1 

" ! COMMITTEE PRINT 115TH CONGRESS

1st Session 

S. PRT. 

115–20 

RECONCILIATION RECOMMENDATIONS 

PURSUANT TO H. CON. RES. 71 

COMMITTEE RECOMMENDATIONS AS SUBMITTED TO 

THE COMMITTEE ON THE BUDGET PURSUANT TO 

H. CON. RES. 71 

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

MICHAEL B. ENZI, Chairman 

DECEMBER 2017 

Prepared for the use of the Committee on the Budget. This document 

has not been officially approved by the Committee and may not reflect 

the views of its members. 
RECONCILIATION RECOMMENDATIONS PURSUANT TO H. CON. RES. 71 
U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

1 

27–718 

" ! COMMITTEE PRINT 115TH CONGRESS

1st Session 

S. PRT. 

2017

115–20 

RECONCILIATION RECOMMENDATIONS 

PURSUANT TO H. CON. RES. 71 

COMMITTEE RECOMMENDATIONS AS SUBMITTED TO 

THE COMMITTEE ON THE BUDGET PURSUANT TO 

H. CON. RES. 71 

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

MICHAEL B. ENZI, Chairman 

DECEMBER 2017 

Prepared for the use of the Committee on the Budget. This document 

has not been officially approved by the Committee and may not reflect 

the views of its members. 
(II) 

COMMITTEE ON THE BUDGET 

MICHAEL B. ENZI, Wyoming, Chairman 

CHARLES E. GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

LINDSEY O. GRAHAM, South Carolina 

PATRICK TOOMEY, Pennsylvania 

RON JOHNSON, Wisconsin 

BOB CORKER, Tennessee 

DAVID A. PERDUE, Georgia 

CORY GARDNER, Colorado 

JOHN KENNEDY, Louisiana 

JOHN BOOZMAN, Arkansas 

LUTHER STRANGE, Alabama 

BERNARD SANDERS, Vermont 

PATTY MURRAY, Washington 

RON WYDEN, Oregon 

DEBBIE STABENOW, Michigan 

SHELDON WHITEHOUSE, Rhode Island 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

TIM KAINE, Virginia 

ANGUS S. KING, JR., Maine 

CHRIS VAN HOLLEN, Maryland 

KAMALA D. HARRIS, California 

ELIZABETH MCDONNELL, Republican Staff Director 

WARREN GUNNELS, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

A. Foreword .............................................................................................................. 1 

B. Title-by-Title Analysis ........................................................................................ 2 

I. Committee on Finance .................................................................................. 3 

CBO Cost and Budgetary Considerations ............................................... 430 

II. Committee on Energy and Natural Resources .......................................... 439 

CBO Cost and Budgetary Considerations ............................................... 456 

C. Rollcall Vote in Budget Committee ................................................................... 462 

D. Additional Views ................................................................................................. 463 

(1) 

A. FOREWORD 

On October 26, 2017, H. Con. Res. 71, the Concurrent Resolution 

on the Budget for Fiscal Year 2018, was adopted. The resolution included reconciliation instructions for the Senate Finance and Energy and Natural Resources committees, along with the House 

Ways and Means Committee. To facilitate pro-growth tax reform, 

the resolution instructed the Ways and Means and Finance Committees to report changes in laws within their jurisdiction that 

would increase the deficit by not more than $1.5 trillion on a static 

basis for the 10-year period of fiscal years 2018 through 2027. The 

Energy and Natural Resources Committee was instructed to report 

changes in laws within its jurisdiction that would reduce the deficit 

by not less than $1 billion over the same 10-year period. 

On November 15, the Energy and Natural Resources Committee 

reported recommendations to meet its instruction by opening the 

Coastal Plain of Alaska’s Arctic National Wildlife Refuge to oil and 

gas exploration and development. This legislation will create jobs 

and further enhance America’s energy independence. The Congressional Budget Office estimates this legislation will raise nearly $1.1 

billion over the next decade. 

On November 16, the Finance Committee reported recommendations providing tax cuts for the American people. The legislation 

would reform the U.S. tax system to promote economic growth and 

job creation and to boost wages for American workers. The Joint 

Committee on Taxation estimates this legislation will cost $1.4 trillion over the next decade. 

On November 28, the Senate Budget Committee reported the 

combined Finance and Energy and Natural Resources recommendations without revision, sending the bill to the Senate 

floor. 

This Budget Committee print contains descriptive materials for 

the legislative recommendations reported by the instructed Senate 

committees. The analyses and background materials of the respective committees appear without revision. 
2 

B. TITLE-BY-TITLE SUMMARY 

The following is a title-by-title analysis of the legislation. In each 

case, the analysis is that of the respective committee and is presented as it was submitted to the Budget Committee without revision. 
3 

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United ~rotts ~cnatc COMMinU ON FINANCE 

W•SH<NOTON, DC 2051()-6200 

November22, 2017 

The Honorable Michael B. Enzi, Chairman 

Attention: Kimberly Proctor, Clerk 

Committee on the Budget 

624 Dirksen Senate Office Building 

United States Senate 

Washington, D.C. 205 10-6100 

Re: Transmittal-- Recommendations of tbc Committee on Finance 

Dear Chairman Enzi: 

This letter and its attachments respond to the instruction to the Committee on Finance (the 

Committee) contained in section2001 ofH. Con. Res. 71, the Concurrent 

Resolution on the Budget for Fiscal Year 2018, to report changes in laws within its jurisdiction 

that increase the deficit by not more than $1,500,000,000 for the period of fiscal years 201 8 

through 2027. 

The Committee's submission includes, in addition to this letter of transmittal, the following: (I) 

the text of reconciliation legislation reported favorably by the Committee at its business meeting 

on November 16, 2017; and (2) a cost estimate of the legislative text prepared by the Joint 

Committee on Taxation. Further materials for inclusion in the committee print will be 

forthcoming. 

I appreciate the opportunity to transmit these materials meeting the instruction to the Committee 

contained in the Budget Resolution. Please let me know if you have any questions concerning 

this submission. Thank you for your consideration. 

Chaim1an 
4 

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United ~tatc.s ~cnatc COMMITIEE ON FINANCE 

WAS><INGTON, DC 2051 o-6200 

November 27, 2017 

The Honorable Michael B. Enzi, Chairman 

Attention: Kimberly Proctor, Clerk 

Committee on the Budget 

624 Dirksen Senate Office Building 

United States Senate 

Washington, D.C. 205 10-6100 

Dear Chairman Enzi: 

Pursuant to section 2001 of H. Con. Res. 71, the Concurrent Resolution on the Budget for 

Fiscal Year 20 18, I hereby transmit these recommendations, which have been approved by vote 

of the Senate Committee on Finance, and the appropriate accompanying material including 

additional, supplemental or dissenting views, to the Senate Committee on the Budget. This is 

consistent with section 310 of Congressional Budget and Impoundment Control Act of 1974. 

~~ Orrin Hatch 

Chaim1an 
5 

TITLE I—COMMITTEE ON FINANCE

CONTENTS

Page 

I. Explanation of the Bill ................................................................................................. 5 

II. Budget Effects of the Bill ............................................................................................ 411 

III. Votes of the Committee ............................................................................................... 422 

IV. Regulatory Impact and Other Matters ....................................................................... 423 
6 

If la\able income is: Then income Ia \ equals: 

Over $2 12,500 but not over $416,700 

Over $4 16,700 but not over $444,550 

Over $444,550 

$49,816.50 plus 33% of the excess over $212,500 

$117,202.50 plus 35% of the excess over $416,700 

$126,950 plus 39.6% of the excess over $444,550 

Married btdividutds Filing .Iahti Retums and Survilling Spouses 

Not overS 18,650 

OverS I 8,650 but not over $75,900 

Over $75,900 but not over $153,100 

Over Sl 53,100 but not over $233,350 

Over $233,350 but not over $416,700 

Over $41 6,700 but not over $470,700 

Over $4 70,700 

I 0% of the taxable income 

S I ,865 plus 15% of the excess overS 18,650 

$10,452.50 plus 25% of the excess over $75,900 

$29,752.50 plus 28% of the excess over $153,100 

$52,222.50 plus 33% of the excess over $233,350 

$112,728 plus 35% of the excess over $416,700 

$131,628 plus 39.6% of the excess over $470,700 

Married I ndividuals Filing Separate Relltms 

Not over S9 ,325 

Over $9,325 but not over $37,950 

Over $37,950 but not over $76,550 

Over $76,550 but not over $1 16,675 

Over Sl 16,675 but not over $208,350 

Over $208,350 but not over $235,350 

Over $235,350 

I 0% of the taxable income 

$932.50 plus 15% of dte excess over $9,325 

$5,226.25 plus 25% of the excess over $37,950 

$14,876.25 plus 28% of the excess over $76,550 

S26, 111.25 plus 33% of the excess over S 116,675 

$56,364 plus 35% oftltc excess over $208,350 

$65,814 plus 39.6% of the excess over $235,350 

Estates mul Trusts 

Not over $2,550 

Over $2,550 but not over S6,000 

Over $6,000 but not over $9, 150 

Over $9,150 but not over S 12,500 

OverS 12,500 

1 Rev. Proc. 2016-55,2016-45 I.R.B. 707, sec. 3.01. 

15% of the taxable income 

$382.50 plus 25% of the excess over $2,550 

S 1,245 plus 28% of the excess over $6,000 

$2,127 plus 33% of the excess over $9,150 

$3,232.50 plus 39.6% of the excess over $12,500 
7 

Unearned income of children 

Special rules (generally referred to as the "kiddie tax") apply to the net unearned income 

of certain children. 1 Generally, the kiddie tax applies to a child if: (1) the child has not reached 

the age of 19 by the close of the taxable year, or the child is a full-time student under the age of 

24, and either of the child's parents is alive at such time; (2) the child's unearned income exceeds 

$2,100 (for 2017); and (3) the child does not tile a joint return. 2 The kiddie tax applies 

regardless of whether the child may be claimed as a dependent by either or both parents. For 

children above age 17, the kiddie tax applies only to children whose earned income does not 

exceed one-half of the amount of their support. 

Under these rules, the net unearned income of a child (for 2017, unearned income over 

$2, 100) is taxed at the parents' tax rates if the parents' tax rates are higher than the tax rates of 

the child3 The remainder of a child's taxable income (i.e., earned income, plus unearned income 

up to $2,100 (for 2017), less the child's standard deduction) is taxed at the child's rates, 

regardless of whether the kiddie tax applies to the child. For these purposes, unearned income is 

income other than wages, salaries, professional fees, other amounts received as compensation for 

personal services actually rendered, and distributions from qualified disability trusts. 4 In 

general, a child is eligible to use the preferential tax rates for qualified dividends and capital 

gains. 5 

The kiddie tax is calculated by computing the "allocable parental tax." This involves 

adding the net unearned income of the child to the parent's income and then applying the 

parent's tax rate. A child's "net unearned income" is the child's unearned income less the sum 

of (1) the minimum standard deduction allowed to dependents ($1,050 for 20176), and (2) the 

greater of (a) such minimum standard deduction amount or (b) the amount of allowable itemized 

deductions that are directly connected with the production of the unearned income. 7 

The allocable parental tax equals the hypothetical increase in tax to the parent that results 

from adding the child's net unearned income to the parent's taxable income. 8 If the child has net 

capital gains or qualified dividends, these items are allocated to the parent's hypothetical taxable 

1 Sec. l(g). Unless othcnrise stated. all section references are to the Internal Revcnnc Code of 1986. as 

amended (the "Code"). 

2 Sec. 1 (g)(2). 

3 Special rules apply for determining which parent's mtc applies where a joint return is not filed. 

3 Sec.l(g)(4)andsec.9ll(d)(2). 

5 Sec. !(h). 

6 Sec. 3.02 of Rev. Proc. 2016-55. supra. 

Sec. l(g)(-l). 

8 Sec. 1 (g)(3 ). 
8 

income according to the ratio of net unearned income to the child's total unearned income. If a 

parent has more than one child subject to the kiddie tax, the net unearned income of all children 

is combined, and a single kiddie tax is calculated. Each child is then allocated a proportionate 

share of the hypothetical increase, based upon the child's net unearned income relative to the 

aggregate net unearned income of all of the parent's children subject to the tax. 

Generally, a child must file a separate return to report his or her income 9 In such case, 

items on the parents' return are not affected by the child's income, and the total tax due from the 

child is the greater of: 

1. The sum of(a) the tax payable by the child on the child's earned income and unearned 

income up to $2,100 (for 20 17), plus (b) the allocable parental tax on the child's 

unearned income, or 

2. The tax on the child's income without regard to the kiddie tax provisions. 10 

Under certain circumstances, a parent may elect to report a child's unearned income on 

the parent's return. 11 

Capital gains rates 

In general 

In the case of an individual, estate, or trust, any adjusted net capital gain which otherwise 

would be taxed at the 10- or IS-percent rate is not taxed. Any adjusted net capital gain which 

otherwise would be taxed at rates over IS-percent and below 39.6 percent is taxed at a ISpercent rate. Any adjusted net capital gain which otherwise would be taxed at a 39.6-percent rate 

is taxed at a 20-percent rate. 

The unrecaptured section 12SO gain is taxed at a maximum rate of2S percent, and 28-

percent rate gain is taxed at a maximum rate of 28 percent. Any amount of unrecaptured section 

12SO gain or 28-percent rate gain otherwise taxed at a 10- or IS-percent rate is taxed at the 

otherwise applicable rate. 

In addition, a tax is imposed on net investment income in the case of an individual, estate, 

or trust. In the case of an individual, the tax is 3. 8 percent of the lesser of net investment income, 

which includes gains and dividends, or the excess of modified adjusted gross income over the 

threshold amount. The threshold amount is $2SO,OOO in the case of a joint return or surviving 

spouse, $12S,OOO in the case of a manied individual filing a separate return, and $200,000 in the 

case of any other individual. 

9 Sec. l(g)(6). Sec IRS Form 8615. Tax for Certain Children Who Have Unearned Income. 

10 Sec. l(g)(l). 

11 Sec. l(g)(7). 
9 

Definitions 

Net capital gain 

In general, gain or loss reflected in the value of an asset is not recognized for income tax 

purposes until a taxpayer disposes of the asset On the sale or exchange of a capital asset, any 

gain generally is included in income. Net capital gain is the excess of the net long-term capital 

gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated 

as long-term if the asset is held for more than one year. 

A capital asset generally means any property except (I) inventory, stock in trade, or 

property held primarily for sale to customers in the ordinary course of the taxpayer's trade or 

business, (2) depreciable or real property used in the taxpayer's trade or business, (3) specified 

literary or artistic property, (4) business accounts or notes receivable, (5) certain U.S. 

publications, (6) certain commodity derivative financial instruments, (7) hedging transactions, 

and (8) business supplies. In addition, the net gain from the disposition of certain property used 

in the taxpayer's trade or business is treated as long-term capital gain. Gain from the disposition 

of depreciable personal property is not treated as capital gain to the extent of all previous 

depreciation allowances. Gain from the disposition of depreciable real property is generally not 

treated as capital gain to the extent of the depreciation allowances in excess of the allowances 

available under the straight-line method of depreciation. 

Adjusted net capital gain 

The "adjusted net capital gain" of an individual is the net capital gain reduced (but not 

below zero) by the sum of the 28-percent rate gain and the unrecaptured section 1250 gain. The 

net capital gain is reduced by the amount of gain that the individual treats as investment income 

for purposes of determining the investment interest limitation under section l63(d). 

Qualified dividend income 

Adjusted net capital gain is increased by the amount of qualified dividend income. 

A dividend is the distribution of property made by a corporation to its shareholders out of 

its after-tax earnings and profits. Qualified dividends generally includes dividends received from 

domestic corporations and qualified foreign corporations. The term "qualified foreign 

corporation" includes a foreign corporation that is eligible for the benefits of a comprehensive 

income tax treaty with the United States which the Treasury Department determines to be 

satisfactory and which includes an exchange of information program. In addition, a foreign 

corporation is treated as a qualified foreign corporation for any dividend paid by the corporation 

with respect to stock that is readily tradable on an established securities market in the United 

States. 

If a shareholder does not hold a share of stock for more than 60 days during the 121-day 

period beginning 60 days before the ex-dividend date (as measured under section 246(c)), 

dividends received on the stock are not eligible for the reduced rates. Also, the reduced rates are 

not available for dividends to the extent that the taxpayer is obligated to make related payments 

with respect to positions in substantially similar or related property. 
10 

Dividends received from a corporation that is a passive foreign investment company (as 

defined in section 1297) in either the taxable year of the distribution, or the preceding taxable 

year, are not qualified dividends. 

A dividend is treated as investment income for purposes of determining the amount of 

deductible investment interest only if the taxpayer elects to treat the dividend as not eligible for 

the reduced rates. 

The amount of dividends qualifying for reduced rates that may be paid by a regulated 

investment company ("RIC") for any taxable year in which the qualified dividend income 

received by the RIC is less than 95 percent of its gross income (as specially computed) may not 

exceed the sum of (1) the qualified dividend income of the RIC for the taxable year and (2) the 

amount of earnings and profits accumulated in a non-RIC taxable year that were distributed by 

the RIC during the taxable year. 

The amount of qualified dividend income that may be paid by a real estate investment 

trust ("REIT") for any taxable year may not exceed the sum of (1) the qualified dividend income 

of the REIT for the taxable year, (2) an amount equal to the excess of the income subject to the 

taxes imposed by section 857(b )(1) and the regulations prescribed under section 337(d) for the 

preceding taxable year over the amount of these taxes for the preceding taxable year, and (3) the 

amount of earnings and profits accumulated in a non-REIT taxable year that were distributed by 

the REIT during the taxable year. 

Dividends received from an organization that was exempt from tax under section 501 or 

was a tax-exempt farmers' cooperative in either the taxable year of the distribution or the 

preceding taxable year; dividends received from a mutual savings bank that received a deduction 

under section 591; or deductible dividends paid on employer securities are not qualified dividend 

income. 

28-percent rate gain 

The term "28-percent rate gain" means the excess of the sum of the amount of net gain 

attributable to long-term capital gains and losses from the sale or exchange of collectibles (as 

defined in section 408(m) without regard to paragraph (3) thereof) and the amount of gain equal 

to the additional amount of gain that would be excluded from gross income under section 1202 

(relating to certain small business stock) if the percentage limitations of section 1202(a) did not 

apply, over the sum of the net short-term capital loss for the taxable year and any long-term 

capital loss carryover to the taxable year. 

Unrecaptured section 1250 gain 

"Unrecaptured section 1250 gain" means any long-term capital gain from the sale or 

exchange of section 1250 property (i.e., depreciable real estate) held more than one year to the 

extent of the gain that would have been treated as ordinary income if section 1250 applied to all 

depreciation, reduced by the net loss (if any) attributable to the items taken into account in 

computing 28-percent rate gain. The amount ofunrecaptured section 1250 gain (before the 

reduction for the net loss) attributable to the disposition of property to which section 1231 
11 

(relating to certain property used in a trade or business) applies may not exceed the net section 

1231 gain for the year. 

Reasons for Change 

The Committee believes that changing the individual rate structure by reducing certain 

rates and modifying the size of certain rate brackets creates a fairer Federal income tax. The 

Committee also aims to broaden the tax base to maintain necessary government revenues by 

repealing many existing tax incentives. The Committee further believes that a tax system with 

low rates will lead to efficient growth. 

Under present law, the tax on the unearned income of children depends on the income of 

the child, parents, and when applicable, siblings. The Committee aims to simplify the taxation of 

unearned income of children, while continuing to minimize the benefit of tax-motivated income 

shifting, by subjecting this unearned income to rates applicable to estates and trusts. 

Explanation of Provision 

Temporary modification of rates 

The provision temporarily replaces the individual income tax rate structure with a new 

rate structure. 

Table 2.-Federal Individual Income Tax Rates for 2018 Under the Provision 

Not over $9,525 

Over $9,525 but not over $38,700 

Over $38,700 but not over $70,000 

Over $70,000 but not over $160,000 

Over $160,000 but not over $200,000 

Over $200,000 but not over $500,000 

Not over $13,600 

Over $13,600 but not over $51,800 

Over $51,800 but not over $70,000 

Over $70,000 but not over $160,000 

Over $!60,000 but not over $200,000 

10% ofthe ta'<able income 

$952.50 plus 12% of the excess over $9,525 

$4,453.50 plus 22% ofthe excess over $38,700 

$11,339.50 plus 24% of the excess over $70,000 

$32,939.50plus 32% ofthe excess over $160,000 

$45,739.50 plus 35% of the excess over $200,000 

$150,73950 

10% of the t.•D<able income 

$1,360 plus 12% of the excess over $13,600 

$5,944 plus 22% of the excess over $51,800 

$9,948 plus 24% of the excess over $70,000 

$31,548 plus 32% of the excess over $160,000 
12 

Over $200,000 but not over $500,000 

Over $500,000 

Not over $19,050 

Over $19,050 but not over $77,400 

Over $77,400 but not over $140,000 

Over $140,000 but not over $320,000 

Over $320,000 but not over $400,000 

Over $400,000 but not over $1,000,000 

Not over $9,525 

Over $9,525 but not over $38,700 

Over $38,700 but not over $70,000 

Over $70,000 but not over $160,000 

Over $160,000 but not over $200,000 

Over $200,000 but not over $500,000 

Over $500,000 

Not over $2,550 

Over $2,550 but not over $9,150 

Over $9,150 but not over$12,500 

Over $12,500 

$44,348 plus 35% of the excess over $200,000 

10% of the taxable income 

$1,905 plus 12% of the excess over $19,050 

$&,907 plus 22% of the excess over $77,400 

$22,679 plus 24% of the excess over$140,000 

$65,879 plus 32% of the excess over $320,000 

$91,479 plus 35'Yo of the excess over $400,000 

10% of the taxable income 

$95250 plus 12% of the excess over $9,525 

$4,453.50 plus 22% of the excess over $38,700 

$11,33950plus 24% of the excess over $70,000 

$32,939.50 plus 32% of the excess over $160,000 

$45,739.50 plus 35% of the excess over $200,000 

$150,739.50 plus 38.5% of the excess over $500,000 

10% of the taxable income 

$255 plus 24% of the excess over $2,550 

$1,839 plus 35% of the excess over $9,150 

$3,011.50 plus 38.5% of the excess over $!2,500 

Unlike present law (which uses a measure of the consumer price index for all-urban 

consumers), the new inflation adjustment uses the chained consumer price index for all-urban 

consumers. 

The provision's rate structure does not apply to taxable years beginning after December 

31, 2025. 
13 

Temporary simplification of tax on unearned income of children 

The provision temporarily simplifies the "kiddie tax" by effectively applying ordinary 

and capital gains rates applicable to trusts and estates to the net unearned income of a child. 

Thus, as under present law, taxable income attributable to earned income is taxed according to an 

unmarried taxpayers' brackets and rates. Taxable income attributable to net unearned income is 

temporarily taxed according to the brackets applicable to trusts and estates, with respect to both 

ordinary income and income taxed at preferential rates. Thus, under the temporary provision, the 

child's tax is unaffected by the tax situation of the child's parent or the unearned income of any 

siblings. 

The simplification of tax on unearned income of children does not apply to taxable years 

beginning after December 31, 202S. 

Maximum rates on capital gains and qualified dividends 

The provision generally retains the present-law maximum rates on net capital gain and 

qualified dividends. The breakpoints between the zero- and IS-percent rates ("IS-percent 

breakpoint") and the IS- and 20-percent rates ("20-percent breakpoint") are based on the same 

amounts as the breakpoints under present law, except the breakpoints are indexed using the CCPI-U in taxable years beginning after 2017. Thus, for 20 I 8, the IS-percent breakpoint is 

$77,200 for joint returns and surviving spouses (one-half of this amount for married taxpayers 

filing separately), $S1,700 for heads of household, $2,600 for estates and trusts, and $38,600 for 

other unmarried individuals. The 20-percent breakpoint is $4 79,000 for joint returns and 

surviving spouses (one-half of this amount for married taxpayers filing separately), $4S2,400 for 

heads of household, $12,700 for estates and trusts, and $42S,800 for other unmatTied individuals. 

Therefore, in the case of an individual (including an estate or trust) with adjusted net 

capital gain, to the extent the gain would not result in taxable income exceeding the IS-percent 

breakpoint, such gain is not taxed. Any adjusted net capital gain which would result in taxable 

income exceeding the IS-percent breakpoint but not exceeding the 20-percent breakpoint is taxed 

at IS percent The remaining adjusted net capital gain is taxed at 20 percent 

As under present law, unrecaptured section 1250 gain generally is taxed at a maximum 

rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent 

Paid preparer due diligence requirement for head of household status 

The provision directs the Secretary of the Treasury to promulgate due diligence 

requirements for paid preparers in determining eligibility for a taxpayer to file as head of 

household. A penalty of $SOO is imposed for each failure to meet these requirements. 

The paid preparer due diligence requirement does not sunset 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 
14 

2. Inflation adjustments based on a closer approximation of cost-of-living increases 

(sec. 11002 of the bill and sec. 1 of the Code) 

Present Law 

Under present law, many parameters of the tax system are adjusted for inflation to protect 

taxpayers from the effects of rising prices. Most of the adjustments are based on annual changes 

in the level of the Consumer Price Index for all Urban Consumers ("CPI-U"). 12 The CPI-U is an 

index that measures prices paid by typical urban consumers on a broad range of products, and is 

developed and published by the Department of Labor. 

Among the inflation-indexed tax parameters are the following individual income tax 

amounts: (1) the regular income tax brackets; (2) the basic standard deduction; (3) the additional 

standard deduction for aged and blind; (4) the personal exemption amount; (5) the thresholds for 

the overall limitation on itemized deductions and the personal exemption phase-out; (6) the 

phase-in and phase-out thresholds of the earned income credit; (7) IRA contribution limits and 

deductible amounts; and (8) the saver's credit. 

Reasons for Change 

The Committee believes cost-of-living adjustments throughout the Code can be improved 

by indexing with the chained Consumer Price Index ("C-CPI-U"), which is designed by the 

Bureau of Labor Statistics to be a closer approximation to a cost-of-living index than other CPI 

measures. 

Explanation of Provision 

The provision requires the use of the C-CPI-U to index tax parameters currently indexed 

by the CPI-U. The C-CPI-U, like the CPl-U, is a measure of the average change over time in 

prices paid by urban consumers. It is developed and published by the Department of Labor, but 

differs from the CPI-U in accounting for the ability of individuals to alter their consumption 

patterns in response to relative price changes. The C-CPI-U accomplishes this by allowing for 

consumer substitution between item categories in the market basket of consumer goods and 

services that make up the index, while the CPI-U only allows for modest substitution within item 

categories. 

Under the provision, indexed parameters in the Code switch from CPI-U indexing to CCPI-U indexing going forward in taxable years beginning after December 3 I, 2017. Therefore, 

in the case of any existing tax parameters that are not temporarily reset for 2018, the provision 

indexes parameters as if CPI-U applies through 2017 and C-CPI-U applies for years thereafter; 

the provision does not index all existing tax parameters from their base years using the C-CPI-U. 

Tax parameters with cost-of-living adjustment base years of2016 and later are indexed solely 

with C-CPI-U. 

12 Sec. 1(1)(5). 
15 

Tax values that are temporarily reset for 2018, such as bracket thresholds and the basic 

standard deduction, are indexed by the C-CPI-U in taxable years beginning after December 31, 

2018. 

The provision requiring C-CPI-U indexing after 2017 is permanent Thus, after certain 

temporary tax parameters sunset, such as bracket thresholds and the increased basic standard 

deduction, corresponding present law values in the Code are indexed appropriately with the CCPI-U. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 
16 

PART II- DEDUCTION FOR QUALIFIED BUSINESS INCOME 

OF PASS-THRU ENTITIES 

1. Allow temporary 17.4-percent deduction to certain pass-through income (sec. 11011 of 

the bill and new sec. 199A of the Code) 

Present Law 

Individual income tax rates 

To determine regular tax liability, an individual taxpayer generally must apply the tax 

rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are 

broken into several ranges of income, known as income brackets, and the marginal tax rate 

increases as a taxpayer's income increases. Separate rate schedules apply based on an 

individual's filing status (i.e., single, head of household, married tiling jointly, or married filing 

separately). For 2017, the regular individual income tax rate schedule provides rates of 10, 15, 

25, 28, 33, 35, and 39.6 percent. 

Partnerships 

Partnerships generally are treated for Federal income tax purposes as pass-through 

entities not subject to tax at the entity leve1. 13 Items of income (including tax-exempt income), 

gain, loss, deduction, and credit of the partnership are taken into account by the partners in 

computing their income tax liability (based on the partnership's method of accounting and 

regardless of whether the income is distributed to the partners). 14 A partner's deduction for 

partnership losses is limited to the partner's adjusted basis in its partnership interest. 15 Losses 

not allowed as a result of that limitation generally are carried forward to the next year. A 

partner's adjusted basis in the partnership interest generally equals the sum of(!) the partner's 

capital contributions to the partnership, (2) the partner's distributive share of partnership income, 

and (3) the partner's share of partnership liabilities, less (1) the partner's distributive share of 

losses allowed as a deduction and certain nondeductible expenditures, and (2) any partnership 

13 Sec. 701. 

14 Sec. 702(a). 

15 Sec. 704(d). In addition, passive loss and at-risk limitations limit the extent to which certain types of 

income can be offset by partnership deductions (sections 469 and 465). These limitations do not apply to corporate 

partners (except certain closely-held corporations) and may not be important to individual partners who have 

partner-level passive income from other im·estments. 
17 

distributions to the partner. 16 Partners generally may receive distributions of partnership 

property without recognition of gain or loss, subject to some exceptions. 17 

Partnerships may allocate items of income, gain, loss, deduction, and credit among the 

partners, provided the allocations have substantial economic effect. 18 In general, an allocation 

has substantial economic effect to the extent the partner to which the allocation is made receives 

the economic benefit or bears the economic burden of such allocation and the allocation 

substantially affects the dollar amounts to be received by the partners from the partnership 

independent of tax consequences. 19 

State laws of every State provide for limited liability companies20 ("LLCs"), which are 

neither partnerships nor corporations under applicable State law, but which are generally treated 

as partnerships for Federal tax purposes 21 

Under present law, a publicly traded partnership generally is treated as a corporation for 

Federal tax purposes. 22 For this purpose, a publicly traded partnership means any partnership if 

interests in the partnership are traded on an established securities market or interests in the 

partnership are readily tradable on a secondary market (or the substantial equivalent thereof). 23 

An exception from corporate treatment is provided for certain publicly traded 

partnerships, 90 percent or more of whose gross income is qualifying income. 24 

16 Sec. 705. 

1

' Sec. 731. Gainor loss may nevertheless be recognized, for example. on the distribution of money or 

marketable securities, distributions with respect to contributed property. or in the case of disproportionate 

distributions (which can resull in ordinary income). 

18 Sec. 704(b)(2). 

19 Trcas. Reg. sec. 1.704-l(b)(2). 

00 The first LLC statute was enacted in Wyoming in 1977. All States (and the District of Columbia) now 

have an LLC statute. though the tax treatment of LLCs for State tax ptrrposes may differ. 

21 Under Treasmy regulations promulgated in 1996, any domestic nonpublicly traded unincorporated entity 

with two or more members generally is treated as a partnership for federal income tax pmposes, while any singlemember domestic unincorporated entity generally is treated as disregarded for Federal income tax purposes (i.e., 

treated as not separate from its owner). Instead of the applicable default treatment however. an LLC may elect to be 

treated as a corporation for Federal income tax purposes. Treas. Reg. sec. 301.7701-3. These arc known as the 

"check-the-box" regulations. 

Sec. 7704(a). 

Sec. 7704(b ). 

Sec. 7704(c)(2). Qualifying income is defined to include interest, dividends. and gains from the 

disposition of a capital asset (or of property described in section 1231 (b)) that is held for the production of income 

that is qualifying income. Sec. 7704(d). Qualifying income also includes rents from real property, gains from the 
18 

S corporations 

For Federal income tax purposes, an S corporation25 generally is not subject to tax at the 

corporate leveL 26 Items of income (including tax-exempt income), gain, loss, deduction, and 

credit of the S corporation are taken into account by the S corporation shareholders in computing 

their income tax liabilities (based on the S corporation's method of accounting and regardless of 

whether the income is distributed to the shareholders). A shareholder's deduction for corporate 

losses is limited to the sum of the shareholder's adjusted basis in its S corporation stock and the 

indebtedness of the S corporation to such shareholder. Losses not allowed as a result of that 

limitation generally are carried forward to the next year. A shareholder's adjusted basis in the 

S corporation stock generally equals the sum of (1) the shareholder's capital contributions to the 

S corporation and (2) the shareholder's pro rata share of S corporation income, less (I) the 

shareholder's pro rata share of losses allowed as a deduction and certain nondeductible 

expenditures, and (2) any S corporation distributions to the shareholder. 27 

Tn general, an S corporation shareholder is not subject to tax on corporate distributions 

unless the distributions exceed the shareholder's basis in the stock of the corporation. 

Electing S corporation status 

To be eligible to electS corporation status, a corporation may not have more than 

100 shareholders and may not have more than one class of stock. 28 Only individuals (other than 

sale or other disposition of real property, and income and gains from the e>-'Pioration. development, mining or 

productioiL processing, refining. transportation (including pipelines transporting gas. oil. or products thereof). or the 

marketing of any mineral or natural resource (including fertilizer, geothennal energy. and timber), industrial source 

carbon dioxide. or the transportation or storage of certain fuel mixtures. altemative fuel. alcohol fuel. or biodicsel 

fuel. It also includes income and gains from commodities (not described in section l22l(a)(l)) or futures. options. 

or forward contracts with respect to such commodities (including foreign currency trdnsactions of a commodity 

pool) where a principal activity of the partnership is the buying and selling of such commodities. futures. options. or 

forward contmcts. However. the exception for partnerships with qualifying income docs not apply to any 

partnership resembling a mutual fund (i.e .. that would be described in section 85l(a) if it were a domestic 

corporation). which includes a corporation registered under the Investment Company Act of 1940 (Pub. L. No. 76-

768 (1940)) as a management company or unit investment trust (sec. 7704(c)(3)). 

" An S corporation is so named because its Fedcmltax treatment is govemed by subchapter S of the Code. 

06 Sees. 1363 and 1366. 

2

' Sec. 1367. If any amount that would reduce the adjusted basis of a shareholder's S corporation stock 

exceeds the amount that would reduce that basis to zero, the excess is applied to reduce (but not below zero) the 

shareholder's basis in 31\V indebtedness of the S corporation to the shareholder. If. after a reduction in the basis of 

such indebtedness, there is an event that would increase the adjusted basis of the shareholder's S corporation stock. 

such increase is instead first applied to restore the reduction iu the basis of the shareholder's iudebtcducss. 

Sec. 1367(b)(2). 

28 Sec. 1361. For this purpose, a husband and wife and all members of a family are treated as one 

shareholder. Sec. 136\(c)(l). 
19 

nonresident aliens), certain tax-exempt organizations, and certain trusts and estates are permitted 

shareholders of an S corporation. 

Sole proprietorships 

Unlike a C corporation, partnership, or S corporation, a business conducted as a sole 

proprietorship is not treated as an entity distinct from its owner for Federal income tax 

purposes. 29 Rather, the business owner is taxed directly on business income, and tiles 

Schedule C (sole proprietorships generally), Schedule E (rental real estate and royalties), or 

Schedule F (farms) with his or her individual tax return. Furthermore, transfer of a sole 

proprietorship is treated as a transfer of each individual asset of the business. Nonetheless, a sole 

proprietorship is treated as an entity separate from its owner for employment tax purposes, 30 for 

certain excise taxes, 31 and certain information reporting requirements. 32 

Reasons for Change 

The Committee believes that a reduction in the corporate income tax rate to 20 percent 

provided by the bill does not completely address the income tax rate on business income. Many 

businesses are conducted in the fonn of pass-through entities, namely partnerships and S 

corporations. Further, businesses are frequently conducted as sole proprietorships, rather than 

through a legal entity that is treated for tax purposes as separate from the individual who owns 

the business. The income of businesses conducted in pass-through form or in sole proprietorship 

form is subject to tax in the hands of their individual owners at the income tax rates of 

individuals. To treat corporate and noncorporate business income more similarly under the 

income tax, the bill provides a 17.4-percent deduction for qualified business income of 

individuals. 

Explanation of Provision 

In general 

For taxable years beginning after December 31, 2017, and before January 1, 2026, an 

individual taxpayer generally may deduct 17.4 percent of qualified business income from a 

partnership, S corporation, or sole proprietorship, as well as 17.4 percent of aggregate qualified 

REIT dividends and qualified cooperative dividends. A limitation based on W -2 wages paid is 

29 A single-member unincorporated entity is disregarded for Federal income tax purposes, unless its owner 

elects to be treated as a C corporation. Treas. Reg. sec. 30L7701-3(b)(l)(ii). Sole proprietorships often arc 

conducted through legal entities for nontax reasons. While sole proprietorships generally may have no more than 

one owner. a married couple tlmt files a joint return and jointly owns and operates a business may elect to have that 

business treated as a sole proprietorship under section 761(!). 

30 Treas. Reg. sec. 30L7701-2(c)(2)(iv). 

31 Treas. Reg. sec. 301.7701-2(c)(2)(v). 

Treas. Reg. sec. 30L7701-2(c)(2)(vi). 
20 

phased in above a threshold amount of taxable income. A disallowance of the deduction with 

respect to specified service trades or businesses is also phased in above the threshold amount of 

taxable income. 33 

Qualified business income 

Qualified business income is determined for each qualified trade or business of the 

taxpayer. For any taxable year, qualified business income means the net amount of qualified 

items of income, gain, deduction, and loss with respect to the qualified trade or business of the 

taxpayer. The determination of qualified items of income, gain, deduction, and loss takes into 

account these items only to the extent included or allowed in the determination of taxable income 

for the year. For example, if in a taxable year, a qualified business has $100,000 of ordinary 

income from inventory sales, and makes an expenditure of $25,000 that is required to be 

capitalized and amortized over 5 years under applicable tax rules, the qualified business income 

is $100,000 minus $5,000 (current-year ordinary amortization deduction), or $95,000. The 

qualified business income is not reduced by the entire amount of the capital expenditure, only by 

the amount deductible in determining taxable income for the year. 

If the net amount of qualified business income from all qualified trades or businesses 

during the taxable year is a loss, it is carried forward as a loss from a qualified trade or business 

in the next taxable year. Similar to a qualified trade or business that has a qualified business loss 

for the current taxable year, any deduction allowed in a subsequent year is reduced (but not 

below zero) by 17.4 percent of any carryover qualified business loss. For example, Taxpayer has 

qualified business income of $20,000 from qualified business A and a qualified business loss of 

$50,000 from qualified business Bin Year 1. Taxpayer is not permitted a deduction for Year I 

and has a carryover qualified business loss of $30,000 to Year 2. In Year 2, Taxpayer has 

qualified business income of $20,000 from qualified business A and qualified business income of 

$50,000 from qualified business B. To determine the deduction for Year 2, Taxpayer reduces the 

17.4 percent deductible amount determined for the qualified business income of $70,000 from 

qualified businesses A and B by 17.4 percent of the $30,000 carryover qualified business loss. 

Domestic business 

Items are treated as qualified items of income, gain, deduction, and loss only to the extent 

they are effectively connected with the conduct of a trade or business within the United States. 34 

In the case of a taxpayer who is an individual with otherwise qualified business income from 

sources within the commonwealth of Puerto Rico, if all the income is taxable under section I 

(income tax rates for individuals) for the taxable year, the "United States" is considered to 

include Puerto Rico for purposes of determining the individual's qualified business income. 

33 For purposes of this provisioit taxable income is computed without regard to the 17.4 percent deduction. 

34 For this purpose, section 864( e) is applied substituting "qualified trade or business (within the meaning 

of section 199 Ar' for 11 nonresident alien individu.:tl or a foreign corporation~~ or "a foreign corporation." 
21 

Treatment of investment income 

Qualified items do not include specified investment-related income, deductions, or loss. 

Specifically, qualified items of income, gain, deduction and loss do not include (1) any item 

taken into account in determining net long-term capital gain or net long-term capital loss, (2) 

dividends, income equivalent to a dividend, or payments in lieu of dividends, (3) interest income 

other than that which is properly allocable to a trade or business, (4) the excess of gain over loss 

from commodities transactions, other than those entered into in the normal course of the trade or 

business or with respect to stock in trade or property held primarily for sale to customers in the 

ordinary course of the trade or business, property used in the trade or business, or supplies 

regularly used or consumed in the trade or business, (5) the excess of foreign currency gains over 

foreign currency losses from section 988 transactions, other than transactions directly related to 

the business needs of the business activity, (6) net income from notional principal contracts, 

other than clearly identified hedging transactions that are treated as ordinary (i.e., not treated as 

capital assets), and (7) any amount received from an annuity that is not used in the trade or 

business of the business activity. Qualified items under this provision do not include any item of 

deduction or loss properly allocable to such income. 

Reasonable compensation and guaranteed payments 

Qualified business income does not include any amount paid by an S corporation that is 

treated as reasonable compensation of the taxpayer. Similarly, qualified business income does 

not include any guaranteed payment for services rendered with respect to the trade or business, 35 

and to the extent provided in regulations, does not include any amount paid or incurred by a 

partnership to a partner who is acting other than in his or her capacity as a partner for services. 36 

Qualified trade or business 

A qualified trade or business means any trade or business other than a specified service 

trade or business. 

Specified service business 

A specified service trade or business means any trade or business involving the 

performance of services in the fields of health, 37 law, engineering, architecture, accounting, 

35 Described in sec. 707(c). 

36 Described in sec. 707(a). 

" A similar list of service trades or business is provided in section 448(d)(2)(A) and Treas. Reg. sec. 

1.448-1T(e)(4)(i). For purposes of section 448, Treasury regulations provide that the performance of services in the 

field of health means the provision of medical services by physicians, nurses. dentists. and other similar healthcarc 

professionals. The perfonuance of services in the field of health does not include the provision of services not 

directly related to a medical field. even though the services may purportedly relate to the health of the service 

recipient. For example, the perfonnance of services in the field of health does not include the operation of health 
22 

actuarial science, performing arts, 38 consulting, 39 athletics, financial services, brokerage services, 

including investing and investment management, trading, or dealing in securities, partnership 

interests, or commodities, and any trade or business where the principal asset of such trade or 

business is the reputation or skill of one or more of its employees. For this purpose a security 

and a commodity have the meanings provided in the rules for the mark-to-market accounting 

method for dealers in securities (sections 475(c)(2) and 475(e)(2), respectively). 

Phase-in of specified service business limitation 

The exclusion from the definition of a qualified business for specified service trades or 

businesses phases in for a taxpayer with taxable income in excess of a threshold amount. The 

threshold amount is $250,000 (200 percent of that amount, or $500,000, in the case of a joint 

return) (the "threshold amount"). The threshold amount is indexed for inflation. The exclusion 

from the definition of a qualified business for specified service trades or businesses is fully 

phased in for a taxpayer with taxable income in excess of the threshold amount plus $50,000 

($100,000 in the case of a joint return). For a taxpayer with taxable income within the phase-in 

range, the exclusion applies as follows. 

In computing the qualified business income with respect to a specified service trade or 

business, the taxpayer takes into account only the applicable percentage of qualified items of 

income, gain, deduction, or loss, and of allocable W-2 wages. The applicable percentage with 

respect to any taxable year is 100 percent reduced by the percentage equal to the ratio of the 

excess of the taxable income of the taxpayer over the threshold amount bears to $50,000 

($100,000 in the case of a joint return). 

clubs or health spas that pro\ ide physical exercise or conditioning to their customers. See Treas. Reg. sec. l.448-

IT(e)(4)(ii). 

38 For purposes of the similar list of seN ices in section 448. Treasury regulations provide that the 

perfonuance of services in tl1c field of the pcrfonning arts means the provision of services by actors. actresses, 

singers. musicians. entertainers, and similar artists in their capacity as suclt The performance of services in the field 

of the performing arts does not include the provision of services by persons who themselves arc not perfonning 

artists (e.g.. persons who may manage or promote such artists, and other persons in a trade or business that relates to 

the perfonning arts). Silnilarly. tl1e performance of seNices in the field of the performing arts does not include the 

provision of services by persons who broadcast or otherwise disseminate the performance of such artists to members 

of the public (e.g .. employees of a radio station that broadcasts the perfonnances of musicians and singers). See 

Trcas. Reg. sec. I A48-lT(c)(4)(iii). 

39 For purposes of the similar list of services in section 448. Treasury regulations provide that the 

performance of services in the field of consulting means the provision of advice and counsel. The perfonnancc of 

services in the field of consulting docs not include the performance of services other than advice and cotmseL such 

as sales or brokerage services, or economically similar services. For purposes of the preceding sentence. the 

detcnnination of whether a person· s services are sales or brokerage services, or economically similar services, shall 

be based on all the facts and circumstances of that person's business. Such facts and circumstances include. for 

example, the manner in which the taxpayer is compensated for the services provided (e.g. whether the 

compensation for the services is contingent upon the consummation of the transaction that the services were 

intended to effect). Sec Treas. Reg. sec. l.448-!T(e)(4)(iv). 
23 

For example, Taxpayer has taxable income of $280,000, of which $200,000 is 

attributable to an accounting sole proprietorship after paying wages of $100,000 to employees. 

Taxpayer has an applicable percentage of 40 percent. 40 In determining includible qualified 

business income, Taxpayer takes into account 40 percent of$200,000, or $80,000. In 

determining the includible W -2 wages, Taxpayer takes into account 40 percent of $100,000, or 

$40,000. Taxpayer calculates the deduction by taking the lesser of 17.4 percent of $80,000 

($13,920) or 50 percent of $40,000 ($20,000). Taxpayer takes a deduction for $13,920. 

REIT dividends and cooperative dividends 

A deduction is allowed under the provision for 17.4 percent of the taxpayer's aggregate 

amount of qualified REIT dividends and qualified cooperative dividends for the taxable year. 

Qualified REIT dividends do not include any portion of a dividend received from a REIT that is 

a capital gain dividend41 or a qualified dividend42 A qualified cooperative dividend means a 

patronage dividend, 43 per-unit retain allocation, 44 qualified written notice of allocation, 45 or any 

similar amount, provided it is includible in gross income and is received from either (1) a taxexempt benevolent life insurance association, mutual ditch or irrigation company, cooperative 

telephone company, like cooperative organization, 46 or a taxable or tax-exempt cooperative that 

is described in section 138l(a), or (2) a taxable cooperative govemed by tax rules applicable to 

cooperatives before the enactment of subchapter T of the Code in 1962. 

Tentative deductible amount for a qualified trade or business 

In general 

For each qualified trade or business, the taxpayer is allowed a deductible amount equal to 

the lesser of 17.4 percent of the qualified business income with respect to such trade or business 

or 50 percent of the W-2 wages with respect to such business (the "wage limit"). However, if the 

taxpayer's taxable income is below the threshold amount, the deductible amount for each 

qualified trade or business is equal to 17.4 percent of the qualified business income with respect 

to each respective trade or business. 

40 1 - ($280.000 - $250,000)/($50.000) = 1 - 30.000/50,000 = 1 - .6 = 40 percent. 

41 Defined in sec. 857(b)(3). 

42 Defined in sec. l(h)(ll). 

43 Defined in sec. 1388(a). 

44 Defined in sec. 1388(1). 

Definedinscc. 1388(c). 

46 Described in sec. 501(c)(12). 
24 

W-2 wages 

W-2 wages are the total wages 47 subject to wage withholding, elective deferrals, 48 and 

deferred compensation49 paid by the qualified trade or business with respect to employment of its 

employees during the calendar year ending during the taxable year of the taxpayer. 50 W-2 wages 

do not include any amount which is not properly allocable to the qualified business income as a 

qualified item of deduction. In addition, W-2 wages do not include any amount which was not 

properly included in a return filed with the Social Security Administration on or before the 601

h 

day after the due date (including extensions) for such return. 

In the case of a taxpayer who is an individual with otherwise qualified business income 

from sources within the commonwealth of Puerto Rico, if all the income is taxable under section 

I (income tax rates for individuals) for the taxable year, the determination ofW -2 wages with 

respect to the taxpayer's trade or business conducted in Puerto Rico is made without regard to 

any exclusion under the wage withholding rules 51 for remuneration paid for services in Puerto 

Rico. 

Phase-in of wage limit 

The application of the wage limit phases in for a taxpayer with taxable income in excess 

of the threshold amount. The wage limit applies fully for a taxpayer with taxable income in 

excess of the threshold amount plus $50,000 ($1 00,000 in the case of a joint return). For a 

taxpayer with taxable income within the phase-in range, the wage limit applies as follows. 

With respect to any qualified trade or business, the taxpayer compares (l) 17.4 percent of 

the taxpayer's qualified business income with respect to the qualified trade or business with (2) 

50 percent of the W-2 wages with respect to the qualified trade or business. lfthe amount 

determined under (2) is less than the amount determined (1), (that is, if the wage limit is 

binding), the taxpayer's deductible amount is the amount determined under (1) reduced by the 

same proportion of the difference between the two amounts as the excess of the taxable income 

Defined in sec. 340l(a). 

'" Within the meaning of sec. 402(g)(3). 

49 Deferred compensation includes compensation deferred tmder section 457. as well as the amount of any 

designated Roth contributions (as defined in section 402A). 

50 In the case of a taxpayer with a short taxable year that does not contain a calendar year ending during 

such sh01t taxable year. the Committee intends that the following amounts shall be treated as the W-2 wages of the 

taxpayer for the short taxable year: ( 1) only those wages paid during the short taxable year to employees of the 

qualified trade or business, (2) only those elective deferrals (within the meaning of section 402(g)(3)) made during 

the short taxable year by employees of the qualified trade or business, and (3) only compensation actually deferred 

under section -157 during the short taxable year with respect to employees of the qualified trade or business. The 

Committee intends that amounts that are treated as W -2 wages for a taxable year shall not be treated as W -2 wages 

of any other taxable year. 

51 As provided in sec. 3401(a)(8). 
25 

of the taxpayer over the threshold amount bears to $50,000 ($100,000 in the case of a joint 

return). 

For example, Hand W file a joint return on which they report taxable income of 

$520,000. W has a qualified trade or business that is not a specified service business, such that 

17.4 percent of the qualified business income with respect to the business is $15,000. W's share 

of wages paid by the business is $20,000, such that 50 percent of the W-2 wages with respect to 

the business is $10,000. The $15,000 amount is reduced by 20 percent52 of the difference 

between $15,000 and $10,000, or $1,000. Hand W take a deduction for $14,000. 

Determination of the taxpayer's deduction 

The taxpayer's deduction for qualified business income is equal to the lesser of the 

combined qualified business income amount for the taxable year or an amount equal to 17.4 

percent of the taxpayer's taxable income (reduced by any net capital gain 5

3

) for the taxable year. 

The combined qualified business income amount is the sum of the deductible amounts 

determined for each qualified trade or business for the taxable year and 17.4 percent of the 

qualified REIT dividends and qualified cooperative dividends received by the taxpayer for the 

taxable year. 

Special rules and definitions 

For purposes of the provision, taxable income is determined without regard to the 

deduction allowable under the provision. 

In the case of a partnership or S corporation, the provision applies at the partner or 

shareholder level. Each partner takes into account the partner's allocable share of each qualified 

item of income, gain, deduction, and loss, and is treated as having W -2 wages for the taxable 

year equal to the partner's allocable share ofW-2 wages of the partnership. The partner's 

allocable share ofW-2 wages is required to be determined in the same manner as the partner's 

share of wage expenses. For example, if a partner is allocated a deductible amount of 10 percent 

of wages paid by the partnership to employees for the taxable year, the partner is required to be 

allocated 10 percent of theW -2 wages of the partnership for purposes of calculating the wage 

limit under this deduction. Similarly, each shareholder of an S corporation takes into account the 

shareholder's pro rata share of each qualified item of income, gain, deduction, and loss, and is 

treated as having W -2 wages for the taxable year equal to the shareholder's pro rata share ofW -2 

wages of the S corporation. 

Qualified business income is determined without regard to any adjustments prescribed 

under the rules of the alternative minimum tax. 

" ($520,000-$500.000)/$100.000 = 20 percent. 

55 Defined in sec. 1 (h). 
26 

The provision does not apply to a trust or estate. 

The deduction under the provision is allowed only for Federal income tax purposes. 

For purposes of determining a substantial underpayment of income tax under the 

accuracy related penalty, 54 a substantial underpayment exists if the amount of the understatement 

exceeds the greater of five percent (not 10 percent) of the tax required to be shown on the return 

or $5,000. 

Authority is provided to promulgate regulations needed to carry out the purposes of the 

provision, including regulations requiring, or restricting, the allocation of items of income, gain, 

loss, or deduction, or of wages under the provision. In addition, regulatory authority is provided 

to address reporting requirements appropriate under the provision, and the application of the 

provision in the case of tiered entities. 

The provision does not apply to taxable years beginning after December 31,2025. 

Additional examples 

The following examples provide a comprehensive illustration of the provision. 

Example 1 

Hand W file a joint return on which they report taxable income of$520,000 (determined 

without regard to this provision). His a partner in a qualified trade or business that is not a 

specified service business ("qualified business A"). W has a sole proprietorship qualified trade 

or business that is a specified service business ("qualified business B"). Hand W also received 

$10,000 in qualified REIT dividends during the tax year. 

H's allocable share of qualified business income from qualified business A is $300,000, 

such that 17.4 percent of the qualified business income with respect to the business is $52,200. 55 

H's allocable share of wages paid by qualified business A is $100,000, such that 50 percent of 

the W-2 wages with respect to the business is $50,000. 56 AsH and W's taxable income is above 

the threshold amount for a joint return, the application of the wage limit for qualified business A 

is phased in. Accordingly, the $52,200 amount is reduced by 20 percent57 of the difference 

54 Sec. 6662(d)(l)(A). 

55 $300,000* 174 = $52,200. 

$100,000*5 = $50.()00. 

($520.000-$500,000)/$100.000 = 20 percent. 
27 

between $52,200 and $50,000, or $440. 58 H's deductible amount for qualified business A is 

$51,76059 

W's qualified business income and W-2 wages from qualified business B, which is a 

specified service business, are $325,000 and $150,000, respectively. Hand W's taxable income 

is above the threshold amount for a joint return. Thus, the exclusion of qualified business 

income and W-2 wages from the specified service business are phased in. W has an applicable 

percentage of 80 percent. 60 In determining includible qualified business income, W takes into 

account 80 percent of$325,000, or $260,000. In determining includible W-2 wages, W takes 

into account 80 percent of$150,000, or $120,000. W calculates the deductible amount for 

qualified business B by taking the lesser of 17.4 percent of $260,000 ($45,240) or 50 percent of 

includible W-2 wages of$120,000 ($60,000)61 W's deductible amount for qualified business B 

is $45,240. 

Hand W's combined qualified business income amount of$96,980 is comprised of the 

deductible amount for qualified business A of$51,760, the deductible amount for qualified 

business B of$45,240, and 17.4 percent of the $10,000 qualified REIT dividends ($1,740). H 

and W's deduction is limited to 17.4 percent of their taxable income for the year ($520,000), or 

$90,480. Accordingly, Hand W's deduction for the taxable year is $90,480. 

Example 2 

Hand W file a joint return on which they report taxable income of$200,000 (determined 

without regard to this provision). H has a sole proprietorship qualified trade or business that is 

not a specified service business ("qualified business A"). W is a partner in a qualified trade or 

business that is not a specified service business ("qualified business B"). Hand W have a 

carryover qualified business loss of $50,000. 

H's qualified business income from qualified business A is $150,000, such that 17.4 

percent of the qualified business income with respect to the business is $26,100. AsH and W' s 

taxable income is below the threshold amount for a joint return, the wage limit does not apply to 

qualified business A. H' s deductible amount for qualified business A is $26, I 00. 

W's allocable share of qualified business loss is $40,000, such that 17.4 percent of the 

qualified business loss with respect to the business is $6,960. AsH and W's taxable income is 

below the threshold amount for a joint return, the wage limit does not apply to qualified business 

B. W's deductible amount for qualified business B is a reduction to the deduction of$6,960. 

" ($52.200- $50,000)*2 $440. 

59 $52,200- $440 $5 1_760. 

00 I ($520.000-$500.000)/$100.000 =I $20,000/$100,000 =I -.2 = 80 percent. 

61 Although Hand W's taxable income is above !he threshold amount for a join! return. !he wage limit is 

not binding as !he 17.4 percent of includible qualified business income of qualified business B ($45,240) is less !han 

50 percent of includible W -2 wages of qualified business B ($60.000). 
28 

Hand W's combined qualified business income amount of$10,440 is comprised of the 

deductible amount for qualified business A of $26,100, the reduction to the deduction for 

qualified business B of $6,960, and the reduction to the deduction of $8,700 attributable to the 

carryover qualified business loss. Hand W's deduction is limited to 17.4 percent of their taxable 

income for the year ($200,000), or $34,800. Accordingly, Hand W's deduction for the taxable 

year is $10,440. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

2. Temporary limitation on losses for taxpayers other than corporations (sec. 11012 of the 

bill and sec. 461 of the Code) 

Present Law 

Loss limitation rnles applicable to individuals 

Passive loss rules 

The passive loss rules limit deductions and credits from passive trade or business 

activities 62 The passive loss rules apply to individuals, estates and trusts, and closely held 

corporations. A passive activity for this purpose is a trade or business activity in which the 

taxpayer owns an interest, but in which the taxpayer does not materially participate. A taxpayer 

is treated as materially participating in an activity only if the taxpayer is involved in the 

operation of the activity on a basis that is ret,>ular, continuous, and substantial 61 Deductions 

attributable to passive activities, to the extent they exceed income from passive activities, 

generally may not be deducted against other income. Deductions and credits that are suspended 

under these rules are carried forward and treated as deductions and credits from passive activities 

in the next year. The suspended losses from a passive activity are allowed in full when a 

taxpayer makes a taxable disposition of his entire interest in the passive activity to an unrelated 

person. 

Excess farm loss rules 

A limitation on excess farm losses applies to taxpayers other than C corporations. 64 If a 

taxpayer other than a C corporation receives an applicable subsidy for the taxable year, the 

amount of the excess farm loss is not allowed for the taxable year, and is carried forward and 

treated as a deduction attributable to farming businesses in the next taxable year. An excess farm 

loss for a taxable year means the excess of aggregate deductions that are attributable to farming 

businesses over the sum of aggregate gross income or gain attributable to farming businesses 

Sec. 469. 

63 Regulations provide more detailed standards for material participation. See Treas. Reg. sec. 1.469-5 

and -ST. 

6·1 Sec. 46l(j). 
29 

plus the threshold amount The threshold amount is the greater of(!) $300,000 ($150,000 for 

married individuals filing separately), or (2) for the five-consecutive-year period preceding the 

taxable year, the excess of the aggregate gross income or gain attributable to the taxpayer's 

farming businesses over the aggregate deductions attributable to the taxpayer's farming 

businesses. 

Reasons for Change 

The Committee notes the net operating loss rules for C corporations have been 

significantly limited under this bill. Carrybacks would be eliminated and the taxable income 

limitation on carryforwards would be tightened. In addition, non-business losses of individuals 

have been reformed with respect to personal casualty losses. The Committee believes that 

excess business losses of taxpayers other than corporations should be carried forward rather than 

bunched in the year ofloss. The provision is based on, and operates in a manner that is 

somewhat similar to, the current rule for excess farm losses. 

Explanation of Provision 

For taxable years beginning after December 31, 2017, and before January 1, 2026, excess 

business losses of a taxpayer other than a corporation are not allowed for the taxable year. Such 

losses are carried forward and treated as part of the taxpayer's net operating loss ("NOL") 

carryforward in subsequent taxable years. Under the bill, NOL carryovers generally are allowed 

for a taxable year up to the lesser of the carryover amount or 90 percent (80 percent for taxable 

years beginning after December 31, 2022) of taxable income determined without regard to the 

deduction for NOLs. 

An excess business loss for the taxable year is the excess of ag.t,>regate deductions of the 

taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the 

limitation of the provision), over the sum of aggregate gross income or gain of the taxpayer plus 

a threshold amount The threshold amount for a taxable year is $250,000 (or twice the otherwise 

applicable threshold amount in the case of a joint return). The threshold amount is indexed for 

inflation. 

In the case of a partnership or S corporation, the provision applies at the partner or 

shareholder level. Each partner's distributive share and each S corporation shareholder's pro rata 

share of items of income, gain, deduction, or loss of the partnership or S corporation are taken 

into account in applying the limitation under the provision for the taxable year of the partner or S 

corporation shareholder. Regulatory authority is provided to apply the provision to any other 

pass-through entity to the extent necessary to carry out the provision. Regulatory authority is 

also provided to require any additional reporting as the Secretary determines is appropriate to 

carry out the purposes of the provision. 

The provision applies after the application of the passive loss rules. 65 

65 Sec. 469. 
30 

For taxable years beginning after December 31, 2017 and before January 1, 2026, the 

present-law limitation relating to excess farm losses does not apply. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 
31 

PART lll- TAX BENEFITS FOR FAMILIES AND INDIVIDUALS 

1. Temporary increase in standard deduction (sec. 11021 of the bill and sec. 63 of the 

Code) 

Present Law 

Under present law, an individual who does not elect to itemize deductions may reduce his 

adjusted gross income ("AGI") by the amount of the applicable standard deduction in arriving at 

his taxable income. The standard deduction is the sum of the basic standard deduction and, if 

applicable, the additional standard deduction. The basic standard deduction varies depending 

upon a taxpayer's filing status. For 2017, the amount of the basic standard deduction is $6,350 

for single individuals and married individuals filing separate returns, $9,350 for heads of 

households, and $12,700 for married individuals filing a joint return and surviving spouses. An 

additional standard deduction is allowed with respect to any individual who is elderly or blind. 66 

The amount of the standard deduction is indexed annually for inflation. 

In the case of a dependent for whom a deduction for a personal exemption is allowed to 

another taxpayer, the standard deduction may not exceed the greater of (i) $1,050 (in 2017) or 

(ii) the sum of $350 (in 2017) plus the individual's earned income. 

Reasons for Change 

The Committee believes that consolidating the basic standard deduction and personal 

exemptions for a taxpayer and his or her spouse into a larger standard deduction simplifies the 

Code while still allowing a minimum level of income to be exempt from Federal income 

taxation. 

Explanation of Provision 

The provision temporarily increases the basic standard deduction for individuals across 

all filing statuses. Under the provision, the amount of the standard deduction is temporarily 

increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household 

filers, and $12,000 for all other individuals. The amount of the standard deduction is indexed for 

inflation using the chained consumer price index for all-urban consumers for taxable years 

beginning after December 31, 2018. 

The additional standard deduction for the elderly and the blind is not changed by the 

provision. 

66 For 2017, the additional amount is $1,250 for married taxpayers (for each spouse meeting the applicable 

criterion) aud surviving spouses. The additional amount for single individuals and heads ofhonseholds is $1,550. 

An individual who qualifies as both blind and elderly is entitled to two additional standard deductions. for a total 

additional amount (for 2017) of $2,500 or $3JOO, as applicable. 
32 

The increase of the basic standard deduction does not apply to taxable years beginning 

after December 31, 2025. 67 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

2. Temporary increase in and modification of child tax credit (sec. 11022 of the bill and 

sec. 24 of the Code) 

Present Law 

An individual may claim a tax credit for each qualifying child under the age of 17. The 

amount of the credit per child is $1,000. A child who is not a citizen, national, or resident of the 

United States cannot be a qualifying child. 

The aggregate amount of child credits that may be claimed is phased out for individuals 

with income over certain threshold amounts. Specifically, the otherwise allowable child tax 

credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income 

("AGI") over $75,000 for single individuals or heads of households, $110,000 for married 

individuals filing joint returns, and $55,000 for married individuals filing separate returns. For 

purposes of this limitation, modified AGI includes certain otherwise excludable income earned 

by U.S. citizens or residents living abroad or in certain U.S. territories. 

The credit is allowable against both the regular tax and the alternative minimum tax 

("AMT"). To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is 

eligible for a refundable credit68 (the "additional child tax credit") equal to 15 percent of earned 

income in excess of $3,000 (the "earned income" formula). 

Families with three or more children may determine the additional child tax credit using 

the "alternative formula," if this results in a larger credit than determined under the earned 

income formula. Under the altemative formula, the additional child tax credit equals the amount 

by which the taxpayer's Social Security taxes exceed the taxpayer's earned income credit 

("EIC"). 

Earned income is defined as the sum of wages, salaries, tips, and other taxable employee 

compensation plus net self-employment earnings. At the taxpayer's election, combat pay may be 

treated as earned income for these purposes. Unlike the EIC, which also includes the preceding 

items in its definition of earned income, the additional child tax credit is based only on earned 

income to the extent it is included in computing taxable income. For example, some ministers' 

parsonage allowances are considered self-employment income, and thus are considered earned 

income for purposes of computing the EIC, but the allowances are excluded from gross income 

r,· The standard deduction continues to be indexed with the C-CPT-U after this sunset. 

68 The refundable credit may not exceed the maximum credit per child of$ LOOO. 
33 

for individual income tax purposes, and thus are not considered earned income for purposes of 

the additional child tax credit since the income is not included in taxable income. 

Any credit or refund allowed or made to an individual under this provision (including to 

any resident of a U.S. possession) is not taken into account as income and is not be taken into 

account as resources for the month of receipt and the following two months for purposes of 

determining eligibility of such individual or any other individual for benefits or assistance, or the 

amount or extent of benefits or assistance, under any Federal program or under any State or local 

program financed in whole or in part with Federal funds. 

Reasons for Change 

The Committee believes that it is important to provide an increased tax benefit for 

families with children, as well as to ensure that all dependents of a household are accounted for 

in determining families' ability to pay income tax. The Committee believes that an expanded 

child tax credit is the most equitable means of achieving this goal. 

Explanation of Provision 

The provision temporarily increases the child tax credit to $2,000 per qualifying child. 

Additionally, the age limit for a qualifying child is temporarily increased by one year, such that a 

taxpayer may claim the credit with respect to any qualifying child under the age of 18. 

The credit is further modified to temporarily provide for a $500 nonrefundable credit for 

qualifying dependents other than qualifying children. The provision generally retains the 

present-law definition of dependent. 

Under the temporary provision, beginning in 2018, the threshold at which the credit 

begins to phase out is increased to $500,000 for all taxpayers. These amounts are not indexed 

for inflation. 

The provision temporarily lowers the earned income threshold for the refundable child 

tax credit to $2,500. As under present law, the maximum amount refundable may not exceed 

$1,000 per qualifying child. Under the provision, this $1,000 threshold is indexed for inflation 

with a base year of2017, rounding up to the nearest $100 (such that the threshold is $1,100 in 

2018). A temporary rule provides that, for the taxable years for which the above-described 

changes are in effect, in order to receive the refundable portion of the child tax credit, a taxpayer 

must include a Social Security number for each qualifying child for whom the credit is claimed 

on the tax return. 

The temporary provision expires for taxable years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 
34 

3. Temporary increase in percentage limit for charitable contributions of cash to public 

charities (sec. 11023 of the bill and sec. 170 of the Code) 

Present Law 

In general 

The Internal Revenue Code allows taxpayers to reduce their income tax liability by 

taking deductions for contributions to certain organizations, including charities, Federal, State, 

local and Indian tribal governments, and certain other organizations. 

To be deductible, a charitable contribution generally must meet several threshold 

requirements. First, the recipient of the transfer must be eligible to receive charitable 

contributions (i.e., an organization or entity described in section 170(c)). Second, the transfer 

must be made with gratuitous intent and without the expectation of a benefit of substantial 

economic value in return. Third, the transfer must be complete and generally must be a transfer 

of a donor's entire interest in the contributed property (i.e., not a contingent or partial interest 

contribution). To qualify for a current year charitable deduction, payment of the contribution 

must be made within the taxable year. 69 Fourth, the transfer must be of money or propertycontributions of services are not deductible. Finally, the transfer must be substantiated and in the 

proper form. 

As discussed below, special rules limit the deductibility of a taxpayer's charitable 

contributions in a given year to a percentage of income, and those rules, in part, turn on whether 

the organization receiving the contributions is a public charity or a private foundation. Other 

special rules determine the deductible value of contributed property for each type of property. 

Percentage limits on charitable contributions 

Individual taxpayers 

Charitable contributions by individual taxpayers are limited to a specified percentage of 

the individual's contribution base. The contribution base is the taxpayer's adjusted gross income 

("AGI") for a taxable year, disregarding any net operating loss carryback to the year under 

section 172. 70 In general, more favorable (higher) percentage limits apply to contributions of 

cash and ordinary income property than to contributions of capital gain property. More 

favorable limits also generally apply to contributions to public charities (and certain operating 

foundations) than to contributions to nonoperating private foundations. 

More specifically, the deduction for charitable contributions by an individual taxpayer of 

cash and property that is not appreciated to a charitable organization described in section 

170(b )(l)(A) (public charities, private foundations other than nonoperating private foundations, 

and certain governmental units) may not exceed 50 percent of the taxpayer's contribution base. 

69 Sec. 170(a)(l). 

70 Sec. 170(b)(l)(G). 
35 

Contributions of this type of property to nonoperating private foundations generally may be 

deducted up to the lesser of 30 percent of the taxpayer's contribution base or the excess of (i) 50 

percent of the contribution base over (ii) the amount of contributions subject to the 50 percent 

limitation. 

Contributions of appreciated capital gain property to public charities and other 

organizations described in section 170(b )(I )(A) generally are deductible up to 30 percent of the 

taxpayer's contribution base (after taking into account contributions other than contributions of 

capital gain property). An individual may elect, however, to bring all these contributions of 

appreciated capital gain property for a taxable year within the 50-percent limitation category by 

reducing the amount of the contribution deduction by the amount of the appreciation in the 

capital gain property. Contributions of appreciated capital gain property to nonoperating private 

foundations are deductible up to the lesser of20 percent of the taxpayer's contribution base or 

the excess of (i) 30 percent of the contribution base over (ii) the amount of contributions subject 

to the 30 percent limitation. 

Finally, contributions that are for the use of (not to) the donee charity get less favorable 

percentage limits. Contributions of capital gain property for the use of public charities and other 

organizations described in section 170(b)(l)(A) also are limited to 20 percent of the taxpayer's 

contribution base. Property contributed for the use of an organization generally has been 

interpreted to mean property contributed in trust for the organization. 71 Charitable contributions 

of income interests (where deductible) also generally are treated as contributions for the use of 

the donee organization. 

71 Rockefeller v. Commissioner. 676 F.2d 35, 39 (2d Cir. 1982). 
36 

Table 3.-Charitable Contribution Percentage Limits For Individual Taxpayers1 

Public Charities, Private 

Operating Foundations, and 

Private Distributing 

Foundations 

Nonoperating Private 

Foundations 

50% 

30% 20% 

1 Percentages shown are the percentage of an individual's contribution base. 

20% 

20% 

Capital gain property contributed to public charities. private operating foundations, or private distributing 

foundations will be subject to the 50-percent limitation if the donor elects to reduce the fair market value of the 

property by the amount that would have been long-tenn capital gain if the property had been sold. 

3 Certain qualified conservation contributions to public charities (generally. conservation easements). quali(v for 

more generous contribution limits. In general, the 30-percent limit applicable to contributions of capital gain 

property is increased to I 00 percent if the individual making the qualified conservation contribution is a qualified 

fanner or rancher or to 50 percent if the individual is not a qualified fanner or rancher. 

Corporate taxpayers 

A corporation generally may deduct charitable contributions up to 10 percent of the 

corporation's taxable income for the year. 72 For this purpose, taxable income is determined 

without regard to: (I) the charitable contributions deduction; (2) any net operating loss 

carryback to the taxable year; (3) deductions for dividends received; (4) deductions for dividends 

paid on certain preferred stock of public utilities; and (5) any capital loss carryback to the taxable 

year73 

Carryforwards of excess contributions 

Charitable contributions that exceed the applicable percentage limit generally may be 

carried forward for up to five years. 74 In general, contributions carried over from a prior year are 

taken into account after contributions for the current year that are subject to the same percentage 

'' Sec. 170(b)(2)(A). 

Sec. 170(b)(2)(C). 

Sec. !70(d). 
37 

limit. Excess contributions made for the use of (rather than to) an organization generally may 

not be carried forward. 

Qualified conservation contributions 

Preferential percentage limits and carryforward rules apply for qualified conservation 

contributions. 75 In general, the 30-percent contribution base limitation on contributions of 

capital gain property by individuals does not apply to qualified conservation contributions. 

Instead, individuals may deduct the fair market value of any qualified conservation contribution 

to an organization described in section l70(b)(l)(A) (generally, public charities) to the extent of 

the excess of 50 percent of the contribution base over the amount of all other allowable 

charitable contributions. These contributions are not taken into account in determining the 

amount of other allowable charitable contributions. Individuals are allowed to carry forward any 

qualified conservation contributions that exceed the 50-percent limitation for up to 15 years. In 

the case of an individual who is a qualified farmer or rancher for the taxable year in which the 

contribution is made, a qualified conservation contribution is allowable up to 100 percent of the 

excess of the taxpayer's contribution base over the amount of all other allowable charitable 

contributions. 

In the case of a corporation (other than a publicly traded corporation) that is a qualified 

farmer or rancher for the taxable year in which the contribution is made, any qualit!ed 

conservation contribution is allowable up to 100 percent of the excess of the corporation's 

taxable income (as computed under section 170(b )(2)) over the amount of all other allowable 

charitable contributions. Any excess may be carried forward for up to 15 years as a contribution 

subject to the l 00-percent limitation76 

A qualified farmer or rancher means a taxpayer whose gross income from the trade or 

business offarrning (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the 

taxpayer's gross income for the taxable year. 

Reasons for Change 

The Committee believes that a robust charitable sector is vital to our economy and that 

charitable giving is critical to ensuring that the sector thrives. For this reason, the Committee 

believes that it is desirable to provide additional incentives for taxpayers to provide monetary 

support to charities. Increasing the charitable percentage limit for cash contributions to public 

charities will encourage taxpayers to provide essential monetary support to front-line charities. 

Explanation of Provision 

For contributions in taxable years beginning after December 31, 2017, and before 

January 1, 2026, the provision increases the income-based percentage limit described in section 

'

5 Sec. 170(b)(l)(E). 

'

6 Sec. 170(b)(2)(B). 
38 

170(b )(!)(A) for charitable contributions of cash by an individual taxpayer to public charities 

and certain other organizations from 50 percent to 60 percent. 

Effective Date 

The provision is effective for contributions made in taxable years beginning after 

December 31,2017. 

4. Temporarily allow increased contributions to ABLE accounts, and allow contributions 

to be eligible for saver's credit (sec. 11024 of the bill and sec. 529A of the Code) 

Present Law 

Qualified ABLE programs 

The Code provides for a tax-favored savings program intended to benefit disabled 

individuals, known as qualified ABLE programs. 77 A qualified ABLE program is a program 

established and maintained by a State or agency or instrumentality thereof A qualified ABLE 

program must meet the following conditions: (1) under the provisions of the program, 

contributions may be made to an account (an "ABLE account"), established for the purpose of 

meeting the qualified disability expenses of the designated beneficiary of the account; (2) the 

program must limit a designated beneficiary to one ABLE account; and (3) the program must 

meet certain other requirements discussed below. A qualified ABLE program is generally 

exempt from income tax, but is otherwise subject to the taxes imposed on the unrelated business 

income of tax-exempt organizations. 

A designated beneficiary of an ABLE account is the owner of the ABLE account A 

designated beneficiary must be an eligible individual (defined below) who established the ABLE 

account and who is designated at the commencement of participation in the qualified ABLE 

program as the beneficiary of amounts paid (or to be paid) into and from the program. 

Contributions to an ABLE account must be made in cash and are not deductible for 

Federal income tax purposes. Except in the case of a rollover contribution from another ABLE 

account, an ABLE account must provide that it may not receive aggregate contributions during a 

taxable year in excess of the amount under section 2503(b) of the Code (the annual gift tax 

exemption). For 2017, this is $14,000n Additionally, a qualified ABLE program must provide 

adequate safef,>uards to ensure that ABLE account contributions do not exceed the limit imposed 

on accounts under the qualified tuition program of the State maintaining the qualified ABLE 

'' Sec. 529A 

'

8 This amount is indexed for inflation. In the case that contributions to an ABLE account exceed the 

annual limit, an excise tax in the amount of six percent of the excess contribution to such account is imposed on the 

designated beneficiary. Such tax does not apply in the event that the trustee of such account makes a corrective 

distribution of such excess amounts by the due date (including extensions) of the individual's tax return for the year 

within the taxable year 
39 

program. Amounts in the account accumulate on a tax-deferred basis (i.e., income on accounts 

under the program is not subject to current income tax). 

A qualified ABLE program may permit a designated beneficiary to direct (directly or 

indirectly) the investment of any contributions (or earnings thereon) no more than two times in 

any calendar year and must provide separate accounting for each designated beneficiary. A 

qualified ABLE program may not allow any interest in the program (or any portion thereof) to be 

used as security for a loan. 

Distributions from an ABLE account are generally includible in the distributee's income 

to the extent consisting of earnings on the account. 79 Distributions from an ABLE account are 

excludable from income to the extent that the total distribution does not exceed the qualified 

disability expenses of the designated beneficiary during the taxable year. If a distribution from 

an ABLE account exceeds the qualified disability expenses of the designated beneficiary, a pro 

rata portion of the distribution is excludable from income. The portion of any distribution that is 

includible in income is subject to an additional 10-percent tax unless the distribution is made 

after the death of the beneficiary. Amounts in an ABLE account may be rolled over without 

income tax liability to another ABLE account for the same beneficiary80 or another ABLE 

account for the designated beneficiary's brother, sister, stepbrother or stepsister who is also an 

eligible individuaL 

Except in the case of an ABLE account established in a different ABLE program for 

purposes of transferring ABLE accounts, 81 no more than one ABLE account may be established 

by a designated beneficiary. Thus, once an ABLE account has been established by a designated 

beneficiary, no account subsequently established by such beneficiary shall be treated as an 

ABLE account. 

A contribution to an ABLE account is treated as a completed gift of a present interest to 

the designated beneficiary of the account. Such contributions qualify for the per-donee annual 

gift tax exclusion ($14,000 for 20 17) and, to the extent of such exclusion, are exempt from the 

generation skipping transfer ("GST") tax. A distribution from an ABLE account generally is not 

subject to gift tax or GST tax. 

Eligible individuals 

As described above, a qualified ABLE program may provide for the establishment of 

ABLE accounts only if those accounts are established and owned by an eligible individual, such 

owner referred to as a designated beneficiary. For these purposes, an eligible individual is an 

individual either (I) for whom a disability certification has been filed with the Secretary for the 

The rules of section 72 apply in determining the portion of a distribution that consists of earnings. 

8

° For instance, if a designated beneficiary were to relocate to a different State. 

81 In which case the contributor ABLE account must be closed 60 days after the transfer to the new ABLE 

account is made. 
40 

taxable year, or (2) who is entitled to Social Security Disability Insurance benefits or SSI 

benefits 82 based on blindness or disability, and such blindness or disability occurred before the 

individual attained age 26. 

A disability certification means a certification to the satisfaction of the Secretary, made 

by the eligible individual or the parent or guardian of the eligible individual, that the individual 

has a medically determinable physical or mental impairment, which results in marked and severe 

functional limitations, and which can be expected to result in death or which has lasted or can be 

expected to last for a continuous period of not less than 12 months, or is blind (within the 

meaning of section 1614(a)(2) of the Social Security Act). Such blindness or disability must 

have occurred before the date the individual attained age 26. Such certification must include a 

copy of the diagnosis of the individual's impairment and be signed by a licensed physician. 83 

Qualified disability expenses 

As described above, the earnings on distributions from an ABLE account are excluded 

from income only to the extent total distributions do not exceed the qualified disability expenses 

of the designated beneficiary. For this purpose, qualified disability expenses are any expenses 

related to the eligible individual's blindness or disability which are made for the benefit of the 

designated beneficiary. Such expenses include the following expenses: education, housing, 

transportation, employment training and support, assistive technology and personal support 

services, health, prevention and wellness, financial management and administrative services, 

legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other 

expenses, which are approved by the Secretary under regulations and consistent with the 

purposes of section 529 A. 

Transfer to State 

In the event that the designated beneficiary dies, subject to any outstanding payments due 

for qualified disability expenses incurred by the designated beneficiary, all amounts remaining in 

the deceased designated beneficiary's ABLE account not in excess of the amount equal to the 

total medical assistance paid such individual under any State Medicaid plan established under 

title XIX of the Social Security Act shall be distributed to such State upon filing of a claim for 

payment by such State. Such repaid amounts shall be net of any premiums paid from the account 

or by or on behalf of the beneficiary to the State's Medicaid Buy-In program. 

Treatment of ABLE accounts under Federal programs 

Any amounts in an ABLE account, and any distribution for qualified disability expenses, 

shall be disregarded for purposes of determining eligibility to receive, or the amount of, any 

assistance or benefit authorized by any Federal means-tested program. However, in the case of 

the SSI program, a distribution for housing expenses is not disregarded, nor are amounts in an 

82 These are benefits. respectively, under Title H or Title XVI of the Social Security Act. 

83 No inference may be drawn from a disability certification for purposes of eligibility for Social Security, 

SSI or Medicaid benefits. 
41 

ABLE account in excess of$100,000. In the case that an individual's ABLE account balance 

exceeds $100,000, such individual's SSI benefits shall not be terminated, but instead shall be 

suspended until such time as the individual's resources fall below $100,000. However, such 

suspension shall not apply for purposes of Medicaid eligibility. 

Saver's credit 

Present law provides a nonrefundable tax credit for eligible taxpayers for qualified 

retirement savings contributions. 84 The maximum annual contribution eligible for the credit is 

$2,000 per individual. The credit rate depends on the adjusted gross income ("AGI") of the 

taxpayer. For this purpose, AGI is determined without regard to certain excludable foreignsource earned income and certain U.S. possession income. 

For taxable years beginning in 2017, married taxpayers filing joint returns with AGI of 

$61,500 or less, taxpayers filing head of household returns with AGI of $46,125 or less, and all 

other taxpayers filing returns with AGI of $30,750 or less are eligible for the credit. As the 

taxpayer's AGI increases, the credit rate available to the taxpayer is reduced, until, at certain 

AGI levels, the credit is unavailable. The credit rates based on AGI for taxable years beginning 

in 2016 are provided in the table below. The AGI levels used for the determination of the 

available credit rate are indexed for inflation. 

Table 3.-Credit Rates for Saver's Credit 

The saver's credit is in addition to any deduction or exclusion that would otherwise apply 

with respect to the contribution. The credit offsets alternative minimum tax liability as well as 

regular tax liability. The credit is available to individuals who are 18 years old or older, other 

than individuals who are full-time students or claimed as a dependent on another taxpayer's 

return. 

Qualified retirement savings contributions consist of(!) elective deferrals to a 

section 40l(k) plan, a section 403(b) plan, a governmental section 457 plan, a SIMPLE plan, or a 

SARSEP; (2) contributions to a traditional or Roth IRA; and (3) voluntary after-tax employee 

contributions to a qualified retirement plan or section 403(b) plan. Under the rules governing 

these arrangements, an individual's contribution to the arrangement generally cannot exceed the 

lesser of an annual dollar amount (for example, in 2017, $5,500 in the case of an IRA of an 

individual under age 50) or the individual's compensation that is includible in income. In the 

" Sec. 25B. 
42 

case of IRA contributions of a married couple, the combined includible compensation of both 

spouses may be taken into account. 

The amount of any contribution eligible for the credit is reduced by distributions received 

by the taxpayer (or by the taxpayer's spouse if the taxpayer files a joint return with the spouse) 

from any retirement plan to which eligible contributions can be made during the taxable year for 

which the credit is claimed, during the two taxable years prior to the year for which the credit is 

claimed, and during the period after the end of the taxable year for which the credit is claimed 

and prior to the due date (including extensions) for filing the taxpayer's return for the year. 

Distributions that are rolled over to another retirement plan do not affect the credit. 

Reasons for Change 

The Committee believes that it is important to reward work and encourage savings 

among individuals with disabilities, so as to provide those individuals with the ability to live 

independent and self-directed lives. Therefore, the Committee believes that the contribution 

limits for ABLE accounts should be increased so as to allow individuals with disabilities who 

earn income to contribute a portion of those funds to ABLE accounts, above and beyond the 

contributions that are made on their behalf by family members and others. 

Explanation of Provision 

The provision temporarily increases the contribution limitation to ABLE accounts under 

certain circumstances. While the general overall limitation on contributions (the per-donee 

annual gift tax exclusion ($14,000 for 20 17)) remains the same, the limitation is temporarily 

increased with respect to contributions made by the designated beneficiary of the ABLE account. 

Under the temporary provision, after the overall limitation on contributions is reached, an ABLE 

account's designated beneficiary may contribute an additional amount, up to the lesser of (a) the 

Federal poverty line for a one-person household; or (b) the individual's compensation for the 

taxable year. 

Additionally, the provision temporarily allows a designated beneficiary of an ABLE 

account to claim the saver's credit for contributions made to his or her ABLE account. 

The provision does not apply to taxable years after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after the date of enactment. 
43 

5. Temporarily allow tax-free roll overs between qualified tuition programs and qualified 

ABLE programs (sec. 11025 of the bill and sees. 529 and 529A of the Code) 

Present Law 

Qualified ABLE programs 

The Code provides for a tax-favored savings program intended to benefit disabled 

individuals, known as qualified ABLE programs. 85 A qualified ABLE program is a program 

established and maintained by a State or agency or instrumentality thereof A qualified ABLE 

program must meet the following conditions: (1) under the provisions of the program, 

contributions may be made to an account (an "ABLE account"), established for the purpose of 

meeting the qualified disability expenses of the designated beneficiary of the account; (2) the 

program must limit a designated beneficiary to one ABLE account; and (3) the program must 

meet certain other requirements discussed below. A qualified ABLE program is generally 

exempt from income tax, but is otherwise subject to the taxes imposed on the unrelated business 

income of tax-exempt organizations. 

A designated beneficiary of an ABLE account is the owner of the ABLE account A 

designated beneficiary must be an eligible individual (defined below) who established the ABLE 

account and who is designated at the commencement of participation in the qualified ABLE 

program as the beneficiary of amounts paid (or to be paid) into and from the program. 

Contributions to an ABLE account must be made in cash and are not deductible for 

Federal income tax purposes. Except in the case of a rollover contribution from another ABLE 

account, an ABLE account must provide that it may not receive aggregate contributions during a 

taxable year in excess of the amount under section 2503(b) of the Code (the annual gift tax 

exemption). For 2017, this is $14,000. 86 Additionally, a qualified ABLE program must provide 

adequate safeguards to ensure that ABLE account contributions do not exceed the limit imposed 

on accounts under the qualified tuition program of the State maintaining the qualified ABLE 

program. Amounts in the account accumulate on a tax-deferred basis (i.e., income on accounts 

under the program is not subject to current income tax). 

A qualified ABLE program may permit a designated beneficiary to direct (directly or 

indirectly) the investment of any contributions (or earnings thereon) no more than two times in 

any calendar year and must provide separate accounting for each designated beneficiary. A 

qualified ABLE program may not allow any interest in the program (or any portion thereof) to be 

used as security for a loan. 

85 Sec. 529A 

86 This amount is indexed for iuflation. In the case that contributions to an ABLE account exceed the 

annual limit, an excise tax in the amount of six percent of the excess contribution to such account is imposed on the 

designated beneficiary. Such tax does not apply in the event that the trustee of such account makes a corrective 

distribution of such excess amounts by the due date (including extensions) of the individual's tax return for the year 

within the taxable year. 
44 

Distributions from an ABLE account are generally includible in the distributee's income 

to the extent consisting of earnings on the account. 87 Distributions from an ABLE account are 

excludable from income to the extent that the total distribution does not exceed the qualified 

disability expenses of the designated beneficiary during the taxable year. If a distribution from 

an ABLE account exceeds the qualified disability expenses of the designated beneficiary, a pro 

rata portion of the distribution is excludable from income. The portion of any distribution that is 

includible in income is subject to an additional 1 0-percent tax unless the distribution is made 

after the death of the beneficiary. Amounts in an ABLE account may be rolled over without 

income tax liability to another ABLE account for the same beneficiary88 or another ABLE 

account for the designated beneficiary's brother, sister, stepbrother or stepsister who is also an 

eligible individual. 

Except in the case of an ABLE account established in a different ABLE program for 

purposes of transferring ABLE accounts, 89 no more than one ABLE account may be established 

by a designated beneficiary. Thus, once an ABLE account has been established by a designated 

beneficiary, no account subsequently established by such beneficiary shall be treated as an 

ABLE account. 

A contribution to an ABLE account is treated as a completed gift of a present interest to 

the designated beneficiary of the account. Such contributions qualify for the per-donee annual 

gift tax exclusion ($14,000 for 20 17) and, to the extent of such exclusion, are exempt from the 

generation skipping transfer ("GST") tax. A distribution from an ABLE account generally is not 

subject to gift tax or GST tax. 

Eligible individuals 

As described above, a qualified ABLE program may provide for the establishment of 

ABLE accounts only if those accounts are established and owned by an eligible individual, such 

owner referred to as a designated beneficiary. For these purposes, an eligible individual is an 

individual either (1) for whom a disability certification has been filed with the Secretary for the 

taxable year, or (2) who is entitled to Social Security Disability Insurance benefits or SSI 

benefits90 based on blindness or disability, and such blindness or disability occurred before the 

individual attained age 26. 

A disability certification means a certification to the satisfaction of the Secretary, made 

by the eligible individual or the parent or guardian of the eligible individual, that the individual 

has a medically determinable physical or mental impairment, which results in marked and severe 

,. The rules of section 72 apply in determining the portion of a distribution that consists of earnings. 

" For instance. if a designated beneficiary were to relocate to a different State. 

'" In which case the contributor ABLE account must be closed 60 days after the transfer to the new ABLE 

account is made. 

90 These are benefits, respectively. under Title II or Title XVI of the Social Security Act. 
45 

functional limitations, and which can be expected to result in death or which has lasted or can be 

expected to last for a continuous period of not less than 12 months, or is blind (within the 

meaning of section 1614(a)(2) of the Social Security Act). Such blindness or disability must 

have occurred before the date the individual attained age 26. Such certification must include a 

copy of the diagnosis of the individual's impairment and be signed by a licensed physician 91 

Qualified disability expenses 

As described above, the earnings on distributions from an ABLE account are excluded 

from income only to the extent total distributions do not exceed the qualified disability expenses 

of the designated beneficiary. For this purpose, qualified disability expenses are any expenses 

related to the eligible individual's blindness or disability which are made for the benefit of the 

designated beneficiary. Such expenses include the following expenses: education, housing, 

transportation, employment training and support, assistive technology and personal support 

services, health, prevention and wellness, financial management and administrative services, 

legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other 

expenses, which are approved by the Secretary under regulations and consistent with the 

purposes of section 529A. 

Transfer to State 

In the event that the designated beneficiary dies, subject to any outstanding payments due 

for qualified disability expenses incurred by the designated beneficiary, all amounts remaining in 

the deceased designated beneficiary's ABLE account not in excess of the amount equal to the 

total medical assistance paid such individual under any State Medicaid plan established under 

title XIX of the Social Security Act shall be distributed to such State upon filing of a claim for 

payment by such State. Such repaid amounts shall be net of any premiums paid from the account 

or by or on behalf of the beneficiary to the State's Medicaid Buy-In program. 

Treatment of ABLE accounts under Federal programs 

Any amounts in an ABLE account, and any distribution for qualified disability expenses, 

shall be disregarded for purposes of determining eligibility to receive, or the amount of~ any 

assistance or benefit authorized by any Federal means-tested program. However, in the case of 

the SSI program, a distribution for housing expenses is not disregarded, nor are amounts in an 

ABLE account in excess of$100,000. In the case that an individual's ABLE account balance 

exceeds $100,000, such individual's SSl benefits shall not be terminated, but instead shall be 

suspended until such time as the individual's resources fall below $100,000. However, such 

suspension shall not apply for purposes of Medicaid eligibility. 

91 No inference may be drawn from a disability certification for purposes of eligibility for Social Security, 

SSI or Medicaid benefits. 
46 

Section 529 qualified tuition programs 

In general 

A qualified tuition program is a program established and maintained by a State or agency 

or instrumentality thereof, or by one or more eligible educational institutions, which satisfies 

certain requirements and under which a person may purchase tuition credits or certificates on 

behalf of a designated beneficiary that entitle the beneficiary to the waiver or payment of 

qualified higher education expenses of the beneficiary (a "prepaid tuition program"). Section 

529 provides specified income tax and transfer tax rules for the treatment of accounts and 

contracts established under qualified tuition programs. 92 In the case of a program established 

and maintained by a State or agency or instrumentality thereof, a qualified tuition program also 

includes a program under which a person may make contributions to an account that is 

established for the purpose of satisfying the qualified higher education expenses of the 

designated beneficiary of the account, provided it satisfies certain specified requirements (a 

"savings account program"). Under both types of qualified tuition programs, a contributor 

establishes an account for the benefit of a particular designated beneficiary to provide for that 

beneficiary's higher education expenses. 

In general, prepaid tuition contracts and tuition savings accounts established under a 

qualified tuition program involve prepayments or contributions made by one or more individuals 

for the benefit of a designated beneficiary. Decisions with respect to the contract or account are 

typically made by an individual who is not the designated beneficiary. Qualified tuition accounts 

or contracts generally require the designation of a person (generally referred to as an "account 

owner")93 whom the program administrator (oftentimes a third party administrator retained by 

the State or by the educational institution that established the program) may look to for decisions, 

recordkeeping, and reporting with respect to the account established for a designated beneficiary. 

The person or persons who make the contributions to the account need not be the same person 

who is regarded as the account owner for purposes of administering the account. Under many 

qualified tuition programs, the account owner generally has control over the account or contract, 

including the ability to change designated beneficiaries and to withdraw funds at any time and 

for any purpose. Thus, in practice, qualified tuition accounts or contracts generally involve a 

contributor, a designated beneficiary, an account owner (who oftentimes is not the contributor or 

the designated beneficiary), and an administrator of the account or contract. 

Qualified higher education expenses 

For purposes of receiving a distribution from a qualified tuition program that qualifies for 

favorable tax treatment under the Code, qualified higher education expenses means tuition, fees, 

books, supplies, and equipment required for the enrollment or attendance of a designated 

beneficiary at an eligible educational institution, and expenses for special needs services in the 

92 For purposes of this description, the tenn "accounf' is used interchangeably to refer to a prepaid tuition 

benefit contract or a tuition savings account established pursuant to a qualified tuition program. 

93 Section 529 refers to contributors and designated beneficiaries. but docs not define or otherwise refer to 

the term "account owner:' which is a conunonly used term among qualified tuition programs. 
47 

case of a special needs beneficiary that are incurred in connection with such enrollment or 

attendance. Qualified higher education expenses generally also include room and board for 

students who are enrolled at least half-time. Qualified higher education expenses include the 

purchase of any computer technology or equipment, or Internet access or related services, if such 

technology or services were to be used primarily by the beneficiary during any of the years a 

beneficiary is enrolled at an eligible institution. 

Contributions to qualified tuition programs 

Contributions to a qualified tuition program must be made in cash. Section 529 does not 

impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition 

benefits relating to a qualified tuition account; however, the program is required to have 

adequate safeguards to prevent contributions in excess of amounts necessary to provide for the 

beneficiary's qualified higher education expenses. Contributions generally are treated as a 

completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for 

Federal income tax purposes, although they may be deductible for State income tax purposes. 

Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is 

not subject to current income tax). 

A qualified tuition program may not permit any contributor to, or designated beneficiary 

under, the program to direct (directly or indirectly) the investment of any contributions (or 

earnings thereon) more than two times in any calendar year, and must provide separate 

accounting for each designated beneficiary. A qualified tuition program may not allow any 

interest in an account or contract (or any portion thereof) to be used as security for a loan 

Reasons for Change 

The Committee believes that families should be able to roll over amounts that are 

currently held in 529 accounts into ABLE accounts. This will enable families to ensure that 

amounts set aside in 529 plans have the flexibility to provide support for all members of the 

family. 

Explanation of Provision 

The provision temporarily allows for amounts from qualified tuition programs (also 

known as 529 accounts) to be rolled over to an ABLE account without penalty, provided that the 

ABLE account is owned by the designated beneficiary of that 529 account, or a member of such 

designated beneficiary's family94 Such rolled-over amounts count towards the overall limitation 

on amounts that can be contributed to an ABLE account within a taxable year95 Any amount 

94 For these purposes, a member of the family meaus, with respect to any designated beneficiary, the 

taxpayer's: ( l) spouse: (2) child or descendant of a child: (3) brother, sister, stepbrother or stepsister; (4) father, 

mother or ancestor of either; (5) stepfather or stepmother: (6) niece or nephew: (7) aunt or uncle; (8) in-law: (9) the 

spouse of any individual described in (2)-(8): and (10) any first cousin of the designated beneficiary. 

529A(b)(2)(B)(i). Thus. under the provision. if$14.000 (for 2017) was rolled over into a designated 

beneficiary's ABLE account from a 529 account. no additional funds could be contributed by family members into 

tlmt ABLE account during the taxable year. However. under the modifications made to sec. 529A in sec. 11024 of 
48 

rolled over that is in excess of this limitation shall be includible in the gross income of the 

distributee in a manner provided by section 7296 

The provision is not effective for distributions after December 31, 2025. 

Effective Date 

The provision applies to distributions after December 31, 2017. 

6. Treatment of certain individuals performing services in the Sinai Peninsula of Egypt 

(sec. 11026 of the bill and sees. 2, 112, 692, 2201, 3401, 4253, 6013, and 7508 of the Code) 

Present Law 

Members of the Armed Forces serving in a combat zone are afforded a number of tax 

benefits. These include: 

l. An exclusion from gross income of certain military pay received for any month during 

which the member served in a combat zone or was hospitalize as a result of serving in 

a combat zone; 97 

2. An exemption from taxes on death while serving in combat zone or dying as a result 

of wounds, disease, or injury incurred while so serving; 98 

3. Special estate tax rules where death occurs in a combat zone; 99 

4. Special benefits to surviving spouses in the event of a service member's death or 

missing status; 100 

5. An extension of time limits governing the filing of returns and other rules regarding 

timely compliance with Federal income tax rules; 101 and 

the bill, the designated beneficiary may continue to make contributions of earned income to the ABLE account, up 

to the lesser of the poverty level or compensation for the taxable year. 

90 529(c)(3)(A). 

Sec. 112; see also. sec. 3401(a)(l). exempting such income from wage withholding. 

98 Sec. 692. 

99 Sec. 2201. 

100 Sees. 2(a)(3) and60l3(J)(l). 

101 Sec. 7508. 
49 

6. An exclusion from telephone excise taxes. 102 

Reasons for Change 

The Committee believes that the Sinai Peninsula of Egypt is currently sufficiently 

hazardous that members of the Armed Forces serving in such location should be entitled to 

combat zone benefits. 

Explanation of Provision 

The provision grants combat zone tax benefits to the Sinai Peninsula of Egypt, if as of the 

date of enactment of the provision any member of the Armed Forces of the United States is 

entitled to special pay under section 310 of title 37, United States Code (relating to special pay; 

duty subject to hostile fire or imminent danger), for services performed in such location. This 

benefit lasts only during the period such entitlement is in effect but not later than taxable years 

beginning before January 1, 2026. 

Effective Date 

The provision is generally effective beginning June 9, 2015. The portion of the provision 

related to wage withholding applies to remuneration paid after the date of enactment. 

7. Exclusion from gross income of certain amounts received by wrongly incarcerated 

individuals (sec. 11027 of the bill and sec. 139F of the Code) 

Present Law 

Under a provision added in the PATH Act, 103 with respect to any wrongfully incarcerated 

individual, gross income does not include any civil damages, restitution, or other monetary 

award (including compensatory or statutory damages and restitution imposed in a criminal 

matter) relating to the incarceration of such individual for the covered offense for which such 

individual was convicted. 104 

A wrongfully incarcerated individual means an individual: 

(I) who was convicted of a covered offense; 

(2) who served all or part of a sentence of imprisonment relating to that covered offense; 

and 

102 Sec. 4253(d). 

103 Pub. L. No. 114-113 (2015), Diyision Q (Protecting Americans from Tax Hikes Act of20l5), sec. 304. 

104 Sec. 139F. 
50 

(3) (i) was pardoned, granted clemency, or granted amnesty for such offense because the 

individual was innocent, or 

(ii) for whom the judgment of conviction for the offense was reversed or vacated, and 

whom the indictment, information, or other accusatory instrument for that covered 

offense was dismissed or who was found not guilty at a new trial after the judgment of 

con vi cti on for that covered offense was reversed or vacated. 

For these purposes, a covered offense is any criminal offense under Federal or State law, 

and includes any criminal offense arising from the same course of conduct as that criminal 

offense. 

The Code contains a special rule allowing individuals to make a claim for credit or refund 

of any overpayment of tax resulting from the exclusion, even if such claim would be disallowed 

under the Code or by operation of any law or rule of law (including resjudicata), if the claim for 

credit or refund is filed before the close of the one-year period beginning on the date of 

enactment of the PATH Act (December 18, 2015). 105 

Reasons for Change 

The Committee believes that the period of time to file a claim for credit or refund for any 

overpayment of tax resulting from the exclusion should be extended. 

Explanation of Provision 

The provision would extend the waiver on the statute of limitations with respect to filing 

a claim for a credit or refund of an overpayment of tax resulting from the exclusion described 

above for an additional year. Thus, under the provision, such claim for credit or refund must be 

filed before December 18, 2017. 

Effective Date 

The provision is effective on the date of enactment. 

8. Temporarily allow qualified tuition programs (529 accounts) to be established for the in 

utero (sec. 11028 of the bill and sec. 529 of the Code) 

Present Law 

In general 

A qualified tuition pros>ram is a program established and maintained by a State or agency 

or instrumentality thereof, or by one or more eligible educational institutions, which satisfies 

certain requirements and under which a person may purchase tuition credits or certificates on 

10' Sec. 139F. 
51 

behalf of a designated beneficiary that entitle the beneficiary to the waiver or payment of 

qualified higher education expenses of the beneficiary (a "prepaid tuition program"). Section 

529 provides specified income tax and transfer tax rules for the treatment of accounts and 

contracts established under qualified tuition programs. 106 In the case of a program established 

and maintained by a State or agency or instrumentality thereof, a qualified tuition program also 

includes a program under which a person may make contributions to an account that is 

established for the purpose of satisfying the qualified higher education expenses of the 

designated beneficiary of the account, provided it satisfies certain specified requirements (a 

"savings account program"). Under both types of qualified tuition programs, a contributor 

establishes an account for the benefit of a particular designated beneficiary to provide for that 

beneficiary's higher education expenses. 

In general, prepaid tuition contracts and tuition savings accounts established under a 

qualified tuition program involve prepayments or contributions made by one or more individuals 

for the benefit of a designated beneficiary. Decisions with respect to the contract or account are 

typically made by an individual who is not the designated beneficiary. Qualified tuition accounts 

or contracts generally require the designation of a person (generally referred to as an "account 

owner") 107 whom the program administrator (oftentimes a third party administrator retained by 

the State or by the educational institution that established the program) may look to for decisions, 

recordkeeping, and reporting with respect to the account established for a designated beneficiary. 

The person or persons who make the contributions to the account need not be the same person 

who is regarded as the account owner for purposes of administering the account. Under many 

qualified tuition programs, the account owner generally has control over the account or contract, 

including the ability to change designated beneficiaries and to withdraw funds at any time and 

for any purpose. Thus, in practice, qualified tuition accounts or contracts generally involve a 

contributor, a designated beneficiary, an account owner (who oftentimes is not the contributor or 

the designated beneficiary), and an administrator of the account or contract. 

Qualified higher education expenses 

For purposes of receiving a distribution from a qualified tuition program that qualifies for 

favorable tax treatment under the Code, qualified higher education expenses means tuition, fees, 

books, supplies, and equipment required for the enrollment or attendance of a designated 

beneficiary at an eligible educational institution, and expenses for special needs services in the 

case of a special needs beneficiary that are incurred in connection with such enrollment or 

attendance. Qualified higher education expenses generally also include room and board for 

students who are enrolled at least half-time. Qualified higher education expenses include the 

purchase of any computer technology or equipment, or Internet access or related services, if such 

technology or services were to be used primarily by the beneficiary during any of the years a 

beneficiary is enrolled at an eligible institution. 

106 For purposes oflhis description. the term "account" is used interchangeably to refer to a prepaid tuition 

benefit contract or a tuition savings account established pursuant to a qualified tuition program. 

10' Section 529 refers to contributors and designated beneficiaries. but docs no! define or otherwise refer to 

the term "account owner:' which is a conunonly used tenn among qualified tuition programs. 
52 

Contributions to qualified tuition programs 

Contributions to a qualified tuition program must be made in cash. Section 529 does not 

impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition 

benefits relating to a qualified tuition account; however, the program is required to have 

adequate safeguards to prevent contributions in excess of amounts necessary to provide for the 

beneficiary's qualified higher education expenses. Contributions generally are treated as a 

completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for 

Federal income tax purposes, although they may be deductible for State income tax purposes. 

Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is 

not subject to current income tax). 

A qualified tuition program may not permit any contributor to, or designated beneficiary 

under, the program to direct (directly or indirectly) the investment of any contributions (or 

earnings thereon) more than two times in any calendar year, and must provide separate 

accounting for each designated beneficiary. A qualified tuition program may not allow any 

interest in an account or contract (or any portion thereof) to be used as security for a loan. 

Reasons for Change 

The Committee believes that families should be allowed to begin saving for college in 

Code section 529 accounts as soon as possible. The sooner funds are deposited in a taxadvantaged 529 account, the longer the positive effects of compound interest can operate to 

maximize the amount of assets available to pay for college expenses. Therefore, the Committee 

believes an unborn child should qualify as a designated beneficiary in Code section 529. The 

Committee believes that, for these purposes, an unborn child means a child in utero, and the term 

child in utero means a member of the species homo sapiens, at any stage of development, carried 

in the womb. 

Explanation of Provision 

For contributions made after December 31, 2017, the provision specifies that nothing in 

Code section 529 shall prevent an unborn child from qualifying as a designated beneficiary. For 

these purposes, an unborn child means a child in utero, and the term child in utero means a 

member of the species homo sapiens, at any stage of development, who is carried in the womb. 

The provision does not apply to contributions made after December 31, 2025. 

Effective Date 

The provision is effective for contributions made after December 31, 2017. 
53 

9. Relief for retirement plan distributions and modification of casualty loss deduction for 

the Mississippi River Delta flood disaster area (sec. 11029 of the bill and sees. 72(t), 165, 

401-403,408,457, and 3405 ofthe Code) 

Present Law 

Distributions from tax-favored retirement plans 

A distribution from a qualified retirement plan, a tax-sheltered annuity plan (a 

"section 403(b) plan"), an eligible deferred compensation plan of a State or local government 

employer (a "governmental section 457(b) plan"), or an individual retirement arrangement (an 

"IRA") generally is included in income for the year distributed. 108 These plans are referred to 

collectively as "eligible retirement plans." In addition, unless an exception applies, a distribution 

from a qualified retirement plan, a section 403(b) plan, or an IRA received before age 591;2 is 

subject to a 1 0-percent additional tax (referred to as the "early withdrawal tax") on the amount 

includible in income. 109 

In general, a distribution from an eligible retirement plan may be rolled over to another 

eligible retirement plan within 60 days, in which case the amount rolled over generally is not 

includible in income. The IRS has the authority to waive the 60-day requirement iffailure to 

waive the requirement would be against equity or good conscience, including cases of casualty, 

disaster or other events beyond the reasonable control of the individual. 

The terms of a qualified retirement plan, section 403(b) plan, or governmental 

section 457(b) plan generally determine when distributions are permitted. However, in some 

cases, restrictions may apply to distribution before an employee's termination of employment, 

referred to as "in-service" distributions. Despite such restrictions, an in-service distribution may 

be permitted in the case of financial hardship or an unforeseeable emergency. 

Tax-favored retirement plans are generally required to be operated in accordance with the 

terms of the plan document, and amendments to reflect changes to the plan generally must be 

adopted within a limited period. 

Itemized deduction for casualty losses 

A taxpayer may generally claim a deduction for any loss sustained during the taxable 

year and not compensated by insurance or otherwise. 11° For individual taxpayers, deductible 

losses must be incurred in a trade or business or other profit-seeking activity or consist of 

108 Sees. 401(a). 403(a), 403(b), 457(b) and 408. Under section 3405, distributions from these plans are 

generally subject to income tax withholding unless the recipient elects otherwise. In addition. certain distributions 

from a qualified retirement plan. a section 403(b) plan, or a govenm1ental section 457(b) plan are subject to 

mandatory income tax withholding at a 20-perccnt rate unless the distribution is rolled over. 

109 Sec. 72(1). Under present law, the 10-perccnt early withdrawal tax docs not apply to distributions from 

a govenunental section -!57 (b) plan. 

110 Sec. 165. 
54 

property losses arising from fire, storm, shipwreck, or other casualty, or from theft. Personal 

casualty or theft losses are deductible only if they exceed $100 per casualty or theft. In addition, 

aggregate net casualty and theft losses are deductible only to the extent they exceed 10 percent of 

an individual taxpayer's adjusted gross income. 

Reasons for Change 

The withdrawal, before retirement age, of funds from tax-favored retirement savings 

arrangements undercuts retirement income security, the purpose of the tax subsidy. The 

10-percent early withdrawal tax is therefore intended to discourage such withdrawals. However, 

the Committee reCOf,'llizes that the financial need caused by a presidentially declared disaster 

often forces individuals to make such withdrawals, and the Committee is concerned that the 

additional tax burden may aggravate an individual's financial need. The Committee therefore 

wishes to provide relief by removing the 10-percent early withdrawal tax and allowing income 

attributable to a withdrawal to be included over a multi-year period. Further, the Committee 

wishes to enable individuals to restore the amount withdrawn, and thus replenish their retirement 

savings, by providing an extended period to do so. 

Additionally, the Committee believes that it is important to provide additional relief to 

individuals who suffered uninsured losses as a result of damage suffered in the Mississippi River 

Delta flood disaster area. The Committee believes it is appropriate to relax certain limitations on 

claiming the deduction for casualty losses in this circumstance. 

Explanation of Provision 

In general 

The provision provides tax relief, as described below, relating to the "Mississippi River 

Delta flood disaster area," defined as an area-

• with respect to which a major disaster was declared by the President under 

section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act 

before March 31, 2016, by reason of severe storms and flooding occurring in 

Louisiana, Texas, and Mississippi during March of 2016 (referred to herein as the 

"March 2016 flood area"), or 

• with respect to which a major disaster was declared by the President under 

section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act 

before September 3, 2016, by reason of severe storms and flooding occurring in 

Louisiana during August of2016 (referred to herein as the "August 2016 flood area"). 

Distributions from eligible retirement plans 

Under the provision, an exception to the I 0-percent early withdrawal tax applies in the 

case of a qualified Mississippi River Delta flooding distribution from a qualified retirement plan, 

a section 403(b) plan or an IRA In addition, as discussed further, income attributable to a 

qualified Mississippi River Delta flooding distribution may be included in income ratably over 
55 

three years, and the amount of a qualified Mississippi River Delta flooding distribution may be 

recontributed to an eligible retirement plan within three years. 

A qualified Mississippi River Delta flooding distribution is a distribution from an eligible 

retirement plan-

• made on or after March 1, 2016, and before January l, 2018, to an individual whose 

principal place of abode on March I, 2016, was located in the March 2016 flood area 

and who has sustained an economic loss by reason of the severe storms and flooding 

giving rise to the related Presidential disaster declaration, or 

• made on or after Auf,>ust 11,2016, and before January 1, 2018, to an individual 

whose principal place of abode on August 11, 2016, was located in the August 2016 

flood area and who has sustained an economic Joss by reason of the severe storms and 

flooding giving rise to the related Presidential disaster declaration. 

The total amount of distributions to an individual from all eligible retirement plans that 

may be treated as qualified Mississippi River Delta flooding distributions is $100,000. Thus, any 

distributions in excess of$100,000 during the applicable period are not qualified Mississippi 

River Delta flooding distributions. 

Any amount required to be included in income as a result of a qualified Mississippi River 

Delta flooding distribution is included in income ratably over the three-year period beginning 

with the year of distribution unless the individual elects not to have ratable inclusion apply. 

Any portion of a qualified Mississippi River Delta flooding distribution may, at any time 

during the three-year period beginning the day after the date on which the distribution was 

received, be recontributed to an eligible retirement plan to which a rollover can be made. Any 

amount recontributed within the three-year period is treated as a rollover and thus is not 

includible in income. For example, if an individual receives a qualified hurricane distribution in 

2016, that amount is included in income, generally ratably over the year of the distribution and 

the following two years, but is not subject to the 10-percent early withdrawal tax. If, in 2018, the 

amount of the qualified Mississippi River Delta flooding distribution is recontributed to an 

eligible retirement plan, the individual may file an amended return to claim a refund of the tax 

attributable to the amount previously included in income. In addition, if, under the ratable 

inclusion provision, a portion of the distribution has not yet been included in income at the time 

of the contribution, the remaining amount is not includible in income. 

A qualified Mississippi River Delta flooding distribution is a permissible distribution 

from a qualified retirement plan, section 403(b) plan, or governmental section 457(b) plan, 

regardless of whether a distribution otherwise would be permissible. 111 A plan is not treated as 

violating any Code requirement merely because it treats a distribution as a qualified Mississippi 

River Delta flooding distribution, provided that the aggregate amount of such distributions from 

plans maintained by the employer and members of the employer's controlled group or affiliated 

111 A qualified Mississippi River Delta flooding distribntions is subject to income tax withholding unless 

the recipient elects othenvisc. Mandatory 20-percent withholding does not apply. 
56 

service group does not exceed $100,000. Thus, a plan is not treated as violating any Code 

requirement merely because an individual might receive total distributions in excess of$100,000, 

taking into account distributions from plans of other employers or IRAs. 

A plan amendment made pursuant to the provision (or a regulation issued thereunder) 

may be retroactively effective if, in addition to the requirements described below, the 

amendment is made on or before the last day of the first plan year beginning after December 31, 

2018 (or in the case of a governmental plan, December 31, 2020), or a later date prescribed by 

the Secretary. In addition, the plan will be treated as operated in accordance with plan terms 

during the period beginning with the date the provision or regulation takes effect (or the date 

specified by the plan if the amendment is not required by the provision or regulation) and ending 

on the last permissible date for the amendment (or, if earlier, the date the amendment is adopted). 

In order for an amendment to be retroactively effective, it must apply retroactively for that 

period, and the plan must be operated in accordance with the amendment during that period. 

Modification of rules related to casualty losses 

Under the provision, in the case of a personal casualty loss which arose in the March 

2016 flood area (and was attributable to the severe storms and flooding giving rise to the 

Presidential disaster declaration) or the August 2016 flood area (and was attributable to the 

severe storms and flooding giving rise to the Presidential disaster declaration), such losses are 

deductible without regard to whether aggregate net losses exceed ten percent of a taxpayer's 

adjusted gross income. Under the provision, in order to be deductible the losses must exceed 

$500 per casualty. Additionally, such losses may be claimed in addition to the standard 

deduction. 

Effective Date 

The provision is effective on the date of enactment. 
57 

PART IV- EDUCATION 

1. Temporary treatment of student loans discharged on account of death or disability (sec. 

11031 of the bill and sec. 108 of the Code) 

Present Law 

Gross income generally includes the discharge of indebtedness of the taxpayer. Under an 

exception to this general rule, gross income does not include any amount from the forgiveness 

(in whole or in part) of certain student loans, provided that the forgiveness is contingent on the 

student's working for a certain period of time in certain professions for any of a broad class of 

employers. 112 

Student loans eligible for this special rule must be made to an individual to assist the 

individual in attending an educational institution that normally maintains a regular faculty and 

curriculum and normally has a regularly enrolled body of students in attendance at the place 

where its education activities are regularly carried on. Loan proceeds may be used not only for 

tuition and required fees, but also to cover room and board expenses. The loan must be made by 

(1) the United States (or an instrumentality or agency thereof), (2) a State (or any political 

subdivision thereof), (3) certain tax-exempt public benefit corporations that control a State, 

county, or municipal hospital and whose employees have been deemed to be public employees 

under State law, or (4) an educational organization that originally received the funds from which 

the loan was made from the United States, a State, or a tax-exempt public benefit corporation. 

In addition, an individual's gross income does not include amounts from the forgiveness 

of loans made by educational organizations (and certain tax-exempt organizations in the case of 

refinancing loans) out of private, nongovernmental funds if the proceeds of such loans are used 

to pay costs of attendance at an educational institution or to refinance any outstanding student 

loans (not just loans made by educational organizations) and the student is not employed by the 

lender organization. In the case of such loans made or refinanced by educational organizations 

(or refinancing loans made by certain tax-exempt organizations), cancellation of the student loan 

must be contingent on the student working in an occupation or area with unmet needs and such 

work must be performed for, or under the direction of, a tax-exempt charitable organization or a 

governmental entity. 

Finally, an individual's gross income does not include any loan repayment amount 

received under the National Health Service Corps loan repayment program, certain State loan 

repayment programs, or any amount received by an individual under any State loan repayment or 

loan forgiveness program that is intended to provide for the increased availability of health care 

services in underserved or health professional shortage areas (as determined by the State). 

Reasons for Change 

The Committee believes that taxpayers should not have to bear a tax burden for student 

loan forgiveness in the event that a student dies or becomes permanently disabled. The 

112 Sec. 108([). 
58 

Committee further believes that the exclusion of student loan forgiveness in these cases is fair 

and compassionate. 

Explanation of Provision 

The provision temporarily modifies the exclusion of student loan discharges from gross 

income, by including within the exclusion certain discharges on account of death or total and 

permanent disability of the student. 113 Loans eligible for the exclusion under the provision are 

loans made by (I) the United States (or an instrumentality or agency thereof), (2) a State (or any 

political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a 

State, county, or municipal hospital and whose employees have been deemed to be public 

employees under State law, ( 4) an educational organization that originally received the funds 

from which the loan was made from the United States, a State, or a tax-exempt public benefit 

corporation, or (5) private education loans (for this purpose, private education loan is defined in 

section 140(7) of the Consumer Protection Act). 114 

The provision does not apply to discharges of indebtedness occurring after December 31, 

2025. 

Effective Date 

The provision is effective for discharges of loans after December 31, 2017. 

2. Temporary increase in deduction for certain educator expenses (sec. 11032 of the bill 

and sec. 62 of the Code) 

Present Law 

In general, unreimbursed business expenses incurred by an employee are deductible, but 

only as an itemized deduction and only to the extent the expenses exceed two percent of adjusted 

gross income. 115 However, in the case of certain employees and certain expenses, a deduction 

may be taken in determining adjusted gross income (referred to as an "above-the-line" 

deduction), including certain expenses of eligible educators. 116 Eligible educators are 

113 Although the provision makes specific reference to those provisions of the Higher Education Act of 

1965 that discharge William D. Ford Federal Direct Loan Prof,>rdm loans. Federal Family Education Loan Program 

loans, and Federal Perkins Loan Program loans in the case of death and total and permanent disability, the provision 

provides generally for an exclusion in the case of a student loan discharged on account of the death or total and 

pem1anent disability of the student, in addition to those specific statutory references. 

114 15 U.S. C. 1650(7). 

11s Sees. 62(a)(l). 67. and 162. 

116 Sec. 62(a)(2)(D). 
59 

elementary or secondary school teachers, instructors, counselors, principals, or aides in a school 

for at least 900 hours during a school year. 117 

An eligible educator may take an "above-the-line" deduction for ordinary and necessary 

expenses incurred I) by reason of participation in professional development courses related to 

the curriculum or students the educator teaches, or 2) in connection with books, supplies, 

computer and other equipment, and supplementary materials to be used in the classroom. The 

deduction may not exceed $250 (for 20 17) in expenses, indexed for inflation. 

Reasons for Change 

The Committee believes that teachers perform an indispensable function in the economy, 

and that many teachers spend out-of-pocket money on classroom supplies in excess of the 

present-law $250 amount. Accordingly, the Committee believes that the above-the-line 

deduction for educator expenses, which has remained at $250 since introduction in 2002 (even 

after indexing), should be increased to $500. 

Explanation of Provision 

The provision temporarily increases the limit for the deduction of certain expenses of 

eligible educators, in determining adjusted gross income, to $500. Any deduction for expenses 

in excess of this amount (under present law generally a miscellaneous itemized deduction subject 

to the two-percent floor) is suspended. 118 

The provision does not apply to taxable years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

11 ' Sec. 62(d)(l). 

118 Sec. I 1045 of the bill. 
60 

PART V- DEDUCTIONS AND EXCLUSIONS 

1. Suspension of deduction for personal exemptions (sec. 11041 of the bill and sees. 151 

through 153 of the Code) 

Present Law 

Under present law, in determining taxable income, an individual reduces AGI by any 

personal exemption deductions and either the applicable standard deduction or his or her 

itemized deductions. Personal exemptions generally are allowed for the taxpayer, his or her 

spouse, and any dependents. For 2017, the amount deductible for each personal exemption is 

$4,050. This amount is indexed annually for inflation. The personal exemption amount is 

phased out in the case of an individual with AGI in excess of $313,800 for married taxpayers 

filing jointly, $287,650 for heads of household, $156,900 for married taxpayers filing separately, 

and $261,500 for all other filers. ln addition, no personal exemption is allowed in the case of a 

dependent if a deduction is allowed to another taxpayer. 

Withholding rules 

Under present law, the amount of tax required to be withheld by employers from a 

taxpayer's wages is based in part on the number of withholding exemptions a taxpayer claims on 

his Form W-4. An employee is entitled to the following exemptions: (1) an exemption for 

himself, unless he allowed to be claimed as a dependent of another person; (2) an exemption to 

which the employee's spouse would be entitled, if that spouse does not file a Form W-4 for that 

taxable year claiming an exemption described in (1); (3) an exemption for each individual who is 

a dependent (but only if the employee's spouse has not also claimed such a withholding 

exemption on a Form W-4); (4) additional withholding allowances (taking into account estimated 

itemized deductions, estimated tax credits, and additional deductions as provided by the 

Secretary of the Treasury); and (5) a standard deduction allowance. 

Filing requirements 

Under present law, an unmarried individual is required to file a tax return for the taxable 

year if in that year the individual had income which equals or exceeds the exemption amount 

plus the standard deduction applicable to such individual (i.e., single, head of household, or 

surviving spouse). An individual entitled to file a joint return is required to do so unless that 

individual's gross income, when combined with the individual's spouse's gross income for the 

taxable year, is less than the sum of twice the exemption amount plus the basic standard 

deduction applicable to a joint return, provided that such individual and his spouse, at the close 

of the taxable year, had the same household as their home. 

Trusts and estates 

In lieu of the deduction for personal exemptions, an estate is allowed a deduction of 

$600. A trust is allowed a deduction of$100; $300 if required to distribute all its income 

currently; and an amount equal to the personal exemption of an individual in the case of a 

qualified disability trust. 
61 

Reasons for Change 

The Committee believes that consolidating the basic standard deduction and personal 

exemptions for a taxpayer and his or her spouse into a larger standard deduction simplifies the 

Code while still allowing a minimum level of income to be exempt from Federal income 

taxation. Although the deduction for personal exemptions is suspended, the Committee believes 

it is appropriate to continue to provide benefits for dependents by increasing the child tax credit 

for qualifying children and expanding a modified credit to other dependents. 

Explanation of Provision 

The provision suspends the deduction for personal exemptions. 119 

The provision temporarily modifies the requirements for those who are required to file a 

tax return. In the case of an individual who is not married, such individual is required to file a 

tax return if the taxpayer's gross income for the taxable year exceeds the applicable standard 

deduction. Married individuals are required to file a return if that individual's gross income, 

when combined with the individual's spouse's gross income for the taxable year, is more than 

the standard deduction applicable to a joint return, provided that: (i) such individual and his 

spouse, at the close of the taxable year, had the same household as their home; (ii) the 

individual's spouse does not make a separate return; and (iii) neither the individual nor his 

spouse is a dependent of another taxpayer who has income (other than earned income) in excess 

of $500 (indexed for inflation). 

The provision does not apply to taxable years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

2. Suspension of deduction for State and local taxes (sec. 11042 of the bill and sec. 164 of 

the Code) 

Present Law 

Individuals are permitted a deduction for certain taxes paid or accrued, whether or not 

incurred in a taxpayer's trade or business. These taxes are: (i) State, local and foreign real 

119 The provision also clarifies that. for purposes of taxable years in which the personal exemption is 

reduced to zero, this should not alter the operation of those provisions of the Code which refer to a tawayer allowed 

a deduction (or an individual with respect to whom a taxpayer is allowed a deduction) under section 151. Thus. for 

instance. sec. 24(a) allows a credit against tax with respect to each qualifying child of the taxpayer for which the 

taxpayer is allowed a deduction under section 151. A qualifYing child. as defined under section 152(c). remains 

eligible for the credit. notwithstanding that the deduction under section 151 has been reduced to zero. 
62 

property taxes; 120 (ii) State and local personal property taxes; 121 (iii) State, local and foreign 

income, war profits, and excess profits taxes. 122 At the election of the taxpayer, an itemized 

deduction may be taken for State and local general sales taxes in lieu of the itemized deduction 

for State and local income taxes. 123 

Property taxes may be allowed as a deduction in computing adjusted gross income if 

incurred in connection with property used in a trade or business; otherwise they are an itemized 

deduction. In the case of State and local income taxes, the deduction is an itemized deduction 

notwithstanding that the tax may be imposed on profits from a trade or business. 124 

Individuals also are permitted a deduction for Federal and State generation skipping 

transfer tax ("GST tax") imposed on certain income distributions that are included in the gross 

income of the distributee. 125 

In determining a taxpayer's alternative minimum taxable income, no itemized deduction 

for property, income, or sales tax is allowed. 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including the 

deduction for State and local taxes, makes the system simpler and fairer for all families and 

individuals, and allows for lower tax rates. The Committee further believes that repeal of this 

provision is consistent with streamlining the Code, broadening the tax base, lowering rates, and 

growing the economy. 

The deduction for State and local taxes provides a Federal subsidy for public services 

provided by State and local governments, such as public education and sanitary services. 

Allowing a deduction for State and local taxes permits taxpayer to finance personal consumption 

with pre-tax dollars. If the taxpayer acquired similar services by private purchase, no deduction 

would be permitted for such expenditures. In addition, the deduction provided for State and 

local taxes disproportionately benefits those taxpayers in high-tax states. Those taxpayers in low120 Sec. 16~(a)(l). 

121 Sec. 164(a)(2). 

Sec. 164(a)(3). A foreign tax credit in lien of a dcdnction, is allowable for foreign taxes if the tm;payer 

so elects. 

Sec. 164(h)(5). 

1

" Sec H. Rep. No. 1365 to accompany Individual Income Tax Bill of 1944 (78"' Cong .. 2d. Scss.). 

reprinted at 19 C.B. 839 (1944). 

105 Sec. 164(a)(4). 
63 

tax states, in essence, subsidize the public service benefits received by taxpayers in high-tax 

states. 126 

Explanation of Provision 

The provision provides for a suspension of the itemized deduction for State and local 

taxes, as described below. 

For the taxable years to which the suspension applies, in the case of an individual, State, 

local and foreign property taxes and State and local sales taxes are allowed as a deduction only 

when paid or accrued in carrying on a trade or business or an activity described in section 212 

(relating to expenses for the production ofincome). 127 Thus, the provision allows only those 

deductions for State, local and foreign property taxes, and sales taxes, that are presently 

deductible in computing income on an individual's Schedule C, Schedule E, or Schedule F on 

such individual's tax return. For instance, in the case of property taxes, an individual may 

deduct such items only if these taxes were imposed on business assets (such as residential rental 

property). 

For the taxable years to which the suspension applies, in the case of an individual, State 

and local income, war profits, and excess profits taxes are not allowable as a deduction. 

The suspension ends for taxable years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

3. Suspension of deduction for home equity interest (sec. 11043 of the bill and 

sec. 163(h) of the Code) 

Present Law 

As a general matter, personal interest is not deductible. 128 Qualified residence interest is 

not treated as personal interest and is allowed as an itemized deduction, subject to limitations. 129 

Qualified residence interest means interest paid or accrued during the taxable year on either 

acquisition indebtedness or home equity indebtedness. A qualified residence means the 

126 Sec Staff Report on Comprehensive Tax Rcfonn for 2015 and Beyond, Prepared by the Rcpublicim 

Staff of the Committee on Finance United States Senate, S. Prt. No. 113-31 (Dec. 2014). at 97. 

The provision docs not modify the deductibility of GST tax imposed on certain income distributions. 

Additionally, taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are 

reflected in a partner's or S corporation shareholder's distributive or pro-rata share of income or loss on a Schedule 

K-1 (or similar form), will continue to reduce such partner's or shareholder's distributive or pro-rata share of income 

as under present Jaw. 

128 Sec. 163(h)(l). 

109 Sec. 163(h)(2)(D) and (h)(3). 
64 

taxpayer's principal residence and one other residence of the taxpayer selected to be a qualified 

residence. A qualified residence can be a house, condominium, cooperative, mobile home, house 

trailer, or boat. 

Acquisition indebtedness 

Acquisition indebtedness is indebtedness that is incurred in acquiring, constructing or 

substantially improving a qualified residence of the taxpayer and which secures the residence. 

The maximum amount treated as acquisition indebtedness is $1 million ($500,000 in the case of 

a married person filing a separate return). 

Acquisition indebtedness also includes indebtedness from the refinancing of other 

acquisition indebtedness but only to the extent of the amount (and term) of the refinanced 

indebtedness. Thus, for example, if the taxpayer incurs $200,000 of acquisition indebtedness to 

acquire a principal residence and pays down the debt to $150,000, the taxpayer's acquisition 

indebtedness with respect to the residence cannot thereafter be increased above $150,000 (except 

by indebtedness incurred to substantially improve the residence). 

Interest on acquisition indebtedness is allowable in computing alternative minimum 

taxable income. However, in the case of a second residence, the acquisition indebtedness may 

only be incurred with respect to a house, apartment, condominium, or a mobile home that is not 

used on a transient basis. 

Home equitv indebtedness 

Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured 

by a qualified residence. 

The amount of home equity indebtedness may not exceed $100,000 ($50,000 in the case 

of a married individual filing a separate return) and may not exceed the fair market value of the 

residence reduced by the acquisition indebtedness. 

Interest on home equity indebtedness is not deductible in computing alternative minimum 

taxable income. 

Interest on qualifying home equity indebtedness is deductible, regardless of how the 

proceeds of the indebtedness are used. For example, personal expenditures may include health 

costs and education expenses for the taxpayer's family members or any other personal expenses 

such as vacations, furniture, or automobiles. A taxpayer and a mortgage company can contract 

for the home equity indebtedness loan proceeds to be transferred to the taxpayer in a lump sum 

payment (e.g., a traditional mortgage), a series of payments (e.g, a reverse mortgage), or the 

lender may extend the borrower a line of credit up to a fixed limit over the term of the loan (e.g, 

a home equity line of credit). 

Thus, the aggregate limitation on the total amount of a taxpayer's acquisition 

indebtedness and home equity indebtedness with respect to a taxpayer's principal residence and a 

second residence that may give rise to deductible interest is $1,100,000 ($550,000, for married 

persons filing a separate return). 
65 

Reasons for Change 

The Committee believes that scaling back many of the existing tax incentives, including 

the deduction for interest paid on home equity indebtedness, makes the system simpler and fairer 

for all families and individuals, and allows for lower tax rates. The Committee further believes 

that modification of this provision is consistent with streamlining the Code, broadening the tax 

base, lowering rates, and growing the economy. 

The deduction for interest paid on home equity indebtedness permits taxpayers to borrow 

against their residence and purchase consumer goods thereby circumventing the prohibition on 

deduction of consumer interest. In the event of an economic downturn, a taxpayer may lose his 

or her home as a result of having the home secure the indebtedness. In addition, the deduction 

for interest paid on home equity indebtedness favors homeowners versus renters as the deduction 

is only available for homeowners. 

Explanation of Provision 

The provision suspends the deduction for interest on home equity indebtedness. Thus, 

for taxable years beginning after December 31, 2017, a taxpayer may not claim a deduction for 

interest on home equity indebtedness. The suspension ends for taxable years beginning after 

December 31,2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

4. Temporary modification of deduction for personal casualty and theft losses (sec. 11044 

of the bill and sec. 165 of the Code) 

Present Law 

A taxpayer may generally claim a deduction for any loss sustained during the taxable 

year, not compensated by insurance or otherwise. For individual taxpayers, deductible losses 

must be incurred in a trade or business or other profit-seeking activity or consist of property 

losses arising from fire, storm, shipwreck, or other casualty, or from theft. no Personal casualty 

or theft losses are deductible only if they exceed $100 per casualty or theft. In addition, 

aggregate net casualty and theft losses are deductible only to the extent they exceed ten percent 

of an individual taxpayer's adjusted gross income. 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including the 

deduction for personal casualty and theft losses, except in the case of Presidentially declared 

uv Sec. l65(c). 
66 

disasters, makes the system simpler and fairer for all families and individuals, and allows for 

lower tax rates. The Committee further believes that repeal of this provision is consistent with 

streamlining the Code, broadening the tax base, lowering rates, and growing the economy. 

The Committee believes that the deduction for personal casualty or theft losses should be 

limited to those losses that may be considered extraordinary, nonrecurring losses, and go beyond 

the average (or usual) losses incurred by most taxpayers in everyday living. The Committee 

believes it appropriate to identify such extraordinary situations by the standard of a Presidentially 

declared disaster. 

Explanation of Provision 

The provision temporarily modifies the deduction for personal casualty and theft losses. 

Under the provision, a taxpayer may claim a personal casualty loss (subject to the limitations 

described above) only if such loss was attributable to a disaster declared by the President under 

section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. 

The above-described limitation does not apply with respect to losses incurred after 

December 31, 2025. 

Effective Date 

The provision is effective for losses incurred in taxable years beginning after December 

31,2017. 

5. Suspension of miscellaneous itemized deductions subject to the two-percent floor 

(sec. 11045 of the bill and sees. 62, 67, and 212 of the Code) 

Present Law 

Individuals may claim itemized deductions for certain miscellaneous expenses. Certain of 

these expenses are not deductible unless, in aggregate, they exceed two percent of the taxpayer's 

adjusted gross income ("AGf'). 131 The deductions described below are subject to the aggregate 

two-percent floor. 132 

Expenses for the production or collection of income 

131 Sec. 67(a). 

The miscellaneous itemized deduction for tax preparation e':penses is described in a separate section of 

this document. 
67 

Individuals may deduct all ordinary and necessary expenses paid or incurred during the 

taxable year for the production or collection of income. 133 

Present law and IRS guidance provide examples of items that may be deducted under this 

provision. This non-exhaustive list includes: 134 

• Appraisal fees for a casualty loss or charitable contribution; 

• Casualty and theft losses from property used in performing services as an employee; 

• Clerical help and office rent in caring for investments; 

• Depreciation on home computers used for investments; 

• Excess deductions (including administrative expenses) allowed a beneficiary on 

termination of an estate or trust; 

• Fees to collect interest and dividends; 

• Hobby expenses, but generally not more than hobby income; 

• Indirect miscellaneous deductions from pass-through entities; 

• Investment fees and expenses; 

• Loss on deposits in an insolvent or bankrupt financial institution; 

• Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed; 

• Repayments of income; 

• Safe deposit box rental fees, except for storing jewelry and other personal effects; 

• Service charges on dividend reinvestment plans; and 

• Trustee's fees for an IRA, if separately billed and paid. 

Tax preparation expenses 

For regular income tax purposes, individuals are allowed an itemized deduction for 

expenses for the production of income. These expenses are defined as ordinary and necessary 

expenses paid or incurred in a taxable year: (1) for the production or collection of income; (2) for 

the management, conservation, or maintenance of property held for the production of income; or 

(3) in connection with the determination, collection, or refund of any tax. 135 

Unreimbursed expenses attributable to the trade or business of being an employee 

Sec. 212(1). 

134 Sec IRS Publication 529. "Miscellaneous Deductions" (20 16), p. 9. 

m Sec. 212. 
68 

ln general, unreimbursed business expenses incurred by an employee are deductible, but 

only as an itemized deduction and only to the extent the expenses exceed two percent of adjusted 

gross income. 136 

Present law and IRS f,>uidance provide examples of items that may be deducted under this 

provision. This non-exhaustive list includes: 137 

• Business bad debt of an employee; 

• Business liability insurance premiums; 

• Damages paid to a former employer for breach of an employment contract; 

• Depreciation on a computer a taxpayer's employer requires him to use in his work; 

• Dues to a chamber of commerce if membership helps the taxpayer perform his job; 

• Dues to professional societies; 

• Educator expenses; 138 

• Home office or part of a taxpayer's home used regularly and exclusively in the 

taxpayer's work; 

• Job search expenses in the taxpayer's present occupation; 

• Laboratory breakage fees; 

• Legal fees related to the taxpayer's job; 

• Licenses and regulatory fees; 

• Malpractice insurance premiums; 

• Medical examinations required by an employer; 

• Occupational taxes; 

• Passport fees for a business trip; 

• Repayment of an income aid payment received under an employer's plan; 

• Research expenses of a coli ege professor; 

• Rural mail carriers' vehicle expenses; 

• Subscriptions to professional journals and trade magazines related to the taxpayer's 

work; 

• Tools and supplies used in the taxpayer's work; 

136 Sees. 62(a)(l) and 67. 

137 See IRS Publication 529, '';\[iscel/aneous Deductions" (2016). p. 3. 

138 Under a special provision. these e>:penses are deductible "above the line'' up to $250. 
69 

• Purchase of travel, transportation, meals, entertainment, gifts, and local lodging 

related to the taxpayer's work; 

• Union dues and expenses; 

• Work clothes and uniforms if required and not suitable for everyday use; and 

• Work-related education. 

Other miscellaneous itemized deductions subject to the two-percent floor 

Other miscellaneous itemized deductions subject to the two-percent floor include: 

• Tax preparation fees; 

• Repayments of income received under a claim of right (only subject to the twopercent floor ifless than $3,000); 

• Repayments of Social Security benefits; and 

• The share of deductible investment expenses from pass-through entities. 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including 

miscellaneous itemized deductions subject to the two-percent floor, makes the system simpler 

and fairer for all families and individuals, and allows for lower tax rates. The Committee fm1her 

believes that repeal of this provision is consistent with streamlining the Code, broadening the tax 

base, lowering rates, and growing the economy. 

The Committee believes that keeping records of miscellaneous itemized deductions, 

which in many cases are small expenditures, adds to the administrative and enforcement 

complexity of the tax system for both taxpayers and the Internal Revenue Service. With the 

significant increase of the standard deduction for all individuals, the Committee believes that 

significant simplification without any loss of fairness can be achieved through suspending the 

deduction for miscellaneous itemized deductions. In addition, the Committee believes that some 

miscellaneous itemized deductions are sufficiently personal in nature, such as safe deposit box 

rental fees, that they would be paid or incurred in the absence of any business or investment 

activities of the taxpayer. 

Explanation of Provision 

The provision suspends all miscellaneous itemized deductions that are subject to the twopercent floor under present law. Thus, under the provision, taxpayers may not claim the abovelisted items as itemized deductions for the taxable years to which the suspension applies. The 

provision does not apply for taxable years beginning after December 31,2025. 
70 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

6. Suspension of overall limitation on itemized deductions (sec. 11046 of the bill and sec. 68 

of the Code) 

Present Law 

The total amount of most otherwise allowable itemized deductions (other than the 

deductions for medical expenses, investment interest and casualty, theft or gambling losses) is 

limited for certain upper-income taxpayers. 139 All other limitations applicable to such 

deductions (such as the separate floors) are first applied and, then, the otherwise allowable total 

amount of itemized deductions is reduced by three percent of the amount by which the 

taxpayer's adjusted gross income exceeds a threshold amount. 

For 2017, the threshold amounts are $261,500 for single taxpayers, $287,650 for heads of 

household, $313,800 for married taxpayers filing jointly, and $156,900 for married taxpayers 

filing separately. These threshold amounts are indexed for inflation. The otherwise allowable 

itemized deductions may not be reduced by more than 80 percent by reason of the overall limit 

on itemized deductions. 

Reasons for Change 

The Committee believes that the overall limitation on itemized deductions has functioned 

as a hidden marginal tax rate. In its mission to make the Code simpler, fairer, and more 

transparent, the Committee believes that the provision should be suspended. 

Explanation of Provision 

The provision suspends the overall limitation on itemized deductions. 

The suspension of the overall limitation on itemized deductions does not apply to taxable 

years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

7. Temporary modification of exclusion of gain from sale of a principal residence 

(sec. 11047 ofthe bill and sec. 121 of the Code) 

Present Law 

A taxpayer who is an individual may exclude up to $250,000 ($500,000 if married filing 

a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for 

130 Sec. 68. 
71 

the exclusion, the taxpayer must have owned and used the residence as a principal residence for 

at least two of the five years ending on the date of the sale or exchange. A taxpayer who fails to 

meet these requirements by reason of a change of place of employment, health, or, to the extent 

provided under regulations, unforeseen circumstances, is able to exclude an amount equal to the 

fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of 

the two years that the ownership and use requirements are met. 

The exclusion under this provision may not be claimed for more than one sale or 

exchange during any two-year period. 

Reasons for Change 

The Committee believes that the current exclusion on proceeds from the sale of a 

principal residence is too liberal in its residency requirements. The exclusion is intended to 

prevent longtime homeowners from recognizing a gain upon an infrequent and important 

transaction, and to allow those individuals to use the full proceeds of the home sale to purchase 

another home. The Committee believes that the rule allowing individuals to live in their home 

for only two out of the prior five years to qualify for the exclusion has allowed individuals to 

cycle between building homes and living in those homes while they build the next home, selling 

the lived-in home and qualifying for the exclusion on the proceeds. This Committee believes 

taxpayers are utilizing the exclusion in a manner that was not intended. 

Explanation of Provision 

The provision extends the length of time a taxpayer must own and use a residence to 

qualify for this exclusion. Specifically, under this provision, the exclusion is available only if the 

taxpayer has owned and used the residence as a principal residence for at least five of the eight 

years ending on the date of the sale or exchange. A taxpayer who fails to meet these 

requirements by reason of a change of place of employment, health, or, to the extent provided 

under regulations, unforeseen circumstances, is able to exclude an amount equal to the fraction 

of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of the five 

years that the ownership and use requirements are met. 

Under the provision, a taxpayer may benefit from the exclusion only once every five 

years. 

The provision does not apply to taxable years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

8. Suspension of exclusion for qualified bicycle commuting reimbursement (sec. 11048 of 

the bill and sec. 132(1) of the Code) 

Present Law 
72 

Qualified bicycle commuting reimbursements of up to $20 per qualifying bicycle 

commuting month are excludible from an employee's gross income140 A qualifying bicycle 

commuting month is any month during which the employee regularly uses the bicycle for a 

substantial portion of travel to a place of employment and during which the employee does not 

receive transportation in a commuter highway vehicle, a transit pass, or qualified parking from 

an employer. 

Qualified reimbursements are any amount received from an employer during a 15-month 

period beginning with the first day of the calendar year as payment for reasonable expenses 

during a calendar year. Reasonable expenses are those incurred in a calendar year for the 

purchase of a bicycle and bicycle improvements, repmr, and storage, if the bicycle is regularly 

used for travel between the employee's residence and place of employment. 

Amounts that are excludible from gross income for income tax purposes are also 

excluded from wages for employment tax purposes. 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including the 

exclusion for qualified bicycle commuting reimbursements, makes the system simpler and fairer 

for all families and individuals, and allows for lower tax rates. The Committee further believes 

that repeal of this provision is consistent with streamlining the Code, broadening the tax base, 

lowering rates, and growing the economy. 

Explanation of Provision 

The provision suspends the exclusion from gross income and wages for qualified bicycle 

commuting reimbursements for taxable years beginning after December 31, 2017 and before 

January 1, 2026. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

9. Suspension of exclusion for qualified moving expense reimbursement (sec. 11049 of the 

bill and sec. 132(g) of the Code) 

Present Law 

Qualified moving expense reimbursements are excludible from an employee's gross 

income 141 , and are defined as any amount received (directly or indirectly) from an employer as 

payment for (or reimbursement of) expenses which would be deductible as moving expenses 

14" Section l32(a)(5) and \32(J)(l)(D). 

141 Section 132(a)(6) and 132(g). 
73 

under section 217 142 if directly paid or incurred by the employee. However, qualified moving 

expense reimbursements do not include amounts actually deducted by the individual. 

Amounts excludible from gross income for income tax purposes as qualified moving 

expense reimbursements are also excluded from wages for employment tax purposes. 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including the 

exclusion for qualified moving expense reimbursements, makes the system simpler and fairer for 

all families and individuals, and allows for lower tax rates. The Committee further believes that 

repeal of this provision is consistent with streamlining the Code, broadening the tax base, 

lowering rates, and growing the economy. 

Explanation of Provision 

The provision suspends the exclusion from gross income and wages for qualified moving 

expense reimbursements for taxable years beginning after December 31, 2017 and before 

January I, 2026. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

10. Suspension of deduction for moving expenses (sec. 11050 of the bill and sec. 217 of tbe 

Code) 

Present Law 

Individuals are permitted an above-the-line deduction for moving expenses paid or 

incurred during the taxable year in connection with the commencement of work by the taxpayer 

as an employee or as a self-employed individual at a new principal place ofwork. 143 Such 

expenses are deductible only if the move meets certain conditions related to distance from the 

taxpayer's previous residence and the taxpayer's status as a full-time employee in the new 

location. 

Special rules apply in the case of a member of the Armed Forces of the United States. In 

the case of any such individual who is on active duty, who moves pursuant to a military order 

and incident to a permanent change of station, the limitations related to distance from the 

142 Sec. 217(a). Individuals are allowed an above-the-line deduction for moving e>.1Jenses paid or incurred 

during the taxable year in connection with the commencement of work by the ta:\l)ayer as an employee or as a selfemployed individual at a new principal place of work. Such e"venses arc deductible only if the move meets certain 

conditions related to distance from the taxpayer's previous residence and the taxl)ayer's status as a full-time 

employee in the new location. 

143 Sec. 217(a). 
74 

taxpayer's previous residence and status as a full-time employee in the new location do not 

apply. 144 Additionally, any moving and storage expenses which are furnished in kind to such an 

individual, spouse, or dependents, or if such expenses are reimbursed or an allowance for such 

expenses is provided, such amounts are excluded from gross income. 145 Rules also apply to 

exclude amounts furnished to the spouse and dependents of such an individual in the event that 

such individuals move to a location other than to where the member of the Armed Forces is 

moving. 

Present law provides income exclusions for various benefits provided to members of the 

Armed Forces. 146 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including the 

deduction for moving expenses, makes the system simpler and fairer for all families and 

individuals, and allows for lower tax rates. The Committee further believes that repeal of this 

provision is consistent with streamlining the Code, broadening the tax base, lowering rates, and 

growing the economy. 

However, the Committee recognizes that special circumstances apply to members of the 

Anned Forces, and thus the provision retains present law benefits relating to the moving 

expenses of these taxpayers. 

Explanation of Provision 

The provision generally suspends the deduction for moving expenses from taxable years 

from 2018 through 2025. However, during that suspension period, the provision retains the 

deduction for moving expenses and the rules providing for exclusions of amounts attributable to 

in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for 

members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant 

to a military order and incident to a permanent change of station. 147 

The suspension of the deduction for moving expenses does not apply to taxable years 

beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

1'

14 Sec. 217(g). 

Sec. 217(g)(2). 

116 Sec. 134. 

H' Under the provision. these exclusions are added to section 134. 
75 

ll. Temporary modification to the limitation on wagering losses (sec. ll051 of the bill and 

sec. 165 of the Code) 

Present Law 

Losses sustained during the taxable year on wagering transactions are allowed as a 

deduction only to the extent of the gains during the taxable year from such transactions. 148 

Reasons for Change 

The Committee believes that the scope of the limitation on wagering losses should be 

broadened to cover expenses incurred in the conduct of the individual's gambling activity. 

Explanation of Provision 

The provision clarifies the scope of"losses from wagering transactions" as that term is 

used in section 165(d). The provision provides that this term includes any deduction otherwise 

allowable under chapter 1 of the Code incurred in carrying on any wagering transaction. 

The provision is intended to clarify that the limitation on losses from wagering 

transactions applies not only to the actual costs of wagers incurred by an individual, but to other 

expenses incurred by the individual in connection with the conduct of that individual's gambling 

activity. 149 The provision clarifies, for instance, an individual's otherwise deductible expenses in 

traveling to or from a casino are subject to the limitation under section 165(d). 

The provision does not apply to taxable years beginning after December 31, 2025. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

148 Sec. 165(d). 

149 The provision thus reverses the result reached by theTa'< Court in RonaldA. Mayo v. Commissioner, 

136 T.C. 81 (2011). In that case, the Court held that a taxpayer's e>.penses incurred in the conduct of the trade or 

business of gambling, other than the cost of wagers, were not limited by section 165(d). and were thus deductible 

tmdcr section 162(a). 
76 

PART VI- INCREASE IN ESTATE AND GIFT TAX EXEMPTION 

1. Temporary increase in estate and gift tax exemption (sec. 11061 of the bill and sec. 2010 

of the Code) 

Present Law 

In general 

A gift tax is imposed on certain lifetime transfers, and an estate tax is imposed on certain 

transfers at death. A generation-skipping transfer tax generally is imposed on transfers, either 

directly or in trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation 

more than one generation younger than that of the transferor). Transfers subject to the 

generation-skipping transfer tax include direct skips, taxable terminations, and taxable 

distributions. 

Income tax rules detennine the recipient's tax basis in property acquired from a decedent 

or by gift. Gifts and bequests generally are excluded from the recipient's gross income. 150 

Common features of the estate, gift and generation-skipping transfer taxes 

Unified credit (exemption) and tax rates 

Unified credit.-A unified credit is available with respect to taxable transfers by gift and 

at death. 151 The unified credit offsets tax, computed using the applicable estate and gift tax rates, 

on a specified amount of transfers, referred to as the applicable exclusion amount, or exemption 

amount. The exemption amount was set at $5 million for 2011 and is indexed for inflation for 

later years. 152 For 2017, the inflation-indexed exemption amount is $5.49 million. 153 Exemption 

used during life to offset taxable gifts reduces the amount of exemption that remains at death to 

offset the value of a decedent's estate. An election is available under which exemption that is 

not used by a decedent may be used by the decedent's surviving spouse (exemption portability). 

Common tax rate table.-A common tax-rate table with a top marginal tax rate of 40 

percent is used to compute gift tax and estate tax. The 40-percent rate applies to transfers in 

excess of $1 million (to the extent not exempt). Because the exemption amount currently shields 

the first $5.49 million in gifts and bequests from tax, transfers in excess of the exemption amount 

generally are subject to tax at the highest marginal rate ( 40 percent). 

150 Sec. 102. 

151 Sec. 2010. 

152 For 2011 and later years. the gift and estate taxes were retmificd. meaning that the gift tax exemption 

amount was increased to equal the estate tax exemption amount. 

For 2017. the $5.49 million exemption amount results iu a unified credit of$2.141.800. after applying 

the applicable rates set forth in section 200l(c). 
77 

Generation-skipping transfer tax exemption and rate.-The generation-skipping transfer 

tax is a separate tax that can apply in addition to either the gift tax or the estate tax. The tax rate 

and exemption amount for generation-skipping transfer tax purposes, however, are set by 

reference to the estate tax rules. Generation-skipping transfer tax is imposed using a flat rate 

equal to the highest estate tax rate (40 percent). Tax is imposed on cumulative generationskipping transfers in excess of the generation-skipping transfer tax exemption amount in effect 

for the year of the transfer. The generation-skipping transfer tax exemption for a given year is 

equal to the estate tax exemption amount in effect for that year (currently $5.49 million). 

Transfers between spouses.-A tOO-percent marital deduction generally is permitted for 

the value of property transferred between spouses. 154 In addition, transfers of"qualified 

terminable interest property" also are eligible for the marital deduction. Qualified terminable 

interest property is property: (1) that passes from the decedent, (2) in which the surviving spouse 

has a "qualifying income interest for life," and (3) to which an election under these rules applies. 

A qualifying income interest for life exists if: (1) the surviving spouse is entitled to all the 

income from the property (payable annually or at more frequent intervals) or has the right to use 

the property during the spouse's life, and (2) no person has the power to appoint any part of the 

property to any person other than the surviving spouse. 

A marital deduction generally is denied for property passing to a surviving spouse who is 

not a citizen of the United States. A marital deduction is permitted, however, for property 

passing to a qualified domestic trust of which the noncitizen surviving spouse is a beneficiary. A 

qualified domestic trust is a trust that has as its trustee at least one U.S. citizen or U.S. 

corporation. No corpus may be distributed from a qualified domestic trust unless the U.S. trustee 

has the right to withhold any estate tax imposed on the distribution. 

Tax is imposed on (1) any distribution from a qualified domestic trust before the date of 

the death of the noncitizen surviving spouse and (2) the value of the property remaining in a 

qualified domestic trust on the date of death of the noncitizen surviving spouse. The tax is 

computed as an additional estate tax on the estate of the first spouse to die. 

Transfers to charity.-Contributions to section 50l(c)(3) charitable organizations and 

certain other organizations may be deducted from the value of a gift or from the value of the 

assets in an estate for Federal gift or estate tax purposes. 155 The effect of the deduction generally 

is to remove the full fair market value of assets transferred to charity from the gift or estate tax 

base; unlike the income tax charitable deduction, there are no percentage limits on the deductible 

amount. For estate tax purposes, the charitable deduction is limited to the value of the 

transferred property that is required to be included in the gross estate. 156 A charitable 

15"

1 Sees. 2056 and 2523. 

155 Sees. 2055 and 2522. 

156 Sec. 2055(d). 
78 

contribution of a partial interest in property, such as a remainder or future interest, generally is 

not deductible for gift or estate tax purposes. 157 

The estate tax 

Overview 

The Code imposes a tax on the transfer of the taxable estate of a decedent who is a citizen 

or resident of the United States. 158 The taxable estate is determined by deducting from the value 

of the decedent's gross estate any deductions provided for in the Code. After applying tax rates 

to determine a tentative amount of estate tax, certain credits are subtracted to determine estate tax 

liability. 159 

Because the estate tax shares a common unified credit (exemption) and tax rate table with 

the gift tax, the exemption amounts and tax rates are described together above, along with certain 

other common features of these taxes. 

Gross estate 

A decedent's gross estate includes, to the extent provided for in other sections of the 

Code, the date-of-death value of all of a decedent's property, real or personal, tangible or 

intangible, wherever situated. 160 In general, the value of property for this purpose is the fair 

market value of the property as of the date of the decedent's death, although an executor may 

elect to value certain property as of the date that is six months after the decedent's death (the 

alternate valuation date). 161 

Sees. 2055(e)(2) and 2522(c)(2). 

1

" Sec. 200l(a). 

159 More mechanically. the taxable estate is combined with the value of adjusted tmmble gifts made during 

the dcccdeut's life (generally. post-1976 gifts). before applying tax rates to detenninc a tentative total amount of tax. 

The portion of !he tentative tax attributable to lifetime gifts is then subtracted from the total tentative tax to 

determine the gross estate tax. i.e., the amount of estate tax before considering available credits. Credits are then 

subtracted to detennine the estate tax liability. 

This method of computation was designed to ensure that a taxpayer only gets one run up through the rate 

brackets for all lifetime gifts and transfers at death. at a time when the thresholds for applying the higher marginal 

rates exceeded the exemption amount. However. the higher ($5.49 million) present-law exemption amount 

effectively renders the lower rate brackets irrelevant, because the top marginal rate bracket applies to all transfers in 

excess of $1 million. In other words, all transfers that are not exempt by reason of the $5.49 million exemption 

amount are taxed at the highest Irutrt,>inal rate of 40 percent. 

Wl Sec. 203l(a). 

161 Sec. 2032. 
79 

The gross estate includes not only property directly owned by the decedent, but also other 

property in which the decedent had a beneficial interest at the time of his or her death. 162 The 

gross estate also includes certain transfers made by the decedent prior to his or her death, 

including: (l) certain gifts made within three years prior to the decedent's death; 163 (2) certain 

transfers of property in which the decedent retained a life estate; 164 (3) certain transfers taking 

effect at death; 165 and (4) revocable transfers. 166 In addition, the gross estate also includes 

property with respect to which the decedent had, at the time of death, a general power of 

appointment (generally, the right to determine who will have beneficial ownership). 167 The 

value of a life insurance policy on the decedent's life is included in the gross estate if the 

proceeds are payable to the decedent's estate or the decedent had incidents of ownership with 

respect to the policy at the time of his or her death. 168 

Deductions from the gross estate 

A decedent's taxable estate is determined by subtracting from the value of the gross 

estate any deductions provided for in the Code. 

Marital and charitable transfers.-As described above, transfers to a surviving spouse or to 

charity generally are deductible for estate tax purposes. The effect of the marital and charitable 

deductions generally is to remove assets transferred to a surviving spouse or to charity from the 

estate tax base. 

State death taxes.-An estate tax deduction is permitted for death taxes (e.g., any estate, 

inheritance, legacy, or succession taxes) actually paid to any State or the District of Columbia, in 

respect of property included in the gross estate of the decedent. 169 Such State taxes must have 

been paid and claimed before the later of: (1) four years after the filing of the estate tax return; 

or (2) (a) 60 days after a decision of the U.S. Tax Court determining the estate tax liability 

becomes final, (b) the expiration of the period of extension to pay estate taxes over time under 

section 6!66, or (c) the expiration of the period oflimitations in which to file a claim for refund 

or 60 days after a decision of a court in which such refund suit has become final. 

162 Sec. 2033. 

163 Sec. 2035. 

161 Sec. 2036. 

165 Sec. 2037. 

166 Sec. 2038. 

w Sec. 2041. 

''"' Sec. 2042. 

169 Sec. 2058. 
80 

Other deductions.-A deduction is available for funeral expenses, estate administration 

expenses, and claims against the estate, including certain taxes. 170 A deduction also is available 

for uninsured casualty and theft losses incurred during the settlement of the estate. 171 

Credits against tax 

After accounting for allowable deductions, a gross amount of estate tax is computed. 

Estate tax liability is then determined by subtracting allowable credits from the gross estate tax. 

Unified credit-The most significant credit allowed for estate tax purposes is the unified 

credit, which is discussed in greater detail above. 172 For 2017, the value of the unified credit is 

$2,141,800, which has the effect of exempting $5.49 million in transfers from tax. The unified 

credit available at death is reduced by the amount of unified credit used to offset gift tax on gifts 

made during the decedent's life. 

Other credits.-Estate tax credits also are allowed for: (I) gift tax paid on certain pre1977 gifts (before the estate and gift tax computations were integrated); 173 (2) estate tax paid on 

certain prior transfers (to limit the estate tax burden when estate tax is imposed on transfers of 

the same property in two estates by reason of deaths in rapid succession); 174 and (3) certain 

foreign death taxes paid (generally, where the property is situated in a foreign country but 

included in the decedent's U.S. gross estate). 175 

Provisions affecting small and family-owned businesses and farms 

Special-use valuation.-An executor can elect to value for estate tax purposes certain 

"qualified real property" used in farming or another qualifying closely-held trade or business at 

its current-use value, rather than its fair market value. 176 The maximum reduction in value for 

such real property is $750,000 (adjusted for inflation occurring after 1997; the inflation-adjusted 

amount for 2017 is $1, 120,000). In general, real property qualifies for special-use valuation only 

if ( 1) at least 50 percent of the adjusted value of the decedent's gross estate (including both real 

and personal property) consists of a farm or closely-held business property in the decedent's 

estate and (2) at least 25 percent of the adjusted value of the gross estate consists off arm or 

" 0 Sec. 2053. 

Sec. 2054. 

"' Sec. 20 !0. 

Sec. 2012. 

Sec. 20!3. 

1•5 Sec. 2014. In certain cases, an election may be made to deduct foreign death taxes. See section 

2053(d). 

~' 6 Sec. 2032A. 
81 

closely held business real property. In addition, the property must be used in a qualified use 

(e.g., farming) by the decedent or a member of the decedent's family for five of the eight years 

before the decedent's death. 

If, after a special-use valuation election is made, the heir who acquired the real property 

ceases to use it in its qualified use within 10 years of the decedent's death, an additional estate 

tax is imposed to recapture the entire estate-tax benefit of the special-use valuation. 

Installment payment of estate tax for closely held businesses.-Under present law, the 

estate tax generally is due within nine months of a decedent's death. However, an executor 

generally may elect to pay estate tax attributable to an interest in a closely held business in two 

or more installments (but no more than 1 0). 177 An estate is eligible for payment of estate tax in 

installments if the value of the decedent's interest in a closely held business exceeds 35 percent 

of the decedent's adjusted gross estate (i.e., the gross estate less certain deductions). If the 

election is made, the estate may defer payment of principal and pay only interest for the first five 

years, followed by up to 10 annual installments of principal and interest. This provision 

effectively extends the time for paying estate tax by 14 years from the original due date of the 

estate tax. A special two-percent interest rate applies to the amount of deferred estate tax 

attributable to the first $1 million (adjusted annually for inflation occurring after 1998; the 

inflation-adjusted amount for 2017 is $1,490,000) in taxable value of a closely held business. 

The interest rate applicable to the amount of estate tax attributable to the taxable value of the 

closely held business in excess of $1 million (adjusted for inflation) is equal to 45 percent of the 

rate applicable to underpayments of tax under section 6621 of the Code (i.e., 45 percent of the 

Federal short-term rate plus three percentage points). 178 Interest paid on deferred estate taxes is 

not deductible for estate or income tax purposes. 

The gift tax 

Overview 

The Code imposes a tax for each calendar year on the transfer of property by gift during 

such year by any individual, whether a resident or nonresident of the United States. 179 The 

amount of taxable gifts for a calendar year is determined by subtracting from the total amount of 

gifts made during the year: (I) the gift tax annual exclusion (described below); and (2) allowable 

deductions. 

Gift tax for the current taxable year is determined by: (1) computing a tentative tax on 

the combined amount of all taxable gifts for the current and all prior calendar years using the 

common gift tax and estate tax rate table; (2) computing a tentative tax only on all prior-year 

gifts; (3) subtracting the tentative tax on prior-year gifts from the tentative tax computed for all 

Sec. 6166. 

178 The interest rate on this portion adjusts with the Fedcrd! short-term rate. 

~'9 Sec. 250l(a). 
82 

years to arrive at the portion of the total tentative tax attributable to current-year gifts; and, 

finally, (4) subtracting the amount of unified credit not consumed by prior-year gifts. 

Because the gift tax shares a common unified credit (exemption) and tax rate table with 

the estate tax, the exemption amounts and tax rates are described together above, along with 

certain other common features of these taxes. 

Transfers by gift 

The gift tax applies to a transfer by gift regardless of whether: (1) the transfer is made 

outright or in trust; (2) the gift is direct or indirect; or (3) the property is real or personal, tangible 

or intangible. 18° For gift tax purposes, the value of a gift of property is the fair market value of 

the property at the time of the gift. 181 Where property is transferred for less than full 

consideration, the amount by which the value of the property exceeds the value of the 

consideration is considered a gift and is included in computing the total amount of a taxpayer's 

gifts for a calendar year. 182 

For a gift to occur, a donor generally must relinquish dominion and control over donated 

property. For example, if a taxpayer transfers assets to a trust established for the benefit of his or 

her children, but retains the right to revoke the trust, the taxpayer may not have made a 

completed gift, because the taxpayer has retained dominion and control over the transferred 

assets. A completed gift made in trust, on the other hand, often is treated as a gift to the trust 

beneficiaries. 

By reason of statute, certain transfers are not treated as transfers by gift for gift tax 

purposes. These include, for example, certain transfers for educational and medical purposes, 183 

transfers to section 527 political organizations, 184 and transfers to tax-exempt organizations 

described in sections 50l(c)(4), (5), or (6). 185 

Taxable gifts 

As stated above, the amount of a taxpayer's taxable gifts for the year is determined by 

subtracting from the total amount of the taxpayer's gifts for the year the gift tax annual exclusion 

and any available deductions. 

" 0 Sec. 25ll(a). 

181 Sec. 2512(a). 

182 Sec. 2512(b). 

183 Sec. 2503(e). 

'"'' Sec. 250l(a)(4). 

180 Sec. 250 l(a)(6). 
83 

Gift tax annual exclusion.-Under present law, donors oflifetime gifts are provided an 

annual exclusion of$14,000 per donee in 2017 (indexed for inflation from the 1997 annual 

exclusion amount of$10,000) for gifts of present interests in property during the taxable year. 186 

If the non-donor spouse consents to split the gift with the donor spouse, then the annual 

exclusion is $28,000 per donee in 2017. In general, unlimited transfers between spouses are 

permitted without imposition of a gift tax. Special rules apply to the contributions to a qualified 

tuition program ("529 Plan") including an election to treat a contribution that exceeds the annual 

exclusion as a contribution made ratably over a five-year period beginning with the year of the 

contribution. 187 

Marital and charitable deductions.-As described above, transfers to a surviving spouse or 

to charity generally are deductible for gift tax purposes. The effect of the marital and charitable 

deductions generally is to remove assets transferred to a surviving spouse or to charity from the 

gift tax base. 

The generation-skipping transfer tax 

A generation-skipping transfer tax generally is imposed (in addition to the gift tax or the 

estate tax) on transfers, either directly or in trust or similar arrangement, to a "skip person" (i.e., 

a beneficiary in a generation more than one generation below that of the transferor). Transfers 

subject to the generation-skipping transfer tax include direct skips, taxable terminations, and 

taxable distributions. 

Exemption and tax rate 

An exemption generally equal to the estate tax exemption amount ($5.49 million for 

2017) is provided for each person making generation-skipping transfers. The exemption may be 

allocated by a transferor (or his or her executor) to transferred property, and in some cases is 

automatically allocated. The allocation of generation-skipping transfer tax exemption effectively 

reduces the tax rate on a generation-skipping transfer. 

The tax rate on generation-skipping transfers is a flat rate of tax equal to the maximum 

estate and gift tax rate (40 percent) multiplied by the "inclusion ratio." The inclusion ratio with 

respect to any property transferred indicates the amount of "generation-skipping transfer tax 

exemption" allocated to a trust (or to property transferred in a direct skip) relative to the total 

value of property transferred. 188 If, for example, a taxpayer transfers $5 million in property to a 

trust and allocates $5 million of exemption to the transfer, the inclusion ratio is zero, and the 

applicable tax rate on any subsequent generation-skipping transfers from the trust is zero percent 

(40 percent multiplied by the inclusion ratio of zero). 1f, however, the taxpayer allocated only 

$2.5 million of exemption to the transfer, the inclusion ratio is 0.5, and the applicable tax rate on 

186 Sec. 2503(b). 

18' Sec. 529(c)(2). 

188 The inclusion mtio is one minus the applicable fmction. The applicable fraction is the amount of 

exemption allocated to a trust (or to a direct skip) divided by the value of assets transferred. 
84 

any subsequent generation-skipping transfers from the trust is 20 percent (40 percent multiplied 

by the inclusion ratio of0.5). If the taxpayer allocates no exemption to the transfer, the inclusion 

ratio is one, and the applicable tax rate on any subsequent generation-skipping transfers from the 

trust is 40 percent (40 percent multiplied by the inclusion ratio of one). 

Generation-skipping transfers 

Generation-skipping transfer tax generally is imposed at the time of a generationskipping transfer a direct skip, a taxable termination, or a taxable distribution. 

A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip 

person. A skip person may be a natural person or certain trusts. All persons assigned to the 

second or more remote generation below the transferor are skip persons (e.g., grandchildren and 

great-grandchildren). Trusts are skip persons if (I) all interests in the trust are held by skip 

persons, or (2) no person holds an interest in the trust and at no time after the transfer may a 

distribution (including distributions and terminations) be made to a non-skip person. 

A taxable termination is a termination (by death, lapse of time, release of power, or 

otherwise) of an interest in property held in trust unless, immediately after such termination, a 

non-skip person has an interest in the property, or unless at no time after the termination may a 

distribution (including a distribution upon termination) be made from the trust to a skip person. 

A taxable distribution is a distribution from a trust to a skip person (other than a taxable 

termination or direct skip). If a transferor allocates generation-skipping transfer tax exemption to 

a trust prior to the taxable distribution, generation-skipping transfer tax may be avoided. 

Income tax basis in property received 

In general 

Gain or loss, if any, on the disposition of property is measured by the taxpayer's amount 

realized (i.e., gross proceeds received) on the disposition, less the taxpayer's basis in such 

property. Basis generally represents a taxpayer's investment in property with certain 

adjustments required after acquisition. For example, basis is increased by the cost of capital 

improvements made to the property and decreased by depreciation deductions taken with respect 

to the property. 

A gift or bequest of appreciated (or loss) property is not an income tax realization event 

for the transferor. The Code provides special rules for determining a recipient's basis in assets 

received by lifetime gift or from a decedent 

Basis in property received by lifetime gift 

Under present law, property received from a donor of a lifetime gift generally takes a 

carryover basis. "Carryover basis" means that the basis in the hands of the donee is the same as 

it was in the hands of the donor. The basis of property transferred by lifetime gift also is 

increased, but not above fair market value, by any gift tax paid by the donor. The basis of a 

lifetime gift, however, generally cannot exceed the property's fair market value on the date of the 
85 

gift. If a donor's basis in property is greater than the fair market value of the property on the 

date of the gift, then, for purposes of determining loss on a subsequent sale of the property, the 

donee's basis is the property's fair market value on the date of the gift. 

Basis in property acguired from a decedent 

Property acquired from a decedent's estate generally takes a stepped-up basis. "Steppedup basis" means that the basis of property acquired from a decedent's estate generally is the fair 

market value on the date of the decedent's death (or, if the alternate valuation date is elected, the 

earlier of six months after the decedent's death or the date the property is sold or distributed by 

the estate). Providing a fair market value basis eliminates the recognition of income on any 

appreciation of the property that occurred prior to the decedent's death and eliminates the tax 

benefit from any unrealized loss. 

In community property states, a surviving spouse's one-half share of community propet1y 

held by the decedent and the surviving spouse (under the community property laws of any State, 

U.S. possession, or foreign country) generally is treated as having passed from the decedent and, 

thus, is eligible for stepped-up basis. Thus, both the decedent's one-half share and the surviving 

spouse's one-half share are stepped up to fair market value. This rule applies if at least one-half 

of the whole of the community interest is includible in the decedent's gross estate. 

Stepped-up basis treatment generally is denied to certain interests in foreign entities. 

Stock in a passive foreign investment company (including those for which a mark-to-market 

election has been made) generally takes a carryover basis, except that stock of a passive foreign 

investment company for which a decedent shareholder had made a qualified electing fund 

election is allowed a stepped-up basis. Stock owned by a decedent in a domestic international 

sales corporation (or former domestic international sales corporation) takes a stepped-up basis 

reduced by the amount (if any) which would have been included in gross income under section 

995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the 

estate tax valuation date (i.e., generally the date of the decedent's death unless an alternate 

valuation date is elected). 

Reasons for Change 

The Committee believes the Federal estate tax harms taxpayers and the economy and 

therefore should be modified by doubling the estate and gift tax exemption. A tax on capital, 

such as the estate tax, motivates wealth holders to reduce savings and increase spending during 

life, rather than passing it to the next generation, ultimately increasing the consumption gap 

between the wealthy and poor. A tax on capital also causes investors to provide less capital to 

workers, thereby reducing wages in the long run. 

The Committee is particularly concerned about the effect of the estate tax on the owners 

of farms and family businesses, which create jobs and support our economy. The estate tax hits 

such entrepreneurs especially hard, forcing families of deceased owners to make the difficult 

decision to sell all or part of the farm or business or take out costly loans to satisfy the estate tax 

liability. 
86 

Explanation of Provision 

The provision generally doubles the estate and gift tax exemption amount for estates of 

decedents dying and gifts made after December 31, 2017, and before January I, 2026. This is 

accomplished by increasing the basic exclusion amount provided in section 2010(c)(3) of the 

Code from $5 million to $10 million. The $10 million amount is indexed for inflation occurring 

after 2011. 

As a conforming amendment to section 2010(g) (regarding computation of estate tax), the 

provision provides that the Secretary shall prescribe regulations as may be necessary or 

appropriate to carry out the purposes of the section with respect to differences between the basic 

exclusion amount in effect: (1) at the time of the decedent's death; and (2) at the time of any 

gifts made by the decedent. 

Effective Date 

The provision is effective for estates of decedents dying and gifts made after December 

31,2017. 
87 

PART VII - TAXPAYER RIGHTS AND TAX ADMINISTRATION 

1. Extension of time limit for contesting IRS levy (sec. 11071 of the bill and sees. 6343 and 

6532 of the Code) 

Present Law 

The IRS is authorized to return property that has been wrongfully levied upon. 189 In 

general, monetary proceeds from the sale of levied property may be returned within nine months 

of the date of the levy. 

Generally, any person (other than the person against whom is assessed the tax out of 

which such levy arose) who claims an interest in levied property and that such property was 

wrongfully levied upon may bring a civil action for wrongful levy in a district court of the 

United States. 190 Generally, an action for wrongful levy must be brought within nine months 

from the date oflevy. 191 

Reasons for Change 

The Committee understands that in many cases the time period for bringing an action 

may be insufficient for taxpayers or third parties to discover a wrongful or mistaken levy and 

seek to remedy it Accordingly, the Committee believes it is appropriate to provide for a longer 

period of time within which a person may contest a wrongful IRS levy. 

Explanation of Provision 

The provision extends from nine months to two years the period for returning the 

monetary proceeds from the sale of property that has been wrongfully levied upon. 

The provision also extends from nine months to two years the period for bringing a civil 

action for wrongful levy. 

Effective Date 

The provision is effective with respect to: ( 1) levies made after the date of enactment; 

and (2) levies made on or before the date of enactment provided that the nine-month period has 

not expired as of the date of enactment 

1

" Sec. 6343. 

190 Sec. 7426. 

191 Sec. 6532. 
88 

2. Individuals held harmless on improper levy on retirement plans (sec. 11072 of the bill 

and sec. 6343 of the Code) 

Present Law 

Tax-favored retirement savings 

Under the Code, tax-favored treatment applies to traditional and Roth individual 

retirement arrangements ("IRAs") and certain employer-sponsored retirement plans ("employersponsored plans"). 192 The rules for tax-favored treatment include annual limits on the amount 

that may be contributed to an IRA or employer-sponsored plan. 

In general, a distribution from a traditional IRA or employer-sponsored plan (other than 

from a designated Roth account under an employer-sponsored plan) is includible in income, 

except to the extent attributable to any contributions that were made to the IRA or plan on an 

after-tax basis. 191 Contributions made to a Roth IRA or a designated Roth account are made on 

an after-tax basis. 194 Certain distributions from a Roth IRA or a designated Roth account are 

excluded from income; otherwise, a distribution is includible in income, except to the extent 

attributable to contributions. 195 Amounts that are withdrawn from an IRA or employersponsored plan before age 59V> and are includible in income are subject to a 1 0-percent early 

withdrawal tax unless an exception applies. 196 

A distribution from a traditional IRA or employer-sponsored plan (other than from a 

designated Roth account) generally may be rolled over to another traditional IRA or employersponsored plan (other than to a designated Roth account). 197 The rollover generally can be 

achieved by a direct payment from the distributing IRA or plan to the recipient IRA or plan 

("direct rollover") or by contributing the distribution to the recipient IRA or plan within 60 days 

of receiving the distribution ("60-day rollover"). Amounts that are rolled over generally are not 

includible in gross income. A distribution from a Roth IRA generally may be rolled over to 

another Roth IRA by direct rollover or a 60-day rollover, and a distribution from a designated 

192 Sees. 219. 408. and 408A provide rules for IRAs. Tax-favored employer-sponsored retirement plans 

consist of qualified retirement plans under sections 401 (a) and 403(a). tax-deferred annuity plans under 

section 403(b), and State and local govermnent eligible deferred compensation plans under section 457(b). Under 

section 7701 (j). the Thrift Savings Fnnd is treated as a qualified retirement plan 

193 Sees. 408(d) and 402. 

Sees. 408A(c) aud 402A(a)(2). 

195 Sees. 408A(d) and 402A(d). 

196 Sec. 72(1). 

A rollover is not pennitted with respect to an IRA that an individual has inherited from another 

individual ("inherited IRA"). In addition, the beneficiary of a deceased employee under an employer-sponsored 

plan other than a surviving spouse, may roll a distribution from the plan only to an IRA that is designated as an 

inherited IRA. 
89 

Roth account generally may be rolled over to a Roth IRA or another designated Roth account by 

direct rollover or a 60-day rollover. In general, an individual is permitted to make only one 

60-day rollover from an IRA to another IRA within a one-year period. 

In addition to these roll overs, an individual generally may convert an amount in a 

traditional IRA or a non-Roth account under an employer-sponsored defined contribution plan 

into a Roth IRA or a designated Roth account, referred to as a "Roth conversion." The amount 

converted is generally includible in the individual's income to the same extent as if a distribution 

had been made. The conversion may be accomplished by a direct transfer of the amount from 

the traditional IRA or non-Roth account to the Roth IRA or designated Roth account or by a 

distribution from the traditional IRA or non-Roth account and contribution to the Roth IRA or 

designated Roth account within 60 days. 

An amount withdrawn from an IRA or employer-sponsored plan made on account of an 

IRS levy is includible in income in the same manner as other distributions. However, the 

1 0-percent early withdrawal tax does not apply. 198 

Incorrect levies on lRAs and employer-sponsored plans 

Present law provides rules under which the IRS returns amounts subject to an incorrect 

levy. 199 For example, amounts withdrawn from an IRA pursuant to a levy are returned to the 

individual owning the IRA in the case of a wrongful levy or if the levy was not in accordance 

with IRS administrative procedures. 200 In the case of a wrongful levy, the IRS is required to pay 

interest on the amount returned to the individual at the overpayment rate. 201 The IRS is not 

required to pay interest if the levy was not in accordance with IRS administrative procedures. 202 

Present law does not provide special rules to allow an individual to recontribute to an 

IRA or employer-sponsored plan an amount withdrawn pursuant to a levy and later returned to 

the individual by the IRS, or interest thereon. Thus, if an individual wishes to contribute such 

returned amounts to an IRA or employer-sponsored plan, the contribution is subject to the 

normally applicable rules, including limits on contributions and the time for making a rollover. 

Reasons for Change 

IRAs and employer sponsored retirement plans provide an important source of retirement 

income for many Americans. Under present law, if the IRS improperly levies on an individual's 

IRA or benefits under an employer sponsored plan, the individual may not be made whole, even 

if the IRS returns the amount levied, with interest, because the individual may lose the 

198 Sec. 72(t)(2)(vii). 

199 Sec. 6343(b)-(d). 

'"' Sees. 6343(b)(2). 6343(d)(2)(A). 

201 Sec. G343(c)(l). 

Sec. 6343(d)(2). 
90 

opportunity to have those funds accumulate on a tax-favored basis until retirement. The 

Committee believes that improper levies should not reduce retirement income security. Thus, the 

Committee bill provides that retirement funds that are withdrawn from an IRA or employer 

sponsored retirement plan pursuant to an improper IRS levy and returned by the IRS may be 

recontributed to the IRA or plan or to a different IRA 

Explanation of Provision 

Under the provision, if an amount withdrawn from an lRA ("original IRA") or employersponsored plan pursuant to a levy is returned to an individual by the IRS, the individual may 

contribute the amount returned, and any interest thereon, either to the original iRA or to the 

employer-sponsored plan, if permissible, 203 or to a different IRA to which a rollover from the 

original IRA or employer-sponsored plan would be permitted. 204 The contribution is allowed 

without regard to the normally applicable limits on IRA contributions and roll overs. The 

provision applies to a levied amount that is returned to the individual because the levy on the 

original IRA or employer-sponsored plan (1) was wrongful, or (2) is determined to be premature 

or otherwise not in accordance with administrative procedures. 

A contribution under the provision must be made by the due date (not including 

extensions) for the individual's income tax return for the year in which the IRS returns the 

amount previously levied on. A contribution under the provision is treated as a rollover 

("rollover contribution") made for the taxable year in which the distribution on account of the 

levy occurred, but is not taken into account for purposes of the limit on one IRA rollover within 

a one-year period. In addition, except in the case of a rollover contribution that is treated as a 

Roth conversion, any tax attributable to the amount distributed from the original IRA or 

employer-sponsored plan by reason of a levy ( t) is not to be assessed, (2) if assessed, is to be 

abated, and (3) if collected, is to be credited or refunded as an overpayment made on the due date 

for the return for the taxable year in which the amount was levied on. 

Under the provision, the IRS is required to pay interest on an amount returned to the 

individual at the overpayment rate in the case of a levy that is determined to be premature or 

otherwise not in accordance with administrative procedures (as well as in the case of a wrongful 

levy under present law). Interest paid by the IRS on the amount returned to the individual and 

contributed to an IRA or employer-sponsored plan is treated as earnings within the IRA or 

employer-sponsored plan after the rollover contribution was made and is not includible in gross 

income when received from the IRS. 

When the IRS returns to an individual an amount that was levied on, the IRS must notify 

the individual that a contribution to the original IRA, the employer-sponsored plan, or a new IRA 

203 The tenns of an employer-sponsored plan might not permit the amount retumcd by the IRS to be 

contributed to the plan. In addition. in the case of an amount withdrawn from a designated Roth account pursuant to 

the leYy, the returned amount could be contributed only to the original designated Roth account (or to a Roth IRA). 

204 The proYision allows a rollover with respect to an inherited IRA to an inherited IRA of the same type 

(traditional or Roth) as the original IRA 
91 

may be made of the amount returned, and the interest paid, by the due date (not including 

extensions) for the individual's income tax return for the year in which the amount is returned. 

Effective Date 

The provision is effective for levied amounts, and interest thereon, returned to individuals 

in taxable years beginning after December 31, 2017. 

3. Modifications of user fees requirements for installment agreements (sec. 11073 of the bill 

and new sec. 6159(f) of the Code) 

Present Law 

The Code authorizes the IRS to enter into written agreements with any taxpayer under 

which the taxpayer agrees to pay taxes owed, as well as interest and penalties, in installments 

over an agreed schedule, if the IRS determines that doing so will facilitate collection of the 

amounts owed. This agreement provides for a period during which payments may be made and 

while other IRS enforcement actions are held in abeyance. 205 An installment agreement 

generally does not reduce the amount of taxes, interest, or penalties owed. However, the IRS is 

authorized to enter into installment agreements with taxpayers which do not provide for full 

payment of the taxpayer's liability over the life of the agreement. The IRS is required to review 

such partial payment installment agreements at least every two years to detennine whether the 

financial condition of the taxpayer has significantly changed so as to warrant an increase in the 

value of the payments being made. 

Taxpayers can request an installment agreement by filing Form 9465, Installment 

Agreement Request. 206 If the request for an installment agreement is approved by the IRS, the 

IRS charges a user fee 207 The IRS currently charges $225 for entering into an installment 

agreement. 20s If the application is for a direct debit installment agreement, whereby the taxpayer 

authorizes the IRS to request the monthly electronic transfer of funds from the taxpayer's bank 

account to the IRS, the fee is reduced to $107209 ln addition, regardless of the method of 

payment, the fee is $43 for low-income taxpayers. 21° For this purpose, low-income is defined as 

Sec. 633l(k). 

206 The IRS accepts applications for installment agreements online. from indiYiduals and businesses. if the 

total tax. penalties and interest is below $50.000 for the fonner. and $25,000 for the latter. 

31 U .S.C. sec. 9701: Trcas. reg. sec. JOO.l; The Independent Offices Appropriations Act of 1952 

(IOAA) 65 Stat. B70 (June 27. 1951). A discussion of the IRS practice regarding user fees and a list of actions for 

which fees are charged is included in the lnlemal Revenue Manual. See "User Fees." paragraph 1.32.19 IRM. 

available at https://www.irs.go1'/irm/part !linn 01-035-019. 

208 Treas. reg. sec. 300.1. 

209 Ibid. 

210 Ibid. 
92 

a person who falls below 250 percent of the Federal poverty guidelines published annually. 

Finally, there is no user fee if the agreement qualifies for a short term agreement (120 days or 

less). 

Reasons for Change 

The Committee believes user fees are a barrier to compliance in collection and 

discourage low-income taxpayers from voluntary tax compliance, as many of them do not have 

the means to pay the user fee, even at the reduced rate. Further, when negotiating installment 

agreements, many low-income taxpayers are charged the full user fee, despite qualifying for the 

reduced amount. 211 

Explanation of Provision 

The provision generally prohibits increases in the amount of user fees charged by the IRS 

for installment agreements. For low-income taxpayers (those whose income falls below 250 

percent of the Federal poverty guidelines), it alleviates the user fee requirement in two ways. 

First, it waives the user fee if the low-income taxpayer enters into an installment agreement 

under which the taxpayer agrees to make automated installment payments through a debit 

account. Second, it provides that low-income taxpayers who are unable to agree to make 

payments electronically remain subject to the required user fee, but the fee is reimbursed upon 

completion of the installment agreement. 

Effective Date 

The provision is effective for agreements entered into on or after the date that is 60 days 

after the date of enactment. 

4. Form 1040SR for seniors (sec. 11074 of the bill) 

Present Law 

Persons required to make returns of income are generally required to file returns in the 

form prescribed by the Secretary in regulations. 212 Income tax returns are required from each 

individual whose taxable year gross income equals or exceeds the exemption amount, with 

certain exceptions. 213 The income tax returns are due on April 15 of the year following the 

taxable year, for taxpayers using a calendar year. 

See American Bar Association letter to Mr. Daniel Werfel, Acting Cmmnissioner. IRS, "Comments 

Concerning User Fees for Processing Installment Agreements and Offers in Compromise." October t. 2013, page 2. 

available at 

http://www .amcricanbar. org/contcnt/dam/aba/administrative/taxatio n/policy /100 ll3comments.authcheckdam.pdf. 

Sec. 6011. 

213 Sec section 6012(a)( I)(A). which enumerates several conditions under which individuals with gross 

income in excess of the exemption amount in section 151( d) are nevertheless excused from the filing requirements. 
93 

The standard form available for individuals subject to income tax are in the series of form 

known as Form I 040, and include two simplified versions, the Form I 040A and the Form 

1040EZ. In recent filing seasons, the majority of returns filed by individuals were filed 

electronically. 214 

Reason for Change 

The Committee believes that, for seniors, filing a tax return and its numerous schedules, 

is unnecessarily diftlcult. The Committee believes that this legislation will help simplify the tax 

filing process for older taxpayers with straightforward returns who can be especially hard-hit by 

the financial and technical considerations involved in the filing process. 

Explanation of Provision 

The provision requires that the IRS publish a simplified income tax return form 

designated a Form I 040SR, for use by persons who are age 65 or older by the close of the 

taxable year. The form is to be as similar as possible to the Form 1040EZ. The use of Form 

1040SR is not to be restricted based on the amount of taxable income to be shown on the return, 

or the fact that the income to be reported for the taxable year includes social security benefits, 

distributions from qualified retirement plans, annuities or other such deferred payment 

arrangements, interest and dividends, or capital gains and losses taken into account in 

determining adjusted net capital gain. 

Effective Date 

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

ending before January 1, 2026. 

5. Sense of the Senate on improving customer service and protections for taxpayers by 

reinstating appropriate funding levels (sec. 11075 of the bill) 

The provision expresses the sense of the Senate that politically motivated budget cuts are 

counterproductive to deficit reduction, diminish the IRS's ability to adequately serve taxpayers 

and protect taxpayer information, and reduce the IRS's ability to enforce the law. 

211 The Internal Revenue Service Restructuring and Refonu Act of 1998 ("RRA 1998'') states a 

Congressional policy to promote the paperless filing of Federal tax returns. and set a goal for the IRS to have at least 

80 percent of all Federal tax and information returns filed electronically by 2007. See sec. 200l(a) of RRA 1998. 

The Electronic Tax Administration Ad,isory Committee. the body charged with oversight of IRS progress in 

reaching that goal reported that e-filing by individuals exceeded 80 percent in the 2013 filing season, but projected 

an ovemll rate of 72.8 percent based on all Federal returns. Sec Electronic Tax Administration Advisory 

Conunittee.Annual Report to Congress. June 2013, IRS Pub. 3415, p. 6. 
94 

6. Return preparation programs for low-income taxpayers (sec. 11076 of the bill and new 

sec. 7526A of the Code) 

Present Law 

The Code provides that the Secretary may allocate up to $6 million per year for matching 

grants to certain qualified low-income taxpayer clinics. 215 Eligible clinics are those that charge 

no more than a nominal fee to either represent low-income taxpayers in controversies with the 

IRS or provide tax information to individuals for whom English is a second language. No clinic 

can receive more than $100,000 per year. 

A qualified low-income taxpayer clinic includes (1) a clinical program at an accredited 

law, business, or accounting school, in which students represent low-income taxpayers, or (2) an 

organization exempt from tax under Code section 501(c) which either represents low-income 

taxpayers or provides referral to qualified representatives. A clinic is treated as representing 

low-income taxpayers if (i) at least 90 percent of the taxpayers represented by the clinic have 

income which does not exceed 250 percent of the poverty level, as determined in accordance 

with criteria established by the Director of the Office of Management and Budget, and (ii) the 

amount in controversy for any taxable year is generally $50,000 or less. 216 

There is no provision in the Code allowing for the allocation of funds for matching grants 

for return preparation for low-income taxpayers. 

In the Consolidated Appropriations Act, 2017, 217 Congress appropriated approximately 

$2.157 billion to the IRS for taxpayer services, of which not less than $15 million is to be made 

available for a Community Volunteer Income Tax Assistance ("VITA") matching grants 

program for tax return preparation assistance. VITA is a program created by the IRS in 1969 

which utilizes volunteers to provide tax return preparation and filing service assistance to certain 

low-income taxpayers and members ofunderserved populations. 

Reason for Change 

The Committee believes that low-income taxpayer clinics contribute to compliance with 

the Code by providing representation to taxpayers who might otherwise be uncertain about their 

rights and obligations under the Code. Accordingly, the Committee believes that the amount 

authorized to be appropriated for matching grants to them should be increased and codified. The 

Committee also believes that qualified entities providing outreach relating to the eligibility and 

availability of income supports through the Code should particularly be supported. 

215 Sec. 7526. 

216 Sec. 7463. 

21 ' Pub. L. No. 115-3 L Div. E, Title I (May 5. 20! 7). 
95 

Explanation of Provision 

The provision codifies the VITA program and provides that the Secretary, unless 

otherwise provided by specific appropriation, may allocate from otherwise appropriated funds up 

to $30 million per year in matching grants to qualified entities for the development, expansion, 

or continuation of qualified tax return preparation programs assisting low-income taxpayers and 

members ofunderserved populations. The Secretary is authorized to award a multi-year grant 

not to exceed three years. 

The grant funds may be used for ordinary and necessary operation costs (including for 

wages or salaries of persons coordinating the activities of the program, to develop training 

materials, conduct training, and perfonn quality reviews of the returns for which assistance has 

been provided under the program, and for equipment purchases and vehicle-related expenses 

associates with remote or rural tax preparation services), outreach and educational activities 

relating to the eligibility and availability of income supports available through the Code, and 

services related to financial education and capability, asset development, and the establishment 

of savings accounts in connection with tax return preparation, but not for overhead expenses that 

are not directly related to any qualified return preparation program. In awarding grants, priority 

is given to applications that (i) demonstrate assistance to certain low-income taxpayers with an 

emphasis on outreach; (ii) demonstrate taxpayer outreach and education around available income 

supports available through the Code; and (iii) demonstrate specific outreach and focus on one or 

more underserved populations. The provision allows the IRS to use mass communications, 

referrals, and other means to promote the benefits and encourage the use of the program. The 

Secretary can refer taxpayers to qualified return preparation programs receiving grants and those 

programs are encouraged to refer eligible individuals to local or regional low income taxpayer 

clinics. 

Qualified return preparation program means any program which provides assistance to 

individuals, at least 90 percent of whom are low-income taxpayers, in preparing and filing 

Federal income tax returns, which is administered by a qualified entity, in which all volunteers 

who assist in the preparation of Federal income tax returns meet the training requirements 

prescribed by the Secretary, and which uses a quality review process which reviews 100 percent 

of all returns. Qualified entity means any entity which is an eligible organization (as defined), is 

in compliance with Federal tax filing and payment requirements, is not debarred or suspended 

from Federal contracts, grants, or cooperative agreements, and agrees to provide documentation 

to substantiate any matching funds provided under the VITA grant program. Eligible 

organization means an institution of higher education described in section l 02 (other than 

subsection (a)(l)(C) thereof) of the Higher Education Act of 1965, as in effect on the date of 

enactment, and which has not been disqualified from participating in a program under Title IV of 

such Act, an exempt organization described in Code section 501(c), a local government agency, 

including a county or municipal government agency, and an Indian tribe, as defined in section 

4(12) of the Native American Housing Assistance and Self-Determination Act of 1996 ("Act"), 

including any tribally designated housing entity (as defined in such Act), tribal subsidiary, 

subdivision, or other wholly owned tribal entity, or a local, State, regional, or national coalition 

(with one lead organization which meets the eligibility requirements described above acting as 

the applicant organization. If no eligible organization is available to assist the targeted population 

or community, the eligible organization includes a State government agency, and a Cooperative 
96 

Extension Service office. Low-income taxpayer means a taxpayer who has income for the 

taxable year which does not exceed an amount equal to the completed phaseout amount under 

section 32(b) for a married couple filing a joint return with three or more qualifying children, as 

determined in a revenue procedure or other published guidance. Underserved population includes 

populations of persons with disabilities, persons with limited English proficiency, Native 

Americans, individuals living in rural areas, members of the Armed Forces and their spouses, 

and the elderly. 

Effective Date 

The provision is effective on the date of enactment 

7. Free File Program (sec. 11077 of the bill) 

Present Law 

The IRS has entered into cooperative relationships with commercial return preparation 

service providers (known as the Free File Alliance) to provide free tax preparation and electronic 

filing services to eligible low-income or elderly taxpayers. This arrangement is commonly 

known as the Free File Program. Taxpayers generally must select a designated service provider 

through the IRS' website to access commercial online software provided by Free File Alliance 

companies to prepare and file their tax returns. To qualify, taxpayers must have adjusted gross 

income (AGI) of$64,000 or less (for 2016 returns). Each participating company sets its own 

eligibility requirements and not all taxpayers will qualify to use the software of all companies. 

There is no fee for taxpayers using Free File Program, and Free File Alliance companies also do 

not pay any fee to the IRS to participate in the program. 

Reasons for Change 

The Committee believes that electronic filing promotes effective tax administration and 

wants to encourage increased use of electronic filing. The Committee understands that fewer 

IRS resources are required to process electronic returns, errors are reduced, and taxpayers 

receive their refunds more quickly. The Committee also understands that many taxpayers are 

unwilling to pay a fee to electronically file their tax returns even if they are electronically 

prepared. The Committee further understands that many taxpayers are unwilling to use an 

intermediary to electronically transmit their tax returns to the IRS because of privacy and 

security concerns. The Committee believes that the availability offree and direct electronic 

filing to the IRS will address those concerns and result in the increased use of electronic filing. 

Explanation of Provision 

The provision requires the Secretary of the Treasury, or the Secretary's delegate, in 

cooperation with the private sector, to maintain the current IRS Free File Program that provides 

free individual income tax preparation and electronic filing services to the lowest 70 percent of 

taxpayers by income. The number of taxpayers eligible to receive these services is to be 

calculated by the IRS annually based on prior year aggregate taxpayer adjusted gross income. 

The provision requires the IRS Free File Program to continue to make available to taxpayers at 

all income levels a basic, online electronic tillable forms utility. The provision further requires 
97 

the lRS Free File Program work with State government agencies to enhance and expand the use 

of the program to provide needed benefits to the taxpayer while reducing the cost of processing 

returns. 

The provision does not impact the services provided under Taxpayer Assistance Centers, 

Tax Counseling for the Elderly, and Volunteer Income Tax Assistance programs. 

Effective Date 

The provision is effective on the date of enactment. 

8. Attorneys' fees relating to awards to whistleblowers (sec. 11078 of the bill and 

sec. 62(a)(21) of the Code) 

Present Law 

The Code provides an above-the-line deduction for attorneys' fees and costs paid by, or 

on behalf of, the taxpayer in connection with any action involving a claim of unlawful 

discrimination, certain claims against the Federal Government, or a private cause of action under 

the Medicare Secondary Payer statute. 218 The amount that may be deducted above-the-line may 

not exceed the amount includible in the taxpayer's gross income for the taxable year on account 

of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic 

payments) resulting from such claim. Additionally, the Code provides an above-the-line 

deduction for attorneys' fees and costs paid by, or on behalf of, the individual in connection with 

any award for providing information regarding violations of the tax laws. 219 The amount that 

may be deducted above-the-line may not exceed the amount includible in the taxpayer's gross 

income for the taxable year on account of such award. 220 

Reasons for Change 

The Committee believes that the treatment oflegal fees and court costs in connection 

with various whistleblower awards should be uniform. The Committee further believes that an 

above-the-line deduction for such fees and costs may encourage more whistleblowers to come 

forward. 

'" Sees. 62(a)(20) and (e). Section 62(e) defines "unlawful discrimination"' to include a number of 

specific statutes. any federal whistle-blower statute. and any federal. state. or local law "providing for the 

enforcement of civil rights"' or "regulating any aspect of the employment relationship ... or prohibiting the discharge 

of an employee. the discrimination against an employee. or any other fom1 of retaliation or reprisal against an 

employee for asserting rights or taking otl1er actions pemtitted by law." 

Sees. 7623 and62(a)(21). 

Sees. 7623 and 62(a)(21). 
98 

Explanation of Provision 

The provision provides an above-the-line deduction for attorney fees and court costs paid 

by, or on behalf of, the taxpayer in connection with any action involving a claim under State 

False Claim Acts, the SEC whistleblower program, 221 and the commodity Future Trading 

Commission whistleblower program. 222 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

9. Clarification ofwhistleblower awards (sec. 11079 of the bill and new sec. 7623(c) of the 

Code) 

Present Law 

Awards to whistleblowers 

The Code authorizes the IRS to pay such sums as deemed necessary for: "( l) detecting 

underpayments of tax; or (2) detecting and bringing to trial and punishment persons guilty of 

violating the internal revenue laws or conniving at the same." 223 Generally, amounts are paid 

based on a percentage of proceeds collected based on the information provided. 

The Tax Relief and Health Care Act of 2006 (the "Act")224 established an enhanced 

reward program for actions in which the tax, penalties, interest, additions to tax, and additional 

amounts in dispute exceed $2,000,000 and, if the taxpayer is an individual, the individual's gross 

income exceeds $200,000 for any taxable year in issue. In such cases, the award is calculated to 

be at least 15 percent but not more than 30 percent of collected proceeds (including penalties, 

interest, additions to tax, and additional amounts). 

The Act permits an individual to appeal the amount or a denial of an award determination 

to the United States Tax Court (the "Tax Court") within 30 days of such determination. Tax 

Court review of an award determination may be assigned to a special trial judge. 

Rules relating to taxpayers with foreign assets 

U.S. persons who transfer assets to, and hold interests in, foreign bank accounts or 

foreign entities may be subject to self-reporting requirements under both the Foreign Account 

Tax Compliance Act provisions in the Code and the provisions in the Bank Secrecy Act and its 

15 U.S. C. sees. 78u-6 and 78u-7. 

222 7 U.S.C. sec. 26. 

223 Sec. 7623. 

" 4 Pub. L. No. 109-432. 
99 

underlying regulations (which provide for FinCEN Form 114, Report of Foreign Bank and 

Financial Accounts, the "FBAR"), as discussed below. Amounts recovered for violations of 

FATCA provisions in the Code may be considered for purposes of computing a whistleblower 

award under the Code. However, the IRS has found that amounts recovered for violations of 

non-tax laws, including the provisions of the Bank Secrecy Act (and FBAR) for which the IRS 

has delegated authority, may not be considered for purposes of computing an award under the 

Code225 

Foreign Account Tax Compliance Act ("FA TCA") 

The Code imposes a withholding and reporting regime for U.S. persons engaged in 

foreign activities, directly or indirectly, through a foreign business entity. 226 This regime for 

outbound payments, 227 commonly referred to as the Foreign Account Tax Compliance Act 

("FATCA"), 228 imposes a withholding tax of30 percent of the gross amount of certain payments 

to foreign financial institutions ("FFis") unless the FFI establishes that it is compliant with the 

information reporting requirements ofF A TCA which include identifying certain U.S. accounts 

held in the FFI. An FFI must report with respect to a U.S. account (1) the name, address, and 

taxpayer identification number of each U.S. person holding an account or a foreign entity with 

one or more substantial U.S. owners holding an account; (2) the account number; (3) the account 

balance or value; and (4) except as provided by the Secretary, the gross receipts, including from 

dividends and interest, and gross withdrawals or payments from the account. 229 

Individuals are required to disclose with their annual Federal income tax return any 

interest in foreign accounts and certain foreign securities if the aggregate value of such assets is 

in excess of the greater of $50,000 or an amount determined by the Secretary in regulations. 

Failure to do so is punishable by a penalty of $10,000, which may increase for each 30-day 

period during which the failure continues after notification by the IRS, up to a maximum penalty 

of $50,000. 230 

225 Chief Counsel Memorandum. ··scope of Awards Payable Under l.R.C. section 7623," April 23, 2012, 

available at htlp://\vww.tax-\1 hisllcblowcr.com/resourccs/PMTA-20 12-lO.pdf. Under Title 3 L "[t]he Secretary may 

pay a reward to an individual who provides original information which leads to a recovery of a criminal fine, civil 

penalty. or forfeiture. which exceeds $50,000, for a violation of [chapter 53 of Title 3!]. The Secretary shall 

detennine the amount of a reward ... [and] ... may not award more than 25 per centum of the net amount of the fine. 

penalty. or forfeiture collected or $150,000, whicheyer is less." 31 U.S.C. § 5323. 

226 See. e.g.. sees. 6038, 6038B, and 6046. 

22' Hiring Jncentiyes to Restore Employment Act of20l0. Pub. L. No. 111-l·n. 

Foreign Account Tax Compliance Act of2009 is the name of the House and Senate bills in which the 

provisions first appeared. See H.R. 3933 and S. 1934 (October 27. 2009). 

229 Sec. 147l(c). 

"" Sec. 6038D. Guidance on the scope of reporting required. the threshold values triggering reporting 

requirements for various fact patterns and how the yalne of assets is to be detemtined is found in Treas. Reg. sees. 

1.60380-l to l.6038D-8. 
100 

Report of foreign Bank and Financial Accounts (the "FBAR") 

In addition to the reporting requirements under the Code, U.S. persons who transfer 

assets to, and hold interests in, foreign bank accounts or foreign entities may be subject to selfreporting requirements under the Bank Secrecy Act. 231 

The Bank Secrecy Act imposes reporting obligations on both financial institutions and 

account holders. With respect to account holders, a U.S. citizen, resident, or person doing 

business in the United States is required to keep records and file reports, as specified by the 

Secretary, when that person enters into a transaction or maintains an account with a foreign 

financial agency. 232 Regulations promulgated pursuant to broad regulatory authority granted to 

the Secretary in the Bank Secrecy Act233 provide additional guidance regarding the disclosure 

obligation with respect to foreign accounts. 

The FBAR must be filed by June 30234 of the year following the year in which the 

$10,000 filing threshold is met. 235 Failure to file the FBAR is subject to both criminal 236 and 

civil penalties. 237 Willful failure to file an FBAR may be subject to penalties in amounts not to 

exceed the greater of $100,000 or 50 percent of the amount in the account at the time of the 

violation238 A non-willful, but negligent, failure to file is subject to a penalty of$10,000 for 

each negligent violation. 239 The penalty may be waived if (I) there is reasonable cause for the 

failure to report and (2) the amount of the transaction or balance in the account was properly 

reported. Tn addition, serious violations are subject to criminal prosecution, potentially resulting 

B<mk Secrecy Act. 31 U.S.C. sees. 5311-5332. 

232 31 U.S.C. sec. 5314. The tenn "agency" in the Bank Secrecy Act includes financial institutions. 

31 U.S.C. sec. 5314(a) provides: "Considering the need to avoid impeding or controlling the export or 

import of monetary instmmcnts and the need to avoid burdening unreasonably a person making a transaction with a 

foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a 

person in, and doing business in. the United States, to keep records. file reports, or keep records and file reports. 

\Vhen the resident, citizen. or person makes a tmnsaction or maintains a relation for any person \:rith a foreign 

financial agency." 

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Pub. L. No. 

114-4 L changed the filing date for FinCEN Form 114 from June 30 to April 15 (with a maximum extension for a 6-

month period ending on October 15 and with provision for an e;..1ension under niles similar to the mles in Treas. 

Reg. section 1.6081-5) for tax retums for taxable years beginning after December 31, 2015. 

m 31 C.F.R. sec. 103.27(c). The $10,000 threshold is tl1e aggregate value of all foreign financial accounts 

in which a U.S. person has a financial interest or over which the U.S. person has signature or other authority. 

31 U.S. C. sec. 5322 (failure to file is punishable by a fine up to $250.000 and imprisonment for five 

years. which may double if the violation occurs in COf\junction with certain other violations). 

31 U.S.C. sec. 532l(a)(5). 

038 31 U.S.C. sec. 5321(a)(5)(C). 

239 31 U.SC. sec. 532l(a)(5)(B)(i), (ii). 
101 

in both monetary penalties and imprisonment. Civil and criminal sanctions are not mutually 

exclusive. 

FBAR enforcement responsibility 

Until 2003, the Financial Crimes Enforcement Network ("FinCEN"), an agency of the 

Department of the Treasury, had exclusive responsibility for civil penalty enforcement ofFBAR, 

although administration of the FBAR reporting regime was delegated to the IRS 240 As a result, 

persons who were more than 180 days delinquent in paying any FBAR penalties were referred 

for collection action to the Financial Management Service of the Treasury Department, which is 

responsible for such non-tax collections. 241 Continued nonpayment resulted in a referral to the 

Department of Justice for institution of court proceedings against the delinquent person. ln 2003, 

the Secretary delegated FBAR civil enforcement authority to the IRS. 242 The authority delegated 

to the JRS in 2003 included the authority to determine and enforce civil penalties, 243 as well as to 

revise the form and instructions. However, the Bank Secrecy Act does not include collection 

powers similar to those available for enforcement of the tax laws under the Code. As a 

consequence, FBAR civil penalties remain collectible only in accord with the procedures for 

non-tax collection described above. 

FBAR and awards to whistleblowers 

Recent cases have considered FBAR penalties in connection with JRS whistleblower 

awards. 244 One case analyzed the provision dealing with "additional amounts in dispute" and 

linked that concept to amounts assessed and collected under the Code which FBAR is not. 245 

The issue was whether FBAR penalties constituted "additional amounts" for purposes of 

determining whether "additional amounts in dispute exceed $2,000,000." The case was disposed 

on summary judgment on the grounds that FBAR penalties are not assessed, collected or paid in 

Trcas. Directive 15-14 (December I, 1992). in which the Secretary delegated to the IRS authority to 

investigate violations of the Bank Secrecy Act. If the IRS Criminal InvestigationDivisiondeclines to pursue a 

possible criminal case, it is to refer the matter to FinCEN for civil enforcement. 

"' 31 U.S.C. see. 37ll(g). 

'·" 31 C.F.R. sec. 103.56(g). Memorandum of AgreementandDelegationof Authority for Enforcement of 

FBAR Requirements (April2. 2003); News Release. Internal Revenue Service, IR-2003-48 (April 10, 2003). 

Secretary of the Treasury, "A Report to Congress in Accordance with sec. 36l(b) of the Uniting and Strengthening 

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 200 I (USA Patriot 

Act)" (April24, 2003). 

243 A penalty may be assessed before the end of the six-year period beginning on the date of the transaction 

with respect to which the penalty is assessed. 31 U .S.C. sec. 5321 (b)( I). A civil action for collection rnay be 

commenced within two years of the later of the date of assessment and the date a judgment becomes final in any a 

related criminal action. 31 U.S.C. sec. 532l(b)(2). 

24'1 Whistleb/ower 22716-lJWv. Commissioner. 146 T.C. No.6 (March 14. 2016); and Whist/eblower 

21276-JJWv. Commissioner, 147 T.C. No.4 (August 3, 2016). 

' 4' TVhisrleblower 22716-lJTVv. Commissioner, 146 T.C. No.6 (March 14. 2016). 
102 

the same manner as taxes. As such, they are not additional amounts in dispute and therefore the 

threshold was not exceeded. Notably, the court suggested that the petitioner present its policy 

arguments to Congress based on the fact that the connection between FBAR and tax enforcement 

justified the Secretary to redelegate FBAR administrative authority to the IRS. 246 

Another case dealt with the provision "collected proceeds" and held that the term is not 

limited to amounts assessed and collected under Title 26. 247 The issue in the case was whether 

payments of a criminal fine and civil forfeitures constitute collected proceeds. 

The criminal fine was imposed under Title 18 as a result of guilty plea to conspiring to 

defraud the IRS, file false Federal income tax returns, and evade Federal income taxes. The 

money was forfeited pursuant to Title 18. The IRS argued that criminal fines and forfeitures are 

not collected proceeds because only amounts assessed and collected under Title 26 can be used 

to pay a whistleblower award. The IRS also argued that a criminal fine collected by the 

Government cannot be considered collected proceeds because (1) pursuant to 42 U.S. C. sec. 

10601 all criminal fines collected from persons convicted of offenses against the United States 

are to be deposited in the Crime Victims Fund; (2) criminal fines are paid by the taxpayer 

directly to the imposing court, which in turn deposits them into the Crime Victims Fund; and (3) 

at no time are criminal fines available to the Secretary. The court said that the Code did not refer 

to, or require, the availability of funds to be used in making an award. 248 

Petitioners said the payment resulted from action taken by Secretary and relates to acts 

committed by taxpayer in violation of Title 26 provisions. The court agreed and held that 

collected proceeds are not limited to amounts assessed and collected under Title 26. In reaching 

its holding it referenced Whistleblower 22716-13Wv. Commissioner, discussed above and noted 

there is no inconsistency because the issue there was about whether the threshold of $2,000,000 

was exceeded. It is not clear whether FBAR penalties would be included under their holding 

because in the case, the taxpayer did violate Title 26 (even if the penalties were imposed under 

Title 18). 

Reasons for Change 

The Committee believes it is important to provide clarification regarding the scope of the 

term "collected proceeds." The Committee believes this clarification is necessary because there 

have been conflicting interpretations oflaw as to whether FBAR penalties are within the 

meaning of collected proceeds and this clatification will encourage more whistleblowers to come 

forward. 

'"" Whistleblower 22716-13Wv. Commissioner. 146 T.C. No.6 at 26-27. 

Whistleblower 21276-13Wv. Commissioner, 147 T.C. No.4 (August 3, 2016). 

248 Whistlehlower 21276-13Wv. Commissioner, 147 T.C. No.4 at28-29. 
103 

Explanation of Provision 

Collected proceeds eligible for awards under the Code are defined to include: (1) 

penalties, interest, additions to tax, and additional amounts and (2) any proceeds under 

enforcement pro~;;rams that the Treasury has delegated to the IRS the authority to administer, 

enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting 

requirements. This definition is also used to determine eligibility for the enhanced reward 

program under which proceeds and additional amounts in dispute exceed $2,000,000. 

The collected proceeds amounts are determined without regard to whether such proceeds 

are available to the Secretary. 

Effective Date 

The provision is effective for information provided before, on, or after date of enactment 

with respect to which a final determination has not been made before such date. 
104 

PART VIII- INDIVIDUAL MANDATE 

l. Elimination of shared responsibility payment for individuals failing to maintain minimal 

essential coverage (sec. 11081 of the bill and sec. SOOOA of the Code) 

Present Law 

Under the Patient Protection and Affordable Care Act249 (also called the Affordable Care 

Act, or "ACA"), individuals must be covered by a health plan that provides at least minimum 

essential coverage or be subject to a tax (also referred to as a penalty) for failure to maintain the 

coverage (commonly referred to as the "individual mandate"). 250 Minimum essential coverage 

includes government-sponsored programs (including Medicare, Medicaid, and CHIP, among 

others), eligible employer-sponsored plans, plans in the individual market, grandfathered group 

health plans and grandfathered health insurance coverage, and other coverage as recognized by 

the Secretary of Health and Human Services ("HHS") in coordination with the Secretary of the 

Treasury. 251 The tax is imposed for any month that an individual does not have minimum 

essential coverage unless the individual qualifies for an exemption for the month as described 

below. 

The tax for any calendar month is one-twelfth of the tax calculated as an annual amount. 

The annual amount is equal to the greater of a flat dollar amount or an excess income amount. 

The flat dollar amount is the lesser of (1) the sum of the individual annual dollar amounts for the 

members of the taxpayer's family and (2) 300 percent of the adult individual dollar amount. The 

individual adult annual dollar amount is $695 for 2017 and 2018. 252 For an individual who has 

not attained age 18, the individual annual dollar amount is one half of the adult amount. The 

excess income amount is 2. 5 percent of the excess of the taxpayer's household income for the 

taxable year over the threshold amount of income for requiring the taxpayer to file an income tax 

return. 253 The total annual household payment may not exceed the national average annual 

premium for bronze level health plans for the applicable family size offered through Exchanges 

that year. 

Exemptions from the requirement to maintain minimum essential coverage are provided 

for the following: (I) an individual for whom coverage is unaffordable because the required 

249 Pub. L. No. 111-148. 

250 Section 5000A. If an individual is a dependent as defined in section 152, of another taxpayer. the other 

taxpayer is liable for any lax for failnre to maintain the required coverage \Vith respect to the individual. 

251 Sec. 5000A(f). Minimum essential coverage does not include coverage that consists of only certain 

excepted benefits. such as limited scope dcntal1md vision benefits or long-term care insurance offered under a 

separate policy, certificate or contract. 

252 For years after 2016. the $695 amount is indexed to CPI-U. rounded to the next lowest multiple of$50. 

253 Sec. 6012(a). 
105 

contribution exceeds 8.16254 percent of household income, (2) an individual with household 

income below the income tax return filing threshold, (3) a member of an Indian tribe, (4) a 

member of certain recognized religious sects or a health sharing ministry, (5) an individual with 

a coverage gap for a continuous period of less than three months, and (6) an individual who is 

determined by the Secretary of HHS to have suffered a hardship with respect to the capability to 

obtain coverage255 

Reasons for Change 

The Committee believes that relief from the shared responsibility payment imposed on 

non-exempt individuals who fail to obtain health coverage under the Affordable Care Act, and 

application of the associated savings towards broader tax reform, will provide for a more fair tax 

system for individuals, families, and businesses. 

Explanation of Provision 

The provision reduces the amount of the individual responsibility payment, enacted as 

part of the Affordable Care Act, to zero. 

Effective Date 

The provision is effective with respect to health coverage status for months beginning 

after December 31, 2018. 

"·' For 2017. Rev. Proc. 2016-24. The rate applicable for 2018 is 8.05 percent of household income. Rev. 

Proc. 2017-36. 

In addition. certain individuals present or residing outside of the United States and bona fide residents 

of United States territories are deemed to maintain minimum essential coverage. 
106 

B. Alternative Minimum Tax 

1. Repeal of tax for corporations, suspension of tax for individuals, and credit for prior 

year minimum tax liability (sees. 12001 through 12003 of the bill and sec. 55 of the Code) 

Present Law 

Individual alternative minimum tax 

In general 

An alternative minimum tax ("AMT") is imposed on an individual, estate, or trust in an 

amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. 

For taxable years beginning in 2017, the tentative minimum tax is the sum of(!) 26 percent of so 

much of the taxable excess as does not exceed $187,800 ($93,900 in the case of a married 

individual filing a separate return) and (2) 28 percent of the remaining taxable excess. The 

breakpoints are indexed for inflation. The taxable excess is so much of the alternative minimum 

taxable income ("AMTI") as exceeds the exemption amount. The maximum tax rates on net 

capital gain and dividends used in computing the regular tax are used in computing the tentative 

minimum tax. AMTI is the taxable income adjusted to take account of specified tax preferences 

and adjustments. 

The exemption amounts for taxable years beginning in 2017 are: (1) $84,500 in the case 

of married individuals filing a joint return and surviving spouses; (2) $54,300 in the case of other 

unmarried individuals; (3) $42,250 in the case of married individuals filing separate returns; and 

(4) $24,100 in the case of an estate or trust. For taxable years beginning in 2017, the exemption 

amounts are phased out by an amount equal to 25 percent of the amount by which the 

individual's AMTl exceeds (1) $160,900 in the case of married individuals filing a joint return 

and surviving spouses, (2) $120,700 in the case of other unmarried individuals, and (3) $80,450 

in the case of married individuals filing separate returns or an estate or a trust. The amounts are 

indexed for inflation. 

AMTI is the taxpayer's taxable income increased by certain preference items and 

adjusted by determining the tax treatment of certain items in a manner that negates the deferral of 

income resulting from the regular tax treatment of those items. 

Preference items in computing AMTI 

• The minimum tax preference items are: 

• The excess of the deduction for percentage depletion over the adjusted basis of each 

mineral property (other than oil and gas properties) at the end of the taxable year. 

• The amount by which excess intangible drilling costs (i.e., expenses in excess the 

amount that would have been allowable if amortized over a 10-year period) exceed 

65 percent of the net income from oil, gas, and geothern1al properties. This preference 

applies to independent producers only to the extent it reduces the producer's AMTI 

(determined without regard to this preference and the net operating loss deduction) by 

more than 40 percent. 
107 

• Tax-exempt interest income on private activity bonds (other than qualified 50 l ( c )(3) 

bonds, certain housing bonds, and bonds issued in 2009 and 201 0) issued after 

August 7, 1986. 

• Accelerated depreciation or amortization on certain property placed in service before 

January 1, 1987. 

• Seven percent of the amount excluded from income under section 1202 (relating to 

gains on the sale of certain small business stock). 

In addition, losses from any tax shelter farm activity or passive activities are not taken 

into account in computing AMTI. 

Adjustments in computing AMT! 

The adjustments that individuals must make to compute AMTI are: 

• Depreciation on property placed in service after 1986 and before January 1, 1999, is 

computed by using the generally longer class lives prescribed by the alternative 

depreciation system of section 168(g) and either (a) the straight-line method in the 

case of property subject to the straight-line method under the regular tax or (b) the 

!50-percent declining balance method in the case of other property. Depreciation on 

property placed in service after December 31, 1998, is computed by using the regular 

tax recovery periods and the AMT methods described in the previous sentence. 

Depreciation on property acquired after September 10, 2001, which is allowed an 

additional allowance under section 168(k) for the regular tax is computed without 

regard to any AMT adjustments. 

• Mining exploration and development costs are capitalized and amortized over a 10-

year period. 

• Taxable income from a long-term contract (other than a home construction contract) is 

computed using the percentage of completion method of accounting. 

• Depreciation on property placed in service after 1986 and before January 1, 1999, is 

computed by using the generally longer class lives prescribed by the alternative 

depreciation system of section 168(g) and either (a) the straight-line method in the 

case of property subject to the straight-line method under the regular tax or (b) the 

!50-percent declining balance method in the case of other property. Depreciation on 

property placed in service after December 31, 1998, is computed by using the regular 

tax recovery periods and the AMT methods described in the previous sentence. 

Depreciation on property acquired after September 10, 2001, which is allowed an 

additional allowance under section 168(k) for the regular tax is computed without 

regard to any AMT adjustments. 

• Mining exploration and development costs are capitalized and amortized over a 10-

year period. 

• Taxable income from a long-term contract (other than a home construction contract) is 

computed using the percentage of completion method of accounting. 
108 

• The amortization deduction allowed for pollution control facilities placed in service 

before January 1, 1999 (generally determined using 60-month amortization for a 

portion of the cost of the facility under the regular tax), is calculated under the 

alternative depreciation system (generally, using longer class lives and the straight-line 

method). The amortization deduction allowed for pollution control facilities placed in 

service after December 31, 1998, is calculated using the regular tax recovery periods 

and the straight-line method. 

• Miscellaneous itemized deductions are not allowed. 

• Itemized deductions for State, local, and foreign real property taxes; State and local 

personal property taxes; State, local, and foreign income, war profits, and excess 

profits taxes; and State and local sales taxes are not allowed. 

• Medical expenses are allowed only to the extent they exceed ten percent of the 

taxpayer's adjusted gross income. 

• Deductions for interest on home equity loans are not allowed. 

• The standard deduction and the deduction for personal exemptions are not allowed. 

• The amount allowable as a deduction for circulation expenditures is capitalized and 

amortized over a three-year period. 

• The amount allowable as a deduction for research and experimentation expenditures 

from passive activities is capitalized and amortized over a l 0-year period. 

• The regular tax rules relating to incentive stock options do not apply. 

Other rules 

The taxpayer's net operating loss deduction generally cannot reduce the taxpayer's AMTT 

by more than 90 percent of the AMTI (determined without the net operating loss deduction). 

The alternative minimum tax foreign tax credit reduces the tentative minimum tax. 

The various nonrefundable business credits allowed under the regular tax generally are 

not allowed against the AMT. Certain exceptions apply. 

Tf an individual is subject to AMT in any year, the amount of tax exceeding the 

taxpayer's regular tax liability is allowed as a credit (the "AMT credit") in any subsequent 

taxable year to the extent the taxpayer's regular tax liability exceeds his or her tentative 

minimum tax liability in such subsequent year. The AMT credit is allowed only to the extent 

that the taxpayer's AMT liability is the result of adjustments that are timing in nature. The 

individual AMT adjustments relating to itemized deductions and personal exemptions are not 

timing in nature, and no minimum tax credit is allowed with respect to these items. 

An individual may elect to write off certain expenditures paid or incurred with respect of 

circulation expenses, research and experimental expenses, intangible drilling and development 

expenditures, development expenditures, and mining exploration expenditures over a specified 

period (three years in the case of circulation expenses, 60 months in the case of intangible 
109 

drilling and development expenditures, and 10 years in case of other expenditures). The election 

applies for purposes of both the regular tax and the alternative minimum tax. 

Corporate alternative minimum tax 

In general 

An AMT is also imposed on a corporation to the extent the corporation's tentative 

minimum tax exceeds its regular tax. This tentative minimum tax is computed at the rate of 

20 percent on the AMTI in excess of a $40,000 exemption amount that phases out. The 

exemption amount is phased out by an amount equal to 25 percent of the amount that the 

corporation's AMTI exceeds $150,000. 

AMTI is the taxpayer's taxable income increased by certain preference items and 

adjusted by determining the tax treatment of certain items in a manner that negates the deferral of 

income resulting from the regular tax treatment of those items. 

A corporation with average gross receipts of less than $7.5 million for the prior three 

taxable years is exempt from the corporate minimum tax. The $7.5 million threshold is reduced 

to $5 million for the corporation's first three-taxable year period. 

Preference items in computing AMTI 

The corporate minimum tax preference items are: 

• The excess of the deduction for percentage depletion over the adjusted basis of the 

property at the end of the taxable year. This preference does not apply to percentage 

depletion allowed with respect to oil and gas properties. 

• The amount by which excess intangible drilling costs arising in the taxable year 

exceed 65 percent of the net income from oil, gas, and geothermal properties. This 

preference does not apply to an independent producer to the extent the preference 

would not reduce the producer's AMTI by more than 40 percent. 

• Tax-exempt interest income on private activity bonds (other than qualified 50l(c)(3) 

bonds, certain housing bonds, and bonds issued in 2009 and 201 0) issued after 

August 7, 1986. 

• Accelerated depreciation or amortization on certain property placed in service before 

January 1, 1987. 

Adjustments in computing AMTI 

The adjustments that corporations must make in computing AMTI are: 

• Depreciation on property placed in service after 1986 and before January 1, 1999, 

must be computed by using the generally longer class lives prescribed by the 

alternative depreciation system of section 168(g) and either (a) the straight-line 

method in the case of property subject to the straight-line method under the regular tax 
110 

or (b) the !50-percent declining balance method in the case of other property. 

Depreciation on property placed in service after December 31, 1998, is computed by 

using the regular tax recovery periods and the AMT methods described in the previous 

sentence. Depreciation on property which is allowed "bonus depreciation" for the 

regular tax is computed without regard to any AMT adjustments. 

• Mining exploration and development costs must be capitalized and amortized over a 

1 0-year period. 

• Taxable income from a long-term contract (other than a home construction contract) 

must be computed using the percentage of completion method of accounting. 

• The amortization deduction allowed for pollution control facilities placed in service 

before January 1, 1999 (generally determined using 60-month amortization for a 

portion of the cost of the facility under the regular tax), must be calculated under the 

alternative depreciation system (generally, using longer class lives and the straight-line 

method). The amortization deduction allowed for pollution control facilities placed in 

service after December 31, 1998, is calculated using the regular tax recovery periods 

and the straight-line method. 

• The special rules applicable to Merchant Marine construction funds are not applicable. 

• The special deduction allowable under section 833(b) for Blue Cross and Blue Shield 

organizations is not allowed. 

The adjusted current earnings adjustment applies, as described below. 

Adjusted current earning ("ACE") adjustment 

The adjusted current earnings adjustment is the amount equal to 75 percent of the amount 

by which the adjusted current earnings of a corporation exceed its AMTI (determined without the 

ACE adjustment and the alternative tax net operating loss deduction). In determining ACE the 

following rules apply: 

• For property placed in service before 1994, depreciation generally is determined using 

the straight-line method and the class life determined under the alternative 

depreciation system. 

• Amounts excluded from gross income under the regular tax but included for purposes 

of determining earnings and profits are generally included in determining ACE. 

• The inside build-up of a life insurance contract is included in ACE (and the related 

premiums are deductible). 

• Intangible drilling costs of integrated oil companies must be capitalized and amortized 

over a 60-month period. 

• The regular tax rules of section 173 (allowing circulation expenses to be amortized) 

and section 248 (allowing organizational expenses to be amortized) do not apply. 

• Inventory must be calculated using the FIFO, rather than LIFO, method. 
111 

• The installment sales method generally may not be used. 

• No loss may be recognized on the exchange of any pool of debt obligations for another 

pool of debt obligations having substantially the same effective interest rates and 

maturities. 

• Depletion (other than for oil and gas properties) must be calculated using the cost, 

rather than the percentage, method. 

• In certain cases, the assets of a corporation that has undergone an ownership change 

must be stepped down to their fair market values. 

Other rules 

The taxpayer's net operating loss carryover generally cannot reduce the taxpayer's AMT 

liability by more than 90 percent of AMTI determined without this deduction. 

The various nonrefundable business credits allowed under the regular tax generally are 

not allowed against the AMT. Certain exceptions apply. 

If a corporation is subject to AMT in any year, the amount of AMT is allowed as an 

AMT credit in any subsequent taxable year to the extent the taxpayer's regular tax liability 

exceeds its tentative minimum tax in the subsequent year. Corporations are allowed to claim a 

limited amount of AMT credits in lieu of bonus depreciation. 

A corporation may elect to write off certain expenditures paid or incurred with respect of 

circulation expenses, research and experimental expenses, intangible drilling and development 

expenditures, development expenditures, and mining exploration expenditures over a specified 

period (three years in the case of circulation expenses, 60 months in the case of intangible 

drilling and development expenditures, and 10 years in case of other expenditures). The election 

applies for purposes of both the regular tax and the alternative minimum tax. 

Reasons for Change 

The requirement that taxpayers compute their income for purposes of both the regular 

income tax and the AMT is one of the most far-reaching complexities of the Code. The AMT is 

particularly burdensome for individuals with small businesses, because they often do not know 

whether they will be affected until they file their taxes and therefore must maintain a reserve that 

cannot be used to invest in their businesses. 

Explanation of Provision 

The provision repeals the corporate alternative minimum tax. 

The provision repeals the individual alternative minimum tax for taxable years beginning 

before January 1, 2026. 

The provision allows the AMT credit to offset the taxpayer's regular tax liability for any 

taxable year. In addition, the AMT credit is refundable for any taxable year beginning after 2017 
112 

and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years 

beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount 

of the credit allowable for the year against regular tax liability. Thus, the full amount of the 

minimum tax credit will be allowed in taxable years beginning before 2022. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 
113 

C. Business-Related Provisions 

PART 1- CORPORATE PROVISIONS 

1. 20-percent corporate tax rate (sec. 13001 of the bill and sec. 11 of the Code) 

Present Law 

Corporate taxable income is subject to tax under a four-step graduated rate structure. 256 

The top corporate tax rate is 35 percent on taxable income in excess of$10 million. The 

corporate taxable income brackets and tax rates are as set forth in the table below. 

···•· Taxabi~Jn~~me 

c : ..•. ·. 

tax Rate (p~rcent) < .· 

··'- .·· .... . ... · .· .. 

Not over $50,000 15 

Over $50,000 but not over $75,000 25 

Over $75,000 but not over $10,000,000 34 

Over $10,000,000 35 

An additional five-percent tax is imposed on a corporation's taxable income in excess of 

$100,000. The maximum additional tax is $11,750. Also, a second additional three-percent tax 

is imposed on a corporation's taxable income in excess of $15 million. The maximum second 

additional tax is $100,000. 

Certain personal service corporations pay tax on their entire taxable income at the rate of 

3 5 percent. 257 

Present law provides if the maximum corporate tax rate exceeds 35 percent, the 

maximum rate on a corporation's net capital gain will be 35 percent. 258 

Reasons for Change 

The United States has one of the highest statutory corporate tax rates among developed 

countries. The Committee believes that lowering the corporate tax rate is necessary to ensure 

domestic corporations remain globally competitive with their counterparts domiciled in the 

United States' largest international competitors. The average corporate income tax rate among 

nations in the Organisation for Economic Co-operation and Development is 22.5 percent. A low 

competitive corporate tax rate also contributes to making the United States an attractive location 

Sec. ll(a) and (b)(l). 

Sec. ll(b)(2). 

058 Sec. l20l(a). 
114 

for foreign corporations to invest. In addition, a lower corporate tax rate means corporations will 

have more resources to invest in growing their businesses and creating jobs. 

Explanation of Provision 

The provision eliminates the graduated corporate rate structure and instead taxes 

corporate taxable income at 20 percent. 

The provision eliminates the special tax rate for personal service corporations. 

The provision repeals the maximum corporate tax rate on net capital gain as obsolete. 

For taxpayers subject to the normalization method of accounting (e.g., regulated public 

utilities), the provision provides for the normalization of excess deferred tax reserves resulting 

from the reduction of corporate income tax rates (with respect to prior depreciation or recovery 

allowances taken on assets placed in service before the date of enactment). 

Effective Date 

The provision applies to taxable years beginning after December 31, 2018. 

2. Reduction in dividends-received deductions to reflect lower corporate income tax rates 

(sec. 13002 of the bill and sec. 243 of the Code) 

Present Law 

Corporations are generally taxable on their income. 259 With respect to dividends 

received from other taxable domestic corporations, however, a corporation is allowed a 

deduction. 260 The amount of the deduction is generally equal to 70 percent of the dividend 

received. 

In the case of any dividend received from a 20-percent owned corporation, the amount of 

the deduction is equal to 80 percent of the dividend received261 The term "20-percent owned 

corporation" means any corporation if 20 percent or more of the stock of such corporation (by 

vote and value) is owned by the taxpayer. For this purpose, certain preferred stock is not taken 

into account. 

259 Sec. ll(a). 

260 Sec. 243(a). Such dividends are taxed at a maximum rate of 10.5 percent (30 percent of the top 

corporate tax rate of 35 percent). 

261 Sec. 243(c). Such dividends are taxed at a maximum rate of7 percent (20 percent of the top corporate 

tax rate of 35 percent). 
115 

ln the case of a dividend received from a corporation that is a member of the same 

affiliated group, a corporation is generally allowed a deduction equal to 100 percent of the 

dividend received. 262 

Reasons for Change 

The Committee believes that the marginal tax rate on dividends received by corporations 

should remain the same. Thus, in light of the reduction in the corporate tax rate, the Committee 

believes that commensurate reductions in the dividends-received deduction percentages are 

appropriate. 

Explanation of Provision 

The provision reduces the 70 percent dividends-received deduction to 50 percent and the 

80 percent dividends-received deduction to 65 percent. 263 

Effective Date 

The provision applies to taxable years beginning after December 31, 2018. 

3. Dividends-paid deduction (sees. 13011 through 13013 of the bill and new sec. 242 oftbe 

Code) 

Present Law 

Domestic corporations and their shareholders 

A domestic corporation is taxed on its taxable income as an entity separate from its 

shareholders. 264 Dividends paid by a corporation generally are not deductible in computing its 

taxable income. 265 Thus, when a shareholder is taxed on a dividend paid out of income that was 

taxed at the corporate level, the same income generally bears two levels of tax. For individuals, 

the shareholder tax is partially alleviated by preferential rates for qualified dividends. 266 For 

corporations, the shareholder tax is alleviated by a dividends-received deduction that ranges from 

70 to 100 percent of the dividends received, depending on the corporate shareholder's percentage 

Sec. 243(a)(3) and (b)(l). For this purpose, the term "affiliated !,>roup" generally has the meaning given 

such term by section 1504(a). Sec. 243(b)(2). 

" 3 Such dividends would be taxed at a maximum rate of 10 percent (50 percent of the top corporate ta'< 

rate of 20 percent) and 7 percent (35 percent of the top corporate tax rate of 20 percent), respectively. 

eM Sec. 11. 

But see, e.g, sees. 561 through 565. 

266 Sec. l(h)(J I). 
116 

of stock ownership in the payor corporation. 267 If the shareholder is a U.S. person not subject to 

U.S. tax (such as a tax-exempt organization), no U.S. tax is paid on amounts that are 

characterized as dividends. Dividends paid to foreign shareholders generally are subject to a 30-

percent tax on the gross amount of dividends, collected by means of withholding by the payor. 268 

U.S. bilateral income tax treaties reduce or eliminate this 30-percent tax on dividends paid by 

domestic corporations to persons who are eligible for reduced rates under those treaties. 

U.S. branches of foreign corporations 

The branch profits tax imposes a 30-percent tax on deemed remittances (the "dividend 

equivalent amount") from a U.S. branch of a foreign corporation to its foreign home office. 269 

This tax is intended to replicate for a foreign corporation's U.S. branch operations the 30-percent 

withholding tax that would apply to a domestic subsidiary's payment of dividends to its foreign 

parent corporation. Similar branch interest taxes apply to interest paid or deducted by a 

U.S. trade or business of a foreign corporation. 270 U.S. bilateral income tax treaties reduce or 

eliminate this 30-percent tax for foreign corporations eligible for reduced rates under those 

treaties. 

Allocation of expenses for purposes of the foreign tax credit 

The computation of the foreign tax credit limitation requires a taxpayer to determine the 

amount of its taxable income from foreign sources by allocating and apportioning deductions 

between U.S.-source gross income and foreign-source gross income. In general, deductions are 

allocated and apportioned to the gross income to which the deductions factually relate. 271 

Expenses other than interest, however, that are not directly allocable or apportioned to any 

specific income producing activity are allocated and apportioned as if all members of an 

affiliated group were a single corporation. 272 

Reasons for Change 

The Committee believes that all business income-whether earned by an individual, a 

pass-through entity, or a corporation-should bear only one level of tax. The Committee further 

believes that the best method for achieving one level of tax for corporations is through a 

Sec. 2.\3. See also section 13002 of the bill (Reduction in dividends received deductions to reflect 

lower cotporate income tax rates). 

268 Sees. 87l(a)(l)(A), 88l(a)(l)(A), 1441(a). and 1442(a). 

269 Sec. 884(a). 

Sec. 884(!). 

Treas. Reg. sec. 1.861-8(b), Temp. Treas. Reg. sec. 1.861-ST(c). 

Sec. 864(e)(1) and (6). The term "affiliated group·· is detcnnined generally by reference to the mles for 

detennining whether cotporations arc eligible to file consolidated returns. Sees. 864(e)(5) and 1504. 
117 

dividends-paid deduction. By enacting the mechanism for a dividends-paid deduction, complete 

with the necessary reporting requirements, the Committee is taking an important step toward the 

ultimate goal of full corporate integration.

273 

Expla nation of Pt·ovision 

The provision allows domestic corporations a zero percent deduction for applicable 

dividends paid to shareholders. Applicable dividends are dividends paid from applicable 

eamings and profits, which generally are eamings and profits accumulated in taxable years 

beginning after December 3 1,20 18. Applicable camings and profits do not include earnings and 

profits properly a llocable to amounts that are exempt fi·om or otherwise have not been subj ect to 

the corporate tax. 

For purposes of the dividends-paid deduction, corporations may elect to treat certain 

dividends paid in the first 3!12 months after the close of the taxable year as paid immediately 

before the close of the taxable year. 

Corporations must report with their tax retum (A) the aggregate amount of dividends paic 

in the reporting period, (B) the aggregate amount of such dividends with respect to which the 

corporation is claiming a dividends-paid deduction under the provision, (C) the aggregate 

amount of such dividends paid in the first 3!12 months of the taxable year that the taxpayer electcc 

to treat as paid in the prior taxable yea r, (D) tbe aggregate amount of such dividends pa id in the 

3!12 months after the close of the taxable year that the taxpayer e lected to treat as paid in the 

current taxable year, and (E) such other information as the Secretary requires for the 

administration of the provision. For this purpose, the reporting period includes the taxable year 

and the first 3!12 months a tier the close of the taxable year. 

The provision imposes a penalty on U1e fai lure to report the information described above. 

Unless the corporation shows the failure is because of reasonable cause, the penalty is $1,000 a 

day for each day the failure continues. The maximum penalty under this provision for any 

taxable year is $250,000. 

For foreign corporations, the provision allows a deduction equal to zero percent of the 

dividend equivalent amount. 

The provision allocates and apportions dividend expense of any domestic corporation tha· 

is a member of an affiliated group to foreign-source income in the same proportion that (i) the 

aggrega te foreign-source income of all domestic corporations that are members of such group 

(determined without regard to such dividend expense) bears to (ii) the aggregate income from all 

sources of such domestic corporations (as so detennined). 

"'Sec, e.g., Michael J. Graetz and Alvin C. Warren, Jr., Integration of Corporate and Shareholder Taxes, 

69 Nat' ! Tax .1 . 677 (20 16); Staff Report on Comprehensive Tax Reform for 2015 and BC)'Ond, Prepared by the 

Republican Staff of the Conuniuee on Finance United States Senate, S. Prt. No. I 13-31 (Dec. 2014), at 123-238. 
118 

Effective Date 

The dividends-paid deduction applies to dividends paid in taxable years beginning after 

December 31, 2018. 

The rules regarding the branch profits tax and the allocation of dividend expense among 

members of an affiliated group apply to taxable years beginning after December 31, 2018. 

PART II- SMALL BUSINESS REFORMS 

1. Modifications of rules for expensing depreciable business assets (sec. 13101 of the bill 

and sec. 179 of the Code) 

Present Law 

A taxpayer generally must capitalize the cost of property used in a trade or business or 

held for the production of income and recover such cost over time through annual deductions for 

depreciation or amortization274 Tangible property generally is depreciated under the modified 

accelerated cost recovery system ("MACRS"), which determines depreciation for different types 

of property based on an assigned applicable depreciation method, recovery period, 275 and 

convention. 276 

Election to expense certain depreciable business assets 

A taxpayer may elect under section 179 to deduct (or "expense") the cost of qualifying 

property, rather than to recover such costs through depreciation deductions, subject to limitation. 

The maximum amount a taxpayer may expense is $500,000 of the cost of qualifying property 

placed in service for the taxable year. 277 The $500,000 amount is reduced (but not below zero) 

by the amount by which the cost of qualifying property placed in service during the taxable year 

See sees. 263(a) and 167. However, where property is not used exclusively in a taxpayer's business. 

the amount eligible for a deduction must be reduced by the amount related to personal usc. See. e.g. section 280A. 

The applicable recovery period for an asset is determined in part by statute and in part by historic 

Treasury guidance. Exercising authority granted by Congress. the Secretary issued Rev. Proc. 87-56. 1987-2 C.B. 

674, laying out the framework of recovery· periods for enumerated classes of assets. The Secretary clarified and 

modified the list of asset classes in Rev. Proc. 88-22. 1988-l C.B. 785. In November 1988. Congress revoked the 

Secretary's authority to modify the class lives of depreciable property. Rev. Proc. 87-56, as modified. remains in 

effect except to the extent that the Congress has, since 1988. statutorily modified the recovery period for certain 

depreciable assets. effectively superseding any administrative guidance with regard to such property. 

Sec. 168. 

Sec. 179(b)(l). 
119 

exceeds $2,000,000. 278 The $500,000 and $2,000,000 amounts are indexed for inflation for 

taxable years beginning after 2015. 279 

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. Qualifying property also includes 

off-the-shelf computer software and qualified real property (i.e., qualified leasehold 

improvement property, qualified restaurant property, and qualified retail improvement 

property). zso Qualifying property excludes any property described in section 50(b) (i.e., certain 

property not eligible for the investment tax credit). 281 

Passenger automobiles subject to the section 280F limitation are eligible for section 179 

expensing only to the extent of the dollar limitations in section 280F. For sport utility vehicles 

above the 6,000 pound weight rating and not more than the 14,000 pound weight rating, which 

are not subject to the limitation under section 280F, the maximum cost that may be expensed for 

any taxable year under section 179 is $25,000 (the "sport utility vehicle limitation"). 282 

The amount eligible to be expensed for a taxable year may not exceed the taxable income 

for such taxable year that is derived from the active conduct of a trade or business (determined 

without regard to this provision) 283 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 

limitations). 

No general business credit under section 38 is allowed with respect to any amount for 

which a deduction is allowed under section 179. 284 If a corporation makes an election under 

section 179 to deduct expenditures, the full amount of the deduction does not reduce earnings 

Sec. 179(b )(2). 

079 Sec. 179(b)(6). 

oso Sec. 179(d)(l)(A)(ii) and (f). 

" 1 Sec. 179(d)(l) flush language. Property described in section 50(b) is generally property used outside 

the United States, certain property used for lodging, property used by certain tax exempt organizations, and property 

used by governmental units and foreign persons or entities. 

280 Sec. 179(b )(5). For this purpose. a sport utility vehicle is defined to exclude any vehicle that: (I) is 

designed for more than nine individuals in seating reanvard of the driver's seat; (2) is equipped with an open cargo 

area. or a covered box not readily accessible from the passenger compartment. of at least six feet in interior length: 

or (3) has an integral enclosure. fully enclosing the driver compartment and load carrying device, docs not have 

seating reanvard of the driver's seat. and has no body section protmding more than 30 inches ahead of the leading 

edge of the windshield. 

283 Sec. 179(b)(3). 

284 Sec. 179(d)(9). 
120 

and profits. Rather, the expenditures that are deducted reduce corporate earnings and profits 

ratably over a five-year period285 

An expensing election is made under rules prescribed by the Secretary. 286 In general, any 

election or specification made with respect to any property may not be revoked except with the 

consent of the Commissioner. However, an election or specification under section 179 may be 

revoked by the taxpayer without consent of the Commissioner. 

Reasons for Change 

The Committee believes that section 179 expensing provides two important benefits for 

small businesses. First, it lowers the cost of capital for tangible property used in a trade or 

business. With a lower cost of capital, the Committee believes small businesses will invest in 

more equipment and employ more workers. Second, it eliminates depreciation recordkeeping 

requirements with respect to expensed property. In order to increase the value of these benefits 

and the number of eligible taxpayers that may receive these benefits, the provision increases both 

the amount allowed to be expensed under section 179 and the amount of the phase-out threshold. 

In addition, in order to counteract the negative effect of inflation on the limit and phase-out 

threshold of this provision for small businesses, the provision indexes such amounts, as well the 

sport utility vehicle limitation, for inflation. 

The Committee also believes that investments in certain tangible personal property used 

in rental real estate (e.g., appliances and furnishings) should be included within the definition of 

qualifying property to remove a disincentive for small active businesses to invest in these types 

of assets. Similarly, the Committee believes that additional types of nonresidential real property 

improvements should be included in the section 179 expensing provision to facilitate investment 

by small businesses in such improvement property. 

Explanation of Provision 

The provision increases the maximum amount a taxpayer may expense under section 179 

to $1,000,000, and increases the phase-out threshold amount to $2,500,000. Thus, the provision 

provides that the maximum amount a taxpayer may expense, for taxable years beginning after 

2017, is $1,000,000 of the cost of qualifying property placed in service for the taxable year. The 

$1,000,000 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 $2,500,000. The 

$1,000,000 and $2,500,000 amounts, as well as the $25,000 sport utility vehicle limitation, are 

indexed for inflation for taxable years beginning after 2018. 

285 Sec. 3l2(k)(3)(B). 

286 Sec. 179(c)(l). 
121 

The provision expands the definition of section 179 property to include certain 

depreciable tangible personal property used predominantly to furnish lodging or in connection 

with furnishing lodging. 287 

The provision also expands the definition of qualified real property eligible for 

section 179 expensing to include any of the following improvements to nonresidential real 

property placed in service after the date such property was first placed in service: roofs; heating, 

ventilation, and air-conditioning property; fire protection and alarm systems; and security 

systems. 

Effective Date 

The provision applies to property placed in service in taxable years beginning after 

December31, 2017. 

2. Modifications of gross receipts test for use of cash method of accounting by corporations 

aud partnerships (sec. 13102 of the bill and sees. 447 and 448 of the Code) 

Present Law 

General rule for methods of accounting 

Section 446 generally allows a taxpayer to select the method of accounting to be used to 

compute taxable income, provided that such method clearly reflects the income of the taxpayer. 

The term "method of accounting" includes not only the overall method of accounting used by the 

taxpayer, but also the accounting treatment of any one item. 288 Permissible overall methods of 

accounting include the cash receipts and disbursements method ("cash method"), an accrual 

method, or any other method (including a hybrid method) permitted under regulations prescribed 

by the Secretary. 289 Examples of any one item for which an accounting method may be adopted 

include cost recovery, 290 revenue recognition, 291 and timing of deductions 292 For each separate 

As defined in section 50(b )(2). Properly used predominantly to furnish lodging or in connection with 

furnishing lodging generally includes, e.g. beds and other furniture, refrigerators, ranges. and other equipment used 

in the living quarters of a lodging facility such as an apartment house, dormitory. or any other facility (or part of a 

facility) where sleeping accommodations are provided and let See Treas. Reg. sec. L48-1(h). 

288 Treas. Reg. sec. L446-1(a)(l). 

289 Sec. 44G(c). 

290 See, e.g., sees. 167 and 168. 

291 Sec. e.g. sees. 451 and 460. 

See, e.g. sees. 461 and 467. 
122 

trade or business, a taxpayer is entitled to adopt any permissible method, subject to certain 

restrictions. 293 

A taxpayer filing its first return may adopt any permissible method of accounting in 

computing taxable income for such year. 294 Except as otherwise provided, section 446(e) 

requires taxpayers to secure consent of the Secretary before changing a method of accounting. 

The regulations under this section provide rules for determining: (I) what a method of 

accounting is, (2) how an adoption of a method of accounting occurs, and (3) how a change in 

method of accounting is effectuated. 295 

Cash and accrual methods 

Taxpayers using the cash method generally recognize items of income when actually or 

constructively received and items of expense when paid. The cash method is administratively 

easy and provides the taxpayer flexibility in the timing of income recognition. It is the method 

generally used by most individual taxpayers, including farm and nonfarm sole proprietorships. 

Taxpayers using an accrual method generally accrue items of income when all the events 

have occurred that fix the right to receive the income and the amount of the income can be 

determined with reasonable accuracy. 296 Taxpayers using an accrual method of accounting 

generally may not deduct items of expense prior to when all events have occurred that fix the 

obligation to pay the liability, the amount of the liability can be determined with reasonable 

accuracy, and economic performance has occurred. 297 Accrual methods of accounting generally 

result in a more accurate measure of economic income than does the cash method. The accrual 

method is often used by businesses for financial accounting purposes. 

A C corporation, a partnership that has a C corporation as a partner, or a tax-exempt trust 

or corporation with unrelated business income generally may not use the cash method. 

Exceptions are made for farming businesses, qualified personal service corporations, and the 

aforementioned entities to the extent their average annual gross receipts do not exceed $5 million 

for all prior years (including the prior taxable years of any predecessor of the entity) (the "gross 

receipts test"). The cash method may not be used by any tax shelter. 298 In addition, the cash 

Sec. 446(d): Trcas. Reg. sec. 1.446-l(d). 

1 Treas. Reg. sec. 1.446-l(c)(l). 

095 Treas. Reg. see. 1.446-l(e). 

O% See. e.g., sec. 451. 

Sec, e.g .. sec. 461. 

298 Sees. 448(a)(3) and (d)(3) and 46l(i)(3) and (4). For this pmpose, a tax shelter includes: (l) any 

enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in auy 

offering reqnired to be registered with any Federal or State agency having the authority to regulate the offering of 

securities for sale: (2) any syndicate (within the meaning of section l256(e)(3)(B)): or (3) any ta'< shelter as defined 

in scction6662(d)(2)(C)(ii). In the ease of a fanning trade or business, a tax shelter includes any tax shelter as 

defined in section6662(d)(2)(C)(ii) or any partnership or any other enterprise other than a corporation which is not 
123 

method generally may not be used if the purchase, production, or sale of merchandise is an 

income producing factor. 299 Such taxpayers generally are required to keep inventories and use 

an accrual method with respect to inventory items. 300 

A farming business is defined as a trade or business of farming, including operating a 

nursery or sod farm, or the raising or harvesting of trees bearing fruit, nuts, or other crops, 

timber, or ornamental trees. 301 Such farming businesses are not precluded from using the cash 

method regardless of whether they meet the gross receipts test. However, section 44 7 generally 

requires a farming C corporation (and any farming partnership if a corporation is a partner in 

such partnership) to use an accrual method of accounting. Section 447 does not apply to nursery 

or sod farms, to the raising or harvesting of trees (other than fruit and nut trees), nor to farming 

C corporations meeting a gross receipts test with a $1 million threshold. For family farm 

C corporations, the threshold under the gross receipts test is $25 million. 

A qualified personal service corporation is a corporation: (1) substantially all of whose 

activities involve the performance of services in the fields of health, law, engineering, 

architecture, accounting, actuarial science, performing arts, or consulting, and (2) substantially 

all of the stock of which is owned by current or former employees performing such services, 

their estates, or heirs. Qualified personal service corporations are allowed to use the cash 

method without regard to whether they meet the gross receipts test. 

Reasons for Change 

The Committee believes that the present law accounting method rules impose overly 

complex recordkeeping requirements that increase compliance costs for small businesses, as such 

rules have non-uniform small business exception requirements, rely on varying forms of gross 

receipts tests with widely different exception thresholds, and vary depending on the classification 

of a taxpayer's business activities. The Committee believes that using an accrual method is more 

complicated than using the cash method and any difference in income for a small business may 

be relatively small, such that either method may clearly reflect the income of a small business. 

In addition, the Committee believes that the cash method may address liquidity concerns of small 

businesses in that it measures income when the taxpayer is most likely to have the cash to pay 

any tax. 

The Committee believes that a uniform definition of small business for determining 

applicable accounting method rules and consistent application of a gross receipts test will 

simplify tax administration and taxpayer compliance. An increase in the gross receipts test to 

an S corporation engaged in the trade or business of fanning, (!) if at any time interests in such partnership or 

enterprise have been offered for sale in auy offering required to be rc1,>istered with any Federal or State agency 

having authority to regulate the offering of securities for sale or (2) if more than 35 percent of the losses during any 

period are allocable to limited partners or limited entrepreneurs. 

299 Treas. Reg. sees. l.446-l(c)(2) and 1.471-l. 

300 Sec. 471 and Trcas. Reg. sees. l.446-l(c)(2) and 1.471-1. 

301 Sec. H8(d)(l). 
124 

$15 million will materially increase the number of business entities that are able to obtain relief 

from complex tax accounting rules. Many rules under present law prohibit a taxpayer from 

taking advantage of a small business accounting method exception if they ever fail to meet the 

relevant gross receipts test. The Committee believes that such taxpayers should be allowed to 

avail themselves of simplified accounting methods if they subsequently are able to meet the 

gross receipts test. Finally, the Committee believes that indexing the threshold for inflation will 

ensure that the small business definition remains an accurate reflection of the appropriate level of 

gross receipts for exempting entities from certain tax accounting rules. 

Explanation of Provision 

The provision expands the universe of taxpayers that may use the cash method of 

accounting. Under the provision, the cash method of accounting may be used by taxpayers, other 

than tax shelters, that satisfy the gross receipts test. The gross receipts test allows taxpayers with 

annual average gross receipts that do not exceed $15 million for the three prior taxable-year 

period (the "$15 million gross receipts test") to use the cash method. 302 The $15 million amount 

is indexed for inflation for taxable years beginning after 2018. 

The provision retains the exceptions from the required use of the accrual method for 

qualified personal service corporations and taxpayers other than C corporations. Thus, qualified 

personal service corporations, partnerships without C corporation partners, S corporations, and 

other pass-through entities are allowed to use the cash method without regard to whether they 

meet the $15 million gross receipts test, so long as the use of such method clearly reflects 

income. 303 

The provision expands the universe of farming C corporations (and farming partnerships 

with a C corporation partner) that may use the cash method to include any farming C corporation 

(or farming partnership with a C corporation partner) that meets the $15 million gross receipts 

test. The provision retains the $25 million dollar limit for family farming corporations, but uses 

the $15 million gross receipts test in section 448 (substituting a $25 million threshold for the $15 

million threshold). The $25 million amount is indexed for inflation for taxable years beginning 

after 2018. 

Consistent with present law, the cash method generally may not be nsed by ta>.-paycrs if the purchase, 

production, or sale of merchandise is an income-producing factor. However, for taxable years bcgiillling after 

December 31. 2017, under other provisions described in the bill. an exception to the requirement to use inventories 

is provided for taxpayers that meet the $15 million gross receipts test. thus allowing such taxpayers to also use the 

cash method. Sec section 13103 of the bill (Clarification of inventory accotmling mlcs for small businesses). In 

addition, the cash method may not be used by a tax shelter. 

101 Consistent with present law, the cash method generally may not be used by taxpayers if the purchase. 

production. or sale of merchandise is an income-producing factor. However. for taxable years begiillling after 

December 3L 2017. under other provisioll' of described in the bilL an exception to the requirement to use 

inventories is provided for taxpayers that meet the $15 million gross receipts test, thus allowing such taxpayers to 

also usc the cash method. Sec section 13103 of the bill (Clarification of inventory accounting rules for small 

businesses). In addition, the cash method may not be used by a tax shelter. 
125 

If a taxpayer changes its method of accounting because it is either prohibited or no longer 

prohibited from using the cash method by reason of this provision, such change is treated as 

initiated by the taxpayer and made with the consent of the Secretary. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. Application 

of these rules is a change in the taxpayer's method of accounting for purposes of section 481. 

3. Clarification of inventory accounting rules for small businesses (sec. 13103 of the bill 

and sec. 471 of the Code) 

Present Law 

In general, for Federal income tax purposes, taxpayers must account for inventories if the 

production, purchase, or sale of merchandise is an income-producing factor to the taxpayer. 304 

Treasury regulations also provide that in any case in which the use of inventories is necessary to 

clearly reflect income, the accrual method must be used with regard to purchases and sales. 305 

However, an exception is provided for taxpayers whose average annual gross receipts do not 

exceed $1 million 306 A second exception is provided for taxpayers in certain industries whose 

average annual gross receipts do not exceed $10 million and that are not otherwise prohibited 

from using the cash method under section 448. 307 Such taxpayers may account for inventory as 

materials and supplies that are not incidental (i.e., "non-incidental materials and supplies")30s 

In those circumstances in which a taxpayer is required to account for inventory, the 

taxpayer must maintain inventory records to determine the cost of goods sold during the taxable 

period. Cost of goods sold generally is determined by adding the taxpayer's inventory at the 

beginning of the period to the purchases made during the period and subtracting from that sum 

the taxpayer's inventory at the end of the period. 

Because of the difficulty of accounting for inventory on an item-by-item basis, taxpayers 

often use conventions that assume certain item or cost flows. Among these conventions are the 

first-in, first-out ("FIFO") method, which assumes that the items in ending inventory are those 

304 Sec. 47l(a) and Treas. Reg. sec. 1.471-L 

Treas. Reg. sec. L44G-1(c)(2). 

306 Rev. Proc. 2001-10,2001-1 C.B. 272. 

Rev. Proc. 2002-28. 2002-1 C.B. 815. 

3

"' Treas. Reg. sec. L \62-3(a)(l). A deduction is gencrJ\ly permitted for the cost of non-incidental 

materials and supplies iu the tmmble year in which they are first used or are consumed in the tm,1Jayer's operations. 
126 

most recently acquired by the taxpayer, and the last-in, first-out ("LIFO") method, which 

assumes that the items in ending inventory are those earliest acquired by the taxpayer. 

Reasons for Change 

The Committee believes that the present law accounting method rules impose overly 

complex recordkeeping requirements that increase compliance costs for small businesses, as such 

rules have non-uniform small business exception requirements, rely on varying forms of gross 

receipts tests with widely different exception thresholds, and vary depending on the classification 

of a taxpayer's business activities. The Committee believes that using an accrual method, along 

with keeping inventory records, is more complicated than the cash method and any difference in 

income for a small business may be relatively small, such that either method may clearly reflect 

the income of a small business. The Committee also believes that the ability of small businesses 

to use simplified methods of accounting for inventory generally will be practical and 

administratively convenient for such taxpayers. 

The Committee believes that a uniform definition of small business for determining 

applicable accounting method rules and consistent application of a gross receipts test will 

simplify tax administration and taxpayer compliance. The Committee believes that providing a 

small business exception to the inventory rules for taxpayers meeting the $15 million gross 

receipts test will materially increase the number of business entities that are able to obtain relief 

from complex tax accounting rules. In addition, the Committee believes that indexing the 

threshold for inflation will ensure that the small business definition remains an accurate 

reflection of the appropriate level of gross receipts for exempting entities from certain tax 

accounting rules. 

Explanation of Provision 

The provision exempts certain taxpayers from the requirement to keep inventories. 

Specifically, taxpayers that meet the $15 million gross receipts test309 are not required to account 

for inventories under section 471 310, but rather may use a method of accounting for inventories 

3

"

9 The $15 million gross receipts test is described in section 13102 of the bill (Modifications of gross 

receipts test for use of cash method of accmmting by corporations and partnerships). 

310 In the case of a sole proprietorship, the $15 million gross receipts test is applied as if the sole 

proprietorship were a corporation. The cash method generally may not be used by taxvayers if the purchase, 

production, or sale of merchandise is an income-producing factor. However. for ta"']Jayers that meet the $15 million 

gross receipts test to be exempt from accounting for inventories under section 47 L such taxpayers are thus also 

eligible to use the cash method under the provision. Sec section 13102 of the bill (Modifications of gross receipts 

test for usc of cash method of accounting by corporations and partnerships). 
127 

that either (1) treats inventories as non-incidental materials and supplies311 , or (2) conforms to 

the taxpayer's financial accounting treatment ofinventories312 

If a taxpayer changes its method of accounting because it is either no longer required or is 

required to use inventories by reason of this provision, such change is treated as initiated by the 

taxpayer and made with the consent of the Secretary. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. Application 

of these rules is a change in the taxpayer's method of accounting for purposes of section 481. 

4. Modification of rnles for uniform capitalization of certain expenses (sec. 13104 of the bill 

and sec. 263A of the Code) 

Present Law 

The uniform capitalization rules require certain direct and indirect costs allocable to real 

or tangible personal property produced by the taxpayer to be included in either inventory or 

capitalized into the basis of such property, as applicable. m For real or personal property 

acquired by the taxpayer for resale, section 263A generally requires certain direct and indirect 

costs allocable to such property to be included in inventory. 

Section 263A provides a number of exceptions to the general uniform capitalization 

requirements. One such exception exists for certain small taxpayers who acquire property for 

resale and have $10 million or less of average annual gross receipts; 314 such taxpayers are not 

required to include additional section 263A costs in inventory. 

311 Consistent with present law. a deduction is generally permitted for the cost of non-incidental materials 

and supplies in the taxable year in which they arc first used or are consumed in the taxpayer's operations. See Trcas. 

Reg. sec. l.l62-3(a)(l). 

The taxpayer's financial accounting treatment of inventories is determined by reference to the method 

of accounting used in the taxpayer's applicable financial statement (as defined in section 13221 of the bill (Certain 

special mles for taxable year of inclusion)) or. if the taxpayer does not have an applicable financial statement, the 

method of accounting nsed in the taxpayer's book and records prepared in accordance with the ta"'])ayer's 

accounting procedures. 

313 Sec. 263A. 

314 Sec. 263A(b)(2)(B). No exception is available for small taxpayers who produce property subject to 

section 263A. However. a de minimis mle under Treasury regulations treats producers with total indirect costs of 

$200,000 or less as having no additional indirect costs beyond those nomk1lly capitalized for financial accounting 

purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv). 
128 

Another exception exists for taxpayers who raise, harvest, or grow trees. 315 Under this 

exception, section 263A does not apply to trees raised, harvested, or grown by the taxpayer 

(other than trees bearing fruit, nuts, or other crops, or ornamental trees) and any real property 

underlying such trees. Similarly, the uniform capitalization rules do not apply to any plant 

having a preproductive period of two years or less or to any animal, which is produced by a 

taxpayer in a farming business (unless the taxpayer is required to use an accrual method of 

accounting under section 447 or 448(a)(3)). 316 

Freelance authors, photographers, and artists also are exempt from section 263A for any 

qualified creative expenses 317 

Reasons for Change 

The Committee believes that the present law accounting method rules impose overly 

complex recordkeeping requirements that increase compliance costs for small businesses, as such 

rules have non-uniform small business exception requirements, rely on varying forms of gross 

receipts tests with widely different exception thresholds, and vary depending on the classification 

of a taxpayer's business activities. The Committee believes that using an accrual method, along 

with applying the uniform capitalization rules, is more complicated than using the cash method 

and any difference in income for a small business may be relatively small, such that either 

method may clearly reflect the income of a small business. In addition, the Committee believes 

that the uniform capitalization rules are relatively complex and any potential distortion to income 

caused by not applying such rules is not material enough to warrant the application of unduly 

burdensome rules to small businesses. 

The Committee believes that a uniform definition of small business for determining 

applicable accounting method rules and consistent application of a gross receipts test will 

simplify tax administration and taxpayer compliance. An increase in the gross receipts test to 

$15 million, and the expansion of the test to include any producer or reseller, will materially 

increase the number of business entities that are able to obtain relief from the complex uniform 

capitalization rules. In addition, the Committee believes that indexing the threshold for inflation 

will ensure that the small business definition remains an accurate reflection of the appropriate 

level of gross receipts for exempting entities from certain tax accounting rules. 

Explanation of Provision 

The provision expands the exception for small taxpayers from the uniform capitalization 

rules. Under the provision, any producer or reseller that meets the $15 million gross receipts 

315 Sec. 263A(c)(5). 

316 Sec. 263A(d). 

Sec. 263A(h). Qualified creative expenses arc defined as amounts paid or incurred by an individual in 

the trade or business of being a writer. photographer. or artist. However, such term does not include any expense 

related to printing. photographic plates, motion picture files. video tapes, or similar items. 
129 

test318 is exempted from the application of section 263A. 319 The provision retains the 

exemptions from the uniform capitalization rules that are not based on a taxpayer's gross 

receipts. 

If a taxpayer changes its method of accounting because it is either no longer required or is 

required to apply section 263A by reason of this provision, such change is treated as initiated by 

the taxpayer and made with the consent of the Secretary. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. Application 

of these rules is a change in the taxpayer's method of accounting for purposes of section 481. 

5. Increase in gross receipts test for construction contract exception to percentage of 

completion method (sec. 13105 of the bill and sec. 460 of the Code) 

Present Law 

ln general, in the case of a long-term contract, the taxable income from the contract is 

determined under the percentage-of-completion method. 320 Under this method, the taxpayer 

must include in gross income for the taxable year an amount equal to the product of ( 1) the gross 

contract price and (2) the percentage of the contract completed during the taxable year321 The 

percentage of the contract completed during the taxable year is determined by comparing costs 

allocated to the contract and incurred before the end of the taxable year with the estimated total 

contract costs. 322 Costs allocated to the contract typically include all costs (including 

depreciation) that directly benefit or are incurred by reason of the taxpayer's long-term contract 

activities. 323 The allocation of costs to a contract is made in accordance with regulations. 324 

318 The $15 million gross receipts test is described in section !3102 of the bill (Modifications of gross 

receipts test for usc of cash method of accounting by corporations and partnerships). 

319 In the case of a sole proprietorship. the $15 million gross receipts test is applied as if the sole 

proprietorship were a corporation. 

320 Sec . .!60(a). 

321 See Treas. Reg. sec. 1.460-4. This calculation is done on a cumulative basis. Thus, the amount 

included in gross income in a particular year is that proportion of the e"-pected contract price that the amount of 

costs incurred through the end of the taxable year bears to the total expected costs, reduced by the amotmts of gross 

contmct price included in gross income in previous taxable years. 

Sec. 460(b)(l). 

Sec. 460(c). 

Trcas. Reg. sec. 1.460-5. 
130 

Costs incurred with respect to the long-term contract are deductible in the year incurred, subject 

to general accrual method of accounting principles and limitations. 325 

An exception from the requirement to use the percentage-of-completion method is 

provided for certain construction contracts ("small construction contracts"). Contracts within 

this exception are those contracts for the construction or improvement of real property if the 

contract: (1) is expected (at the time such contract is entered into) to be completed within two 

years of commencement of the contract and (2) is performed by a taxpayer whose average annual 

gross receipts for the prior three taxable years do not exceed $10 million. 326 Thus, long-term 

contract income from small construction contracts must be reported consistently using the 

taxpayer's exempt contract method. 327 Pennissible exempt contract methods include the 

completed contract method, the exempt-contract percentage-of-completion method, the 

percentage-of-completion method, or any other permissible method. 328 

Reasons for Change 

The Committee believes that the present law accounting method rules impose overly 

complex recordkeeping requirements that increase compliance costs for small businesses, as such 

rules have non-uniform small business exception requirements, rely on varying forms of gross 

receipts tests with widely different exception thresholds, and vary depending on the classification 

of a taxpayer's business activities. The Committee believes that using an accrual method, along 

with using the percentage-of-completion method, is more complicated than using the cash 

method and any difference in income for a small business may be relatively small, such that 

either method may clearly reflect the income of a small business. The Committee also believes 

that the ability of small businesses to use simplified methods of accounting for certain 

construction contracts generally will be practical and administratively convenient for such 

taxpayers. 

The Committee believes that a uniform definition of small business for determining 

applicable accounting method rules and consistent application of a gross receipts test will 

simplify tax administration and taxpayer compliance. An increase in the gross receipts test to 

$15 million for small construction contracts will materially increase the number of business 

entities that are able to obtain relief from the complex percentage-of-completion method. In 

addition, the Committee believes that indexing the threshold for inflation will ensure that the 

small business definition remains an accurate reflection of the appropriate level of gross receipts 

for exempting entities from certain tax accounting rules. 

325 Treas. Reg. sees. 1.460-4(b)(2)(iv) and U60-l(b)(8). 

326 Sees. 460(e)(l)(B) and (4). 

327 Since snch contracts involve the construction of real property. they are subject to the interest 

capitalization rules without regard to their duration. Sec Trcas. Reg. sec. 1.263A-8. 

323 Treas. Reg. sec. U60-4(c)(l). 
131 

Explanation of Provision 

The provision expands the exception for small construction contracts from the 

requirement to use the percentage-of-completion method. Under the provision, contracts within 

this exception are those contracts for the construction or improvement of real property if the 

contract: (1) is expected (at the time such contract is entered into) to be completed within two 

years of commencement of the contract and (2) is performed by a taxpayer that (for the taxable 

year in which the contract was entered into) meets the $15 million gross receipts test. 329 

Effective Date 

The provision applies to contracts entered into after December 31, 2017, in taxable years 

ending after such date. 

Application of this rule is a change in the taxpayer's method of accounting for purposes 

of section 481, but is applied on a cutoff basis for all similarly classified contracts (hence there is 

no adjustment under section 481(a) for contracts entered into before January 1, 2018). 

'

29 The $15 million gross receipts test is described in section 13102 of the bill (Modifications of gross 

receipts test for use of cash method of accmmting by corporations and partnerships). In the case of a sole 

proprietorship, the $15 million gross receipts test is applied as if the sole proprietorship were a corporation. 
132 

PART lll- COST RECOVERY AND ACCOUNTING METHODS 

1. Temporary 100-percent expensing for certain business assets (sec. 13201 of the bill and 

sec. 168(k) of the Code) 

Present Law 

A taxpayer generally must capitalize the cost of property used in a trade or business or 

held for the production of income and recover such cost over time through annual deductions for 

depreciation or amortization. 330 

Tangible property 

Tangible property generally is depreciated under the modified accelerated cost recovery 

system ("MACRS"), which determines depreciation for different types of property based on an 

assigned applicable depreciation method, recovery period, 331 and convention 332 

Bonus depreciation 

An additional first-year depreciation deduction is allowed equal to 50 percent of the 

adjusted basis of qualified property acquired and placed in service before January 1, 2020 

(January I, 2021, for longer production period property333 and certain aircraft334). 335 The 50-

percent allowance is phased down for property placed in service after December 31, 2017 (after 

December 31, 2018 for longer production period property and certain aircraft). The bonus 

depreciation percentage rates are as follows. 

330 See sees. 263(a) and 167. However. where property is not used exclusively in a taxpayer's busiuess. 

the amount eligible for a deduction must be reduced by the amount related to personal usc. Sec, e.g., section 280A. 

331 The applicable recovery period for an asset is determined in part by statute and in part by historic 

Treasury guidance. Exercising authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 1987-2 C.B. 

674, laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and 

modified the list of asset classes in Rev. Proc. 88-22. 1988-1 C.B. 785. In November 1988. Congress revoked the 

Secretary's authority to modify the class lives of depreciable property. Rev. Proc. 87-56. as modified, remains in 

effect except to the extent that the Congress has, since 1988. statutorily modified the recovery period for certain 

depreciable assets. effectively superseding any administrative guidance with regard to such property. 

332 Sec. 168. 

333 As defined in section 168(k)(2)(B). 

334 As defined in section l68(k)(2)(C). 

335 Sec. l68(k). The additional first-year depreciation deduction is generally subject to the mles regarding 

whether a cost must be capitalized tmder section 263A. 
133 

Bonus Depreciation Percentage 

Placed in Service Year Qualified Property Longer Production Period 

in General Property and 

Certain Aircraft 

2017 50 percent 50 percent 

2018 40 percent 50 percent336 

2019 30 percent 40 percent 

2020 n/a 3 0 percent337 

The additional first-year depreciation deduction is allowed for both the regular tax and 

the alternative minimum tax ("AMT"), 338 but is not allowed in computing earnings and 

profits. 339 The basis of the property and the depreciation allowances in the year of purchase and 

later years are appropriately adjusted to reflect the additional first-year depreciation deduction. 340 

The amount of the additional first-year depreciation deduction is not affected by a short taxable 

year341 The taxpayer may elect out of the additional first-year depreciation for any class of 

property for any taxable year. 342 

The interaction of the additional first-year depreciation allowance with the otherwise 

applicable depreciation allowance may be illustrated as follows. Assume that in 2017 a taxpayer 

purchases new depreciable property and places it in service. 343 The property's cost is $10,000, 

and it is five-year property subject to the 200 percent declining balance method and half-year 

convention. The amount of additional first-year depreciation allowed is $5,000. The remaining 

$5,000 of the cost of the property is depreciable under the rules applicable to five-year property. 

336 It is intended that for longer production period property placed in service in 2018, 50 percent applies to 

the entire adjusted basis. Similarly, for longer production period property placed in scrYice in 2019. 40 percent 

applies to the entire adjusted basis. A technical correction may be necessary with respect to longer production 

period property placed in serYice in 2018 and 2019 so that the statute reflects this intent. 

337 In the case oflonger production period property described in section 168(k)(2)(B) and placed in service 

in 2020. 30 percent applies to the adjusted basis attributable to manufacture, constmctiorL or production before 

January I, 2020. and the remaining adjusted basis does not qualify for bonus depreciation. Thirty percent applies to 

the entire adjusted basis of certain aircraft described in section 168(k)(2)(C) and placed in service in 2020. 

338 Sec. 168(k)(2)(G). Sec also Treas. Reg. sec. 1.168(k)-l(d). 

Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)-1(1)(7). 

Sec. 168(k)( I )(B). 

341 Ibid. 

Sec. l68(k)(7). For the definition of a class of property, see Treas. Reg. sec. 1.168(k)-l(e)(2). 

343 Assume that the cost of the property is not eligible for exvensing under section 179 or Treas. Reg. 

sec. 1.263(a)-l(f). 
134 

Thus, $1,000 also is allowed as a depreciation deduction in 2017 344 The total depreciation 

deduction with respect to the property for 2017 is $6,000. The remaining $4,000 adjusted basis 

of the property generally is recovered through otherwise applicable depreciation rules. 

Qualified property 

Property qualifying for the additional first-year depreciation deduction must meet all of 

the following requirements 345 First, the property must be: (1) property to which MACRS 

applies with an applicable recovery period of20 years or less; (2) water utility property; 346 

(3) computer software other than computer software covered by section 197; or (4) qualified 

improvement property. 347 Second, the original use348 of the property must commence with the 

taxpayer. 349 Third, the taxpayer must acquire the property within the applicable time period (as 

described below). Finally, the property must be placed in service before January l, 2020. As 

noted above, an extension of the placed-in-service date of one year (i.e., before January 1, 2021) 

is provided for certain property with a recovery period of 10 years or longer, certain 

transportation property, and certain aircraft. 350 

344 $1,000 results from the application of the half-year com·cntion and the 200 percent declining balance 

method to the remaining $5.000. 

Requirements relating to actions taken before 2008 are not described herein since they have little (if 

any) remaining effect. 

316 As defined in sectionl68(e)(5). 

The additional first-year depreciation deduction is not available for any property that is required to be 

depreciated under the altemative depreciation system of MACRS. Sec. 168(k)(2)(D)(i). 

318 The tcnu "original use" means the first use to which the property is put. whether or not such usc 

corresponds to the use of such property by the taxpayer. If in the nonnal course of its business a tawayer sells 

fractional interests in property to unrelated third parties, then the original use of such property begins with the first 

user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of 

the property). Treas. Reg. sec. l.l68(k)-l(h)(3). 

3

'

19 A special role applies in the case of certain leased property. In the case of any property that is 

originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the 

taxpayer within three months after the date that the property was placed in service. the property would be treated as 

originally placed in service by the taxpayer not earlier than the dale that the property is used under the leaseback If 

property is originally placed in serv·ice by a lessor. such property is sold within three months after the date that the 

property was placed in sef\·icc. and the user of such property docs not change, then the property is treated as 

originally placed in sef\•ice by the taxpayer not earlier than the date of such sale. Sec. 168(k)(2)(E)(ii) and (iii). 

" 0 Property qualifying for the extended placed-in-service date must have an estimated production period 

exceeding one year and a cost exceeding $1 million. Transportation property generally is defined as tangible 

personal property used in the tmde or business of transporting persons or property. Cert;rin aircraft wlrich is not 

transportation property. other than for agricultural or fircfighting uses. also qualifies for tl1e extended placed-inservice date, if at the time of the contract for purchase. the purchaser made a nonrefundable deposit of the lesser of 

10 percent of the cost or $100,000. and which has an estimated production period exceeding four months and a cost 

exceeding $200.000. 
135 

To qualify, property must be acquired (l) before January 1, 2020, or (2) pursuant to a 

binding written contract which was entered into before January I, 2020. With respect to 

property that is manufactured, constructed, or produced by the taxpayer for use by the taxpayer, 

the taxpayer must begin the manufacture, construction, or production of the property before 

January 1, 2020. 351 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. 352 For property eligible for the extended placed-in-service date, a special rule limits 

the amount of costs eligible for the additional first-year depreciation. With respect to such 

property, only the portion of the basis that is properly attributable to the costs incurred before 

January 1, 2020 ("progress expenditures") is eligible for the additional first-year depreciation 

deduction. 353 

Qualified improvement property 

Qualified improvement property is any improvement to an interior portion of a building 

that is nonresidential real property if such improvement is placed in service after the date such 

building was first placed in service. 354 Qualified improvement property does not include any 

improvement for which the expenditure is attributable to the enlargement of the building, any 

elevator or escalator, or the internal structural framework of the building. 

Election to accelerate AMT credits in lieu of bonus depreciation 

A corporation otherwise eligible for additional first-year depreciation may elect to claim 

additional AMT credits in lieu of claiming additional depreciation with respect to qualified 

property. 355 In the case of a corporation making this election, the straight line method is used for 

the regular tax and the AMT with respect to qualified property. 356 

A corporation making an election increases the tax liability limitation under section 53( c) 

on the use of minimum tax credits by the bonus depreciation amount. The aggregate increase in 

credits allowable by reason of the increased limitation is treated as refundable. 

351 Sec. !68(k)(2)(E)(i). 

350 Trcas. Reg. sec. l.l68(k)-l(b)(4)(iii). 

Sec. 168(k)(2)(B)(ii). For purposes of determining the amount of eligible progress expenditures, ntlcs 

similar to section46(d)(3) as in effect prior to theTa'< Reform Act of 1986 apply. 

351 Sec. l68(k)(3). 

355 Sec. 168(k)(4). 

350 Sec. 168(k)(4)(A)(ii). 
136 

The bonus depreciation amount generally is equal to 20 percent of bonus depreciation for 

qualified property that could be claimed as a deduction absent an election under this provision357 

As originally enacted, the bonus depreciation amount for all taxable years was limited to the 

lesser of(!) $30 million or (2) six percent of the minimum tax credits allocable to the adjusted 

net minimum tax imposed for taxable years beginning before January 1, 2006. However, 

extensions of this provision have provided that this limitation applies separately to property 

subject to each extension. 

For taxable years ending after December 31, 2015, the bonus depreciation amount for a 

taxable year (as defined under present law with respect to all qualified property) is limited to the 

lesser of (1) 50 percent of the minimum tax credit for the first taxable year ending after 

December 31, 2015 (determined before the application of any tax liability limitation) or (2) the 

minimum tax credit for the taxable year allocable to the adjusted net minimum tax imposed for 

taxable years ending before January I, 2016 (determined before the application of any tax 

liability limitation and determined on a first-in, first-out basis). 

All corporations treated as a single employer under section 52( a) are treated as one 

taxpayer for purposes of the limitation, as well as for electing the application of this provision358 

In the case of a corporation making an election which is a partner in a partnership, for 

purposes of determining the electing partner's distributive share of partnership items, bonus 

depreciation does not apply to any qualified property and the straight line method is used with 

respect to that property. 359 

In the case of a partnership having a single corporate partner owning (directly or 

indirectly) more than 50 percent of the capital and profits interests in the partnership, each 

partner takes into account its distributive share of partnership depreciation in determining its 

bonus depreciation amount. 360 

Special rules 

Passenger automobiles 

The limitation under section 280F on the amount of depreciation deductions allowed with 

respect to certain passenger automobiles is increased in the first year by $8,000 for automobiles 

that qualify (and for which the taxpayer does not elect out of the additional first-year 

35' For this purpose, bonus depreciation is the difference between (i) the aggregate amount of depreciation 

detennincd if section 1 68(k)( I) applied to all qualified property placed in service during the taxable year and (ii) the 

amount of depreciation that would be so detennined if section 168(k)(l) did not so apply. This determination is 

made using the most accelerated depreciation method and the shortest life otherwise allowable for each property. 

3ss Sec. 168(k)(-I)(B)(iii). 

359 Sec. l68(k)(4)(D)(ii). 

369 Sec. 168(k)(4)(D)(iii). 
137 

deduction)361 The $8,000 amount is phased down from $8,000 by $1,600 per calendar year 

beginning in 2018. Thus, the section 280F increase amount for property placed in service during 

2018 is $6,400, and during 2019 is $4,800. While the underlying section 280F limitation is 

indexed for inflation, 362 the section 280F increase amount is not indexed for inflation. The 

increase does not apply to a taxpayer who elects to accelerate AMT credits in lieu of bonus 

depreciation for a taxable year. 

Certain plants bearing fruits and nuts 

A special election is provided for certain plants bearing fruits and nuts. 363 Under the 

election, the applicable percentage of the adjusted basis of a specified plant which is planted or 

grafted after December 31, 2015, and before January 1, 2020, is deductible for regular tax and 

AMT purposes in the year planted or grafted by the taxpayer, and the adjusted basis is reduced 

by the amount of the deduction 364 The percentage is 50 percent for 2017,40 percent for 2018, 

and 30 percent for 2019. A specified plant is any tree or vine that bears fruits or nuts, and any 

other plant that will have more than one yield of fruits or nuts and generally has a preproductive 

period of more than two years from planting or grafting to the time it begins bearing fruits or 

nuts 365 The election is revocable only with the consent of the Secretary, and if the election is 

made with respect to any specified plant, such plant is not treated as qualified property eligible 

for bonus depreciation in the subsequent taxable year in which it is placed in service. 

Long-term contracts 

In general, in the case of a long-term contract, the taxable income from the contract is 

determined under the percentage-of-completion method. 366 Solely for purposes of determining 

the percentage of completion under section 460(b )(1 )(A), the cost of qualified property with a 

MACRS recovery period of seven years or less is taken into account as a cost allocated to the 

contract as if bonus depreciation had not been enacted for property placed in service before 

January 1, 2020 (January l, 2021, in the case oflonger production period property) 367 

361 Sec. !68(k)(2)(F). 

Sec. 280F(d)(7). 

363 See sec. 168(k)(5). 

3

"' Any amount deducted under this election is not subject to capitalization under section 263A. 

365 A specified plant does not include any property that is planted or grafted outside the United States. 

366 Sec. 460. 

Sec. 460( c )(6). Other dates involving prior years arc not described herein. 
138 

Intangible property 

MACRS does not apply to certain property, including any motion picture film, video 

tape, or sound recording, or to any other property if the taxpayer elects to exclude such property 

from MACRS and the taxpayer properly applies a unit-of-production method or other method of 

depreciation not expressed in a term of years. 368 Section 197 (amortization of goodwill and 

certain other intangibles) does not apply to certain intangible property, including certain property 

produced by the taxpayer or any interest in a film, sound recording, video tape, book or similar 

property not acquired in a transaction (or a series of related transactions) involving the 

acquisition of assets constituting a trade or business or substantial portion thereof 369 Thus, the 

recovery of the cost of a film, video tape, or similar property that is produced by the taxpayer or 

is acquired on a "stand-alone" basis by the taxpayer may not be determined under either the 

MACRS depreciation provisions or under the section 197 amortization provisions. The cost 

recovery of such property may be determined under section 167, which allows a depreciation 

deduction for the reasonable allowance for the exhaustion, wear and tear, or obsolescence of the 

property if it is used in a trade or business or held for the production of income. In addition, the 

costs of motion picture films, video tapes, sound recordings, copyrights, books, and patents are 

eligible to be recovered using the income forecast method of depreciation. 370 

Expensing of certain qualified film, television and live theatrical productions 

Under section 181, a taxpayer may elect371 to deduct the cost of any qualifying film, 

television and live theatrical production, commencing prior to January I, 2017, in the year the 

expenditure is incurred in lieu of capitalizing the cost and recovering it through depreciation 

allowances 372 A taxpayer may elect to deduct up to $15 million of the aggregate cost of the film 

or television production under this section. m The threshold is increased to $20 million if a 

significant amount of the production expenditures are incurred in areas eligible for designation as 

36' Sec. 168(1)(1). (3) and (4). 

369 Sec. 197(c)(2) and (c)(4)(A). Ifsectionl97 applies to the acquisition of intangible assets held in 

connection with a trade or business, any value properly attributable to a "section 197 iutangiblc" is amortizable ou a 

straight-line basis over 15 years. Sec. 197(a) and (c). 

Sec. 167(g)(6). Under the income forecast method, a property's depreciation deduction for a taxable 

year is determined by multiplying the adjusted basis of the property by a fraction. the numerator of which is the 

gross income generated by the property during the year, and the denominator of which is the total forecasted or 

estimated gross income expected to be generated prior to the close of the tenth taxable year after the year the 

property is placed in service. Any costs that arc not recovered by the end of the tenth taxable year after the property 

is placed in service may be taken into account as depreciation in that year. Sec. 167(g)(1). 

Sec Treas. Reg. sec. 1.181-2 for niles on making an election under this section. 

For this purpose. a qualified film or television production is treated as commencing on the first date of 

principal photography. The date on which a qualified live theatrical production commences is the date of the first 

public perfonnance of such production for a paying audience. 

Sec. 18l(a)(2)(A). See Trcas. Reg. sec. U8l-l for niles on detennirting eligible production costs. 
139 

a low-income community or eligible for designation by the Delta Regional Authority as a 

distressed county or isolated area of distress. 374 

A qualified film, television or live theatrical production means any production of a 

motion picture (whether released theatrically or directly to video cassette or any other format), 

television program or live staged play if at least 75 percent of the total compensation expended 

on the production is for services performed in the United States by actors, directors, producers, 

and other relevant production personnel. 375 The term "compensation" does not include 

participations and residuals (as defined in section 167(g)(7)(B))376 

Each episode of a television series is treated as a separate production, and only the first 

44 episodes of a particular series qualify under the provision. 377 Qualified productions do not 

include sexually explicit productions as referenced by section 2257 of title 18 of the U.S. 

Code378 

A qualified live theatrical production is defined as a live staged production of a play 

(with or without music) which is derived from a written book or script and is produced or 

presented by a commercial entity in any venue which has an audience capacity of not more than 

3,000, or a series of venues the majority of which have an audience capacity of not more than 

3,000. 379 In addition, qualified live theatrical productions include any live staged production 

which is produced or presented by a taxable entity no more than 10 weeks annually in any venue 

which has an audience capacity of not more than 6,500380 In general, in the case of multiple 

live-staged productions, each such live-staged production is treated as a separate production. 

Similar to the exclusion for sexually explicit productions from the definition of qualified film or 

television productions, qualified live theatrical productions do not include stage performances 

that would be excluded by section 2257(h)(l) of title 18 of the U.S. Code, if such provision were 

extended to live stage performances 381 

For purposes of recapture under section 1245, any deduction allowed under section 181 is 

treated as if it were a deduction allowable for amortization. 382 

Sec. 18l(a)(2)(B). 

Sec. 18l(d)(3)(A). 

Sec. 18l(d)(3)(B). 

Sec. l81(d)(2)(B). 

3

" Sec. 18l(d)(2)(C). 

r 9 Sec. 18l(c)(2)(A). 

" 0 Sec. 18l(e)(2)(D). 

381 Sec. 181(c)(2)(E). 

3

" Sec. 1245(a)(2)(C). 
140 

Reasons for Change 

The Committee believes that providing full expensing for certain business assets will 

accelerate purchases of equipment and other assets, and promote capital investment, 

modernization, and growth. The Committee also believes that full expensing under section 

168(k) for certain business assets is important for small businesses that qualify for section 179 

expensing because a business may only expense costs under section 179 to the extent of its 

taxable income for the year. Thus, increased expensing under section 168(k) will provide 

additional flexibility and accelerated cost recovery for most businesses. 

In addition, the Committee believes that providing full expensing for certain production 

costs of qualified film, television and live theatrical productions (as defined in section 181) once 

placed in service will encourage investment in and financing of these types of domestic 

productions, and will help to prevent the production of American projects abroad. The 

Committee also believes that these productions create broader economic effects in cities and 

towns across the United States, with revenues and jobs generated in a variety of other local 

businesses. Hotels, restaurants, catering companies, equipment rental facilities, transportation 

vendors, and many others benefit from these productions. 

Explanation of Provision 

In general 

The provision extends and modifies the additional first-year depreciation deduction 

through 2022 (through 2023 for longer production period property and certain aircraft). The 50-

percent allowance is increased to I 00 percent for property placed in service after September 27, 

2017, and before January l, 2023 (January 1, 2024, for longer production period property and 

certain aircraft), as well as for specified plants planted or grafted after September 27, 2017, and 

before January 1, 2023. Thus, the provision repeals the phase-down of the additional first-year 

depreciation deduction for property placed in service after December 31, 2017, and for specified 

plants planted or grafted after such date. 

As a conforming amendment to the repeal of corporate AMT, the election to accelerate 

AMT credits in lieu of bonus depreciation is repealed383 

Special rules 

The provision maintains the section 280F increase amount of $8,000 for passenger 

automobiles placed in service after December 31, 2017. 

The provision extends the special rule under the percentage-of-completion method for the 

allocation of bonus depreciation to a long-term contract for property placed in service before 

January I, 2023 (January 1, 2024, in the case oflonger production period property). 

" 3 See sec. 12001 of the bill (Repeal of tax for corporations). 
141 

Application to qualified film, television and live theatrical productions 

The provision expands the definition of qualified property eligible for the additional firstyear depreciation allowance to include qualified film, television and live theatrical productions384 

placed in service after September 27, 2017, and before January I, 2023, for which a deduction 

otherwise would have been allowable under section 181 without regard to the dollar limitation or 

termination of such section. For purposes of this provision, a production is considered placed in 

service at the time of initial release, broadcast, or live staged perf01mance (i.e., at the time of the 

first commercial exhibition, broadcast, or live staged performance of a production to an 

audience). 

Exception for certain utility property 

The provision excludes from the definition of qualified property any property which is 

primarily used in the trade or business of the fumishing385 or sale of (I) electrical energy, water, 

or sewage disposal services, (2) gas or steam through a local distribution system, or 

(3) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case 

may be, have been established or approved by a State or political subdivision thereof, by any 

agency or instrumentality of the United States, by a public service or public utility commission 

or other similar body of any State or political subdivision thereof, or by the governing or 

ratemaking body of an electric cooperative 386 

Effective Date 

The provision generally applies to property placed in service after September 27, 2017, in 

taxable years ending after such date, and to specified plants planted or grafted after such date. 

A transition rule provides that, for a taxpayer's first taxable year ending after 

September 27, 2017, the taxpayer may elect to apply a 50-percent allowance. 387 

2. Modifications to depreciation limitations on luxury automobiles and personal use 

property (sec. 13202 of the bill and sec. 280F of the Code) 

Present Law 

Section 280F(a) limits the annual cost recovery deduction with respect to certain 

passenger automobiles. This limitation is commonly referred to as the "luxury automobile 

depreciation limitation." For passenger automobiles placed in service in 2017, and for which the 

additional first-year depreciation deduction under section 168(k) is not claimed, the maximum 

3x

4 As defined in section 181(d) and (c). 

385 The tcnn "furnishing" includes generatioiL transmission. and distribution activities. 

386 Sec sec. 13301 of the bill (Limitation on deduction for interest). 

387 Such election shall be made at such time aud in such form aud mmmer as prescribed by the Secretary. 
142 

amount of allowable depreciation is $3,160 for the year in which the vehicle is placed in service, 

$5,100 for the second year, $3,050 for the third year, and $1,875 for the fourth and later years in 

the recovery period. 388 This limitation is indexed for inflation and applies to the aggregate 

deduction provided under present law for depreciation and section 179 expensing. Hence, 

passenger automobiles subject to section 280F are eligible for section 179 expensing only to the 

extent of the applicable limits contained in section 280F. For passenger automobiles eligible for 

the additional first-year depreciation allowance in 2017, the first-year limitation is increased by 

an additional $8,000389 

For purposes of the depreciation limitation, passenger automobiles are defined broadly to 

include any four-wheeled vehicles that are manufactured primarily for use on public streets, 

roads, and highways and which are rated at 6,000 pounds unloaded gross vehicle weight or 

less. 390 In the case of a truck or a van, the depreciation limitation applies to vehicles that are 

rated at 6,000 pounds gross vehicle weight or less. Sport utility vehicles are treated as a truck for 

the purpose of applying the section 280F limitation. 

Basis not recovered in the recovery period of a passenger automobile is allowable as an 

expense in subsequent taxable years. 391 The expensed amount is limited in each such subsequent 

taxable year to the amount of the limitation in the fourth year in the recovery period. 

Listed property 

In the case of certain listed property, special rules apply. Listed property generally is 

defined as (1) any passenger automobile; (2) any other property used as a means of 

transportation; 392 (3) any property of a type generally used for purposes of entertainment, 

recreation, or amusement; (4) any computer or peripheral equipment; 393 and (5) any other 

property of a type specified in Treasury regulations. 394 

First, iffor the taxable year in which the property is placed in service, the use of the 

property for trade or business purposes does not exceed 50 percent of the total use of the 

3

" Rev. Proc. 2017-29, Table 3, 2017-14 l.R.B. 1065. 

389 Sec. 168(k)(2)(F). For proposed changes to section 168(k), sec section III.C.2. of this document 

(Temporary tOO-percent expensing for certain business assets). 

390 Sec. 280F(d)(5). Exceptions arc provided for any ambulance. hearse, or combination ambulance-hearse 

used by the taxpayer directly in a trade or business, or any vehicle nsed by the taxpayer directly in the trade or 

business of transporting persons or property for compensation or hire. 

391 Sec. 280F(a)( l)(B). 

Property substantially all of the usc of which is in a trade or business of providing transportation to 

unrelated persons for hire is not considered other property used as a means of transportation. Sec. 280F(d)(4)(C). 

393 Computer or peripheral equipment used exclusively at a regular business establishment and owned or 

leased by the person operating such establishment. however, is not listed property. Sec. 280F(d)(4)(B). 

39'

1 Sec. 280F(d)(4)(A). 
143 

property, then the depreciation deduction with respect to such property is determined under the 

alternative depreciation system. 395 The alternative depreciation system generally requires the use 

of the straight-line method and a recovery period equal to the class life of the property. 396 

Second, if an individual owns or leases listed property that is used by the individual in 

connection with the performance of services as an employee, no depreciation deduction, 

expensing allowance, or deduction for lease payments is available with respect to such use unless 

the use of the property is for the convenience of the employer and required as a condition of 

employment. 397 Both limitations apply for purposes of section 179 expensing. 

For listed property, no deduction is allowed unless the taxpayer adequately substantiates 

the expense and business usage of the property. 398 A taxpayer must substantiate the elements of 

each expenditure or use oflisted property, including (1) the amount (e.g., cost) of each separate 

expenditure and the amount of business or investment use, based on the appropriate measure 

(e.g., mileage for automobiles), and the total use of the property for the taxable period, (2) the 

date of the expenditure or use, and (3) the business purposes for the expenditure or use. 399 The 

level of substantiation for business or investment use of listed property varies depending on the 

facts and circumstances. In general, the substantiation must contain sufficient information as to 

each element of every business or investment use. 400 

Reasons for Change 

The Committee believes that increasing the amount a business can deduct for passenger 

vehicles, including light trucks or vans, will modernize the current and outdated depreciation 

rules for certain business vehicles. 

In addition, the Committee believes that removing computers from the definition oflisted 

property will reduce compliance burdens for businesses in the modern economy. 

Explanation of Provision 

The provision increases the depreciation limitations under section 280F that apply to 

listed property. For passenger automobiles placed in service after December 31, 2017, and for 

which the additional first-year depreciation deduction under section 168(k) is not claimed, the 

305 Sec. 280F(b)( l ). If for any taxable year after the year in which the property is placed in service the use 

of the property for trade or business purposes decreases to 50 percent or less of the total use of the property. then the 

amount of depreciation allowed in prior years in excess ofthc amount of depreciation that would have been allowed 

for such prior years under the alternative depreciation system is recaptured (i.e .• included in gross income) for such 

taxable year. 

39' Sec. l68(g). 

39' Sec. 280F( d)(3). 

398 Sec. 274(d)(4). 

399 Temp. Reg. sec. 1.274-5T(b)(6). 

''"1 Temp. Reg. sec. 1.274-5T(c)(2)(ii)(C). 
144 

maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is 

placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the 

fourth and later years in the recovery period. 401 The limitations are indexed for inflation for 

passenger automobiles placed in service after 2018. 

The provision removes computer or peripheral equipment from the definition oflisted 

property. Such property is therefore not subject to the heightened substantiation requirements 

that apply to listed property. 

Effective Date 

The provision is effective for property placed in service after December 31, 2017, in 

taxable years ending after such date. 

3. Modifications of treatment of certain farm property (sec. 13203 of the bill and sec. 168 of 

the Code) 

Present Law 

A taxpayer generally must capitalize the cost of property used in a trade or business or 

held for the production of income and recover such cost over time through annual deductions for 

depreciation or amortization. 402 Tangible property generally is depreciated under the modified 

accelerated cost recovery system ("MACRS"), which determines depreciation for different types 

of property based on an assigned applicable depreciation method, recovery period, and 

convention. 403 

The applicable recovery period for an asset is detennined in part by statute and in part by 

historic Treasury !,>uidance. 404 The "type of property" of an asset is used to determine the "class 

life" of the asset, which in tum dictates the applicable recovery period for the asset. 

The MACRS recovery periods applicable to most tangible personal property range from 

three to 20 years. The depreciation methods generally applicable to tangible personal property 

401 Rev. Proc. 2017-29. Table 3. 2017-14l.R.B. 1065. 

See sees. 263(a) and 167. However. where property is not used exclusiYely in a tax1Jayer·s business, 

the amount eligible for a deduction must be reduced by the amount related to personal use. See. e.g. section 280A. 

403 Sec. 168. 

·'04 Exercising authority granted by Congress. the Secretmy issued Rev. Proc. 87-56. 1987-2 C. B. 6N. 

laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and modified 

the list of asset classes in Rev. Proc. 88-22. 1988-1 C. B. 785. In November 1988, Congress revoked the Secretary's 

authority to modify the class lives of depreciable property. Rev. Proc. 87-56, as modified. remains in effect except 

to the extent that the Congress has. since 1988. statutorily modified the recovery period for certain depreciable 

assets. effectively superseding any administrative !,'Uidance with regJrd to such property. 
145 

are the 200-percent and !50-percent declining balance methods, 405 switching to the straight line 

method for the first taxable year where using the straight line method with respect to the adjusted 

basis as of the beginning of that year yields a larger depreciation allowance. The recovery 

periods for most real property are 39 years for nonresidential real property and 27.5 years for 

residential rental property. The straight line depreciation method is required for the 

aforementioned real property. 

Property used in a farming business is assigned various recovery periods in the same 

manner as other business property. For example, depreciable assets used in agriculture activities 

that are assigned a recovery period of 7 years include machinery and equipment, grain bins, and 

fences (but no other land improvements), that are used in the production of crops or plants, vines, 

and trees; livestock; the operation of farm dairies, nurseries, greenhouses, sod farms, mushrooms 

cellars, cranberry bogs, apiaries, and fur farms; and the performance of agriculture, animal 

husbandry, and horticultural services. 406 Cotton ginning assets are also assigned a recovery 

period of 7 years. 407 Any single purpose agricultural or horticultural structure, 408 and any tree or 

vine bearing fruit or nuts are assigned a recovery period of 1 0 years. 409 Land improvements such 

as drainage facilities, paved lots, and water wells are assigned a recovery period of 15 years. 410 

A 5-year recovery period was assigned to new farm machinery or equipment (other than 

any grain bin, cotton ginning asset, fence, or other land improvement) which was used in a 

405 Under the declining balance method the depreciation rate is determined by dividing the appropriate 

percentage (here 150 or 200) by the appropriate recovery period. This leads to accelerated depreciation when the 

declining balance percenl1ge is greater than 100. The table below illustrates depreciation for an asset with a cost of 

$1,000 and a seven-year recovery period under the 200-percent declining balance method. the !50-percent declining 

balance method. and the straight line method. 

Recovery method Year I Ycar2 Year 3 Year4 Year 5 Year6 Year 7 I Total I 200~percent declitling balance 285.71 204.08 !45.77 104.12 86.77 86.77 86.77 1 1,ooo.oo 1 

lSO~perccnt declirring balance 214.29 !68.37 !32.29 121.26 12!.26 12!26 121.26~ Straight-line 142.86 142.86 142.86 142.86 142.86 142.86 142.86 

Rev. Proc. 87-56. Asset class 01.1, Agriculture. 

"" Rev. Proc. 87-56, Asset class 01.11, Cotton ginning assets. 

408 Within the meaning of section 168(i)(l3). Sec also Rev. Proc. 87-56. Asset class 0 1.4. Single purpose 

agricultural or horticultural structures. Farm buildings that do not meet the definition of a single purpose 

agricultural or horticultural stmcture are assigned a recovery period of 20 years. Rev. Proc. 87-56. Asset class 01.3. 

Farm buildings except stmctnrcs included in asset class 0 1.4. 

109 Sec. 168(e)(3)(D)(i) and (ii). 

" 0 Rev. Proc. 87-56, Asset class 00.3, Land improvements. See also, IRS Publication 225, Fanner's Tax 

Guide (20 17). 
146 

farming business, 411 the original use of which commenced with the taxpayer after December 31, 

2008, and which was placed in service before January l, 2010412 

Any property (other than nonresidential real property, 413 residential rental property, 414 

and trees or vines bearing fruits or nuts 415) used in a farming business416 is subject to the !50-

percent declining balance method. 417 

Under a special accounting rule, certain taxpayers engaged in the business offarming 

who elect to deduct preproductive period expenditures are required to depreciate all farming 

assets using the alternative depreciation system (i.e., using longer recovery periods and the 

straight line method). 418 

Reasons for Change 

The Committee believes that the depreciation incentives will provide important economic 

benefits to encourage development within the agricultural sector. The provision lowers the cost 

of capital for property used in agricultural trades or businesses which will lead to additional 

investment in more equipment and employment of more workers. 

Explanation of Provision 

The provision shortens the recovery period from 7 to 5 years for any machinery or 

equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) 

used in a farming business, the original use of which commences with the taxpayer and is placed 

in serviceafterDecember3l, 2017. 

The provision also repeals the required use of the !50-percent declining balance method 

for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property). The !50-

percent declining balance method will continue to apply to any 15-year or 20-year property used 

in the farming business to which the straight line method does not apply, or to property for which 

the taxpayer elects the use of the !50-percent declining balance method. 

4

" As defined in section 263A(e)(4). Sec also Treas. Reg. sec. 1.263A--4(a)(4). 

Sec. 168(e)(3)(B)(vii). 

413 Sec. 168(b)(3)(A). 

il-l Sec. 168(b)(3)(B). 

415 Sec. 168(b)(3)(E). 

416 Within the meaning of section 263A(e)(4). See also Trcas. Reg. sec. 1.263A-4(a)(4). 

Sec. 168(b)(2)(B). 

418 Sec. 263A(d)(3) and (e)(2). 
147 

For these purposes, the term "farming business" means a farming business as defined in 

section 263A(e)(4). Thus, the tenn "farming business" means a trade or business involving the 

cultivation of land or the raising or harvesting of any agricultural or horticultural commodity 

(e.g., the trade or business of operating a nursery or sod farm; the raising or harvesting of trees 

bearing fruit, nuts, or other crops; the raising of ornamental trees (other than evergreen trees that 

are more than six years old at the time they are severed from their roots); and the raising, 

shearing, feeding, caring for, training, and management of animals). 419 A farming business 

includes processing activities that are normally incident to the growing, raising, or harvesting of 

agricultural or horticultural products. 420 A farming business does not include contract harvesting 

of an agricultural or horticultural commodity grown or raised by another taxpayer, or merely 

buying and reselling plants or animals grown or raised by another taxpayer. 421 

Effective Date 

The provision is effective for property placed in service after December 31, 2017, in 

taxable years ending after such date. 

4. Applicable recovery period for real property (sec. 13204 of the bill and sec. 168 of the 

Code) 

Present Law 

In general 

A taxpayer generally must capitalize the cost of property used in a trade or business or 

held for the production of income and recover such cost over time through annual deductions for 

depreciation or amortization. 422 Tangible property generally is depreciated under the modified 

accelerated cost recovery system ("MACRS"), which determines depreciation for different types 

of property based on an assigned applicable depreciation method, recovery period, and 

convention. 423 

419 Trcas. Reg. sec. 1.263A--I(a)(-l)(i). 

420 Treas. Reg. sec. l.263A-4(a)(4)(ii). 

"' Treas. Reg. sec. l.263A--I(a)(4)(i). 

"' See sees. 263(a) and 167. However. where property is not used exclusiwly in a ta'-1Jayer's business. 

the ammmt eligible for a deduction must be reduced by the amount related to personal usc. See. e.g., section 280A. 

423 Sec. 168. 
148 

Recovery periods and depreciation methods 

The applicable recovery period for an asset is determined in part by statute and in part by 

historic Treasury guidance. 424 The "type of property" of an asset is used to determine the "class 

life" of the asset, which in tum dictates the applicable recovery period for the asset. 

The MACRS recovery periods applicable to most tangible personal property range from 

three to 20 years. The depreciation methods generally applicable to tangible personal property 

are the 200-percent and !50-percent declining balance methods, 425 switching to the straight line 

method for the first taxable year where using the straight line method with respect to the adjusted 

basis as of the beginning of that year yields a larger depreciation allowance. The recovery 

periods for most real property are 39 years for nonresidential real property and 27.5 years for 

residential rental property. The straight line depreciation method is required for the 

aforementioned real property. 

Placed-in-service conventions 

Depreciation of an asset begins when the asset is deemed to be placed in service under 

the applicable convention. 426 Under MACRS, nonresidential real property, residential rental 

property, and any railroad grading or tunnel bore generally are subject to the mid-month 

convention, which treats all property placed in service during any month (or disposed of during 

any month) as placed in service (or disposed of) on the mid-point of such month427 All other 

property generally is subject to the half-year convention, which treats all property placed in 

service during any taxable year (or disposed of during any taxable year) as placed in service (or 

disposed of) on the mid-point of such taxable year to reflect the assumption that assets are placed 

Exercising authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 1987-2 C. B. 674, 

laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and modified 

the list of asset classes in Rev. Proc. 88-22, 1988-1 C. B. 785. In November 1988, Congress revoked the Secretary's 

authority to modify the class lives of depreciable property. Rev. Proc. 87-56, as modified, remains in effect except 

to the extent that the Congress has, since 1988, statutorily modified the recovery period for certain depreciable 

assets. effectively superseding any administrative guidance with regard to such property. 

42' Under the declining balance method the depreciation rate is determined by dividing the appropriate 

percentage (here 150 or 200) by the appropriate recovery period. This leads to accelerated depreciation when the 

declining balance percentage is greater than 100. The table below illustrates depreciation for an asset with a cost of 

$ LOOO and a seven-year recovery period tmder the 200-pcrcent declining balance method, the !50-percent declining 

balance method, and the straight line method. 

Recovery method Year l Year 2 Year 3 Year4 Year 5 Year6 Year? Total 

200~percent declining balance 285.71 204.08 145.77 104.12 86.77 86.77 86.77 1,000.00 

150~percent declining balance 214.29 16837 132.29 121.26 121.26 121.26 121.26 1,000.00 

Strai~ht-line 142.86 142.86 142.86 142.86 142.86 142.86 142.8(> 1,000.00 

<:6 Treas. Reg. see. 1.167(a)-10(b). 

Sec. 168(d)(2) and (d)(4)(B). 
149 

in service ratably throughout the year. 428 However, if substantial property is placed in service 

during the last three months of a taxable year, a special rule requires use of the mid-quarter 

convention, 429 designed to prevent the recognition of disproportionately large amounts of firstyear depreciation under the half-year convention. 

Depreciation of additions or improvements to property 

The recovery period for any addition or improvement to real or personal property begins 

on the later of (1) the date on which the addition or improvement is placed in service, or (2) the 

date on which the property with respect to which such addition or improvement is made is placed 

in service. 430 Any MACRS deduction for an addition or improvement to any property is to be 

computed in the same manner as the deduction for the underlying property would be if such 

property were placed in service at the same time as such addition or improvement. Thus, for 

example, the cost of an improvement to a building that constitutes nonresidential real property is 

recovered over 39 years using the straight line method and mid-month convention. Certain 

improvements to nonresidential real property are eligible for the additional first-year 

depreciation deduction if the other requirements of section 168(k) are met (i.e., improvements 

that constitute "qualified improvement property"). 431 

Qualified improvement property 

Qualified improvement property is any improvement to an interior portion of a building 

that is nonresidential real property if such improvement is placed in service after the date such 

building was first placed in service. 432 Qualified improvement property does not include any 

improvement for which the expenditure is attributable to the enlargement of the building, any 

elevator or escalator, or the internal structural framework of the building. 

Depreciation of leasehold improvements 

Generally, depreciation allowances for improvements made on leased property are 

determined under MACRS, even if the MACRS recovery period assigned to the property is 

longer than the term of the lease. 433 This rule applies regardless of whether the lessor or the 

lessee places the leasehold improvements in service. If a leasehold improvement constitutes an 

428 Sec. 168(d)(1) and (d)(4)(A). 

'

129 The mid-quarter com·ention treats all property placed in service (or disposed of) during auy quarter as 

placed iu service (or disposed of) ou the mid-point of such quarter. Sec. 168(d)(3) and (d)(4)(C). 

430 Sec. 168(i)(6). 

431 Sec. 168(k)(2)(A)(i)(IV) and (k)(3). Sec also section 13201 of the bill (Temporary 100-percent 

expensing for certain business assets). 

Sec. 168(k)(3). 

433 Sec. 168(i)(8). 
150 

addition or improvement to nonresidential real property already placed in service, the 

improvement generally is depreciated using the straight-line method over a 39-year recovery 

period, beginning in the month the addition or improvement was placed in service. However, 

exceptions to the 39-year recovery period exist for certain qualified leasehold improvements, 

qualified restaurant property, and qualified retail improvement property. 

Qualified leasehold improvement property 

Section l68(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified 

leasehold improvement property. Qualified leasehold improvement property is any improvement 

to an interior portion of a building that is nonresidential real property, provided certain 

requirements are met. 434 The improvement must be made under or pursuant to a lease either by 

the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied 

exclusively by the lessee (or sublessee). The improvement must be placed in service more than 

three years after the date the building was first placed in service. Qualified leasehold 

improvement property does not include any improvement for which the expenditure is 

attributable to the enlargement of the building, any elevator or escalator, any structural 

component benefiting a common area, or the internal structural framework of the building. If a 

lessor makes an improvement that qualifies as qualified leasehold improvement property, such 

improvement does not qualify as qualified leasehold improvement property to any subsequent 

owner of such improvement. An exception to the rule applies in the case of death and certain 

transfers of property that qualify for non-recognition treatment. 

Qualified leasehold improvement property is generally recovered using the straight-line 

method and a half-year convention, 435 and is eligible for the additional first-year depreciation 

deduction if the other requirements of section 168(k) are met436 

Qualified restaurant property 

Section !68(e)(3)(E)(v) provides a statutory IS-year recovery period for qualified 

restaurant property. Qualified restaurant property is any section 1250 property that is a building 

or an improvement to a building, if more than 50 percent of the building's square footage is 

devoted to the preparation of, and seating for on-premises consumption of, prepared meals. 437 

Qualified restaurant property is recovered using the straight-line method and a half-year 

convention. 438 Additionally, qualified restaurant property is not eligible for the additional first434 Sec. l68(c)(6). 

435 Sec. 168(b)(3)(G) and (d). 

43" Sec. 168(k)(2)(A)(i)(IV) and (k)(3). Sec section 13201 of the bill (Temporary 100-pcrccnt ex-pensing 

for certain business assets). 

Sec. 168(e)(7). 

438 Sec. 168(b)(3)(H) and (d). 
151 

year depreciation deduction unless it also satisfies the definition of qualified improvement 

property. 439 

Qualified retail improvement property 

Section 168( e )(3)(E)(ix) provides a statutory 15-year recovery period for qualified retail 

improvement property. Qualified retail improvement property is any improvement to an interior 

portion of a building which is nonresidential real property if such portion is open to the general 

public440 and is used in the retail trade or business of selling tangible personal property to the 

general public, and such improvement is placed in service more than three years after the date 

the building was first placed in service. 441 Qualified retail improvement property does not 

include any improvement for which the expenditure is attributable to the enlargement of the 

building, any elevator or escalator, any structural component benefiting a common area, or the 

internal structural framework of the building. 442 ln the case of an improvement made by the 

owner of such improvement, the improvement is a qualified retail improvement only so long as 

the improvement is held by such owner. 443 

Retail establishments that qualify for the 15-year recovery period include those primarily 

engaged in the sale of goods. Examples of these retail establishments include, but are not limited 

to, grocery stores, clothing stores, hardware stores, and convenience stores. Establishments 

primarily engaged in providing services, such as professional services, financial services, 

personal services, health services, and entertainment, do not qualify. Generally, it is intended 

that businesses defined as a store retailer under the current North American Industry 

Classification System (industry sub-sectors 441 through 453) qualify while those in other 

industry classes do not qualify. 444 

139 Sec. l68(c)(7)(B). 

440 Improvements to portions of a building not open to the general public (e.g.. stock room in back of retail 

space) do not qualify under the provision. 

441 Sec. 168(e)(8). 

Sec. 168(e)(8)(C). 

443 Sec. l68(e)(8)(B). Rules similar to section l68(e)(6)(B) apply in the case of death and certain transfers 

of property that qualify for non-recognition treatment. 

444 Joint Committee on Taxation, General Explanalion ofTax Legislation Enacted in the illY" Congress 

(JCS-1-09). March 2009. p. 402. 
152 

Qualified retail improvement property is recovered using the straight-line method and a 

half-year convention, 445 and is eligible for the additional first-year depreciation deduction if the 

other requirements of section 168(k) are met. 446 

Alternative depreciation system 

The alternative depreciation system ("ADS") is required to be used for tangible property 

used predominantly outside the United States, certain tax-exempt use property, tax-exempt bond 

financed property, and certain imported property covered by an Executive order. 447 An election 

to use ADS is available to taxpayers for any class of property for any taxable year. 448 Under 

ADS, all property is depreciated using the straight line method over recovery periods which 

generally are equal to the class life of the property, with certain exceptions. 449 For example 

nonresidential real and residential rental property have a 40-year ADS recovery period, while 

qualified leasehold improvement property, qualified restaurant property, and qualified retail 

improvement property have a 39-year ADS recovery period. 450 

Reasons for Change 

The Committee believes that shortening the recovery period for nonresidential real and 

residential rental property will promote capital investment in such real estate assets. 

The Committee believes that taxpayers should not be required to recover the costs of 

certain building and leasehold improvements beyond the useful life of the investment. The 39-

year and 15-year recovery periods for certain types of building and leasehold improvements 

extend beyond the useful life of many such investments. Additionally, the Committee believes 

that taxpayers should not be treated differently based on whether the building in which they 

operate is owned or leased. In the interests of simplicity and administrability, a uniform 

definition and period for the recovery of certain building improvements is desirable. Therefore, 

the provision provides a uniform definition and 1 0-year recovery period for qualified 

improvement property. 

445 Sec. 168(b)(3)(1) and (d). 

"'" Sec. 168(k)(2)(A)(i)(IV) and (k)(3). Sec section 13301 of the bill (Temporary 100-percent c"-pcnsing 

for certain business assets). 

447 Sec. 168(g). 

448 Sec. 168(g)(7). 

4

49 Sec. !68(g)(2) and (3). 

450 Sec. 168(g)(3). 
153 

The Committee recognizes that certain types of trades or businesses have particular 

characteristics that warrant special rules related to interest deductibility and the related cost 

recovery of property used in such trades or businesses. 

Explanation of Provision 

The provision shortens the recovery period for determining the depreciation deduction 

with respect to nonresidential real and residential rental property to 25 years. As a conforming 

amendment, the provision changes the statutory recovery period for nonresidential real and 

residential rental property to 25 years for purposes of determining whether a rental agreement is 

a long-term agreement under the section 467 rules applicable to certain payments for the use of 

property or services. 451 The provision also shortens the ADS recovery period for residential 

rental property from 40 years to 30 years. 

The provision eliminates the separate definitions of qualified leasehold improvement, 

qualified restaurant, and qualified retail improvement property, and provides a general 10-year 

recovery period for qualified improvement property, 452 and a 20-year ADS recovery period for 

such property. Thus, for example, qualified improvement property placed in service after 

December 31, 2017, is generally depreciable over 10 years using the straight line method and 

half-year convention, without regard to whether the improvements are property subject to a 

lease, placed in service more than three years after the date the building was first placed in 

service, or made to a restaurant building. Restaurant building property placed in service after 

December 31, 2017, that does not meet the definition of qualified improvement property is 

depreciable over 25 years as nonresidential real property, using the straight line method and the 

mid-month convention. 

As a conforming amendment, the provision replaces the references in section 179(f) to 

qualitied leasehold improvement property, qualified restaurant property, and qualified retail 

improvement property with a reference to qualified improvement property. 453 Thus, for 

example, the provision allows section 179 expensing for improvement property without regard to 

whether the improvements are property subject to a lease, placed in service more than three years 

after the date the building was first placed in service, or made to a restaurant building. 

Restaurant building property placed in service after December 31, 2017, that does not meet the 

definition of qualified improvement property is not eligible for section 179 expensing. 

A long-term section 467 rental agreement is a lease of property for a term in excess of75 percent of the 

property's statutory recovery period. Sec. 467(b)(4)(A) and (e)(3)(A). A disqualified long-tenn agreement is one 

that has as one of its principal purposes the avoidance of taxes. Sec. 467(b)(4)(B). 

4

·" Described in present law section 168(k)(3). 

"' For additional changes to section 179. see section 13101 of the bill (Modifications ofmles for 

e"-pensing depreciable business assets). 
154 

The provision also requires a real property trade or business454 electing out of the 

limitation on the deduction for interest to use ADS to depreciate any of its nonresidential real 

property, residential rental property, and qualified improvement property455 

Effective Date 

The provision is effective for property placed in service after December 31, 2017. 

5. Use of alternative depreciation system for electing farming businesses (sec. 13205 of the 

bill and sec. 168 of the Code) 

Present Law 

In general 

A taxpayer generally must capitalize the cost of property used in a trade or business or 

held for the production of income and recover such cost over time through annual deductions for 

depreciation or amortization. 456 Tangible property generally is depreciated under the modified 

accelerated cost recovery system ("MACRS"), which determines depreciation for different types 

of property based on an assigned applicable depreciation method, recovery period, and 

convention. 457 

The applicable recovery period for an asset is determined in part by statute and in part by 

historic Treasury guidance. 458 The "type of property" of an asset is used to determine the "class 

life" of the asset, which in turn dictates the applicable recovery period for the asset. 

The MACRS recovery periods applicable to most tangible personal property range from 

three to 20 years. The depreciation methods generally applicable to tangible personal property 

As defined in section 13301 of the bill (Limitation on deduction for interest). by cross reference to 

section 469(c)(7)(C) (i.e., any real property development, redevelopment. constmction, reconstruction, acquisition. 

conversion, rentaL operation. management, leasing. or brokerage trade or business). Note that a mortgage broker 

who is a broker of financial instmmcnts is not in a real property trade or business for this purpose. See, e.g. CCA 

201504010 (December 17, 2014). 

455 The Committee intends that an election ont of the interest limitation and resulting required use of ADS 

be treated as a change in use. Sec Treas. Reg. sec. I. 168(i)-4 

456 See sees. 263(a) and 167. However. where property is not used exclusively in a taxpayer's business. 

!he amount eligible for a deduction must be reduced by the amount related to personal use. See. e.g., section 280A. 

Sec. 168. 

Exercising authority granted by Congress. the Secretary issued Rev. Proc. 87-56. 1987-2 C.B. 674, 

laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and modified 

the list of asset classes in Rev. Proc. 88-22, 1988-1 C. B. 785. In November 1988, Congress revoked the Secretary's 

authority to modify the class lives of depreciable property. Rev. Proc. 87-56, as modified. remains in effect except 

to the extent that the Congress has, since 1988. statutorily modified the recovery period for certain depreciable 

assets, effectively superseding any administrative guidance with regard to such property. 
155 

are the 200-percent and !50-percent declining balance methods, 459 switching to the straight line 

method for the first taxable year where using the straight line method with respect to the adjusted 

basis as of the beginning of that year yields a larger depreciation allowance. The recovery 

periods for most real property are 39 years for nonresidential real property and 27.5 years for 

residential rental property. 460 The straight line depreciation method is required for the 

aforementioned real property. 

Property used in a farming business is assigned various recovery periods in the same 

manner as other business property. For example, depreciable assets used in agriculture activities 

that are assigned a recovery period of 7 years include machinery and equipment, grain bins, and 

fences (but no other land improvements), that are used in the production of crops or plants, vines, 

and trees; livestock; the operation of farm dairies, nurseries, greenhouses, sod farms, mushrooms 

cellars, cranberry bogs, apiaries, and fur farms; and the performance of agriculture, animal 

husbandry, and horticultural services. 461 Cotton ginning assets are also assigned a recovery 

period of 7 years. 462 Any single purpose agricultural or horticultural structure, 463 and any tree or 

vine bearing fruit or nuts are assigned a recovery period of 10 years 464 Land improvements such 

as drainage facilities, paved lots, and water wells are assigned a recovery period of 15 years. 465 

A 5-year recovery period was assigned to new farm machinery or equipment (other than 

any grain bin, cotton ginning asset, fence, or other land improvement) which was used in a 

159 Under the declining balance method the depreciation rate is determined by dividing the appropriate 

percentage (here 150 or 200) by the appropriate recovety period. This leads to accelerated depreciation when the 

declining balance percentage is greater tlmn 100. The table below illustrates depreciation for an asset with a cost of 

$1,000 and a seven-year recovery period under the 200-percent declining balance method, the !50-percent declining 

balance method, and the straight line method. 

Recovery method Year 1 Year 2 Year 3 Year4 Year 5 Ycar6 Year? Total 

200~percent declining balance 285.71 204.08 145.77 104.12 86.77 86.77 86.77 11,000.00 

150-percent declining balance 214.29 168.37 132.29 121.26 121.26 12126 121.26 1 1.ooo.oo 

Straight-line 142.86 142.86 142.86 142.86 142.86 142.86 142.86 11,000.00 

4m However, section 13204 of the bill (Applicable recovery period for real property) reduces the recovery 

period to 25 years for both nonresidential real property and residential rental property. 

'

161 Rev. Proc. 87-56. Asset class 01.1. Agriculture. 

460 Rev. Proc. 87-56, Asset class 0 !.II, Cotton ginning assets. 

463 Within the meaning of section 168(i)(l3). See also Rev. Proc. 87-56, Asset class 01.4, Single purpose 

agricultural or horticultural stmcturcs. Farm buildings that do not meet the definition of a single purpose 

agricultural or horticultural stmcturc are assigned a recovery period of 20 years. Rev. Proc. 87-56, Asset class 0 1.3. 

Farm buildings except stmctures included in asset class 0 1.4. 

464 Sec. 168(e)(3)(D)(i) and (ii). 

465 Rev. Proc. 87-56, Asset class 00.3, Land improvements. See also, IRS Publication 225. Fanner's Tax 

Guide (2017). 
156 

fanning business, 466 the original use of which commenced with the taxpayer after December 31, 

2008, and which was placed in service before January I, 2010467 

Any property (other than nonresidential real property, 468 residential rental property, 469 

and trees or vines bearing fruits or nuts 470) used in a farming business471 is subject to the !50-

percent declining balance method. 472 

Alternative depreciation system 

The alternative depreciation system ("ADS") is required to be used for tangible property 

used predominantly outside the United States, certain tax-exempt use property, tax-exempt bond 

financed property, and certain imported property covered by an Executive order. 473 An election 

to use ADS is available to taxpayers for any class of property for any taxable year. 474 Under 

ADS, all property is depreciated using the straight line method over recovery periods which 

generally are equal to the class life of the property, with certain exceptions. 475 For example, any 

single purpose agricultural or horticultural structure has a 15-year ADS recovery period, 476 while 

any tree or vine bearing fruit or nuts has a 20-year ADS recovery period. 477 Similarly, land 

166 As defined in section 263A(c)(4). 

46' Sec. 168( e )(3)(B)(vii). However, section 13203 of the bill (Modifications of treatment of certain farm 

property) also shortens the recovery period from 7 to 5 years for any machinery or equipment (other than auy grain 

bin. cotton girming asset. fence. or other land improYCment) which is used in a farming business. the original nse of 

which commences with the ta,']Jayer and is placed in service after December 3 L 2017. 

4

h8 Sec. l68(b)(3)(A). 

469 Sec. 168(b)(3)(B). 

4

'

0 Sec. 168(b)(3)(E). 

·'" Within the meaning of section 263A(e)(4). 

Sec. 168(b )(2)(B). However, section 13203 of the bill (Modifications of treatment of certain farm 

property) repeals the reqnired usc ofthe !50-percent declining balance method for property used in a farming 

business (i.e .. for 3-. 5-. 7-. and 10-yearproperty). The !50-percent declining balance method will continue to apply 

to any 15-year or 20-year property used in the farming business to which the straight line method does not apply, or 

to property for which the taxpayer elects the use of the !50-percent declining balance method. 

See. 168(g). 

404 Sec. 168(g)(7). 

Sec. 168(g)(2) and (3). 

4'6 Sec. l68(g)(3)(B). Fann buildings that do not meet the definition of a single purpose agricultural or 

horticultural structure have au ADS recovery period of 25 years. Rev. Proc. 87-56. Asset class 0 1.3, Fann buildings 

except stmctures included in asset class 01.4. 

Sec. 168(g)(3)(B). 
157 

improvements such as drainage facilities, paved lots, and water wells have an ADS recovery 

period of 20 years. 478 

Under a special accounting rule, certain taxpayers engaged in the business of farming 

who elect to deduct preproductive period expenditures under the uniform capitalization rules are 

required to depreciate all farming assets using ADS 479 

Reasons for Change 

The Committee recognizes that certain types of trades or businesses have particular 

characteristics that warrant special rules related to interest deductibility and the related cost 

recovery of property used in such trades or businesses. 

Explanation of Provision 

The provision requires an electing farming business, 480 i.e., a farming business electing 

out of the limitation on the deduction for interest, 481 to use ADS to depreciate any property with 

a recovery period of 10 years or more (e.g, property such as single purpose agricultural or 

horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land 

improvements). 482 

Effective Date 

Rev. Proc. 87-56, Asset class 00.3, Land improvements. 

4'

9 Sec. 263A(d)(3) ;md (e)(2). 

" 0 As defined in section 13301 of the bill (Limitation on deduction for interest). by cross reference to 

section 263A( e)( 4) (i.e., farming business means the trade or business of farming and includes the trade or business 

of operating a nursery or sod farm. or the raising or han:esting of trees bearing fmit, nuts. or other crops. or 

omamental trees (other than eYergreen trees tlmt are more than six years old at the time they are seyered from their 

roots)). Treas. Reg. sec. 1.263A-4(a)(4) further defines a fanning business as a trade or business inYoll•ing the 

cultiyation of land or the raising or lmrvesting or any agricultural or horticultural conunodity. Examples of a 

fanning business include the trade or business of operating a nursery or sod fanu: the raising or haryesting of trees 

bearing fntit. nuts, or other crops: the raising of ornamental trees (other than evergreen trees that are more than six 

years old at the time they are seyered from their roots): and the ntising, shearing, feeding, caring for, training, and 

management of mtimals. A fanning business also includes processing actiYities that are normally incident to the 

growing. raising, or harvesting of agricultural or horticultural products. Sec Trcas. Reg. sec. l.263A-4(a)(4)(i) and 

(ii). A farming business does not include contract hatvesting of an agricnltuml or horticultural conunodity !,>rown or 

raised by another tax'jlayer, or merely buying and reselling plants or artimals grown or raised by another taxpayer. 

Sec Trcas. Reg. sec. 1.263A-4(a)(4)(i). 

" 1 Sec section 13301 of the bill (Limitation on deduction for interest). Section 13301 of the bill also 

includes an exception from the limitation on the deduction for interest for taxpayers meeting the $15 ntillion gross 

receipts test. 

482 The Committee intends that an election out of the interest limitation and resulting required use of ADS 

be treated as a clmnge in use. Sec Trcas. Reg. sec. 1.168(i)-4. 
158 

The provision is effective for taxable years beginning after December 31, 2017. 

6. Amortization of research and experimental expenditures (sec. 13206 of the bill and 

sec. 17 4 of the Code) 

Present Law 

Business expenses associated with the development or creation of an asset having a 

useful life extending beyond the current year generally must be capitalized and depreciated over 

such useful life. 483 Taxpayers, however, may elect to deduct currently the amount of certain 

reasonable research or experimentation expenditures paid or incurred in connection with a trade 

or business. 484 Taxpayers may choose to forgo a current deduction, capitalize their research 

expenditures, and recover them ratably over the useful life of the research, but in no case over a 

period of less than 60 months 485 Taxpayers, alternatively, may elect to amortize their research 

expenditures over a period of 10 years. 486 Research and experimental expenditures deductible 

under section 174 are not subject to capitalization under either section 263(a)487 or section 

263A488 

Amounts defined as research or experimental expenditures under section 174 generally 

include all costs incurred in the experimental or laboratory sense related to the development or 

improvement of a product. 489 In particular, qualifying costs are those incurred for activities 

483 Sees. 167 and 263(a). 

481 Sees. 174(a)and(e). 

485 Sec. 174(b). Taxpayers generating significant short-term losses often choose to defer the deduction for 

their research and experimentation expenditures under this section. Additionally, section 17 4 amounts are excluded 

from the definition of "start-up expenditures" under section 195 (section 195 generally provides that start-up 

e:\']Jcnditures in excess of $5.000 either are not deductible or arc amorti1.able over a period of not less than 180 

months once an active trade or business be1,>ins). So as not to generate significant losses before beginning their trade 

or business. a taxpayer may choose to defer the deduction and amortize its section 174 costs beginning with the 

month in which the taxpayer first realizes benefits from the expenditures. 

'"6 Sees. 174(f)(2) and 59( e). This special 10-year election is available to mitigate the effect of the 

alternative minimum tax adjustment for research expenditures set forth in section 5G(b)(2). Ta"']Jayers with 

significant losses also may elect to amortize their othenvisc deductible research and experimentation e;.;penditures to 

reduce amounts that could be subject to expiration under the net operating loss carryfom·ard regime. 

487 Sec. 263(a)(l)(B). 

488 Sec. 263A(c)(2). 

489 Treas. Reg. sec. U74-2(a)(l) and (2). Product is defined to include any pilot model, process, formula, 

invention, technique, patent, or sirnilar property, and includes products to be used by the ta:\']Jaycr in its trade or 

business as well as products to be held for sale. lease. or license. Trcas. Reg. sec. L l74-2(a)(ll), Example 10, 

provides an example of new process development costs eligible for section 174 treatment 
159 

intended to discover information that would eliminate uncertainty concerning the development or 

improvement of a product. 490 Uncertainty exists when information available to the taxpayer is 

not sufficient to ascertain the capability or method for developing, improving, and/or 

appropriately designing the product491 The determination of whether expenditures qualify as 

deductible research expenses depends on the nature of the activity to which the costs relate, not 

the nature of the product or improvement being developed or the level of technological 

advancement the product or improvement represents. Examples of qualifying costs include 

salaries for those engaged in research or experimentation efforts, amounts incun·ed to operate 

and maintain research facilities (e.g., utilities, depreciation, rent), and expenditures for materials 

and supplies used and consumed in the course of research or experimentation (including amounts 

incurred in conducting trials). 492 In addition, under administrative guidance, the costs of 

developing computer software have been accorded treatment similar to research expenditures. 491 

Research or experimental expenditures under section 174 do not include expenditures for 

quality control testing; efficiency surveys; management studies; consumer surveys; advertising 

or promotions; the acquisition of another's patent, model, production or process; or research in 

connection with literary, historical, or similar projects. 494 For purposes of section 174, quality 

control testing means testing to determine whether particular units of materials or products 

conform to specified parameters, but does not include testing to determine if the design of the 

product is appropriate. 495 

Generally, no current deduction under section 174 is allowable for expenditures for the 

acquisition or improvement of land or of depreciable or depletable property used in connection 

with any research or experimentation. 496 In addition, no current deduction is allowed for 

research expenses incurred for the purpose of ascertaining the existence, location, extent, or 

quality of any deposit of ore or other mineral, including oil and gas. 497 

Reasons for Change 

1

m Treas. Reg. sec. 1.174-2(a)(l). 

491 Ibid. 

192 See Treas. Reg. sec. 1.174-4(c ). The definition of research and e"-perimental e:~.-penditurcs also includes 

the costs of obtaining a patent such as attorneys' fees incurred in making and perfecting a patent. Treas. Reg. 

sec. 1.174-2(a)(l). 

493 Rev. Proc. 2000-50. 2000-2 C.B. 601. 

49•

1 Trcas. Reg. sec. 1.174-2(a)(6). 

495 Treas. Reg. sec. 1.174-2(a)(7). 

4% Sec. 174(c). 

Sec. 174(d). Special mlcs apply with respect to geological and geophysical costs (section 167(h)). 

qualified tertiary injectant expenses (section 193), intangible drilling costs (sections 263(c) and 29l(b)), and mining 

e"-ploration and development costs (sections 616 and 617). 
160 

The Committee recognizes that research and experimentation expenditures have a useful 

life beyond the tax year in which the expenditures are incurred, and that the tangible and 

intangible property created through research and experimentation activities provide value to a 

business beyond a single tax year. The Committee also acknowledges that the costs of 

developing software closely resemble the types of research and experimental expenditures that 

fall within the purview of section 174, and therefore should be accorded similar treatment. For 

these reasons, the Committee believes research expenditures, including software development 

costs, should be amortized over a period beyond the current year. Further, the Committee 

believes that research and experimentation expenditures that are attributable to research 

conducted outside of the United States should be amortized over a longer period so as to 

encourage research and experimental activities inside the United States. 

Explanation of Provision 

Under the provision, amounts defined as specified research or experimental expenditures 

are required to be capitalized and amortized ratably over a five-year period, beginning with the 

midpoint of the taxable year in which the specified research or experimental expenditures were 

paid or incurred. Specified research or experimental expenditures which are attributable to 

research that is conducted outside of the United States498 are required to be capitalized and 

amortized ratably over a period of 15 years, beginning with the midpoint of the taxable year in 

which such expenditures were paid or incurred. Specified research or experimental expenditures 

subject to capitalization include expenditures for software development. 

Specified research or experimental expenditures do not include expenditures for land or 

for depreciable or depletable property used in connection with the research or experimentation, 

but do include the depreciation and depletion allowances of such property. Also excluded are 

exploration expenditures incurred for ore or other minerals (including oil and gas). 

In the case of retired, abandoned, or disposed property with respect to which specified 

research or experimental expenditures are paid or incurred, any remaining basis may not be 

recovered in the year of retirement, abandonment, or disposal, but instead must continue to be 

amortized over the remaining amortization period. 

The application of this rule is treated as a change in the taxpayer's method of accounting 

for purposes of section 481, initiated by the taxpayer, and made with the consent of the 

Secretary. This rule is applied on a cutoff basis to research or experimental expenditures paid or 

incurred in taxable years beginning after December 31, 2025 (hence there is no adjustment under 

section 48l(a) for research or experimental expenditures paid or incurred in taxable years 

beginning before January I, 2026). 

Effective Date 

'

19' For this purpose. the tcnu "United States" includes the United States. the Commonwealth of Puerto 

Rico, and any possession of the United States. 
161 

The provision applies to amounts paid or incurred in taxable years beginning after 

December 31, 2025. 

7. Expensing of certain costs of replanting citrus plants lost by reason of casualty 

(sec. 13207 of the bill and sec. 263A of the Code) 

Present Law 

In general 

The uniform capitalization ("UNICAP") rules, which were enacted as part of the Tax 

Reform Act of 1986,499 require certain direct and indirect costs allocable to real or tangible 

personal property produced by the taxpayer to be either capitalized into the basis of such 

property or included in inventory, as applicable. 50° For real or personal property acquired by the 

taxpayer for resale, section 263 A generally requires certain direct and indirect costs allocable to 

such property to be either capitalized into the basis of such property or included in inventory, as 

applicable. 

Section 263A generally requires the capitalization of the direct and indirect costs 

allocable to the production of any property in a farming business, including animals and plants 

without regard to the length of their preproductive period. 501 The costs of a plant generally 

required to be capitalized under section 263(a) include preparatory costs incurred so that the 

plant's growing process may begin, such as the acquisition costs of the seed, seedling, or plant. 

Under section 263A, the costs of producing a plant generally required to be capitalized also 

include the preproductive period costs of planting, cultivating, maintaining, and developing the 

plant during the preproductive period. 502 Preproductive period costs may include management, 

irrigation, pruning, soil and water conservation, fertilizing, frost protection, spraying, harvesting, 

storage and handling, upkeep, electricity, tax depreciation and repairs on buildings and 

equipment used in raising the plants, farm overhead, taxes, and interest, as applicable. 503 

·'99 Sec. 803(a) of Pub. L. No. 99-514 (1986). 

500 Sec. 263A. 

501 Trcas. Reg. sec. 1.263A-4(b)(l). 

Trcas. Reg. sec. 1.263A-4(b)(l)(i). 

503 Ibid. 
162 

Special rules for plant farmers 

Section 263A provides an exception to the general capitalization requirements for 

taxpayers who raise, harvest, or grow trees. 504 Under this exception, section 263A does not 

apply to trees raised, harvested, or grown by the taxpayer (other than trees bearing fruit, nuts, or 

other crops, or ornamental trees) and any real property underlying such trees. Similarly, the 

UNICAP rules do not apply to any plant having a preproductive period of two years or less, 

which is produced by a taxpayer in a farming business (unless the taxpayer is required to use an 

accrual method of accounting under section 447 or 448(a)(3)). 505 Hence, in general, the 

UNICAP rules apply to the production of plants that have a preproductive period of more than 

two years, and to taxpayers required to use an accrual method of accounting. 

Plant farmers otherwise required to capitalize preproductive period costs may elect to 

deduct such costs currently, provided the alternative depreciation system described in section 

168(g)(2) is used on all farm assets and the preproductive period costs are recaptured upon 

disposition of the product. 506 The election is not available to taxpayers required to use the 

accrual method of accounting. Moreover, the election is not available with respect to certain 

costs attributable to planting, cultivating, maintaining, or developing citrus or almond groves. 

Section 263A does not apply to costs incurred in replanting edible crops for human 

consumption following loss or damage due to freezing temperatures, disease, drought, pests, or 

casualty. 507 The same type of crop as the lost or damaged crop must be replanted. However, the 

exception to capitalization still applies if the replanting occurs on a parcel ofland other than the 

land on which the damage occurred provided the acreage of the new land does not exceed that of 

the land to which the damage occurred and the new land is located in the United States. This 

exception may also apply to costs incurred by persons other than the taxpayer who incurred the 

loss or damage, provided (1) the taxpayer who incurred the loss or damage retains an equity 

interest of more than 50 percent in the property on which the loss or damage occurred at all times 

during the taxable year in which the replanting costs are paid or incurred, and (2) the person 

holding a minority equity interest and claiming the deduction materially participates in the 

"" Sec. 263A(c)(5). 

505 Sec. 263A(d). 

sOli Sec. 263A(d)(3). (c)(l). and (c)(2). 

Sec. 263A(d)(2). Such replanting costs generally include costs attributable to the replanting, 

cultivating, maintaining, and developing of the plants that were lost or damaged that are incurred during the 

preproductive period. Treas. Reg. sec. l.263A-4(e)(l ). The acquisition costs of the replacement trees or seedlings 

must still be capitalized under section263(a) (see, e.g.. T.D. 8897, 65 FR 50638, Treas. Reg. sec. l.263A-4(e)(3). 

Examples I - 3. and TAM 9547002 (July 18. 1995)). potentially subject to the special bonus depreciation deduction 

in the year of planting under section 168(k)(5). 
163 

planting, maintenance, cultivation, or development of the property during the taxable year in 

which the replanting costs are paid or incurred. 508 

Reasons for Change 

The Committee believes the special rule for farmers under the UNICAP rules should be 

expanded temporarily to apply to costs incurred by persons other than the taxpayer in connection 

with replanting citrus plants following a casualty. This change will encourage investment 

necessary to replace diseased citrus trees and ensure the continuity of citrus crops in the United 

States. 

Explanation of Provision 

The provision modifies the special rule for costs incurred by persons other than the 

taxpayer in connection with replanting an edible crop for human consumption following loss or 

damage due to casualty. Under the provision, with respect to replanting costs paid or incurred 

after the date of enactment, but no later than a date which is ten years after such date of 

enactment, for citrus plants lost or damaged due to casualty, such replanting costs may also be 

deducted by a person other than the taxpayer if (1) the taxpayer has an equity interest of not less 

than 50 percent in the replanted citrus plants at all times during the taxable year in which the 

replanting costs are paid or incurred and such other person holds any part of the remaining equity 

interest, or (2) such other person acquires all of the taxpayer's equity interest in the land on 

which the lost or damaged citrus plants were located at the time of such loss or damage, and the 

replanting is on such land. 

Effective Date 

The provision is effective for costs paid or incurred after the date of enactment. 

8. Certain special rules for taxable year of inclusion (sec. 13221 of the bill and sec. 451 of 

the Code) 

Present Law 

In general 

A taxpayer generally is required to include an item in income no later than the time of its 

actual or constructive receipt, unless the item properly is accounted for in a different period 

under the taxpayer's method of accounting. 509 If a taxpayer has an unrestricted right to demand 

'"8 Sec. 263A( d)(2)(B). Material participation for this purpose is determined in a similar manner as under 

section 2032A(e)(6) (relating to qualified use valuation of farm property upon death of the ta"1Jayer). 

509 Sec. ~5l(a). 
164 

the payment of an amount, the taxpayer is in constructive receipt of that amount whether or not 

the taxpayer makes the demand and actually receives the payment. 510 

In general, for a cash basis taxpayer, an amount is included in income when actually or 

constructively received. For an accrual basis taxpayer, an amount is included in income when all 

the events have occurred that fix the right to receive such income and the amount thereof can be 

determined with reasonable accuracy (i.e., when the "all events test" is met), unless an exception 

permits deferral or exclusion. 511 

A number of exceptions that exist to permit deferral of income relate to advance 

payments. An advance payment is when a taxpayer receives payment before the taxpayer 

provides goods or services to its customer. The exceptions often allow tax deferral to mirror 

financial accounting deferral (e.g., income is recognized as the goods are provided or the 

services are performed). 512 

Interest income 

A taxpayer generally must include in gross income the amount of interest received or 

accrued within the taxable year on indebtedness held by the taxpayer. 513 

Original issue discount 

The holder of a debt instrument with original issue discount ("OlD") generally accrues 

and includes the OlD in gross income as interest over the tenn of the instrument, regardless of 

when the stated interest (if any) is paid. 514 

The amount ofOrD with respect to a debt instrument is the excess of the stated 

redemption price at maturity over the issue price of the debt instrument. 515 The stated 

redemption price at maturity is the sum of all payments provided by the debt instrument other 

than qualified stated interest payments. 516 The holder includes in gross income an amount equal 

to the sum of the daily portions of the OlD for each day during the taxable year the holder held 

such debt instrument. The daily portion is determined by allocating to each day in any accrual 

510 Sec Trcas. Reg. sec. l.451-2. 

511 See Treas. Reg. sees. 1.446-l(c)(l)(ii) and !A51-l(a). 

For examples of provisions pennining deferral of advance payments. see Treas. Reg. sec. 1.451-5 and 

Rev. Proc. 2004-34,2004-1 C.B. 991. as modified and clarified by Rev. Proc. 2011-18. 2011-5l.R.B. 443, and Rev. 

Proc. 2013-29. 2013-33 l.R.B. 141. 

513 Sees. 6l(a)(4) and451. 

514 Sec. 1272. 

515 Sec. 1273(a)(l). 

516 Sec. 1273(a)(2) and Treas. Reg. sec. l.l273-1(b). 
165 

period its ratable portion of the increase during such accrual period in the adjusted issue price of 

the debt instrument 517 The adjustment to the issue price is determined by multiplying the 

adjusted issue price (i.e., the issue price increased by adjustments prior to the accrual period) by 

the instrument's yield to maturity, and then subtracting the interest payable during the accrual 

period. Thus, to compute the amount of OlD and the portion of OlD allocable to a period, the 

stated redemption price at maturity and the term must be known. Issuers of OlD instruments 

accrue and deduct the amount of OlD as interest expense in the same manner as the holder. 518 

Debt instruments subject to acceleration 

Special rules for determining the amount of OlD allocated to a period apply to certain 

instruments that may be subject to prepayment If a borrower can reduce the yield on a debt by 

exercising a prepayment option, the OlD rules assume that the borrower will prepay the debt 519 

In addition, in the case of (1) any regular interest in a real estate mortgage investment conduit 

("REMIC") or qualified m01tgages held by a REMIC or (2) any other debt instrument if 

payments under the instrument may be accelerated by reason of prepayments of other obligations 

securing the instrument, the daily portions of the OlD on such debt instruments are determined 

by taking into account an assumption regarding the prepayment of principal for such 

instruments520 

The Taxpayer Relief Act of 1997521 extended these rules to any pool of debt instruments 

the payments on which may be accelerated by reason of prepayments. 522 Thus, if a taxpayer 

holds a pool of credit card receivables that require interest to be paid only if the borrowers do not 

pay their accounts by a specified date ("grace-period interest"), the taxpayer is required to accrue 

interest or OlD on such pool based upon a reasonable assumption regarding the timing of the 

payments of the accounts in the pool. Under these rules, certain amounts (other than graceperiod interest) related to credit card transactions, such as late-payment fees, 523 cash-advance 

Sec. l272(a)(l) and (3). 

518 Sec. 163( c). 

519 Treas. Reg. sec. Ll272-l(c)(5). 

520 Sec. 1272(a)(6). 

501 Pub. L. No. 105-34. sec. 1004(a). 

Sec. l272(a)(6)(C)(iii). 

Rev. Proc. 2004-33. 2004-1 C.B. 989. 
166 

fees, 524 and interchange fees, 525 have been determined to create OlD or increase the amount of 

OlD on the pool of credit card receivables to which the amounts relate. 526 

Reasons for Change 

The Committee believes that with respect to the recognition of income under the accrual 

method of accounting, book-tax conformity may promote simplification and reduced compliance 

costs. In addition, the Committee believes that such conformity will create a healthy tension 

between a taxpayer's desire to have high book income and its desire to have low taxable income. 

Thus, the Committee believes that it is appropriate to generally require certain accrual method 

taxpayers to recognize items of income no later than when recognized in an applicable financial 

statement. The Committee also believes that it is not always appropriate to defer the recognition 

of income over a lengthy period of time, regardless of when such income was received. Thus, 

the Committee believes it is appropriate to apply the book-tax conformity income recognition 

provision before the original issue discount mles. 

The Committee believes it is important to reconcile the Federal income tax and financial 

accounting treatment of advance payments received by accmal method taxpayers for goods, 

services and other items identified by the Secretary, that are properly includible in gross income 

without permitting extended deferral of the inclusion of those payments in gross income for 

Federal income tax purposes. Such reconciliation will facilitate reporting and verification of 

such items by both the taxpayers affected and the IRS. The Committee also believes that it is 

appropriate to allow accrual method taxpayers in certain specified and limited circumstances to 

defer the inclusion in gross income for Federal income tax purposes of payments received (or 

amounts due and payable) in one taxable year for goods, services, and other specified items to be 

provided by the end of the next succeeding taxable year. In the interest of reducing controversy 

and providing a limited deferral of advance payments that are otherwise properly includible in 

income, the Committee believes that it is appropriate to codify the current deferral method of 

accounting for advance payments provided by the IRS under Rev. Proc. 2004-34. 

Explanation of Provision 

The provision revises the rules associated with the recognition of income. Specifically, 

the provision requires an accrual method taxpayer subject to the all events test for an item of 

gross income to recognize such income no later than the taxable year in which such income is 

taken into account as income on an applicable financial statement527 or another financial 

Rev. Proc. 2005-47, 2005-2 C.B. 269. 

525 Capital One Financial Corp. and Suhsidiariesv. Commissioner, 133 T.C. No.8 (2009): IRS Chief 

Counsel Notice CC-2010-018. September 27.2010. 

See also Rev. Proc. 2013-26, 2013-22 I.R.B. 1160. for a safe ha!bor method of accounting forOID on a 

pool of credit card receivables for purposes of section 1272(a)(6). 

For purposes of the provision. the term "applicable financial statement" means: (A) a financial 

statement which is certified as being prepared in accordance with generally accepted accounting principles and 

which is (i) a 10-K (or successor form). or annual statement to shareholders. required to be filed by the taxpayer 
167 

statement under rules specified by the Secretary, but provides an exception for taxpayers without 

an applicable or other specified financial statement. 528 In the case of a contract which contains 

multiple performance obligations, the provision allows the taxpayer to allocate the transaction 

price in accordance with the allocation made in the taxpayer's applicable financial statement. 

In addition, the provision directs accrual method taxpayers with an applicable financial 

statement to apply the revenue recognition rules under section 451 before applying the special 

rules under part V of subchapter P, which, in addition to the OID rules, also includes rules 

regarding the treatment of market discount on bonds, discounts on short-term obligations, OID 

on tax-exempt bonds, and stripped bonds and stripped coupons. 529 Thus, for example, to the 

extent amounts are included in income for financial statement purposes when received (e.g., latepayment fees, cash-advance fees, or interchange fees), such amounts generally are includable in 

income at such time in accordance with the general recognition principles under section 451. 

The provision also codifies the current deferral method of accounting for advance 

payments for goods, services, and other specified items provided by the IRS under Revenue 

Procedure 2004-34. 530 That is, the provision allows accrual method taxpayers to elect531 to defer 

with the United States Securities and Exchange Commission ("SEC'). (ii) an audited financial statement of the 

taxpayer which is used for (I) credit purposes. (II) reporting to shareholders. partners, or other proprietors, or to 

beneficiaries. or (lll) any other substantial nontax purpose, but only if there is no statement of the ta:\payer described 

in clause (i), or (iii) filed by the taxpayer with any other Federal agency for purposes other than Federal tax 

purposes. but only if there is no statement of the taxpayer described in clause (i) or (ii); (B) a financial statement 

which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency 

of a foreign government which is equivalent to the SEC and which has reporting standards not less stringent than the 

standards required by such Commission. but only if there is no statement of the tmqJayer described in 

subparagraph (A); or (C) a financial statement filed by the taxpayer with any other regulatory or governmental body 

specified by the Secretary. but only if there is no statement of the ta,.paycr described in subparagraph (A) or (B). 

The Couunittee intends that the provision apply to items of gross income for which the timing of 

income inclusion is determined using the all events test under present law. Under the provision, an accrual method 

taxpayer with an applicable financial statement will include an item in income under section 451 upon the earlier of 

when the all events test is met or when the taxpayer includes such item in revenue in an applicable financial 

statement. For example, under the provision. any unbilled receivables for partially perfonned services must be 

recognized to the extent the amounts arc taken into income for financial statement purposes. However, accnml 

method tm .. payers without an applicable or other specified financial statement will continue to deternline income 

inclusion under the all events test, unless an exception pennits deferral or exclusion. See sec. 45l(a) and Treas. 

Reg. sec. 1.451-l(a). The Committee intends that the financial statement conformity requirement added to 

section 451 not be constmed as preventing the usc of special methods of accmmting provided elsewhere in the Code. 

other than part V of subchapter P (special mles for bonds and other debt instnuncnts). For example. it docs not 

preclude the nse of the installment method under section 453 or the use of long-term contract methods under 

section 460. Sec Treas. Reg. sec. 1.446-l(c)(l)(iii). 

529 Sees. 1271 1288. 

530 2004-1 C.B. 991, as modified and clarified by Rev. Proc. 2011-18. 20ll-5 I.R.B. 443. and Rev. Proc. 

2013-29, 2013-33 I.R.B. 141. 

531 The election shall be made at such time, in such fonn and manner. and with respect to such categories 

of advance payments as the Secretary may provide. For these purposes. the recognition of income under such 

election is treated as a method of accom1ting. 
168 

the inclusion of income associated with certain advance payments to the end of the tax year 

following the tax year of receipt if such income also is deferred for financial statement 

purposes. 532 In the case of advance payments received for a combination of services, goods, 

and/or other specified items, the provision allows the taxpayer to allocate the transaction price in 

accordance with the allocation made in the taxpayer's applicable financial statement. The 

provision requires the inclusion in gross income of a deferred advance payment if the taxpayer 

ceases to exist. 

ln the case of any taxpayer required by this provision to change its method of accounting 

for its first taxable year beginning after December 31, 2017, such change is treated as initiated by 

the taxpayer and made with the consent of the Secretary. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017, and 

application of these rules is a change in the taxpayer's method of accounting for purposes of 

section 481. 

"' Thus. the provision is intended to override the deferral method provided by Treasury Regulation section 

1.451-5 for advance payments received for goods. 
169 

PART IV- BUSINESS-RELATED EXCLUSIONS AND DEDUCTIONS 

1. Limitation on deduction for interest (sec. 13301 of the bill and sec. 163 of the Code) 

Present Law 

Interest deduction 

Interest paid or accrued by a business generally is deductible in the computation of 

taxable income subject to a number of limitations. 533 

Interest is generally deducted by a taxpayer as it is paid or accrued, depending on the 

taxpayer's method of accounting. For all taxpayers, if an obligation is issued with original issue 

discount ("OID"), a deduction for interest is allowable over the life of the obligation on a yield to 

maturity basis. 534 Generally, OlD arises where interest on a debt instrument is not calculated 

based on a qualified rate and required to be paid at least annually. 

Investment interest expense 

In the case of a taxpayer other than a corporation, the deduction for interest on 

indebtedness that is allocable to property held for investment ("investment interest") is limited to 

the taxpayer's net investment income for the taxable year 535 Disallowed investment interest is 

carried forward to the next taxable year 

Net investment income is investment income net of investment expenses. Investment 

income generally consists of gross income from property held for investment, and investment 

expense includes all deductions directly connected with the production of investment income 

(e.g., deductions for investment management fees) other than deductions for interest 

The two-percent floor on miscellaneous itemized deductions allows taxpayers to deduct 

investment expenses connected with investment income only to the extent such deductions 

exceed two percent of the taxpayer's adjusted gross income ("AGT"). 536 Miscellaneous itemized 

533 Sec. 163(a). In addition to the limitations discussed herein, other limitations include: denial of the 

dednction for the disqualified portion of the original issue discount on an applicable high yield discount obligation 

(sec. 163(e)(5)), denial of deduction for interest on certain obligations not in registered fonn (sec. 163(!)), reduction 

of the deduction for interest on indebtedness with respect to which a mortgage credit certificate has been issued 

lmder section 25 (sec. 163(g)), disallowance of deduction for personal interest (sec. l63(h)). disallowance of 

deduction for interest on debt with respect to certain life insurance contracts (sec. 264). and disallowance of 

deduction for interest relating to tax-exempt income (sec. 265). Interest may also be subject to capitalization. See. 

e.g., sections 263A(l) and 46l(g). 

534 Sec. 163(e). But sec section 267 (dealing in part with interest paid to a related or foreign party). 

535 Sec. 163(d). 

Sec. 67(a). 
170 

deductions 537 that are not investment expenses are disallowed first before any investment 

expenses are disallowed. 538 

Earnings stripping 

Section 1630) may disallow a deduction for disqualified interest paid or accrued by a 

corporation in a taxable year if two threshold tests are satisfied: the payor's debt-to-equity ratio 

exceeds 1.5 to 1.0 (the safe harbor ratio) and the payor's net interest expense exceeds 50 percent 

of its adjusted taxable income (generally, taxable income computed without regard to deductions 

for net interest expense, net operating losses, domestic production activities under section 199, 

depreciation, amortization, and depletion). Disqualified interest includes interest paid or accrued 

to: (1) related parties when no Federal income tax is imposed with respect to such interest; 539 

(2) unrelated parties in certain instances in which a related party guarantees the debt; or (3) to a 

real estate investment trust ("REIT") by a taxable REIT subsidiary of that trust. 540 Interest 

amounts disallowed under these rules can be carried forward indefinitely. 54J In addition, any 

excess limitation (i.e., the excess, if any, of 50 percent of the adjusted taxable income of the 

payor over the payor's net interest expense) can be carried forward three years. 542 

Reasons for Change 

The Committee believes that the general deductibility of interest payments on debt may 

result in businesses undertaking more leverage than they would in the absence of the tax system. 

The effective marginal tax rate on debt-financed investment is lower than that on equity-financed 

investment. 543 Limiting the deductibility of interest along with reducing the corporate tax rate 

narrows the disparity in the effective marginal tax rates applicable to different sources of 

financing. This leads to a more efficient capital structure for firms. The Committee believes that 

Miscellaneous itemized deductions include itemized deductions of individuals other than certain 

specific itemized deductions. Sec. 67(b). Miscellaneous itemized deductions generally include. for example. 

investment management fees and certain employee business expenses. but specifically do not include. for example, 

interest taxes. casualty and theft losses, charitable contributions. medical expenses. or other listed itemized 

deductions. 

538 H.R. Rep. No. 841, 99th Cong .. 2d Sess .. p. ll-154. Sept. 18. 1986 (Conf. Rep.) ("'n computing the 

amount of expenses that exceed the 2-percent floor. expenses that are not investment ex']Jenses are intended to be 

disallowed before any investment expenses are disallowed."). 

539 If a tax treaty reduces the rate of tax on interest paid or accrued by the taxpayer. the interest is treated as 

interest on which no Federal income tax is imposed to the extent of the same proportion of such interest as the rate 

of tax imposed without regard to the treaty, reduced by the mte of tax imposed by the treaty. bears to the rate of tax 

imposed without regard to the treaty. Sec. l63(j)(5)(B). 

540 Sec. 163(j)(3). 

541 Sec. 163(j)(l )(B). 

5

'"' Sec. 163(j)(2)(B)(ii). 

For a discussion of effective marginal tax rates on iuvestment. sec Joint Committee on Taxation. 

Economic Growth and Tax Policv (JCX-19-17). May 16.2017, p. 15ff. 
171 

it is necessary to apply the limitation on the deductibility of interest to businesses regardless of 

the form in which such businesses are organized so as not to create distortions in the choice of 

entity. 

The Committee believes that limitations on the deductibility of interest should be applied 

to those businesses with the greatest levels of leverage. Such firms may pose the greatest 

societal costs in times of financial distress. Smaller firms are likely to impose smaller costs on 

the economy than larger firms. Additionally, smaller firms have limited access to public equity 

capital markets as compared to larger firms. Thus, the Committee believes it is appropriate to 

limit the interest deduction of only the largest taxpayers. 

The Committee understands that some taxpayers who do not consistently incur excessive 

amounts of leverage may nonetheless at times incur an amount of interest expense that is large in 

relation to its taxable income. For instance, a bad year in a business cycle might reduce taxable 

income to the point where a limitation based on taxable income takes effect. Furthermore, 

earnings attributable to investments financed by debt and interest payments associated with such 

debt may arise in different periods. For that reason, the Committee believes taxpayers should be 

able to average annual results, and so believes the carryforward of denied interest deductions is 

appropriate. 

Finally, the Committee recognizes that certain types of trades or businesses have 

particular characteristics that warrant special rules related to interest deductibility. 

Explanation of Provision 

In general 

In the case of any taxpayer for any taxable year, the deduction for business interest is 

limited to the sum of business interest income plus 30 percent of the adjusted taxable income of 

the taxpayer for the taxable year. The amount of any interest not allowed as a deduction for any 

taxable year may be carried forward indefinitely. The limitation applies at the taxpayer level. In 

the case of a group of affiliated corporations that file a consolidated return, it applies at the 

consolidated tax return filing level. 

Business interest means any interest paid or accrued on indebtedness properly allocable 

to a trade or business. Any amount treated as interest for purposes of the Internal Revenue Code 

is interest for purposes of the provision. Business interest income means the amount of interest 

includible in the gross income of the taxpayer for the taxable year which is properly allocable to 

a trade or business. Business interest does not include investment interest, and business interest 

income does not include investment income, within the meaning of section 163( d). 

By including business interest income in the limitation, the rule operates to limit the 

deduction for net interest expense to 30 percent of adjusted taxable income. That is, a deduction 

for business interest is permitted to the full extent of business interest income. To the extent that 

business interest exceeds business interest income, the deduction for the net interest expense is 

limited to 30 percent of adjusted taxable income. 
172 

Adjusted taxable income means the taxable income of the taxpayer computed without 

regard to: (1) any item of income, gain, deduction, or loss which is not properly allocable to a 

trade or business; (2) any business interest or business interest income; (3) the deduction under 

section 199 for income attributable to domestic production activities; 544 (4) the 17.4 percent 

deduction for certain pass-through income; 545 and (5) the amount of any net operating loss 

deduction. The Secretary may provide other adjustments to the computation of adjusted taxable 

income. 

Carryforward of disallowed business interest 

The amount of any business interest not allowed as a deduction for any taxable year is 

treated as business interest paid or accrued in the succeeding taxable year. Business interest may 

be carried forward indefinitely. It is intended that the provision be administered in a way to 

prevent trafficking in carryforwards. With respect to the limitation on deduction of interest by 

domestic corporations which are United States shareholders that are members of worldwide 

affiliated groups with excess domestic indebtedness, 546 whichever rule imposes the lower 

limitation on the deduction of interest with respect to the taxable year (and therefore the greatest 

amount of interest to be carried forward) governs. 

Any carryforward of disallowed interest is an item taken into account in the case of 

certain corporate acquisitions described in section 381 and is subject to limitation under 

section 382. 

Application to pass-through entities 

In general 

In the case of any partnership, the limitation is applied at the partnership leveL Any 

deduction for business interest is taken into account in determining the nonseparately stated 

taxable income or loss of the partnership. 547 To prevent double counting, special rules are 

provided for the determination of the adjusted taxable income of each partner of the partnership. 

Similarly, to allow for additional interest deduction by a partner in the case of an excess amount 

of unused adjusted taxable income limitation of the partnership, special rules apply. Similar 

rules apply with respect to any S corporation and its shareholders. 

54'

1 The deduction for income attributable to domestic production activities is repealed effective for taxable 

years beginning after December 3 L 2018. See section 13305 of the bill (Repeal of deduction for inwme attributable 

to domestic production activities). 

545 Sec section 11011 of the bill (Deduction for qualified business income). 

5

"

16 See section 14221 of the bill (Denial of deduction for interest e"-pense of United States shareholders 

which are members of worldwide affiliated groups with excess domestic indebtedness). 

This amount is the "Ordinary business income or loss" reflected on Fonn 1065 (U.S. Return of 

Partnership Income). The partner's distributive share is reflected in Box I of Schedule K-1 (Form l065). 
173 

Special rules for partners and partnerships also apply in the case of a carryforward of 

disallowed business interest. These rules (described below) require that the carryforward be 

allocated to partners (rather than remaining an attribute of the partnership) and that a partner's 

basis is reduced in respect of such a carryforward allocation. These rules do not apply in the 

case of an S corporation. 

Double counting rule 

The adjusted taxable income of each partner (or shareholder, as the case may be) is 

determined without regard to such partner's distributive share of the nonseparately stated income 

or loss of such partnership. In the absence of such a rule, the same dollars of adjusted taxable 

income of a partnership could generate additional interest deductions as the income is passed 

through to the partners. 

Example I.-ABC is a partnership owned 50-50 by XYZ Corporation and an individual. 

ABC generates $200 of noninterest income. Its only expense is $60 of business interest. Under 

the provision the deduction for business interest is limited to 30 percent of adjusted taxable 

income, that is, 30 percent * $200 $60. ABC deducts $60 of business interest and reports 

ordinary business income of $140. XYZ's distributive share of the ordinary business income of 

ABC is $70. XYZ has net taxable income of zero from its other operations, none of which is 

attributable to interest income and without regard to its business interest expense. XYZ has 

business interest expense of $25. In the absence of a double counting rule, the $70 of taxable 

income from XYZ' s distributive share of ABC's income would permit XYZ to deduct up to an 

additional $21 of interest (30 percent* $70 $21), and XYZ's $100 share of ABC's adjusted 

taxable income would generate $51 of interest deductions, well in excess of the intended 30% 

limitation. IfXYZ were a pass-through entity rather than a corporation, additional deductions 

might be available to its partners as well, and so on. 

The double counting rule prevents this result by providing that XYZ has adjusted taxable 

income computed without regard to the $70 distributive share of the nonseparately stated income 

of ABC. As a result it has adjusted taxable income of$0. XYZ's deduction for business interest 

is limited to 30 percent* $0 = $0, resulting in a deduction disallowance of$25. 

Additional deduction limit 

The limit on the amount allowed as a deduction for business interest is increased by a 

partner's distributive share of the partnership's excess taxable income. The excess taxable 

income with respect to any partnership is the amount which bears the same ratio to the 

partnership's adjusted taxable income as the excess (if any) of 30 percent of the adjusted taxable 

income of the partnership over the amount (if any) by which the business interest of the 

partnership exceeds the business interest income of the partnership bears to 30 percent of the 

adjusted taxable income of the partnership. This allows a partner of a partnership to deduct 

additional interest expense the partner may have paid or incurred to the extent the partnership 

could have deducted more business interest. The provision requires that excess taxable income 

be allocated in the same manner as nonseparately stated income and loss. 
174 

Example 2.-The facts are the same as in Example l except ABC has only $40 ofbusiness 

interest. As in Example I, ABC has a limit on its interest deduction of$60. The excess of this 

limit over the business interest of the partnership is $60- $40 $20. The excess taxable income 

for ABC is $20 I $60 * $200 $66.67. XYZ's distributive share of the excess taxable income 

from ABC partnership is $33.33. XYZ's deduction for business interest is limited to 30 percent 

of the sum of its adjusted taxable income plus its distributive share of the excess taxable income 

from ABC partnership (30 percent* ($0 + $33.33) = $10). As a result of the rule, XYZ may 

deduct $10 of business interest and has an interest deduction disallowance of$15. 

Special carryforward rule for partnerships 

In the case of an S corporation, the general carryforward rule applies. In the case of a 

partnership, the general carryforward rule described above does not apply. Instead, any business 

interest that is not allowed as a deduction to the partnership for the taxable year is allocated to 

each partner in the same manner as nonseparately stated taxable income or loss of the 

partnership. The partner may deduct its share of the partnership's excess business interest in any 

future year, but only against excess taxable income attributed to the partner by the partnership 

the activities of which gave rise to the excess business interest carryforward. Any such 

deduction requires a corresponding reduction in excess taxable income. Additionally, when 

excess business interest is allocated to a partner, the partner's basis in its partnership interest is 

reduced (but not below zero) by the amount of such allocation, even though the carryforward 

does not give rise to a partner deduction in the year of the basis reduction. However, the 

partner's deduction in a future year for interest carried forward does not reduce the partner's 

basis in the partnership interest. In the event the partner disposes of a partnership interest the 

basis of which has been so reduced, the partner's basis in such interest shall be increased, 

immediately before such disposition, by the amount that any such basis reductions exceed any 

amount of excess interest expense that has been treated as paid by the partner (i.e., excess 

interest expense that has been deducted by the partner against excess taxable income of the same 

partnership). 

Exceptions 

The limitation does not apply to any taxpayer that meets the $15 million gross receipts 

test of section 448(c), that is, if the average annual gross receipts for the three-taxable-year 

period ending with the prior taxable year does not exceed $15 million. 548 

The trade or business of performing services as an employee is not treated as a trade or 

business for purposes of the limitation. As a result, for example, the wages of an employee are 

not counted in the adjusted taxable income of the taxpayer for purposes of determining the 

limitation. 

5

" Sec section 13102 of the bill (Modifications of gross receipts test for usc of cash method of accmmting 

by corporations and partnerships). In the case of a sole proprietorship, the $15 million gross receipts test is applied 

as if the sole proprietorship were a corporation or partnership. 
175 

The limitation also does not apply to certain regulated public utilities or electric 

cooperatives. Specifically, the trade or business of the furnishing 549 or sale of (l) electrical 

energy, water, or sewage disposal services, (2) gas or steam through a local distribution system, 

or (3) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the 

case may be, have been established or approved by a State or political subdivision thereof, by 

any agency or instrumentality of the United States, or by a public service or public utility 

commission or other similar body of any State or political subdivision thereof, or by the 

governing or ratemaking body of an electric cooperative, is not treated as a trade or business for 

purposes of the limitation. 

At the taxpayer's election, any real property development, redevelopment, construction, 

reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage 

trade or business is not treated as a trade or business for purposes of the limitation, and therefore 

the limitation does not apply to such trades or businesses. 550 Similarly, at the taxpayer's 

election, any farming business 551 is not treated as a trade or business for purposes of the 

limitation, and therefore the limitation does not apply to such trade or business. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

549 The tenn ''furnishing" includes generatioll transmission, and distribution activities. 

550 It is intended that any such real property trade or business, including such a trade or business conducted 

by a corporation or real estate investment trust be included. Because tllis description of a real property trade or 

business refers only to the section469(c)(7)(C) descriptioll and not to other mles of section 469 (such as the mlc of 

section 469(c)(2) that passive activities include rental activities or the mle of section 469(a) that a passive activity 

loss is limited under section 469). the other roles of section 469 are not made applicable by tins reference. It is 

further intended that a real property operation or a real property management trade or business includes the 

operation or management of a lodging facility. 

551 As defined in section 263A( e)( 4) (i.e .• fanning business means the trade or business of fanning and 

includes the trade or business of operating a nursery or sod farm, or the raising or hmYesting of trees bearing fruit 

nuts. or other crops. or ornamental trees (other than evergreen trees that are more than six years old at the time they 

arc severed from !heir roots)). Treas. Reg. sec. 1.263A-4(a)(4) further defines a famling business as a trade or 

business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural conuuodity. 

Examples of a fanning business include the trade or business of operating a nursery or sod fann; the raising or 

harvesting of trees bearing fmit. nuts. or other crops: the raising of ornamental trees (other than evergreen trees that 

arc more than six years old at the time they are severed from their roots); and the raising, shearing. feeding. caring 

for, training, and management of animals. A farming business also includes processing activities that arc nonnally 

incident to the growing. raising, or harvesting of agricultural or horticultural products. See Treas. Reg. sec. 1.263A4(a)( 4 )(i) and (ii). A fanning business does not include contract harvesting of an agricultural or horticultural 

commodity grown or raised by another taxpayer. or merely buying and reselling plants or animals t,>rown or raised 

by anotherta"1Jayer. See Treas. Reg. sec. l.263A-4(a)(4)(i). 
176 

2. Modification of net operating loss deduction (sec. 13302 of the bill and sec. 172 of the 

Code) 

Present Law 

A net operating loss ("NOL'') generally means the amount by which a taxpayer's 

business deductions exceed its gross income. 552 In general, an NOL may be carried back two 

years and carried over 20 years to offset taxable income in such years. 553 NOLs offset taxable 

income in the order of the taxable years to which the NOL may be carried. 554 

Different carryback periods apply with respect to NOLs arising in different 

circumstances. Extended carryback periods are allowed for NOLs attributable to specified 

liability losses and certain casualty and disaster losses. 555 Limitations are placed on the 

carryback of excess interest losses attributable to corporate equity reduction transactions. 556 

Reasons for Change 

The Committee believes that, except in limited circumstances of disaster losses for farms, 

NOLs should be carried forward, but not back. The Committee also believes that taxpayers 

should pay some income tax in years in which the taxpayer has taxable income (determined 

without regard to the NOL deduction). Therefore, the Committee believes that the NOL 

deduction should be limited to a certain percentage of taxable income (determined without 

regard to the deduction). 

Explanation of Provision 

The provision generally limits the NOL deduction to 90 percent of taxable income 

(determined without regard to the deduction) and to 80 percent of taxable income (determined 

without regard to the deduction) in taxable years beginning after December 31, 2022. 

Carryovers to other years are adjusted to take account of this limitation, and may be carried 

forward indefinitely. 

The provision repeals the two-year carryback and the special carryback provisions, but 

provides a two-year carryback in the case of certain losses incurred in the trade or business of 

farming. 

552 Sec. 172(c). 

'" Sec. 172(b )(1 )(A). 

55 ' Sec. 172(b )(2). 

555 Sec. 172(b)(I)(C) and (E). 

Sec. 172(b)(l)(D). 
177 

The provision adds a special rule for the NOLs of property and casualty insurance 

companies, which may be carried back two years and carried over 20 years to offset 100 percent 

of taxable income in such years. 

Effective Date 

The provision allowing indefinite carryovers and modifying carrybacks applies to losses 

arising in taxable years beginning after December 31, 2017. 

The provision limiting the NOL deduction applies to losses arising in taxable years 

beginning after December 31,2017. 

3. Like-kind exchanges of real property (sec. 13303 of the bill and sec. 1031 of the Code) 

Present Law 

An exchange of property, like a sale, generally is a taxable event. However, no gain or 

loss is recognized if property held for productive use in a trade or business or for investment is 

exchanged for property of a "like kind" which is to be held for productive use in a trade or 

business or for investment. 557 In general, section 1031 does not apply to any exchange of stock 

in trade (i.e., inventory) or other property held primarily for sale; stocks, bonds, or notes; other 

securities or evidences of indebtedness or interest; interests in a partnership; certificates of trust 

or beneficial interests; or choses in action. 558 Section 1031 also does not apply to certain 

exchanges involving livestock559 or foreign property. 560 

For purposes of section 1031, the determination of whether property is of a "like kind" 

relates to the nature or character of the property and not its grade or quality, i.e., the 

nonrecognition rules do not apply to an exchange of one class or kind of property for property of 

a different class or kind (e.g., section 1031 does not apply to an exchange of real property for 

personal property). 561 The different classes of property are: ( 1) depreciable tangible personal 

Sec. 103l(a)(l). 

558 Sec. 103l(a)(2). A chose in action is a right that can be enforced by legal action. 

559 Sec. 103l(e). 

560 Sec. 103l(h). 

Treas. Reg. sec. 1.103l(a)-l(h). 
178 

property; 562 (2) intangible or nondepreciable personal property; 563 and (3) real property. 564 

However, the rules with respect to whether real estate is "like kind" are applied more liberally 

than the rules governing like-kind exchanges of depreciable, intangible, or nondepreciable 

personal property. For example, improved real estate and unimproved real estate generally are 

considered to be property of a "like kind" as this distinction relates to the grade or quality of the 

real estate, 565 while depreciable tangible personal properties must be either within the same 

General Asset Class 566 or within the same Product Class. 567 

The nonrecognition of gain in a like-kind exchange applies only to the extent that likekind property is received in the exchange. Thus, if an exchange of property would meet the 

requirements of section 1031, but for the fact that the property received in the transaction 

consists not only of the property that would be permitted to be exchanged on a tax-free basis, but 

also other non-qualifying property or money ("additional consideration"), then the gain to the 

recipient of the other property or money is required to be recognized, but not in an amount 

562 For example, an exchange of a personal computer classified nnder asset class 00.12 of Rev. Proc. 87-

56, 1987-2 C. B. 674. for a printer classified under the same asset class of Rev. Proe. 87-56 would be treated as 

property of a like kind. However, an exchange of an airplane classified under asset class 00.21 of Rev. Proc. 87-56 

for a heavy general purpose tmck classified under asset class 00.242 of Rev. Proc. 87-56 would not be treated as 

property of a like kind. Sec Treas. Reg. sec. l.l031 (a)-2(b)(7). 

563 For example, an exchange of a copyright on a novel for a copyright on a different novel would be 

treated as property of a like kind. See Treas. Reg. sec. 1.103 l(a)-2(c)(3). However, the good"ill or going concern 

value of one business is not of a like kind to the goodwill or going concern value of a different business. See Treas. 

Reg. sec. 1.103l(a)-2(c)(2). The Internal Revenue Service CIRS") has mled that iutangiblc assets such as 

trademarks. trade names. mastheads, and customer-based intangibles that can be separately described and valued 

apart from goodwill qualify as property of a like kind under section I 031. See Chief Counsel Advice 200911006, 

February 12. 2009. 

Treas. Reg. sec. 1.103l(a)-l(b) and (c). 

565 Treas. Reg. sec. l.I03l(a)-l(b). 

566 Treasury Regulation section l.l03l(a)-2(b)(2) provides the following list of General Asset Classes, 

based on asset classes 00.11 through 00.28 and 00.4 of Rev. Proc. 87-56, 1987-2 C.B. 67-1: (i) Office furniture, 

fixtures, and equipment (asset class 00.11). (ii) Information systems (computers and peripheral equipment) (asset 

class 00.12), (iii) Data handling equipment, except computers (asset class 00.13), (iv) Airplanes (airframes and 

engines), except those used in commercial or contract canying of passengers or freight. and all helicopters 

(airframes and engines) (asset class 00.21). (v) Automobiles. taxis (asset class 00.22), (vi) Buses (asset class 00.23). 

(vii) Light general purpose trucks (asset class 00.241). (viii) Heavy general purpose tmcks (asset class 00.242). 

(ix) Railroad cars and locomotives, except those owned by railroad transportation companies (asset class 00.25). 

(x) Tractor units for use over-the-road (asset class 00.26), (xi) Trailers and trailer-monuted containers (asset class 

00.27), (xii) Vessels. barges, tugs. and si1uilar water-transportation equipment. except those used in marine 

constmction (asset class 00.28). and (xiii) Industrial steam and electric generation and/or distribution systems (asset 

class 00.4). 

567 Properly within a product class consists of depreciable tangible personal properly that is described in a 

6-digit product class within Sectors 31, 32, and 33 (pertaining to manufacturing industries) of the North American 

Industty Classification System ('"NAICS .. ). set forth in Executive Office of the President, Office of Management and 

Budget North American industry Classification i'ivsiem, United States, 2002 (NAlCS Manna!). as periodically 

updated. Treas. Reg. sec. 1.103l(a)-2(b)(3). 
179 

exceeding the fa ir market value of such other property or money.>~~ Additionally, any such gain 

realized on a section I 031 exchange as a result of additiona l consideration being involved 

constihltes ordinary income to the extent tha t the gain is subject to the recapture provisions of 

sections 1245 and 1250.

569 No losses may be recognized from a like-kind exchange.570 

If sec tion I 031 applies to an exchange of properties, the basis of the property received in 

the exchange is equal to the basis of the property transferred. This basis is increased to the 

extent of any gain recognized as a result of the receipt of other property or money in the likekind exchange, and decreased to the extent of any money received by the taxpayer.571 The 

holding pe ri od of qua lifying property received includes the ho ld ing period of the qua lifying 

prope tty transferred, but the nonqualify ing property received is required to begin a new holding 

period.

572 

A like-kind exchange also does not require tl1at tl1e properties be excha tlged 

simultaneously. Ratl1er, the property to be received in the exchange must be received not more 

than 180 days a fter the date on which the taxpayer relinquishes the original property (but in no 

event later than the due date (including extensions) of the taxpayer's income tax re turn for the 

taxable year in which the transfer of the relinquished property occurs). In addition, the taxpayer 

must identify the property to be received within 45 days after the date on whi ch the taxpayer 

transfers the property re linquished in the exchange.573 

The Treasury Department has issued regttlations

574 and revenue procedures575 providing 

guidance and safe harbors for taxpayers engaging in deterred like-kind exchanges. 

"* Sec. 1031(b). For example, if a taxpayer holding land A having a basis ofS40.000 and a fair market 

value ofS 100,000 exchanges the property for land B worth S90.000 plus $10,000 i.n cash, the taxpayer would 

recognizeS I 0,000 of gain on the transaction, which would be includable in income. The remaining S50.000 of gain 

would be deferred until the taxpayer disposes of land Bin a taxable sale or exchange. 

,.. Sees. 1245(b)(4) and 1250(d)(4). For example, if a taxpayer holding section 1245 property A with an 

original cost basis ofSII ,000, an adjusted basis ofSIO,OOO, and a fair market value ofS15,000 exchanges the 

property for section 1245 propcny B with a fair market value ofS14,000 plus Sl.OOO in cash, the taxpayer would 

recognize S I ,000 of ordinary income on the transaction. The remaining 54,000 of gain would be deferred until the 

taxpayer disposes of section 1245 property B in a taxable sale or exchange. 

»o Sec. 1031(c). 

m Sec. 103 I (d). Thus, in the example in footnote 568, the taxpayer's basis in land B would be S40,000 

(the taxpayer's basis in land A of$40,000, increased by $10,000 in gain recognized, and decreased by S 10,000 in 

money received). 

m Sec. 1223(1). 

"' Sec. 1031(aX3). 

S

1

·' Treas. Reg. sec. I 1031(k)·l(a) through (o). 

m See Rev. Proe. 2000-37, 2000-40 I.R.B. 308, as modified by Rev. Proe. 2004-51,2004-33 I.R.B. 294. 
180 

Reasons for Change 

The definition of! ike-kind property has been modified legislatively over the years to 

address issues relating to targeted types of property. With the provisions in the bill of increased 

and expanded expensing under sections 168(k) and 179 for tangible personal property and 

certain building improvements, 576 the Committee believes that section 1031 should be limited to 

exchanges of real property not held primarily for sale. 

Explanation of Provision 

The provision modifies the provision providing for nonrecognition of gain in the case of 

like-kind exchanges by limiting its application to real property that is not held primarily for sale. 

A special rule treats shares in a mutual ditch, reservoir, or irrigation company as real 

property if at the time of the exchange (1) the mutual ditch, reservoir, or irrigation company is an 

organization described in section 501(c)(12)(A) (determined without regard to the percentage of 

its income that is collected from its members for the purpose of meeting losses and expenses) 

and (2) such shares have been recognized by the highest court of the State in which such 

company was organized or by applicable State statute as constituting or representing real 

property or an interest in real property. 

Effective Date 

The provision generally applies to exchanges completed after December 31, 2017. 

However, an exception is provided for any exchange if the property disposed of by the taxpayer 

in the exchange is disposed of on or before December 31, 2017, or the property received by the 

taxpayer in the exchange is received on or before such date. 

4. Limitation on deduction by employers of expenses for fringe benefits (sec. 13304 of the 

bill and sec. 274 of the Code) 

Present Law 

In general 

No deduction is allowed with respect to (1) an activity generally considered to be 

entertainment, amusement, or recreation ("entertainment"), unless the taxpayer establishes that 

the item was directly related to (or, in certain cases, associated with) the active conduct of the 

taxpayer's trade or business, or (2) a facility (e.g., an airplane) used in connection with such 

activity. 577 If the taxpayer establishes that entertainment expenses are directly related to (or 

associated with) the active conduct of its trade or business, the deduction generally is limited to 

5'6 See sections 1320 l (Temporary I 00-percent expensing for certain business assets) and 13101 

(Modifications of rules for expensing depreciable business assets) of !he bill. 

Sec. 274(a)(l). 
181 

50 percent of the amount otherwise deductible. 578 Similarly, a deduction for any expense for 

food or beverages generally is limited to 50 percent of the amount otherwise deductible. 579 In 

addition, no deduction is allowed for membership dues with respect to any club organized for 

business, pleasure, recreation, or other social purpose. 580 

There are a number of exceptions to the general rule disallowing deduction of 

entertainment expenses and the rules limiting deductions to 50 percent of the otherwise 

deductible amount. Under one such exception, those rules do not apply to expenses for goods, 

services, and facilities to the extent that the expenses are reported by the taxpayer as 

compensation and as wages to an employee. 581 Those rules also do not apply to expenses for 

goods, services, and facilities to the extent that the expenses are includible in the gross income of 

a recipient who is not an employee (e.g, a nonemployee director) as compensation for services 

rendered or as a prize or award. 582 The exceptions apply only to the extent that amounts are 

properly reported by the company as compensation and wages or otherwise includible in income. 

In no event can the amount of the deduction exceed the amount of the taxpayer's actual cost, 

even if a greater amount (i.e., fair market value) is includible in income. 583 

Those deduction disallowance rules also do not apply to expenses paid or incurred by the 

taxpayer, in connection with the performance of services for another person (other than an 

employer), under a reimbursement or other expense allowance arrangement if the taxpayer 

accounts for the expenses to such person. 584 Another exception applies for expenses for 

recreational, social, or similar activities primarily for the benefit of employees other than certain 

owners and highly compensated employees. 585 An exception applies also to the 50 percent 

deduction limit for food and beverages provided to crew members of certain commercial vessels 

and certain oil or gas platform or drilling rig workers. 586 

Sec. 274(n)(l)(B). 

" 9 Sec. 274(n)( l)(A). 

580 Sec. 274(a)(3). 

581 Sec. 274(e)(2)(A). See below for a discussion of the recent modification of this rule for certain 

individuals. 

Sec. 274(e)(9). 

583 Treas. Reg. sec. 1.162-25T(a). 

581 Sec. 274(e)(3). 

585 Sec. 274(e)(4). 

586 Sec. 274(n)(2)(E). 
182 

Expenses treated as compensation 

Except as otherwise provided, gross income includes compensation for services, 

including fees, commissions, fringe benefits, and similar items. 587 ln general, an employee (or 

other service provider) must include in gross income the amount by which the fair market value 

of a fringe benefit exceeds the sum of the amount (if any) paid by the individual and the amount 

(if any) specifically excluded from gross income. 588 Treasury regulations provide detailed rules 

regarding the valuation of certain fringe benefits, including flights on an employer-provided 

aircraft. In general, the value of a non-commercial flight generally is detennined under the base 

aircraft valuation formula, also known as the Standard Industry Fare Level formula or "SIFL." 589 

If the SIFL valuation rules do not apply, the value of a flight on an employer-provided aircraft 

generally is equal to the amount that an individual would have to pay in an arm's-length 

transaction to charter the same or a comparable aircraft for that period for the same or a 

comparable flight. 590 

In the context of an employer providing an aircraft to employees for nonbusiness (e.g., 

vacation) flights, the exception for expenses treated as compensation has been interpreted as not 

limiting the company's deduction for expenses attributable to the operation of the aircraft to the 

amount of compensation reportable to its employees. 591 The result of that interpretation is often 

a deduction several times larger than the amount required to be included in income. Further, in 

many cases, the individual including amounts attributable to personal travel in income directly 

benefits from the enhanced deduction, resulting in a net deduction for the personal use of the 

company aircraft. 

The exceptions for expenses treated as compensation or otherwise includible income 

were subsequently modified in the case of specified individuals such that the exceptions apply 

only to the extent of the amount of expenses treated as compensation or includible in income of 

the specified individual. 592 Specified individuals are individuals who, with respect to an 

employer or other service recipient (or a related party), are subject to the requirements of 

section 16(a) of the Securities Exchange Act of 1934, or would be subject to such requirements if 

Sec. 61(a)(l). 

" 8 Treas. Reg. sec. 1.61-21(b)(l). 

589 Trcas. Reg. sec. 1.61-21(g)(5). 

590 Treas. Reg. sec. 1.6l-21(b)(6). 

591 Sutherland Lumber-Sowhwest, Inc. v. Commissioner, 114 T.C. 197 (2000). aff'd. 255 F. 3d 495 (8th Cir. 

2001). 

592 Sec. 274(c)(2)(B)(i). See also Treas. Reg. sec. l.274-9(a). 
183 

the employer or service recipient (or related party) were an issuer of equity securities referred to 

in section 16(a)593 

As a result, in the case of specified individuals, no deduction is allowed with respect to 

expenses for ( l) a nonbusiness activity generally considered to be entertainment, amusement or 

recreation, or (2) a facility (e.g., an airplane) used in connection with such activity to the extent 

that such expenses exceed the amount treated as compensation or includible in income to the 

specified individual. For example, a company's deduction attributable to aircraft operating costs 

and other expenses for a specified individual's vacation use of a company aircraft is limited to 

the amount reported as compensation to the specified individual. However, in the case of other 

employees or service providers, the company's deduction is not limited to the amount treated as 

compensation or includible in income. 594 

Excludable fringe benefits 

Certain employer-provided fringe benefits are excluded from an employee's gross 

income and wages for employment tax purposes, including, but not limited to, de minimis 

fringes, qualified transportation fringes, and meals provided for the "convenience of the 

employer." 595 

A de minimis fringe generally means any property or service the value of which is (taking 

into account the frequency with which similar fringes are provided by the employer) so small as 

to make accounting for it unreasonable or administratively impracticable, 596 and also includes 

food and beverages provided to employees through an eating facility operated by the employer 

that is located on or near the employer's business premises and meets certain requirements. 597 

Qualified transportation fringes include qualified parking (parking on or near the 

employer's business premises or on or near a location from which the employee commutes to 

593 Sec. 274(e)(2)(B)(ii). Sec also Treas. Reg. sec. l.274-9(b). 

594 Sec Treas. Reg. sec. 1.274-10(a)(2). 

595 Sees. 132(a). 119(a), 312l(a)(l9) and (20). 323l(e)(5) and (9), 3306(b)(14) and (16). and 340l(a)(19). 

5

" Sec. l32(e)(l). Examples include occasional personal use of an employer's copying machine. 

occasional parties or meals for employees and their guests, local telephone calls, and coffee, doughnuts and soft 

drinks. Treas. Reg. sec. 1.132-6(c)(l). 

Sec. 132(e)(2). Revenue derived from such a facility must nonnally equal or exceed the direct operating 

costs of the facility. Employees who are entitled, under Section 119, to exclude the value of a meal provided at such 

a facility are treated as having paid an amount for the meal equal to the direct operating costs of the facility 

attributable to such meal. 
184 

work by public transit), transit passes, vanpool benefits, and qualified bicycle commuting 

reimbursements. 598 

The value of meals furnished to an employee or the employee's spouse or dependents by 

or on behalf of an employer for the convenience of the employer is excludible from the 

employee's gross income, but only if such meals are provided on the employer's business 

premises. 599 

Reasons for Change 

The Committee believes that the difficulty in determining whether entertainment 

expenses are directly related to, or associated with, a trade or business creates uncertainty for 

taxpayers and the potential for significant abuse, and therefore permits a tax deduction for 

entertainment-related expenses only to the extent such items are reported as employee 

compensation. The Committee also aligns the treatment of the employer's deduction for 

qualified transportation fringes with other similar taxable items, such that a deduction is 

permitted if included in the employee's reported compensation. ln addition, the Committee 

generally disallows or limits deductions in connection with commuting benefits and providing 

meals to employees for the convenience of the employer. 

Explanation of Provision 

The provision provides that no deduction is allowed with respect to (I) an activity 

generally considered to be entertainment, amusement or recreation, (2) membership dues with 

respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a 

facility or portion thereof used in connection with any of the above items. Thus, the provision 

repeals the present-law exception to the deduction disallowance for entertainment, amusement, 

or recreation that is directly related to (or, in certain cases, associated with) the active conduct of 

the taxpayer's trade or business (and the related rule applying a 50 percent limit to such 

deductions). 

In addition, the provision disallows a deduction for expenses associated with providing 

any qualified transportation fringe to employees of the taxpayer, and except as necessary for 

ensuring the safety of an employee, any expense incurred for providing transportation (or any 

payment or reimbursement) for commuting between the employee's residence and place of 

employment. 

Taxpayers may still generally deduct 50 percent of the food and beverage expenses 

associated with operating their trade or business (e.g., meals consumed by employees on work 

travel). For amounts incurred and paid after December 31, 2017 and until December 31, 2025, 

the provision expands this 50 percent limitation to expenses of the employer associated with 

providing food and beverages to employees through an eating facility that meets requirements 

598 Sec. l32(f)(l), (5). The qualified transportation fringe exclusions are subject to monthly limits. 

Sec. 132(f)(2) 

599 Sec. 119(a). 
185 

for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid 

after December 31, 2025 are not deductible. 

Effective Date 

The provision generally applies to amounts paid or incurred after December 31, 2017. 

However, for expenses of the employer associated with providing food and beverages to 

employees through an eating facility that meets requirements for de minimis fringes and for the 

convenience of the employer, amounts incurred and paid after December 31, 2025 will not be 

deductible. 

5. Repeal of deduction for income attributable to domestic production activities (sec. 13305 

of the bill and sec. 199 of the Code) 

Present Law 

Section 199 provides a deduction from taxable income (or, in the case of an individual, 

adjusted gross income600) that is equal to nine percent of the lesser of the taxpayer's qualified 

production activities income or taxable income (determined without regard to the section 199 

deduction) for the taxable year. 601 For corporations subject to the 35-percent corporate income 

tax rate, the nine-percent deduction effectively reduces the corporate income tax rate to slightly 

less than 32 percent on qualified production activities income. 602 A similar reduction applies to 

the graduated rates applicable to individuals with qualifying domestic production activities 

income. 

In general, qualified production activities income is equal to domestic production gross 

receipts reduced by the sum of: (I) the costs of goods sold that are allocable to those receipts; 

and (2) other expenses, losses, or deductions which are properly allocable to those receipts. 603 

Domestic production gross receipts generally are gross receipts of a taxpayer that are 

derived from: (J) any sale, exchange, or other disposition, or any lease, rental, or license, of 

6w For this purpose. adjusted gross income is determined after application of sections 86, 135, 137, 219. 

221, 222. and 469, without regard to the section 199 deduction. Sec. 199(d)(2). 

601 Sec. 199(a). In the case of oil related qualified production activities income. the deduction from taxable 

income is equal to six percent of the lesser of the taxpayer's oil related qualified production activities income, 

qualified production activities income. or taxable income. Sec. 199( d)(9). 

60' This example assumes the deduction does not exceed the wage limitation discussed below. 

603 Sec. 199( c)( 1). In computing qualified production activities income, the domestic production activities 

deduction itself is not an allocable deduction. Sec. 199( c)( l)(B)(ii). Sec Treas. Reg. sees. 1.199-1 tbrough 1.199-9 

where the Secretary has prescribed mles for the proper allocation of items of income, deduction. ex'J)ense, and loss 

for purposes of determining qualified production activities income. 
186 

qualifying production property604 that was manufactured, produced, grown or extracted by the 

taxpayer in whole or in significant part within the United States; 605 (2) any sale, exchange, or 

other disposition, or any lease, rental, or license, of qualified film606 produced by the taxpayer; 

(3) any sale, exchange, or other disposition, or any lease, rental, or license, of electricity, natural 

gas, or potable water produced by the taxpayer in the United States; ( 4) construction of real 

property performed in the United States by a taxpayer in the ordinary course of a construction 

trade or business; or (5) engineering or architectural services performed in the United States for 

the construction of real property located in the United States. 607 

The amount of the deduction for a taxable year is limited to 50 percent of the W-2 wages 

paid by the taxpayer, and properly allocable to domestic production gross receipts, during the 

calendar year that ends in such taxable year. 608 

Reasons for Change 

The Committee believes the reduction in corporate rate and creation of a 17.4 percent 

deduction for business income of individuals will enhance the ability of all domestic businesses 

to compete in the global marketplace and enable small businesses to maintain their position as 

the primary source of new jobs in this country. Therefore, while the Committee believes that the 

deduction for income attributable to domestic production activities has generally helped 

domestic manufacturing firms by improving the cash flow of domestic manufacturers and 

604 Qualifying production property generally includes any tangible personal property. computer software. 

and sound recordings. Sec. l99(c)(5). 

605 When used in the Code in a geographical sense. the tenu "United States" generally includes only the 

States and the District of Columbia. Sec. 7701 (a)(9). A special rule for detemtining domestic production gross 

receipts. however. proYides that for taxable years beginning after December 31. 2005. and before January 1. 2017. in 

the case of any taxpayer with gross receipts from sources within the Connnonwealth of Puerto Rico. the term 

··united States" includes the Commonwealth of Puerto Rico. but only if all of the taxpayer's Puerto Rico-sourced 

gross receipts are taxable under the Federal income tax for individuals or corporations for such taxable year. 

Sees. l99(d)(8)(A) and (C). In computing the 50-percent wage lintitation, the taxpayer is permitted to take into 

account wages paid to bona fide residents of Puerto Rico for sen·ices performed in Puerto Rico. Sec. !99(d)(8)(B). 

606 Qualified film includes any motion picture film or videotape (including live or delayed television 

progrmrnning. but not including certain sexually e'<plicit productions) if 50 percent or more of the total 

compensation relating to the production of the film (including compensation in the form of residuals and 

participations) constitutes compensation for services performed in the United States by actors, production personnel, 

directors, and producers. Sec. !99(c)(6). 

60' Sec. !99(c)(4)(A). 

6

"' Sec. l99(b)(l). For purposes of the provision, "W-2 wages" include the sum of the amounts of wages 

as defined in section 340l(a) and elective deferrals that the taxpayer properly reports to the Social Security 

Administration with respect to the employment of employees of the taxpayer during the calendar year ending during 

the taxpayer's taxable year. Elective deferrals include elective deferrals as defined in section 402(g)(3), amounts 

deferred under section 457, and designated Roth contributions as defined in section 402A See sec. 199(b)(2)(A). 

The wage limitation for qualified films includes any compensation for services performed in the United States by 

actors, production personneL directors. and producers and is not restricted to W-2 wages. Sec. !99(b)(2)(D). 
187 

making investments in domestic manufacturing facilities more attractive, there is no longer a 

need for such deduction. Finally, the Committee believes that elimination of the deduction for 

income attributable to domestic production activities furthers the Committee's general goal of 

simplification of the tax code. 

Explanation of Provision 

The provision repeals the deduction for income attributable to domestic production 

acti viti es. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2018. 

6. Denial of deduction for certain fines, penalties, and other amounts (sec. 13306 of the bill 

aud sec.162(f) aud uew sec. 6050X oftbe Code) 

Present Law 

The Code denies a deduction for fines or penalties paid to a government for the violation 

of any law609 

Reasons for Change 

The Committee believes that taxpayers should not be able to deduct as normal business 

expenses settlement payments that are intended to punish bad behavior. Allowing these 

deductions forces other taxpayers to subsidize a part of their wrongdoing and blunts the deterrent 

effect of the penalty. The Committee believes denying these deductions will help deter 

taxpayers from violating the standards Congress has enacted to protect the American public, and 

ensure that wrongdoers fully pay their penalties. 

Explanation of Provision 

The provision denies deductibility for any otherwise deductible amount paid or incurred 

(whether by suit, agreement, or otherwise) to or at the direction of a government or specified 

nongovernmental entity in relation to the violation of any law or the investigation or inquiry by 

such government or entity into the potential violation of any law. An exception applies to 

payments that the taxpayer establishes are either restitution (including remediation of property) 

or amounts required to come into compliance with any law that was violated or involved in the 

investigation or inquiry, that are identified in the court order or settlement agreement as 

restitution, remediation, or required to come into compliance. In the case of any amount of 

restitution for failure to pay any tax and assessed as restitution under the Code, such restitution is 

deductible only to the extent it would have been allowed as a deduction if it had been timely 

paid. The tRS remains free to challenge the characterization of an amount so identified; 

however, no deduction is allowed unless the identification is made. Restitution or included 

6

'" Sec. 162([). 
188 

remediation of property does not include reimbursement of government investigative or litigation 

costs. 

The provision applies only where a government (or other entity treated in a manner 

similar to a government under the provision) is a complainant or investigator with respect to the 

violation or potential violation of any law. 610 An exception also applies to any amount paid or 

incurred as taxes due. 

The provision requires government agencies (or entities treated as such agencies under 

the provision) to report to the IRS and to the taxpayer the amount of each settlement agreement 

or order entered into where the aggregate amount required to be paid or incurred to or at the 

direction of the government is at 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 report must separately identify any amounts that are for restitution or 

remediation of property, or correction of noncompliance. The report must be made at the time 

the agreement is entered into, as determined by the Secretary of the Treasury. 

Effective Date 

The provision denying the deduction and the reporting provision are effective for 

amounts paid or incurred after the date of enactment, except that it would not apply to amounts 

paid or incurred under any binding order or agreement entered into before such date. Such 

exception does not apply to an order or agreement requiring court approval unless the approval 

was obtained before such date. 

7. Denial of deduction for settlements subject to nondisclosure agreements paid in 

connection with sexual harassment or sexual abuse (sec. 13307 of the bill and new sec. 

162(q) of the Code) 

Present Law 

A taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or 

incurred in carrying on any trade or business. 611 However, certain exceptions apply. No 

deduction is allowed for (I) any charitable contribution or gift that would be allowable as a 

deduction under section 170 were it not for the percentage limitations, the dollar limitations, or 

the requirements as to the time of payment, set forth in such section; (2) any illegal bribe, illegal 

kickback, or other illegal payment; (3) certain lobbying and political expenditures; (4) any fine 

or similar penalty paid to a government for the violation of any law; (5) two-thirds of treble 

damage payments under the antitrust laws; (6) certain foreign advertising expenses; (7) certain 

6 "' Thus. for example. the provision docs 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 docs not cause the 

payment to be made '·at the direction of a govermnent" for purposes of the provision. 

611 Sec. l62(a). 
189 

amounts paid or incurred by a corporation in connection with the reacquisition of its stock or of 

the stock of any related person; or (8) certain applicable employee remuneration. 

Reasons for Change 

The Committee believes that taxpayers should not be able to deduct as normal business 

expenses settlement payments subject to nondisclosure agreements that relate to sexual 

harassment or sexual abuse. Allowing these deductions forces other taxpayers to subsidize a part 

of their wrongdoing or the wrongdoing of their employees. The Committee also believes that 

this provision will discourage the use of nondisclosure agreements in these circumstances. 

Explanation of Provision 

Under the provision, no deduction is allowed for any settlement, payout, or attorney fees 

related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure 

agreement. 

Effective Date 

The provision is effective for expenses and costs paid or incurred in taxable years 

beginning after the date of enactment. 

8. Uniform treatment of expenses in contingency fee cases (sec. 13308 of the bill and new 

sec. 162( r) of the Code) 

Present Law 

The Code provides that a taxpayer may deduct all ordinary and necessary expenses paid 

or incurred during the taxable year in carrying on a trade or business. 612 

A current deduction for an expense for which there is a right or expectation of 

reimbursement may be disallowed because these payments are not expenses of the taxpayer and 

are instead in the nature of an advance or a loan. The extent to which the right must be 

established has varied. Some cases have denied the current deduction because the right of 

reimbursement was fixed, 613 others have allowed the current deduction because the right of 

612 Sec. 162(a): Trcas. Reg. sec. 1.162-l(a). 

613 Charles Baloian Company, Inc. v. Commissioner, 68 T.C. 620, 626, 628 (1977): c'vfanocchio v. 

Commissioner. 710 F.2d 1400, P02 (9th Cir. 1983); Glendinning, :vfcLeish & Cn. v. Commissioner. 61 F.2d 950. 

952 (2d Cir. 1932): Webbe v. Commissioner, T.C. Memo. 1987-426, aff'd, 902 F.2d 688 (8th Cir. 1990). 
190 

reimbursement was uncertain, 614 and other cases have denied the current deduction if the 

taxpayer's right to reimbursement was subject to a contingency. 

Courts have held that an attorney representing clients on a contingent fee basis may not 

currently deduct advances to or expenses paid on behalf of the clients as ordinary and necessary 

business expenses 615 The amounts in these cases were to be repaid from any recovery. Courts 

have also held that even if reimbursement is due only under certain circumstances, generally no 

immediate deduction is allowable. 616 

However, the Ninth Circuit reached the opposite conclusion and held that attorneys who 

represent clients in "gross fee" contingency fee cases are not extending loans to clients and 

therefore may treat litigation costs, such as court fees and witness expenses, as deductible 

business expenses under the Code. 617 The IRS does not follow this decision, except in the Ninth 

Circuit, based on the fact that amounts advanced by attorneys will be reimbursed by the client 

and therefore are not deductible business expenses. 618 

Reasons for Change 

The Committee believes that amounts advanced by attorneys in "gross fee" cases are 

loans and therefore should not be treated as deductible expenses. The Committee further 

believes this change is necessary to provide uniform treatment of expenses in contingency fee 

cases. 

Explanation of Provision 

The proposal denies attorneys an otherwise-allowable deduction for litigation costs paid 

under arrangements that are primarily on a contingent fee basis until the contingency ends. The 

proposal effects a legislative override of the opinion in the Ninth Circuit Court of Appeals in 

Boccardo v. Commissioner, 56 F. 3d 1016 (9th Cir. 1995). No inference regarding the tax 

treatment of these costs under present law is intended. 

614 George K. Herman Chevrolet, inc. v. Commissioner, 39 T.C. 846, 853 (1963); Allegheny Cmporation 

v. Commissioner, 28 T.C. 298, 305 (1957). acq .. 1957-2 C. B. 3: F/ectric Tachometer Corporation v. Commissioner. 

37 T.C. 158, 161-162 (1961). acq .. 1962-2 C.B. 4. 

615 Burnett v. Commissioner. 356 F.2d 755, 760 (5th Cir.), cert. denied, 385 U.S. 832 (1966); Herrick v. 

Commissioner. 63 T.C. 562, 567. 568 (1975): Cane/a v. Commissioner. 53 T.C. 217, 225 (1969). a!I'd. 4-!7 F.2d 

484 (9th Cir. 1971). acq. 1971-2 C. B. 2. nonacq. in part. 1982-2 C. B. 2: Si!Ferton v. Commissioner, T.C. Memo. 

1977-198. aff'd, 647 F.2d 172 (9th Cir.), cert. denied. 454 U.S. 1033 (1981): Watts v. Commissioner. T.C. Memo. 

1968-183. 

016 Boccardo v. Commissioner. 12 Cl Ct. 184 (1987): Boccardo v. Commissioner. 65 T.C.M. 2739 (1993). 

617 Boccardo v. Commissioner. 56 F.3d 1016 (9th Cir. 1995), rcv'g 65 T.C.M. 2739 (1993). 

618 1997 FSA LEXIS 4-!2 (Jtmc 2. 1997). 
191 

Effective Date 

The proposal applies to expenses and costs paid or incurred in taxable years beginning 

after the date of enactment. 

9. Repeal of deduction for local lobbying expenses (sec. 13309 of the bill and sec. 162(e) of 

the Code) 

Present Law 

In general 

A taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or 

incurred in carrying on any trade or business 619 However, section 162(e) denies a deduction for 

amounts paid or incurred in connection with (1) influencing legislation, 620 (2) participation in, or 

intervention in, any political campaign on behalf of (or in opposition to) any candidate for public 

office, (3) any attempt to influence the general public, or segments thereof, with respect to 

elections, legislative matters, or referendums, or (4) any direct communication with a covered 

executive branch official 621 in an attempt to influence the official actions or positions of such 

official. Expenses paid or incurred in connection with lobbying and political activities (such as 

research for, or preparation, planning, or coordination of, any previously described activity) also 

are not deductible622 

Exceptions 

Local legislation 

Notwithstanding the above, a deduction is allowed for ordinary and necessary expenses 

incurred in connection with any legislation of any local council or similar governing body ("local 

619 Sec. 162(a). 

620 The tenn "influencing legislation" means any attempt to influence any legislation through 

communication with any member or employee of a legislative body, or with any govcnunent official or employee 

who may participate in the fommlation of legislation. The term "legislatiOI1' includes actions with respect to Acts. 

bills. resolutions. or similar items by the Congress. any State legislature, any local council, or similar governing 

body, or by the public in a referendum, initiative. constitutional amendment or similar procedure. Sees. 162( e)( 4) 

and49ll(e)(2). 

621 The term "covered executive branch official" means (1) the President. (2) the Vice President (3) any 

officer or employee of the White House Office of the Executive Office of the President and the two most senior 

level officers of each of the other agencies in such Executive Office, ( 4) any individual servicing in a position in 

Ievell of the Executive Schedule under section 5312 of title 5. United States Code, (5) any other individual 

designated by tl1e President as having Cabinet-level status, and (6) any immediate deputy of an individual described 

in (4) or (5). Sec. 162(e)(6). 

622 Sec. l62(e)(5)(C). 
192 

legislation") 623 With respect to local legislation, the exception permits a deduction for amounts 

paid or incurred in canying on any trade or business (1) in direct connection with appearances 

before, submission of statements to, or sending communications to the committees or individual 

members of such council or body with respect to legislation or proposed legislation of direct 

interest to the taxpayer, or (2) in direct connection with communication of information between 

the taxpayer and an organization of which the taxpayer is a member with respect to any such 

legislation or proposed legislation which is of direct interest to the taxpayer and such 

organization, and (3) that portion of the dues paid or incurred with respect to any organization of 

which the taxpayer is a member which is attributable to the expenses of the activities described 

in (1) or (2) carried on by such organization624 

For purposes of this exception, legislation of an Indian tribal government is treated in the 

same manner as local legislation. 625 

De minimis 

For taxpayers with $2,000 or less of in-house expenditures related to lobbying and 

political activities, a de minimis exception is provided that permits a deduction. 626 

Reasons for Change 

The Committee believes that Federal tax law should not draw a distinction between the 

deductibility of local and non-local lobbying expenses. The Committee further believes that 

ending the deductibility oflocallobbying expenses eliminates a Federal tax subsidy for efforts to 

influence local legislation. Finally, the Committee believes that elimination of this distinction 

furthers its general goal of simplification of Federal tax law. 

Explanation of Provision 

The provision repeals the exception for amounts paid or incurred related to lobbying local 

councils or similar governing bodies, including Indian tribal governments. Thus, the general 

disallowance rules applicable to lobbying and political expenditures will apply to costs incurred 

related to such local legislation. 

Effective Date 

The provision applies to amounts paid or incurred on or after the date of enactment. 

603 Sec. l62(e)(2)(A). 

624 Sec. 162(e)(2)(B). 

625 Sec. !62(c)(7). 

626 Sec. !62(e)(5)(B). 
193 

10. Recharacterization of certain gains in the case of partnership profits interests held in 

connection with performance of investment services (sec. 13310 of the bill and sees. 1061 

and 83 of the Code) 

Present Law 

Partnership profits interest for services 

A protlts interest in a partnership is the right to receive future profits in the partnership 

but does not generally include any right to receive money or other property upon the immediate 

liquidation of the partnership. The treatment of the receipt of a profits interest in a partnership 

(sometimes referred to as a carried interest) in exchange for the performance of services has been 

the subject of controversy. Though courts have differed, in some instances, a taxpayer receiving 

a profits interest for performing services has not been taxed upon the receipt of the partnership 

interest. 627 

In 1993, the Internal Revenue Service, referring to the litigation of the tax treatment of 

receiving a partnership profits interest and the results in the cases, issued administrative guidance 

that the IRS generally would treat the receipt of a partnership profits interest for services as not a 

taxable event for the partnership or the partner. 628 Under this guidance, this treatment does not 

apply, however, if: (1) the profits interest relates to a substantially certain and predictable stream 

of income from partnership assets, such as income from high-quality debt securities or a highquality net lease; (2) within two years of receipt, the partner disposes of the profits interest; or (3) 

the profits interest is a limited partnership interest in a publicly traded partnership. More recent 

administrative guidance629 clarifies that this treatment applies with respect to substantially 

unvested profits interests provided the service partner takes into income his distributive share of 

partnership income, and the partnership does not deduct any amount either on grant or on vesting 

of the profits interest630 

By contrast, a partnership capital interest received for services is includable in the 

partner's income under generally applicable rules relating to the receipt of property for the 

Only a handful of cases have addressed this issue. Though one case required the value to be included 

currently. where value was easily determined by a sale of the profits interest soon after receipt (Diamond v. 

Commissioner. 56 T.C. 530 (1971). affd 492 F.2d 286 (7th Cir. 1974)), a more recent case concluded that 

partnership profits interests were not includable on receipt. because the profits interests were speculative and 

without fair market value (Campbell v. Commissioner, 943 F. 2d 815 (8th Cir. 1991)). 

608 Rev. Proc. 93-27 (1993-2 C.B. 343). citing tl1e Diamond and Campbell cases. supra. 

629 Rev. Proc. 2001-43 (2001-2 C.B. 191). This result applies llllder the guidance even if the interest is 

substantially nonvested on the date of grant. 

630 A similar result would occur under the "safe harbor'' election under proposed regulations regarding the 

application of section 83 to the compensatory transfer of a partnership interest. REG-105346-03. 70 Fed. Reg. 

29675 (May 24, 2005). 
194 

performance of services. 631 A partnership capital interest for this purpose is an interest that 

would entitle the receiving partner to a share of the proceeds if the partnership's assets were sold 

at fair market value and the proceeds were distributed in liquidation632 

Property received for services under section 83 

In general 

Section 83 governs the amount and timing of income and deductions attributable to 

transfers of property in connection with the performance of services. If property is transferred in 

connection with the performance of services, the person perfonning the services (the "service 

provider") generally must recognize income for the taxable year in which the property is first 

substantially vested (i.e., transferable or not subject to a substantial risk offorfeiture)633 The 

amount includible in the service provider's income is the excess of the fair market value of the 

property over the amount (if any) paid for the property. A deduction is allowed to the person for 

whom such services are performed (the "service recipient") equal to the amount included in 

gross income by the service provider634 The deduction is allowed for the taxable year of the 

service recipient in which or with which ends the taxable year in which the amount is included in 

the service provider's income. 

Property that is subject to a substantial risk offorfeiture and that is not transferable is 

generally referred to as "substantially nonvested." Property is subject to a substantial risk of 

forfeiture if the individual's right to the property is conditioned on the future performance (or 

refraining from performance) of substantial services. In addition, a substantial risk of forfeiture 

exists if the right to the property is subject to a condition other than the performance of services, 

631 Sees. 61 and 83: Treas. Reg. sec. 1.721-l(b)(l): sec US. v. Frazell, 335 F.2d 487 (5th Cir. 1964), ccrt. 

denied. 380 U.S. 961 (1965). 

Rev. Proc. 93-27. !993-2 C.B. 343. 

633 The Department of Treasury has issued proposed regulations regarding the application of section 83 to 

the compensatory transfer of a partnership interest. 70 Fed. Reg. 29675 (May 24, 2005). The proposed regulations 

provide that a partnership interest is "property" for purposes of section 83. Thus, a compensatory transfer of a 

partnership interest is includible in the service provider's gross income at the time that it first becomes substantially 

vested (or, in the case of a substantially nonvested partnership interest. at the time of grant if a section 83(b) election 

is made). However, because the fair market value of a compensatory partnership interest is often difficult to 

detenuine, the proposed regulations also permit a partnership and a partner to elect a safe harbor nndcr which the 

fair market value of a compensatory partnership interest is treated as being eqnalto the liquidation value of that 

interest. Therefore, in the case of a tmc profits interest in a partnership (one under which the partner would be 

entitled to nothing if the partnership were liquidated immediately following the grant), under the proposed 

regulations, the grant of a substantially vested profits interest (or. if a section 83(b) election is made. t11e grant of a 

substantially nonvested profits interest) results in no income inclusion under section 83 because the fair market 

value of the property received by the service provider is zero. The proposed safe harbor is subject to a number of 

conditions. For example, the election cannot be made retroactively and must apply to all compensatory partnership 

transfers that occur during the period that tl1e election is in effect. 

634 Sec. 83(h). 
195 

provided that the condition relates to a purpose of the transfer and there is a substantial 

possibility that the property will be forfeited if the condition does not occur. 

Section 83(b) election 

Under section 83(b), even if the property is substantially nonvested at the time of transfer, 

the service provider may nevertheless elect within 30 days of the transfer to recognize income 

for the taxable year of the transfer. Such an election is referred to as a "section 83(b) election." 

The service provider makes an election by filing with the IRS a written statement that includes 

the fair market value of the property at the time of transfer and the amount (if any) paid for the 

property. The service provider must also provide a copy of the statement to the service recipient. 

Pass-through tax treatment of partnerships 

The character of partnership items passes through to the partners, as if the items were 

realized directly by the partners. 635 Thus, for example, long-term capital gain of the partnership 

is treated as long-term capital gain in the hands of the partners. 

A partner holding a partnership interest includes in income its distributive share (whether 

or not actually distributed) of partnership items of income and gain, including capital gain 

eligible for the lower tax rates. A partner's basis in the partnership interest is increased by any 

amount of gain thus included and is decreased by losses. These basis adjustments prevent double 

taxation of partnership income to the partner, preserving the partnership's tax status as a passthrough entity. Money distributed to the partner by the partnership is taxed to the extent the 

amount exceeds the partner's basis in the partnership interest. 

Net long-term capital gain 

In the case of an individual, estate, or trust, any adjusted net capital gain which otherwise 

would be taxed at the 10- or IS-percent rate is not taxed. Any adjusted net capital gain which 

otherwise would be taxed at rates over 15 percent and below 39.6 percent is taxed at a IS-percent 

rate. Any adjusted net capital gain which otherwise would be taxed at a 39.6-percent rate is 

taxed at a 20-percent rate 636 

035 Sec. 702. 

636 Sec. I. Other rates apply to certain types of gain. The unrecapturcd section 1250 gain is taxed at a 

maximum rate of 25 percent. and 28-percent rate gain is taxed at a maximum rate of 28 percent. Any amount of 

unrecaptured section 1250 gain or 28-percent rate gain otherwise taxed at a I 0- or 15-percent rate is taxed at the 

otherwise applicable rate. In addition, a tax is imposed on net investment income in the case of an individual, estate. 

or trust. In the case of an individuaL the tax is 3.8 percent of the lesser of net investment income, which includes 

gains and dividends. or the excess of modified adjusted gross income over the threshold amount. The threshold 

amount is $250.000 in the case of a joint rctun1 or stm•iving spouse, $125.000 in the case of a married individual 

filing a separate return, and $200.000 in the case of any other individual. 
196 

In general, gain or loss reflected in the value of an asset is not recognized for income tax 

purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, 637 any 

gain generally is included in income. 

Short-term capital gain means gain from the sale or exchange of a capital asset held for 

not more than one year, if and to the extent such gain is taken into account in computing gross 

income. Net short-term capital loss means the excess of short term capital losses for the taxable 

year over the short-term capital gains for the taxable year. 

Net long-term capital gain means the excess of long-term capital gains for the taxable 

year over the long-term capital losses for the taxable year. 

Net capital gain is the excess of the net long-term capital gain for the taxable year over 

the net short-term capital loss for the year. Gain or loss is treated as long-term if the asset is held 

for more than one year. 

The adjusted net capital gain of an individual is the net capital gain reduced (but not 

below zero) by the sum of the 28-percent rate gain and the unrecaptured section 1250 gain. The 

net capital gain is reduced by the amount of gain that the individual treats as investment income 

for purposes of determining the investment interest limitation 638 

Reasons for Change 

The Committee is concerned about Federal tax issues arising from the use of carried 

interests in asset management businesses. In these arrangements, the investment fund typically 

is a partnership. The investors are limited partners that contribute capital to acquire fund assets, 

and the fund manager is the general partner of the investment fund partnership. The general 

partner is itself a partnership of individuals with investment management expertise. The fund 

manager receives management fees along with a carried interest. The arrangement requires the 

performance of services by individuals whose professional skill as fund managers generates 

capital income for investors in the fund. 

Because the character of a partnership's income passes through to partners, income from 

a carried interest may take the form oflong-term or short-term capital gain realized by the 

6'"' Sec. 1221. A capital asset generally means any property except (1) inventory, stock in trade, or 

property held primarily for sale to customers in the ordinary course of the taxpayer's trade or business. (2) 

depreciable or real property used in the taxpayer's trade or business, (3) specified literary or artistic property. ( 4) 

business accounts or notes receivable. (5) certain U.S. publications, (6) certain commodity derivative financial 

instruments. (7) hedging transactions. and (8) business supplies. In addition. the net gain from the disposition of 

certain property used in the taxpayer· s trade or business is treated as long-tem1 capital gain. Gain from the 

disposition of depreciable personal property is not treated as capital gain to the extent of all previous depreciation 

allowances. Gain from the disposition of depreciable real property is generally not treated as capital gain to the 

extent of the depreciation allowances in excess of the allowances available under the straight-line method of 

depreciation. 

638 Sec. 163(d). 
197 

underlying investment fund as the fund sells off investment assets. Long-term capital gain 

allocated to individual partners may represent compensation for their services as fund managers. 

The Committee believes that the lower rates that apply to long-term capital gain from 

sales or exchanges of capital assets of partnerships should not be available to holders of 

applicable partnership interests unless an extended holding period requirement has been met. 

Therefore, the Committee bill imposes a three-year holding period (not the generally applicable 

one-year holding period) in the case oflong-term capital gain from applicable partnership 

interests. If the holder of an applicable partnership interest is allocated gain from the sale of 

property held for less than three years, that gain is treated as short-term capital gain and is 

subject to tax at the rates applicable to ordinary income. The Committee believes that providing 

a three-year holding period requirement on certain capital gains for holders of applicable 

partnership interests strikes the right balance for economic growth and fairness without stifling 

investment. 

Explanation of Provision 

General rule 

The provision provides for a three-year holding period in the case of certain net long-term 

capital gain with respect to any applicable partnership interest held by the taxpayer, 

notwithstanding the rules of section 83 or any election in effect under section 83(b ). 

Short-term capital gain 

The provision treats as short-term capital gain taxed at ordinary income rates the amount 

of the taxpayer's net long-term capital gain with respect to an applicable partnership interest for 

the taxable year that exceeds the amount of such gain calculated as if a three-year (not one-year) 

holding period applies. In making this calculation, the provision takes account oflong-term 

capital losses calculated as if a three-year holding period applies. 

A special rule provides that, as provided in regulations or other guidance issued by the 

Secretary, this rule does not apply to income or gain attributable to any asset that is not held for 

portfolio investment on behalf of third party investors. Third party investor means a person ( l) 

who holds an interest in the partnership that is not property held in connection with an applicable 

trade or business (defined below) with respect to that person, and (2) who is not and has not been 

actively engaged in directly or indirectly providing substantial services for the partnership or any 

applicable trade or business (and is (or was) not related to a person so engaged). A related 

person for this purpose is a family member (within the meaning of attribution rules639) or 

colleague, that is a person who performed a service within the current calendar year or the 

preceding three calendar years in any applicable trade or business in which or for which the 

taxpayer performed a service. 

639 Sec. 318(a)(l). 
198 

Applicable partnership interest 

An applicable partnership interest is any interest in a partnership that, directly or 

indirectly, is transferred to (or held by) the taxpayer in connection with performance of services 

in any applicable trade or business. The services may be performed by the taxpayer or by any 

other related person or persons in any applicable trade or business. 1t is intended that partnership 

interests shall not fail to be treated as transferred or held in connection with the performance of 

services merely because the taxpayer also made contributions to the partnership, and the 

Treasury Department is directed to provide guidance implementing this intent. An applicable 

partnership interest does not include an interest held by a person who is employed by another 

entity that is conducting a trade or business (which is not an applicable trade or business) and 

who provides services only to the other entity. 

An applicable partnership interest does not include an interest in a partnership directly or 

indirectly held by a corporation. For example, if two corporations form a partnership to conduct 

a joint venture for developing and marketing a pharmaceutical product, the partnership interests 

held by the two corporations are not applicable partnership interests. 

An applicable partnership interest does not include any capital interest in a partnership 

giving the taxpayer a right to share in partnership capital commensurate with the amount of 

capital contributed (as of the time the partnership interest was received), or commensurate with 

the value of the partnership interest that is taxed under section 83 on receipt or vesting of the 

partnership interest. For example, in the case of a partner who holds a capital interest in the 

partnership with respect to capital he or she contributed to the partnership, if the partnership 

agreement provides that the partner's share of partnership capital is commensurate with the 

amount of capital he or she contributed (as of the time the partnership interest was received) 

compared to total partnership capital, the partnership interest is not an applicable partnership 

interest to that extent. 

Applicable trade or business 

An applicable trade or business means any activity (regardless of whether the activity are 

conducted in one or more entities) that consists in whole or in part of the following: (1) raising 

or returning capital, and either (2) investing in (or disposing of) specified assets (or identifying 

specified assets for investing or disposition), or (3) developing specified assets. 

Developing specified assets takes place, for example, if it is represented to investors, 

lenders, regulators, or others that the value, price, or yield of a portfolio business may be 

enhanced or increased in connection with choices or actions of a service provider or of others 

acting in concert with or at the direction of a service provider. Services performed as an 

employee of an applicable trade or business are treated as performed in an applicable trade or 

business for purposes of this rule. Merely voting shares owned does not amount to development; 

for example, a mutual fund that merely votes proxies received with respect to shares of stock it 

holds is not engaged in development. 
199 

Specified assets 

Under the provision, specified assets means securities (generally as defined under rules 

for mark-to-market accounting for securities dealers), commodities (as defined under rules for 

mark-to-market accounting for commodities dealers), real estate held for rental or investment, 

cash or cash equivalents, options or derivative contracts with respect to such securities, 

commodities, real estate, cash or cash equivalents, as well as an interest in a partnership to the 

extent of the partnership's proportionate interest in the foregoing. A security for this purpose 

means any (I) share of corporate stock, (2) partnership interest or beneficial ownership interest 

in a widely held or publicly traded partnership or trust, (3) note, bond, debenture, or other 

evidence of indebtedness, (4) interest rate, currency, or equity notional principal contract, (5) 

interest in, or derivative financial instrument in, any such security or any currency (regardless of 

whether section 1256 applies to the contract), and (6) position that is not such a security and is a 

hedge with respect to such a security and is clearly identified. A commodity for this purpose 

means any (I) commodity that is actively traded, (2) notional principal contract with respect to 

such a commodity, (3) interest in, or derivative financial instrument in, such a commodity or 

notional principal contract, or (4) position that is not such a commodity and is a hedge with 

respect to such a commodity and is clearly identified. For purposes of the provision, real estate 

held for rental or investment does not include, for example, real estate on which the holder 

operates an active farm. 

A partnership interest, for purposes of determining the proportionate interest of a 

partnership in any specified asset, includes any partnership interest that is not otherwise treated 

as a security for purposes of the provision (for example, an interest in a partnership that is not 

widely held or publicly traded). For example, assume that a hedge fund acquires an interest in an 

operating business conducted in the form of a non-publicly traded partnership that is not widely 

held; the partnership interest is a specified asset for purposes of the provision. 

Transfer of applicable partnership interest to related person 

If a taxpayer transfers any applicable partnership interest, directly or indirectly, to a 

person related to the taxpayer, then the taxpayer includes in gross income as short-term capital 

gain so much of the taxpayer's net long-term capital gain attributable to the sale or exchange of 

an asset held for not more than three years as is allocable to the interest The amount included as 

short-term capital gain on the transfer is reduced by the amount treated as short-term capital gain 

on the transfer for the taxable year under the general rule of the provision (that is, amounts are 

not double-counted). A related person for this purpose is a family member (within the meaning 

of attribution rules 640) or colleague, that is a person who performed a service within the current 

calendar year or the preceding three calendar years in any applicable trade or business in which 

or for which the taxpayer performed a service. 

Reporting requirement 

The Secretary is directed to require reporting (at the time in the manner determined by 

the Secretary) necessary to carry out the purposes of the provision. The penalties otherwise 

6'

10 Sec. 3l8(a)(l). 
200 

applicable to a failure to report to partners under section 6031(b) apply to failure to report under 

this requirement. 

Regulatory authority 

The Treasury Department is directed to issue regulations or other guidance necessary to 

carry out the provision. Such guidance is to address prevention of the abuse of the purposes of 

the provision, including through the allocation of income to tax-indifferent parties. Guidance is 

also to provide for the application of the provision in the case of tiered structures of entities. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 
201 

PART V- BUSINESS CREDITS 

1. Modification of orphan drug credit (sec. 13401 of the bill and sec. 45C of the Code) 

Present Law 

A 50-percent business tax credit is available for qualified clinical testing expenses 

incurred in the testing of certain drugs to treat rare diseases or conditions. 641 Such drugs are 

generally referred to as "orphan drugs" and the credit is generally referred to as the "orphan drug 

credit." Qualified clinical testing expenses are costs incurred to test an orphan drug after the 

drug has been approved for human testing by the Food and Drug Administration ("FDA") but 

before the drug has been approved for sale by the FDA. 642 A rare disease or condition is defined 

as one that (l) affects fewer than 200,000 persons in the United States, or (2) affects more than 

200,000 persons, but for which there is no reasonable expectation that businesses could recoup 

the costs of developing a drug for such disease or condition from sales in the United States of the 

drug. 643 

Amounts included in computing the credit under this section are excluded from the 

computation of the research credit under section 41. 644 Deductions allowed to a taxpayer are 

reduced by an amount equal to 100 percent of the taxpayer's orphan drug credit determined for 

the taxable year. 645 

Reasons for Change 

The Committee believes that the reform of many existing tax incentives, including the 

orphan drug credit, makes the system simpler and fairer for all individuals, families, and 

businesses, and allows for lower tax rates. The Committee further believes that the reform of 

this provision is an important part of its larger tax reform effort. 

Explanation of Provision 

The provision reduces the credit rate to 27.5 percent of qualified clinical testing expenses. 

The proposal also adds a disclosure requirement, requiring the Secretary of the Treasury to 

disclose the name of the orphan drug, the amount of credits claimed with respect to the drug, the 

name of the orphan disease being treated by the drug, and the name of the taxpayer claiming the 

credits. 

641 Sec. 45C. 

Sec. ~5C(b ). 

643 Sec. 45C( d). 

Sec. 45C(c). 

615 Sec. 280C(b). 
202 

Effective Date 

The provision applies to amounts paid or incurred in taxable years beginning after 

December 31, 2017. 

2. Rehabilitation credit limited to certified historic structures (sec. 13402 of the bill and 

sec. 47 of the Code) 

Present Law 

Section 47 provides a two-tier tax credit for rehabilitation expenditures. 

A 20-percent credit is provided for qualified rehabilitation expenditures with respect to a 

certified historic structure. For this purpose, a certified historic structure means any building that 

is listed in the National Register, or that is located in a registered historic district and is certified 

by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance 

to the district. 

A 10-percent credit is provided for qualified rehabilitation expenditures with respect to a 

qualified rehabilitated building, which generally means a building that was first placed in service 

before 1936. A pre-1936 building must meet requirements with respect to retention of existing 

external walls and internal structural framework of the building in order for expenditures with 

respect to it to qualify for the 1 0-percent credit. A building is treated as having met the 

substantial rehabilitation requirement under the 10-percent credit only if the rehabilitation 

expenditures during the 24-month period selected by the taxpayer and ending within the taxable 

year exceed the greater of(l) the adjusted basis of the building (and its structural components), 

or (2) $5,000. 

The provision requires the use of straight-line depreciation or the alternative depreciation 

system in order for rehabilitation expenditures to be treated as qualified under the provision. 

Reasons for Change 

The Committee believes that limiting the rehabilitation credit to certified historic 

structures targets this incentive more effectively to what the Committee believes is its core 

purpose, encouraging the preservation and rehabilitation of historic structures. Furthermore, 

limiting the credit contributes to the effort to lower tax rates. 

Explanation of Provision 

The provision repeals the I 0-percent credit for pre-1936 buildings. The provision retains 

the 20-percent credit for qualified rehabilitation expenditures with respect to a certified historic 

structure, with a modification. Under the provision, the credit allowable for a taxable year 

during the five-year period beginning in the taxable year in which the qualified rehabilitated 

building is placed in service is an amount equal to the ratable share. The ratable share for a 

taxable year during the five-year period is amount equal to 20 percent of the qualified 

rehabilitation expenditures for the building, as allocated ratably to each taxable year during the 

five-year period. It is intended that the sum of the ratable shares for the taxable years during the 
203 

five-year period does not exceed l 00 percent of the credit for qualified rehabilitation 

expenditures for the qualified rehabilitated building. 

Effective Date 

The provision applies to amounts paid or incurred after December 31, 2017. A transition 

rule provides that in the case of qualified rehabilitation expenditures (for either a certified 

historic structure or a pre-1936 building), with respect to any building owned or leased (as 

provided under present law) by the taxpayer at all times on and after January I, 2018, the 24-

month period selected by the taxpayer (under section 47(c)(l )(C)) is to begin not later than the 

end of the 180-day period beginning on the date of the enactment of the Act, and the 

amendments made by the provision apply to such expenditures paid or incurred after the end of 

the taxable year in which such 24-month period ends. 

3. Repeal of deduction for certain unused business credits (sec. 13403 of the bill and 

sec. 196 of the Code) 

Present Law 

The general business credit ("GBC") consists of various individual tax credits allowed 

with respect to certain qualified expenditures and activities. 646 In general, the various individual 

tax credits contain provisions that prohibit "double benefits," either by denying deductions in the 

case of expenditure-related credits or by requiring income inclusions in the case of activityrelated credits. Unused credits may be carried back one year and carried forward 20 years. 647 

Section 196 allows a deduction to the extent that certain portions of the GBC expire 

unused after the end of the carry forward period. In general, 100 percent of the unused credit is 

allowed as a deduction in the taxable year after such credit expired. However, with respect to the 

investment credit determined under section 46 (other than the rehabilitation credit) and the 

research credit determined under section 41 (a) (for a taxable year beginning before January I, 

1990), section 196limits the deduction to 50 percent of such unused credits648 

Reasons for Change 

The Committee believes that the repeal of many existing tax incentives, including the 

deduction for certain unused business credits, makes the system simpler and fairer for all 

individuals, families, and businesses, and allows for lower tax rates. The Committee further 

believes that the repeal of this provision is a necessary part of its larger tax reform effort. 

646 Sec. 38. 

Sec. 39. 

648 Sec. 196(d). 
204 

Explanation of Provision 

This provision repeals the deduction for certain unused business credits. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

4. Employer credit for paid family and medical leave (sec. 13404 of the bill and new sec. 

45S of the Code) 

Present Law 

Present law does not provide a credit to employers for compensation paid to employees 

while on leave. 

Reasons for Change 

The Committee believes this provision offers employers incentives to voluntarily provide 

paid family or medical leave to their employees who face complicated demands of caring for 

aging parents and young children while managing careers and workplace schedules. By 

improving flexibility for working families, the Committee believes this provision strengthens the 

workforce and its ability to compete in a global economy. 

Explanation of Provision 

This provision allows eligible employers to claim a general business credit equal to 

12.5 percent of the amount of wages paid to qualifying employees during any period in which 

such employees are on family and medical leave if the rate of payment under the program is 

50 percent of the wages nom1ally paid to an employee. The credit is increased by 

0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of 

payment exceeds 50 percent. The maximum amount of family and medical leave that may be 

taken into account with respect to any employee in a taxable year for purposes of the credit is 12 

weeks. 

An eligible employer is one that allows all qualifying full-time employees not less than 

two weeks of annual paid family and medical leave, and who allows all less-than-full-time, 

qualifying employees a commensurate amount of leave on a pro rata basis. For purposes of this 

requirement, leave paid for or required by a State or local government is not taken into account. 

A qualifying employee is an employee as defined in section 3(e) of the Fair Labor Standards Act 

of 1938 who has been employed by the employer for one year or more, and who for the 

preceding year, had compensation not in excess of 60 percent of the compensation threshold for 

highly compensated employees. 649 

049 Sec. 414(g)(1)(B) ($120.000 for 2017). 
205 

Family and medical leave is defined as leave described under section 102(a)(l)(A)-(E) or 

1 02(a)(3) of the Family and Medical Leave Act of 1993 650 If an employer provides paid leave 

as vacation leave, personal leave, or other medical or sick leave, this paid leave would not be 

considered to be family and medical leave. 

This provision would not apply to wages paid in taxable years beginning after 

December 31,2019. 

Effective Date 

The provision is generally effective for wages paid in taxable years beginning after 

December 31, 2017. 

5. Low-income housing credit modifications (sees. 13411 through 13416 of the bill and 

sec. 42 of the Code) 

P1·esent Law 

In general 

The low-income housing credit may be claimed over a 1 0-year period for the cost of 

building rental housing a sufficient portion of which is rent restricted and occupied by tenants 

having incomes below specified levels651 The amount of the credit for any taxable year in the 

credit period is the applicable percentage of the qualified basis of each qualified low-income 

building. The qualified basis of any qualified low-income building for any taxable year equals 

the applicable fraction of the eligible basis of the building. Eligible basis is generally adjusted 

basis at the close of the first taxable year of the credit period. 

Qualified low-income housing project 

To qualify for the low-income housing credit, the incomes of the tenants must satisfy 

certain targeting rules. A project is a qualified low-income housing project if20 percent or more 

of the residential units in such project are both rent-restricted and occupied by individuals whose 

income is 50 percent or less of area median gross income (the "20-50 test"). Alternatively, a 

project is a qualified low-income housing project if 40 percent or more of the residential units in 

such project are both rent-restricted and occupied by individuals whose income is 60 percent or 

less of area median gross income (the "40-60 test"). A unit is rent-restricted if the gross rent 

does not exceed 30 percent of the applicable income limitation. The owner must elect to apply 

050 In order to be an eligible employer. an employer must provide certain protections applicable under the 

Family and Medical Leave Act of 1993, regardless of whether they otherwise apply. Specifically. the employer 

must provide paid family and medical leave in compliance with a policy which ensures that the employer will not 

interfere with. restrain. or deny the exercise of or the attempt to exercise, any right provided under the policy and 

will not discharge or in any other rnarmer discriminate against any individual for opposing any practice prohibited 

by the policy. 

651 Sec. 42. 
206 

either the 20-50 test or the 40-60 test. Operators of qualified low-income housing projects must 

annually certify that such project meets the requirements for qualification, including meeting the 

20-50 test or the 40-60 test. For many projects every unit satisfies the income targeting rules 

such that the applicable fraction is 100 percent, and the eligible basis of the entire project 

qualifies for the credit. 

Qualified allocation plan 

Each State housing credit agency must have a qualified allocation plan for allocating lowincome housing credits. 652 First, the qualified action plan must give preference in allocating 

housing credit dollar amounts among project candidates: (1) serving the lowest income tenants, 

(2) obligated to serve qualified tenants for the longest periods, and (3) which are located in 

qualified census tracts and the development of which contributes to a concerted community 

revitalization plan. The qualified allocation plan must also set forth selection criteria to be used 

to determine housing priorities of the housing credit agency that are appropriate to local 

conditions. 653 Third, the qualified allocation plan must provide a procedure that the agency will 

follow in monitoring for, and notifying the IRS of, noncompliance with section 42 and in 

monitoring for noncompliance with habitability standards through regular site visits. 

Recapture 

To avoid adverse tax consequences, a building must remain in compliance with the 20-50 

test or the 40-60 test, as applicable, for the period beginning on the first day of the first taxable 

year of the credit period of such building and ending 15 years from such date. 

If as of the close of any taxable year in the 15-year compliance period, the amount of 

qualified basis of any building with respect to the taxpayer is less than the amount of such basis 

as of the close of the preceding taxable year, the excess portion of the accelerated credit is 

recaptured, with interest, for all prior years. 

The recapture does not apply to a reduction in qualified basis by reason of a casualty loss 

to the extent such loss is restored by reconstruction or replacement within a reasonable period 

established by the Secretary. 

The owner of a building that is beyond the first year of the credit period, and that, 

because of a disaster that caused the President to issue a major disaster declaration, has suffered 

a reduction in qualified basis that would cause it to be subject to recapture or loss of credit will 

not be subject to recapture or loss if the building's qualified basis is restored within a reasonable 

Sec. 42(m)(l)(B) 

653 The selection criteria set forth in a qualified allocation plan mnst include: (I) project location: 

(2) housing needs characteristics: (3) project characteristics, including whether the project includes the use of 

existing housing as part of a community revitalization plan: (4) sponsor characteristics: (5) tenant populations with 

special housing needs; (6) public housing waiting lists; (7) tenant populations of indiYiduals with children: 

(8) projects intended for eventual tenant ownership; (9) the energy efficiency of the project: and (I 0) the historic 

nature of the project. Sec. 42(m)(l)(C). 
207 

period. 654 The housing agency that monitors the project for compliance may determine what 

constitutes a reasonable period, but in no instance is it allowed to extend beyond the end of the 

25th month following the close of the month of the major disaster declaration. To determine the 

credit amount allowable during the reconstruction or replacement period, an owner of the 

building must use the building's qualified basis at the end of the taxable year that preceded the 

President's major disaster declaration. These rules only apply to property located in an area 

designated as a major disaster area by the President of the United States. These rules do not 

apply to casualty losses in general. 

Rights of first refusal 

Under present law, any determination as to whether Federal income tax benefits are 

allowable to a taxpayer with respect to a qualified low income building is made without regard to 

whether the tenants (or certain other entities) are given the right of first refusal to purchase the 

property after the end of the compliance period. Tenants (in cooperative form or otherwise), the 

resident management corporation of the building, a qualified nonprofit organization, or 

government agency may exercise the right of first refusal to purchase the property at a minimum 

purchase price after the end of the compliance period655 

Reasons for Change 

The low income housing credit is an important tool in providing affordable housing. The 

Committee believes making certain modifications to the credit to preserve and encourage such 

housing are appropriate. For example, the committee understands from stakeholders that the rule 

relating to the right of first refusal is not operating as intended and therefore believes it is 

appropriate to make modifications to allow for a purchase option with respect to the property or a 

partnership interest relating to the property. 

Explanation of Provision 

The provision incorporates several provisions ofS.548, the Affordable Housing Credit 

Improvement Act of2017: 

Reconstruction or replacement period after casualty loss: The provision provides that the 

determination of recapture will not be made with respect to a property the basis of which is 

affected by a casualty loss until a reasonable period established by the applicable housing agency 

has expired. The period established by the applicable housing is not to exceed 25 months from 

the date of the casualty. 

Modification of rights relating to building purchase: The provision changes the right of 

first refusal (held by tenants, resident management corporation, qualified nonprofit organization, 

or government agency) to a purchase option for the property or related partnership interest. The 

determination of whether Federal income tax benefits are allowable to a taxpayer with respect to 

654 Rev. Proc. 2014-49.2014-37 I.R.B. 535 (9/08/2014). 

655 Sec. 42(i)(7). 
208 

a qualified low income building is made without regard to such a purchase option at the present 

law minimum purchase price. 

Determination of community revitalization plan to be made by State housing credit 

agency: The provision provides that the criteria established by a housing credit agency for 

determining whether the development of a project contributes to a concerted community 

development plan is to take into account any factors the agency deems appropriate, including the 

extent to which the proposed plan (1) is geographically specific; (2) outlines a clear plan for 

implementation and goals for outcomes; (3) includes a strategy for applying for or obtaining 

commitments of public or private investment (or both) in nonhousing infrastructure, amenities, 

or services; and (4) demonstrates the need for community revitalization. 

Prohibition oflocal approval and contribution requirements: Under the provision, the 

selection criteria under a qualified allocation plan shall not include consideration of(!) any 

support or opposition with respect to the project from local or elected leaders, or (2) any local 

government contribution to the project, except to the extent such contribution is taken into 

account as part of a broader consideration of the project's ability to leverage outside funding 

sources, and is not prioritized over any other source of outside funding. 

Selection criteria under qualified allocation plans: The provision requires that qualified 

allocation plans include selection criteria that take into consideration of the affordable housing 

needs of individuals in the State who are members oflndian tribes. 

Affordable housing credit: The provision renames the "Low Income Housing Credit" the 

"Affordable Housing Credit". 

Effective Date 

Section 13411 of the bill (reconstruction or replacement period after casualty loss) 

applies to casualty losses arising after the date of enactment. 

Section 13412 of the bill (modification of rights relating to building purchase) applies to 

agreements entered into or amended after the date of enactment. 

Section 13413 of the bill (determination of community revitalization plan to be made by 

housing credit agency) applies to allocations of housing credit dollar amounts made under 

qualified allocation plans adopted after December 31, 2017. 

Section 13414 of the bill (prohibition oflocal approval and contribution requirements) 

applies to allocations of housing credit dollar amounts made after December 31, 2017. 

Section 13415 of the bill (selection criteria under qualified allocation plans) applies to 

allocations of credit made after December 31, 2017. 

Section 13416 (change in name to affordable housing credit) is effective on the date of 

enactment. 
209 

PART VI- PROVISIONS RELATED TO SPECIFIC ENTITIES AND INDUSTRIES 

1. Treatment of gain or loss of foreign persons from sale or exchange of interests in 

partnerships engaged in trade or business within the United States (sec. 13501 of the bill 

and sees. 864( c) and 1446 of the Code) 

Present Law 

In general 

A partnership generally is not treated as a taxable entity, but rather, income of the 

partnership is taken into account on the tax returns of the partners. The character (as capital or 

ordinary) of partnership items passes through to the partners as if the items were realized directly 

by the partners. 656 A partner holding a partnership interest includes in income its distributive 

share (whether or not actually distributed) of partnership items of income and gain, including 

capital gain eligible for the lower tax rates, and deducts its distributive share of partnership items 

of deduction and loss. A partner's basis in the partnership interest is increased by any amount of 

gain and decreased by ay amount oflosses thus included. These basis adjustments prevent 

double taxation of partnership income to the partner. Money distributed to the partner by the 

partnership is taxed to the extent the amount exceeds the partner's basis in the partnership 

interest. 

Gain or loss from the sale or exchange of a partnership interest generally is treated as 

gain or loss from the sale or exchange of a capital asset. 657 However, the amount of money and 

the fair market value of property received in the exchange that represent the partner's share of 

certain ordinary income-producing assets of the partnership give rise to ordinary income rather 

than capital gain. 658 In general, a partnership does not adjust the basis of partnership property 

following the transfer of a partnership interest unless either the partnership has made a one-time 

election to do so, 659 or the partnership has a substantial built-in loss immediately after the 

transfer. 660 If an election is in effect or the partnership has a substantial built-in loss immediately 

after the transfer, adjustments are made with respect to the transferee partner. These adjustments 

are to account for the difference between the transferee partner's proportionate share of the 

adjusted basis of the partnership property and the transferee partner's basis in its partnership 

" 56 Sec. 702. 

65' Sec. 741: Pollackv. Commissioner. 69 T.C. 142 (1977). 

658 Sec. 751(a). These ordinary income· producing assets are unrealized receivables of the partnership or 

inventory items of the partnership ("751 assets'"). 

659 Sec. 754. 

660 Sec. 743(a). 
210 

interest661 The effect of the adjustments on the basis of partnership property is to approximate 

the result of a direct purchase of the property by the transferee partner. 

Source of gain or loss on transfer of a partnership interest 

A foreign person that is engaged in a trade or business in the United States is taxed on 

income that is "effectively connected" with the conduct of that trade or business ("effectively 

connected gain or loss"). 662 Partners in a partnership are treated as engaged in the conduct of a 

trade or business within the United States if the partnership is so engaged. 663 Any gross income 

derived by the foreign person that is not effectively connected with the person's U.S. business is 

not taken into account in determining the rates of U.S. tax applicable to the person's income 

from the business. 664 

Among the factors taken into account in determining whether income, gain, or loss is 

effectively connected gain or loss are the extent to which the income, gain, or loss is derived 

from assets used in or held for use in the conduct of the U.S. trade or business and whether the 

activities of the trade or business were a material factor in the realization of the income, gain, or 

loss (the "asset use" and "business activities" tests). 665 In determining whether the asset use or 

business activities tests are met, due regard is given to whether such assets or such income, gain, 

or loss were accounted for through such trade or business. Thus, notwithstanding the general 

rule that source of gain or loss from the sale or exchange of personal property is generally 

determined by the residence of the seller, 666 a foreign partner may have effectively connected 

income by reason of the asset use or business activities of the partnership in which he is an 

investor. 

Special rules apply to treat gain or loss from disposition of U.S. real property interests as 

effectively connected with the conduct of a U.S. trade or business667 To the extent that 

consideration received by the nonresident alien or foreign corporation for all or part of its interest 

in a partnership is attributable to a U.S. real property interest, that consideration is considered to 

661 Sec. 743(b). 

600 Sees. 87l(b). 864(c), 882. 

663 Sec. 875. 

&~ Sees. 87l(b)(2), and 882(a)(2). Non-business income received by foreign persons from U.S. sources is 

generally subject to tax on a gross basis at a rate of30 percent and is collected by withholding at the source of the 

payment The income of non-resident aliens or foreign corporations that is subject to tax at a rate of 30-percent is 

fixed, detenninablc. annual or periodical income that is not effectively connected with the conduct of a U.S. trade or 

business. 

665 Sec. 864(c)(2). 

666 Sec. 865(a). 

66- Sec. 897(a), (g). 
211 

be received from the sale or exchange in the United States of such property. 668 In certain 

circumstances, gain attributable to sales of U.S. real property interests may be subject to 

withholding tax of ten percent of the amount realized on the transfer. 669 

Under a 1991 revenue ruling, in determining the source of gain or loss from the sale or 

exchange of an interest in a foreign partnership, the IRS applied the asset-use test and business 

activities test at the partnership level to determine the extent to which income derived from the 

sale or exchange is effectively connected with that U.S. business. 670 Under the ruling, if there is 

unrealized gain or loss in partnership assets that would be treated as effectively connected with 

the conduct of a U.S. trade or business if those assets were sold by the partnership, some or all of 

the foreign person's gain or loss from the sale or exchange of a partnership interest may be 

treated as effectively connected with the conduct of a U.S. trade or business. However, a 2017 

Tax Court case rejects the logic of the ruling and instead holds that, generally, gain or loss on 

sale or exchange by a foreign person of an interest in a partnership that is engaged in a U.S. trade 

or business is foreign-source. 671 

Reasons for Change 

The Committee believes that where a partnership has built-in gain or loss on assets that, if 

sold by the partnership, would give rise to effectively connected gain or loss to a foreign partner, 

gain or loss on sale or exchange by that foreign partner of an interest in that partnership should 

not be ignored by the U.S. Federal income tax system. Nonetheless, the Committee does not 

believe that a foreign partner's entire gain or loss on such a sale necessarily should be treated as 

effectively connected with the conduct of a U.S. trade or business. Instead, the Committee 

believes it is appropriate to look through the partnership interest to the assets of the partnership, 

and treat gain or loss on sale or exchange of an interest in the partnership as effectively 

connected to a U.S. trade or business to the extent that gain or loss on sale of partnership assets 

would have been so treated. 

Explanation of Provision 

Under the provision, gain or loss from the sale or exchange of a partnership interest is 

effectively connected with a U.S. trade or business to the extent that the transferor would have 

had effectively connected gain or loss had the partnership sold all of its assets at fair market 

value as of the date of the sale or exchange. The provision requires that any gain or loss from the 

hypothetical asset sale by the partnership be allocated to interests in the partnership in the same 

manner as nonseparately stated income and loss. 

The provision also requires the transferee of a partnership interest to withhold I 0 percent 

of the amount realized on the sale or exchange of a partnership interest unless the transferor 

6

"" Sec. 897(g). 

669 Sec. 1445(e)(5). Temp. Treas. Reg. sec. 1.1445-llT(b).(d). 

6

"0 ReY. Rul. 91-32. 1991-1 C.B. 107. 

" 1 See Grecian Magnesite Mining v. Commissioner. 149 T.C. No.3 (July 13. 2017). 
212 

certifies that the transferor is not a nonresident alien individual or foreign corporation. If the 

transferee fails to withhold the correct amount, the partnership is required to deduct and withhold 

from distributions to the transferee partner an amount equal to the amount the transferee failed to 

withhold. 

The provision provides the Secretary of the Treasury with specific regulatory authority to 

address coordination with the nonrecognition provisions of the Code. 

Effective Date 

The provision is effective for sales and exchanges on or after November 27, 2017. 

2. Modification of the definition of substantial built-in loss in the case of transfer of 

partnership interest (sec. 13502 of the bill and sec. 743 of the Code) 

Present Law 

In general, a partnership does not adjust the basis of partnership property following the 

transfer of a partnership interest unless either the partnership has made a one-time election under 

section 754 to make basis adjustments, or the partnership has a substantial built-in loss 

immediately after the transfer. 672 

If an election is in effect, or if the partnership has a substantial built-in loss immediately 

after the transfer, adjustments are made with respect to the transferee partner. These adjustments 

are to account for the difference between the transferee partner's proportionate share of the 

adjusted basis of the partnership property and the transferee's basis in its partnership interest673 

The adjustments are intended to adjust the basis of partnership property to approximate the result 

of a direct purchase of the property by the transferee partner. 

Under the provision, a substantial built-in loss exists if the partnership's adjusted basis in 

its property exceeds by more than $250,000 the fair market value of the partnership property674 

Certain securitization partnerships and electing investment partnerships are not treated as having 

a substantial built-in loss in certain instances, and thus are not required to make basis 

adjustments to partnership property. 675 For electing investment partnerships, in lieu of the 

partnership basis adjustments, a partner-level loss limitation rule applies676 

Sec. 743(a). 

6"3 Sec. 743(b). 

6"

4 Sec. 743(d). 

See sec. 743(e) (alternative rules for electing investment partnerships) and sec. 743(1) (exception for 

securitization partnerships). 

6

" Unlike in the case of an electing investment partnership. the partner-level loss limitation rule docs nol 

apply for a securitization partnership. 
213 

Reasons for Change 

The Committee is concerned that the present-law definition of a substantial built-in loss 

for purposes of requiring adjustments to the basis of partnership property on the transfer of a 

partnership interest is too narrow and does not address situations in which the partnership's basis 

should be adjusted to prevent loss shifting or loss duplication. 

Explanation of Provision 

The provision modifies the definition of a substantial built-in loss for purposes of section 

743(d), affecting transfers of partnership interests. Under the provision, in addition to the 

present-law definition, a substantial built-in loss also exists if the transferee would be allocated a 

net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all 

partnership's assets in a fully taxable transaction for cash equal to the assets' fair market value, 

immediately after the transfer of the partnership interest. 

For example, a partnership of three taxable partners (pmtners A, B, and C) has not made 

an election pursuant to section 754. The partnership has two assets, one of which, Asset X, has a 

built-in gain of$\ million, while the other asset, Asset Y, has a built-in loss of$900,000. 

Pursuant to the partnership agreement, any gain on sale or exchange of Asset X is specially 

allocated to partner A. The three partners share equally in all other partnership items, including 

in the built-in loss in Asset Y. In this case, each of partner Band partner C has a net built-in loss 

of $300,000 (one third of the loss attributable to asset Y) allocable to his partnership interest. 

Nevertheless, the partnership does not have an overall built-in loss, but a net built-in gain of 

$100,000 ($1 million minus $900,000). Partner C sells his partnership interest to another person, 

D, for $33,333. Under the provision, the test for a substantial built-in loss applies both at the 

partnership level and at the transferee partner level. If the partnership were to sell all its assets 

for cash at their fair market value immediately after the transfer to D, D would be allocated a loss 

of $300,000 (one third of the built-in loss of $900,000 in Asset Y). A substantial built-in loss 

exists under the partner-level test added by the provision, and the partnership adjusts the basis of 

its assets accordingly with respect to D. 

Effective Date 

The provision applies to transfers of partnership interests after December 31, 2017. 

3. Charitable contributions and foreign taxes taken into account in determining limitation 

on allowance of partner's share of loss (sec. 13503 of the bill and sec. 704 of the Code) 

Present Law 

A partner's distributive share of partnership loss (including capital loss) is allowed only 

to the extent of the adjusted basis (before reduction by current year's losses) of the partner's 

interest in the partnership at the end of the partnership taxable year in which the loss occurred. 

Any disallowed loss is allowable as a deduction at the end of the first succeeding partnership 

taxable year, and subsequent taxable years, to the extent that the partner's adjusted basis for its 
214 

partnership interest at the end of any such year exceeds zero (before reduction by the loss for the 

year)677 

A partner's basis in its partnership interest is increased by its distributive share of income 

(including tax exempt income). A partner's basis in its partnership interest is decreased (but not 

below zero) by distributions by the partnership and its distributive share of partnership losses and 

expenditures of the partnership not deductible in computing partnership taxable income and not 

properly chargeable to capital account. 678 In the case of a charitable contribution, a partner's 

basis is reduced by the partner's distributive share of the adjusted basis of the contributed 

property. 679 

A partnership computes its taxable income in the same manner as an individual with 

certain exceptions. The exceptions provide, in part, that the deductions for foreign taxes and 

charitable contributions are not allowed to the partnership. 680 Instead, a partner takes into 

account its distributive share of the foreign taxes paid by the partnership and the charitable 

contributions made by the partnership for the taxable year. 681 

However, in applying the basis limitation on partner losses, Treasury regulations do not 

take into account the partner's share of partnership charitable contributions and foreign taxes 

paid or accrued. 682 The IRS has taken the position in a private letter ruling that the basis 

limitation on partner losses does not apply to limit the partner's deduction for its share of the 

partnership's charitable contributions683 While the regulations relating to the loss limitation do 

Sec. 704(d) and Treas. Reg. sec. 1.70+-l(d)(l). 

678 Sec. 705(a). 

679 Rev. Rul. 96-11, 1996-1 C. B. 140. 

680 Sec. 703(a)(2)(B) and (C). In addition. section 703(a)(2) provides that other deductions are not allowed 

to the partnership, notwithstanding that the partnership's taxable income is computed in the same manner as an 

individual's taxable income. specifically: personal exemptions. net operating loss deductions. certain itemized 

deductions for individuals. or depletion. 

681 Sec. 702. 

682 The regulation pro\ ides that "fi]fthe partner's distributive share of the aggregate of items ofloss 

specified in section 702(a)(l). (2). (3), (8) [now (7)], and (9) I now (8)1 exceeds the basis of the partner's interest 

computed under the precediug sentence. the limitation on losses under section 704( d) must be allocated to his 

distributiYC slme of each such loss." The regulation does not refer to section 702(a)(4) (charitable contributions) 

and 702(a)(6) (foreign taxes paid or accrued). Trcas. Reg. sec. 1.704-l(d)(2). 

683 Priv. Ltr. RuL 8405084. And see WilliamS. McKee, William F. Nelson and Robert L. Whitmire. 

Federal Taxation of Partnerships and Partners. WG&L. 4'h Edition (20 11). paragraph 11.05[ !Jib], pp. ll-214 

(noting that the "failure to include charitable contributions in the§ 704(d) limitation is an apparent teclmical flaw in 

the statute. Because of it. a zero-basis partner may reap the benefits of a partnership charitable contribution without 

an offsetting decrease iu the basis of his interest. whereas a fellow partner who happens to have a positive basis may 

do so only at the cost of a basis decrease."). 
215 

not mention the foreign tax credit, a taxpayer may choose the foreign tax credit in lieu of 

deducting foreign taxes. 684 

By contrast, under S corporation rules limiting the losses and deductions which may be 

taken into account by a shareholder of an S corporation to the shareholder's basis in stock and 

debt of the corporation, the shareholder's pro rata share of charitable contributions and foreign 

taxes are taken into account. 685 In the case of charitable contributions, a special rule is provided 

prorating the amount of appreciation not subject to the limitation in the case of charitable 

contributions of appreciated property by the S corporation. 686 

Reasons for Change 

The Committee has become aware of a flaw in the operation of the basis limitation on 

partner losses: the limitation fails to take into account partnership charitable contributions and 

foreign taxes. Because deductions for partnership charitable contributions and foreign taxes are 

allowable at the partner level, they are specifically excluded from the computation of partnership 

taxable income. In the interests of accurate income measurement under the income tax, the 

Committee believes partnership charitable contributions and foreign taxes should be taken into 

account for purposes of the basis limitation on partner losses. 

At the same time, the Committee wishes to provide parity as between partners in 

partnerships and shareholders in S corporations with respect to present-law tax treatment of 

charitable contributions of appreciated property. Thus, in the case of a partnership charitable 

contribution of appreciated property, the bill provides that the basis limitation on partner losses 

does not apply to the extent of the partner's distributive share of the excess of the fair market 

value over the adjusted basis of the contributed property. 

Explanation of Provision 

The provision modifies the basis limitation on partner losses to provide that the limitation 

takes into account a partner's distributive share of partnership charitable contributions (as 

defined in section 170(c)) and taxes (described in section 901) paid or accrued to foreign 

countries and to possessions of the United States. Thus, the amount of the basis limitation on 

partner losses is decreased to reflect these items. In the case of a charitable contribution by the 

partnership, the amount of the basis limitation on partner losses is decreased by the partner's 

distributive share of the adjusted basis of the contributed property. In the case of a charitable 

contribution by the partnership of property whose fair market value exceeds its adjusted basis, a 

special rule provides that the basis limitation on partner losses does not apply to the extent of the 

partner's distributive share of the excess. 

684 Sec. 901. 

685 Sec. 1366(d) and sec. 1366(a)(l). Under a related rule, the shareholder's basis in his interest is 

decreased by the basis (rather than the fair market value) of appreciated property by reason of a charitable 

contribution of the property· by the S corporation (sec. 1367(a)(2)). 

686 Sec. 1366(d)(4). 
216 

Effective Date 

The provision applies to partnership taxable years beginning after December 31, 2017. 

4. Net operating losses of life insurance companies (sec. 13511 of the bill and sec. 810 of the 

Code) 

Present Law 

A net operating loss ("NOL'') generally means the amount by which a taxpayer's 

business deductions exceed its gross income. In general, an NOL may be carried back two years 

and carried over 20 years to offset taxable income in such years. NOLs offset taxable income in 

the order of the taxable years to which the NOL may be carried687 

For purposes of computing the alternative minimum tax ("AMT"), a taxpayer's NOL 

deduction cannot reduce the taxpayer's alternative minimum taxable income ("AMTI") by more 

tban 90 percent of the AMTI688 

In the case of a life insurance company, a deduction is allowed in the taxable year for 

operations loss carryovers and carrybacks, in lieu of the deduction for net operation losses 

allowed to other corporations 689 A life insurance company is permitted to treat a loss from 

operations (as detlned under section 810(c)) for any taxable year as an operations loss carryback 

to each of the three taxable years preceding the loss year and an operations loss carryover to each 

of the 15 taxable years following the loss year690 

Reasons for Change 

The Committee believes that the treatment of loss carryovers of life insurance companies 

should not differ from the treatment ofNOL carryovers of other corporations. Consequently, the 

Committee bill eliminates the separate life insurer carryover rules and applies the generally 

applicable NOL rules to life insurance companies. 

Explanation of Provision 

The provision repeals the operations loss deduction for life insurance companies and 

allows the NOL deduction under section 172. This provides the same treatment for losses of life 

insurance companies as for losses of other corporations. The provision thus limits the 

companies' NOL deduction to 90 percent of taxable income (determined without regard to the 

deduction), provides that carryovers to other years are adjusted to take account of this limitation 

and may be carried forward indetlnitely. The NOL deduction of a life insurance company is 

6

" Sec. l72(b )(2). 

688 Sec. 56( d). 

689 Sees. 810, 805(a)(5). 

690 Sec. 810(b)(l). 
217 

determined by treating the NOL for any taxable year generally as the excess of the life insurance 

deductions for such taxable year over the life insurance gross income for such taxable year. 

Effective Date 

The provision applies to losses arising in taxable years beginning after December 31, 

2017. 

5. Repeal of small life insurance company deduction (sec. 13512 of the bill and sec. 806 of 

the Code) 

Present Law 

The small life insurance company deduction for any taxable year is 60 percent of so 

much of the tentative life insurance company taxable income ("LICTI") for such taxable year as 

does not exceed $3 million, reduced by 15 percent of the excess of tentative LICTI over 

$3 million. The maximum deduction that can be claimed by a small company is $1.8 million, 

and a company with a tentative LICTI of$15 million or more is not entitled to any small 

company deduction. A small life insurance company for this purpose is one with less than 

$500 million of assets. 

Reasons for Change 

The Committee believes that the small life insurance company deduction may have 

served as a transition rule effectively providing a corporate tax rate reduction to small life 

insurers in connection with 1984 changes to the rules governing life insurance company taxation. 

However, that purpose has been obviated by the passage of time. The Committee believes that in 

light of the reduction in the corporate income tax rate to 20 percent, it is appropriate to eliminate 

the small life insurance company deduction. 

Explanation of Provision 

The provision repeals the small life insurance company deduction. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

6. Adjustment for change in computing reserves (sec. 13513 of the bill and sec. 807 of the 

Code) 

Present Law 

Change in method of accounting 

In general, a taxpayer may change its method of accounting under section 446 with the 

consent of the Secretary (or may be required to change its method of accounting by the 

Secretary). In such instances, a taxpayer generally is required to make an adjustment (a 
218 

"section 48l(a) adjustment") to prevent amounts from being duplicated in, or omitted from, the 

calculation of the taxpayer's income. Pursuant to IRS procedures, negative section 481 (a) 

adjustments generally are deducted from income in the year of the change whereas positive 

section 481(a) adjustments generally are required to be included in income ratably over four 

taxable years. 691 

However, section 807(f) explicitly provides that changes in the basis for determining life 

insurance company reserves are to be taken into account ratably over 10 years. 

10-year spread for change in computing life insurance company reserves 

For Federal income tax purposes, a life insurance company includes in gross income any 

net decrease in reserves, and deducts a net increase in reserves. 692 Methods for determining 

reserves for tax purposes generally are based on reserves prescribed by the National Association 

ofinsurance Commissioners for purposes of financial reporting under State regulatory rules. 

Income or loss resulting from a change in the method of computing reserves is taken into 

account ratably over a l 0-year period. 693 The rule for a change in basis in computing reserves 

applies only if there is a change in basis in computing the Federally prescribed reserve (as 

distinguished from the net surrender value). Although life insurance tax reserves require the use 

of a Federally prescribed method, interest rate, and mortality or morbidity table, changes in other 

assumptions for computing statutory reserves (e.g., when premiums are collected and claims are 

paid) may cause increases or decreases in a company's life insurance reserves that must be 

spread over a l 0-year period. Changes in the net surrender value of a contract are not subject to 

the 1 0-year spread because, apart from its use as a minimum in determining the amount of life 

insurance tax reserves, the net surrender value is not a reserve but a current liability. 

Iffor any taxable year the taxpayer is not a life insurance company, the balance of any 

adjustments to reserves is taken into account for the preceding taxable year. 

Reasons for Change 

The Committee believes that the treatment of changes to the method of computing 

reserves of life insurance companies should not differ from the treatment of changes to the 

method of accounting in the case of other corporations. Consequently, the Committee bill 

eliminates the separate rule providing a I 0-year period for taking into account a change in the 

method of computing reserves of a life insurer. 

691 See. e.g.. Rev. Proc. 2015-13. 2015-5l.R.B. 419. and Rev. Proc. 2017-30.2017-18 I.RB. 1131. 

692 Sec. 807. 

693 Sec. 807([). 
219 

Explanation of Provision 

Income or loss resulting from a change in method of computing life insurance company 

reserves is taken into account consistent with IRS procedures, generally ratably over a four-year 

period, instead of over a I 0-year period. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

7. Repeal of special rule for distributions to shareholders from pre-1984 policyholders 

surplus account (sec. 13514 of the bill and sec. 815 of the Code) 

Present and Prior Law 

Under the law in effect from 1959 through 1983, a life insurance company was subject to 

a three-phase taxable income computation under Federal tax law. Under the three-phase system, 

a company was taxed on the lesser of its gain from operations or its taxable investment income 

(Phase I) and, if its gain from operations exceeded its taxable investment income, 50 percent of 

such excess (Phase IT). Federal income tax on the other 50 percent of the gain from operations 

was deferred, and was accounted for as part of a policyholder's surplus account and, subject to 

certain limitations, taxed only when distributed to stockholders or upon corporate dissolution 

(Phase Ill). To determine whether amounts had been distributed, a company maintained a 

shareholders surplus account, which generally included the company's previously taxed income 

that would be available for distribution to shareholders. Distributions to shareholders were 

treated as being first out of the shareholders surplus account, then out of the policyholders 

surplus account, and finally out of other accounts. 

The Deficit Reduction Act of 1984694 included provisions that, for 1984 and later years, 

eliminated further deferral of tax on amounts (described above) that previously would have been 

deferred under the three-phase system. Although for taxable years after 1983, life insurance 

companies may not enlarge their policyholders surplus account, the companies are not taxed on 

previously deferred amounts unless the amounts are treated as distributed to shareholders or 

subtracted from the policyholders surplus account695 

Any direct or indirect distribution to shareholders from an existing policyholders surplus 

account of a stock life insurance company is subject to tax at the corporate rate in the taxable 

year of the distribution. Present law (like prior law) provides that any distribution to 

shareholders is treated as made (1) first out of the shareholders surplus account, to the extent 

thereof, (2) then out of the policyholders surplus account, to the extent thereof, and (3) finally, 

out of other accounts. 

694 Pub. L. No. 98-369. 

695 Sec. 815. 
220 

For taxable years beginning after December 31, 2004, and before January I, 2007, the 

application of the rules imposing income tax on distributions to shareholders from the 

policyholders surplus account of a life insurance company were suspended. Distributions in 

those years were treated as first made out of the policyholders surplus account, to the extent 

thereof, and then out of the shareholders surplus account, and lastly out of other accounts. 

Reasons for Change 

The Committee believes it is appropriate to require life insurers with a policyholders 

surplus account to be subject to current income taxation on any remaining amounts of income 

deferred from periods before 1984. 

Explanation of Provision 

The provision repeals section 815, the rules imposing income tax on distributions to 

shareholders from the policyholders surplus account of a stock life insurance company. 

In the case of any stock life insurance company with an existing policyholders surplus 

account (as defined in section 815 before its repeal), tax is imposed on the balance of the account 

as of December 31, 2017. A life insurance company is required to pay tax on the balance of the 

account ratably over the first eight taxable years beginning after December 31, 2017. 

Specifically, the tax imposed on a life insurance company is the tax on the sum of life insurance 

company taxable income for the taxable year (but not less than zero) plus 1/8 of the balance of 

the existing policyholders surplus account as of December 31, 2017. Thus, life insurance 

company losses are not allowed to offset the amount of the policyholders surplus account 

balance subject to tax. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

8. Modification of proration rules for property and casualty insurance companies 

(sec. 13515 of the bill and sec. 832 of the Code) 

Present Law 

The taxable income of a property and casualty insurance company is determined as the 

sum of its gross income from underwriting income and investment income (as well as gains and 

other income items), reduced by allowable deductions. 

A proration rule applies to property and casualty insurance companies. In calculating the 

deductible amount of its reserve for losses incurred, a property and casualty insurance company 

must reduce the amount oflosses incmred by 15 percent of(l) the insurer's tax-exempt interest, 

(2) the deductible portion of dividends received (with special rules for dividends from affiliates), 

and (3) the increase for the taxable year in the cash value oflife insurance, endowment, or 
221 

annuity contracts the company owns. 696 This proration rule reflects the fact that reserves are 

generally funded in part from tax-exempt interest, from deductible dividends, and from other 

untaxed amounts. 

Reasons for Change 

The Committee believes that the rate of proration applicable to property and casualty 

insurers with respect to untaxed income should be adjusted to take account of the tax rate 

reduction to 20 percent that applies to income of corporations, including property and casualty 

insurers. The Committee bill therefore modifies the percentage applicable under the proration 

rule. 

Explanation of Provision 

The provision replaces the IS-percent reduction under present law with a reduction equal 

to 5.25 percent divided by the top corporate tax rate. For 2018, the top corporate tax rate is 35 

percent, and the percentage reduction is 15 percent. For 2019 and thereafter, the corporate tax 

rate is 20 percent, and the percentage reduction is 26.25 percent under the proration rule for 

property and casualty insurance companies. The proration percentage will be automatically 

adjusted in the future if the top corporate tax rate is changed, so that the product of the proration 

percentage and the top corporate tax rate always equals 5.25 percent. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

9. Repeal of special estimated tax payments (sec. 13516 of the bill and sec. 847 of the Code) 

Present Law 

Allowance of additional deduction and establishment of special loss discount account 

Present law allows an insurance company required to discount its reserves an additional 

deduction that is not to exceed the excess of(!) the amount of the undiscounted unpaid losses 

over (2) the amount of the related discounted unpaid losses, to the extent the amount was not 

deducted in a preceding taxable year. 697 The provision imposes the requirement that a special 

loss discount account be established and maintained, and that special estimated tax payments be 

made. Unused amounts of special estimated tax payments are treated as a section 6655 estimated 

tax payment for the 16'11 year after the year for which the special estimated tax payment was 

made. 

The total payments by a taxpayer, including section 6655 estimated tax payments and 

other tax payments, together with special estimated tax payments made under this provision, are 

696 Sec. 832(b)(5). 

697 Sec. 847. 
222 

generally the same as the total tax payments that the taxpayer would make if the taxpayer did not 

elect to have this provision apply, except to the extent amounts can be refunded under the 

provision in the 16th year. 

Calculation of special estimated tax payments based on tax benefit attributable to 

deduction 

More specifically, present law imposes a requirement that the taxpayer make special 

estimated tax payments in an amount equal to the tax benefit attributable to the additional 

deduction allowed under the provision. If amounts are included in gross income as a result of a 

reduction in the taxpayer's special loss discount account or the liquidation or termination of the 

taxpayer's insurance business, and an additional tax is due for any year as a result of the 

inclusion, then an amount of the special estimated tax payments equal to such additional tax is 

applied against such additional tax. If there is an adjustment reducing the amount of additional 

tax against which the special estimated tax payment was applied, then in lieu of any credit or 

refund for the reduction, a special estimated tax payment is treated as made in an amount equal 

to the amount that would otherwise be allowable as a credit or refund. 

The amount of the tax benefit attributable to the deduction is to be determined (under 

Treasury regulations (which have not been promulgated)) by taking into account tax benefits that 

would arise from the carryback of any net operating loss for the year as well as current year 

benefits. In addition, tax benefits for the current and carryback years are to take into account the 

benefit of filing a consolidated return with another insurance company without regard to the 

consolidation limitations imposed by section 1503(c). 

The taxpayer's estimated tax payments under section 6655 are to be determined without 

regard to the additional deduction allowed under this provision and the special estimated tax 

payments. Legislative history698 indicates that it is intended that the taxpayer may apply the 

amount of an overpayment of any section 6655 estimated tax payments for the taxable year 

against the amount of the special estimated tax payment required under this provision. The 

special estimated tax payments under this provision are not treated as estimated tax payments for 

purposes of section 6655 (e.g., for purposes of calculating penalties or interest on underpayments 

of estimated tax) when such special estimated tax payments are made. 

Refundable amount 

To the extent that a special estimated tax payment is not used to offset additional tax due 

for any of the first 15 taxable years beginning after the year for which the payment was made, 

such special estimated tax payment is treated as an estimated tax payment made under 

section 6655 for the 16th year after the year for which the special estimated tax payment was 

made. If the amount of such deemed section 6655 payment, together with the taxpayer's other 

payments credited against tax liability for such 161

h year, exceeds the tax liability for such year, 

"'" Sec H.R. Rep. No. 100-1104, Conference Report to accompany H.R. 4333, the Technical and 

Miscellaneous Revenue Act of 1988. October 21, 1988. p. 174. 
223 

then the excess (up to the amount of the deemed section 6655 payment) may be refunded to the 

taxpayer to the same extent provided under present law with respect to overpayments of tax. 

Regulatory authority 

In addition to the regulatory authority to adjust the amount of special estimated tax 

payments in the event of a change in the corporate tax rate, authority is provided to Treasury to 

prescribe regulations necessary or appropriate to carry out the purposes of the provision. 

Such regulations include those providing for the separate application of the provision 

with respect to each accident year. Separate application of the provision with respect to each 

accident year (i.e., applying a vinta1,>ing methodology) may be appropriate under regulations to 

determine the amount of tax liability for any taxable year against which special estimated tax 

payments are applied, and to determine the amount (if any) of special estimated tax payments 

remaining after the 15111 year which may be available to be refunded to the taxpayer. 

Regulatory authority is also provided to make such adjustments in the application of the 

provision as may be necessary to take into account the corporate alternative minimum tax. 

Under this regulatory authority, rules similar to those applicable in the case of a change in the 

corporate tax rate are intended to apply to determine the amount of special estimated tax 

payments that may be applied against tax calculated at the corporate alternative minimum tax 

rate. The special estimated tax payments are not treated as payments of regular tax for purposes 

of determining the taxpayer's alternative minimum tax liability. 

Regulations have not been promulgated under section 847. 

Reasons for Change 

The Committee believes that the special estimated tax payment rules add complexity to 

the tax law and do not improve the accuracy of income measurement of property and casualty 

insurers. The Committee bill therefore repeals these rules. 

Explanation of Provision 

The provision repeals section 847. Thus, the election to apply section 847, the additional 

deduction, special loss discount account, special estimated tax payment, and refundable amount 

rules of present law are eliminated. 

The entire balance of an existing account is included in income of the taxpayer for the 

first taxable year beginning after 2017, and the entire amount of existing special estimated tax 

payments are applied against the amount of additional tax attributable to this inclusion. Any 

special estimated tax payments in excess of this amount are treated as estimated tax payments 

under section 6655. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 
224 

10. Capitalization of certain policy acquisition expenses (sec. 13517 of the bill and sec. 848 

of the Code) 

Present Law 

In the case of an insurance company, specified policy acquisition expenses for any 

taxable year are required to be capitalized, and generally are amortized over the 120-month 

period beginning with the first month in the second half of the taxable year. 699 

A special rule provides for 60-month amortization of the first $5 million of specified 

policy acquisition expenses with a phase-out The phase-out reduces the amount amortized over 

60 months by the excess of the insurance company's specified policy acquisition expenses for 

the taxable year over $10 million. 

Specified policy acquisition expenses are determined as that portion of the insurance 

company's general deductions for the taxable year that does not exceed a specific percentage of 

the net premiums for the taxable year on each of three categories of insurance contracts. For 

annuity contracts, the percentage is I. 75; for group life insurance contracts, the percentage is 

2.05; and for all other specified insurance contracts, the percentage is 7.7. 

With certain exceptions, a specified insurance contract is any life insurance, annuity, or 

noncancellable accident and health insurance contract or combination thereof. A group life 

insurance contract is any life insurance contract that covers a group of individuals defined by 

reference to employment relationship, membership in an organization, or similar factor, the 

premiums for which are determined on a group basis, and the proceeds of which are payable to 

(or for the benefit of) persons other than the employer of the insured, an organization to which 

the insured belongs, or other similar person. 

Reasons for Change 

In connection with the reduction in the corporate tax rate, the Committee believes it is 

timely and appropriate to update present-law tax provisions governing capitalization of policy 

acquisition expenses. The provision therefore increases the amortization period and percentages 

relating to policy acquisition expenses. 

Explanation of Provision 

The provision extends the amortization period for specified policy acquisition expenses 

from a 120-month period to the 600-month period beginning with the first month in the second 

half of the taxable year. The provision does not change the special rule providing for 60-month 

amortization of the first $5 million of specified policy acquisition expenses (with phaseout). The 

provision provides that for annuity contracts, the percentage is 3.17; for group life insurance 

contracts, the percentage is 3.72; and for all other specified insurance contracts, the percentage is 

13.97. 

699 See. 848. 
225 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

11. Tax reporting for life settlement transactions, clarification of tax basis of life insurance 

contracts, and exception to transfer for valuable consideration rules (sees. 13518 through 

13520 of the bill and sees. 101, 1016, and 6050X of the Code) 

Present Law 

An exclusion from Federal income tax is provided for amounts received under a life 

insurance contract paid by reason of the death of the insured. 700 

Under rules known as the transfer for value rules, if a life insurance contract is sold or 

otherwise transferred for valuable consideration, the amount paid by reason of the death of the 

insured that is excludable generally is limited. 701 Under the limitation, the excludable amount 

may not exceed the sum of(l) the actual value of the consideration, and (2) the premiums or 

other amounts subsequently paid by the transferee of the contract. Thus, for example, if a person 

buys a life insurance contract, and the consideration he pays combined with his subsequent 

premium payments on the contract are less than the amount of the death benefit he later receives 

under the contract, then the difference is includable in the buyer's income. 

Exceptions are provided to the limitation on the excludable amount. The limitation on 

the excludable amount does not apply if(1) the transferee's basis in the contract is determined in 

whole or in part by reference to the transferor's basis in the contract, 702 or (2) the transfer is to 

" 0 Sec. 10 l(a)(l). In the case of certain accelerated death benefits and viatica! settlements, special rules 

treat certain amounts as amounts paid by reason of the death of an insured (that is. generally, excludable from 

income). Sec. I 0 I (g). The rules relating to accelerated death benefits provide that amounts treated as paid by 

reason of the death of the insured include any amount received under a life insurance contract on the life of an 

insured who is a terminally ill individuaL or who is a chronically ill individual (provided certain requirements arc 

met). For this pnrpose. a terminally ill individual is one who has been certified by a physician as having an illness 

or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the 

certification. A chronically ill individual is one who has been certified by a licensed health care practitioner within 

the preceding 12-month period as meeting certain ability-related requirements. In the case of a viatica! settlement. if 

any portion of the death benefit under a life insurance contract on the life of an insured who is terminally ill or 

chronically ill is sold to a viatica! settlement provider. the amount paid for the sale or assignment of that portion is 

treated as an amount paid under the life insurance contract by reason of the death of the insured (that is, generally. 

excludable from income). For this purpose. a v~atical settlement provider is a person regularly engaged in the trade 

or business of purchasing. or taking assignments of. life insurance contracts on the lives of terminally ill or 

chronically ill individuals (provided certain requirements are met). 

" 01 Sec. 10l(a)(2). 

Sec. IOI(a)(2)(A). 
226 

the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a 

corporation in which the insured is a shareholder or officer. 701 

IRS guidance sets forth more details of the tax treatment of a life insurance policyholder 

who sells or surrenders the life insurance contract and the tax treatment of other sellers and of 

buyers of life insurance contracts. The guidance relates to the character of taxable amounts 

(ordinary or capital) and to the taxpayer's basis in the life insurance contract. 

In Revenue Ruling 2009-13, 704 the IRS ruled that income recognized under section 72(e) 

on surrender to the life insurance company of a life insurance contract with cash value is 

ordinary income. In the case of sale of a cash value life insurance contract, the IRS ruled that the 

insured's (seller's) basis is reduced by the cost of insurance, and the gain on sale of the contract 

is ordinary income to the extent of the amount that would be recognized as ordinary income if 

the contract were surrendered (the "inside buildup"), and any excess is long-term capital gain. 

Gain on the sale of a term life insurance contract (without cash surrender value) is long-term 

capital gain under the ruling. 

In Revenue Ruling 2009-14, 705 the IRS ruled that under the transfer for value rules, a 

portion of the death benefit received by a buyer of a life insurance contract on the death of the 

insured is includable as ordinary income. The portion is the excess of the death benefit over the 

consideration and other amounts (e.g., premiums) paid for the contract. Upon sale of the 

contract by the purchaser of the contract, the gain is long-term capital gain, and in determining 

the gain, the basis of the contract is not reduced by the cost of insurance. 

Reasons for Change 

Sales of life insurance contracts on the secondary market have grown in recent years. 

Though there has been some administrative guidance in the area, the Committee believes it is 

useful to buyers, sellers, and issuers of these contracts, as well as the payors and recipients of 

death benefits under the contracts, for the law to provide clarity about the determination of the 

basis of property changing hands and the measurement of gain and income with respect to the 

contract. Further, efficient tax administration is improved, and a reduction in the number of 

disputes between taxpayers and government is achieved, by requiring reporting with respect to 

transfers of life insurance contracts to which the provision applies. 

Explanation of Provision 

In general 

The provision imposes reporting requirements in the case of the purchase of an existing 

life insurance contract in a reportable policy sale and imposes reporting requirements on the 

payor in the case of the payment of reportable death benefits. The provision sets forth rules for 

703 Sec. IOI(a)(2)(B). 

'

01 2009-2ll.R.B. 1029. 

2009-21 J.R.B. 1031. 
227 

determining the basis of a life insurance or annuity contract. Lastly, the provision modifies the 

transfer for value rules in a transfer of an interest in a life insurance contract in a reportable 

policy sak 

Reporting requirements for acquisitions of life insurance contracts 

Reporting upon acquisition of life insurance contract 

The reporting requirement applies to every person who acquires a life insurance contract, 

or any interest in a life insurance contract, in a reportable policy sale during the taxable year. A 

reportable policy sale means the acquisition of an interest in a life insurance contract, directly or 

indirectly, if the acquirer has no substantial family, business, or financial relationship with the 

insured (apart from the acquirer's interest in the life insurance contract). An indirect acquisition 

includes the acquisition of an interest in a partnership, trust, or other entity that holds an interest 

in the life insurance contract. 

Under the reporting requirement, the buyer reports infonnation about the purchase to the 

IRS, to the insurance company that issued the contract, and to the seller. The infonnation 

reported by the buyer about the purchase is (1) the buyer's name, address, and taxpayer 

identification number ("TIN"), (2) the name, address, and TIN of each recipient of payment in 

the reportable policy sale, (3) the date of the sale, (4) the name of the issuer, and (5) the amount 

of each payment. The statement the buyer provides to any issuer of a life insurance contract is 

not required to include the amount of the payment or payments for the purchase of the contract. 

Reporting of seller's basis in the life insurance contract 

On receipt of a report described above, or on any notice of the transfer of a life insurance 

contract to a foreign person, the issuer is required to report to the IRS and to the seller (1)) the 

name, address, and TIN of the seller or the transferor to a foreign person, (2) the basis of the 

contract (i.e., the investment in the contract within the meaning of section 72(e)(6)), and (3) the 

policy number of the contract. Notice of the transfer of a life insurance contract to a foreign 

person is intended to include any sort of notice, including information provided for nontax 

purposes such as change of address notices for purposes of sending statements or for other 

purposes, or information relating to loans, premiums, or death benefits with respect to the 

contract. 

Reporting with respect to reportable death benefits 

When a reportable death benefit is paid under a life insurance contract, the payor 

insurance company is required to report infonnation about the payment to the IRS and to the 

payee. Under this reporting requirement, the payor reports (I) the name, address and TIN of the 

person making the payment, (2) the name, address, and TIN of each recipient of a payment, (3) 

the date of each such payment, (4) the gross amount of the payment (5) the payor's estimate of 

the buyer's basis in the contract. A reportable death benefit means an amount paid by reason of 

the death of the insured under a life insurance contract that has been transferred in a reportable 

policy sale. 
228 

For purposes of these reporting requirements, a payment means the amount of cash and 

the fair market value of any consideration transferred in a reportable policy sale. 

Determination of basis 

The provision provides that in determining the basis of a life insurance or annuity 

contract, no adjustment is made for mortality, expense, or other reasonable charges incurred 

under the contract (known as "cost of insurance"). This reverses the position of the IRS in 

Revenue Ruling 2009-13 that on sale of a cash value life insurance contract, the insured's 

(seller's) basis is reduced by the cost of insurance. 

Scope of transfer for value rules 

The provision provides that the exceptions to the transfer for value rules do not apply in 

the case of a transfer of a life insurance contract, or any interest in a life insurance contract, in a 

reportable policy sale. Thus, some portion of the death benefit ultimately payable under such a 

contract may be includable in income. 

Effective Date 

Under the provision, the reporting requirement is effective for reportable policy sales 

occurring after December 31, 2017, and reportable death benefits paid after December 31, 2017. 

The clarification of the basis rules for life insurance and annuity contracts is effective for 

transactions entered into after August 25, 2009. The modification of exception to the transfer for 

value rules is effective for transfers occurring after December 31, 2017. 

12. Limitation on deduction for FDIC premiums (sec. 13531 of the bill and sec. 162 of the 

Code) 

Present Law 

Corporations organized under the laws of any of the 50 States (and the District of 

Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable 

income. The taxable income of a C corporation 706 generally comprises gross income less 

allowable deductions. A taxpayer generally is allowed a deduction for ordinary and necessary 

expenses paid or incurred in carrying on any trade or business. 707 

Corporations subject to tax are commonly referred to as C corpomtions after subchapter C of the Code. 

which sets forth corpomte tax mles. Certain specialized entities that invest primarily in real estate related assets 

(real estate investment tmsts) or in stock and securities (regulated investment companies) and that meet other 

requirements, generally including annual distribution of90 percent of their income. are allowed to deduct their 

distributions to shareholders, thus generally paying little or no corporate-level tax despite othenvise being subject to 

subchapter C. 

'

07 Sec. 162(a). However, certain exceptions apply. No deduction is allowed for(!) any charitable 

contribution or gift that would be allowable as a deduction under section 170 were it not for the percentage 

limitations. the dollar limitations, or the requirements as to the time of payment. set forth in such section; (2) any 

illegal bribe. illegal kickback or other illegal payment; (3) certain lobbying and political expenditures; (~)any fine 
229 

Corporations that make a valid election pursuant to section 1362 of subchapter S of the 

Code, referred to as S corporations, generally are not subject to corporate-level income tax on its 

items of income and loss. Instead, an S corporation passes through to shareholders its items of 

income and loss. The shareholders separately take into account their shares of these items on 

their individual income tax returns. 

Banks, thrifts, and credit unions 

In general 

Financial institutions are subject to the same Federal income tax rules and rates as are 

applied to other corporations or entities, with specified exceptions. 

C corporation banks and thrifts 

A bank is generally taxed for Federal income tax purposes as a C corporation. For this 

purpose a bank generally means a corporation, a substantial portion of whose business is 

receiving deposits and making loans and discounts, or exercising certain fiduciary powers. 708 A 

bank for this purpose generally includes domestic building and loan associations, mutual stock or 

savings banks, and certain cooperative banks that are commonly referred to as thrifts 709 

S corporation banks 

A bank is generally eligible to electS corporation status under section 1362, provided it 

meets the other requirements for making this election and it does not use the reserve method of 

accounting for bad debts as described in section 585 710 

Special bad debt loss rules for small banks 

Section 166 provides a deduction for any debt that becomes worthless (wholly or 

partially) within a taxable year The reserve method of accounting for bad debts, repealed in 

1986711 for most taxpayers, is allowed under section 585 for any bank (as defined in section 581) 

other than a large bank For this purpose, a bank is a large bank if, for the taxable year (or for 

or similar penalty paid to a government for the violation of any law: (5) two-thirds of treble damage payments under 

the antitmst laws: (6) certain foreign advertising expenses: (7) certain amom1ts paid or incurred by a corporation in 

connection with the reacquisition of its stock or of the stock of any related person: or (8) certain applicable 

employee remuneration. 

'

08 Sec. 58L See also Treas. Reg. sec. 1.581-l(a). 

" 09 While the general principles for detemrining the taxable income of a corporation are applicable to a 

mutual savings bank a building and loan association, and a cooperative bank. there are certain exceptions and 

special mles for such institutions. Treas. Reg. sec. L581-2(a). 

no Sec. l36l(b)(2)(A). 

711 Tax Reforn1 Act of 1986, Pub. L. No. 99-514. 
230 

any preceding taxable year after 1986), the average adjusted basis of all its assets (or the assets of 

the controlled group of which it is a member) exceeds $500 million. Deductions for reserves are 

taken in lieu of a worthless debt deduction under section 166. Accordingly, a small bank is able 

to take deductions for additions to a bad debt reserve. Additions to the reserve are determined 

under an experience method that generally looks to the ratio of(!) the total bad debts sustained 

during the taxable year and the five preceding taxable years to (2) the sum of the loans 

outstanding at the close of such taxable years. 712 

Credit unions 

Credit unions are exempt from Federal income taxation. 713 The exemption is based on 

their status as not-for-profit mutual or cooperative organizations (without capital stock) operated 

for the benefit of their members, who generally must share a common bond. The definition of 

common bond has been expanded to permit greater use of credit unions. 714 While significant 

differences between the rules under which credit unions and banks operate have existed in the 

past, most of those differences have disappeared over time. 715 

FDIC premiums 

The Federal Deposit Insurance Corporation ("FDIC") provides deposit insurance for 

banks and savings institutions. To maintain its status as an insured depository institution, a bank 

must pay semiannual assessments into the deposit insurance fund. Assessments for deposit 

insurance are treated as ordinary and necessary business expenses. These assessments, also 

known as premiums, are deductible once the all events test for the premium is satisfied. 716 

Reasons for Change 

The Committee believes that this provision is necessary to correct for the fact that, when 

the FDIC determines the assessments necessary to maintain an adequate balance in the Deposit 

Insurance Fund ("DlF"), it does so on a pretax basis and does not take into account the 

' 12 Sec. 585(b)(2). 

Sec. 50 I( c)(l4 )(A). For a discussion of the history of and reasons for Federal tax exemption, see 

United States Department of the Treasury, Comparing Credit Unions with Other Deposito~v Institutions, Report 

3070, January 15. 200 I, available at https://www.treasury.gov/press-centcr/pressreleases/Documents/rcport30702.doc. 

The Credit Union Membership Access Act, Pub. L. No. 105-219, allows multiple common bond credit 

unions. The legislation in part responds to .Yational Credit Union Administration v. First Xational Bank & Trust 

Co., 522 U.S. 4 79 ( 1998). which interpreted the permissible membership of tax-exempt credit unions narrowly. 

'" The Treasury Department has concluded that any remaining regulatory differences do not raise 

competitive equity concerns between credit unions and banks. United States Department of the Treasury, 

Comparing Credit L'nions with Other Depository Institutions, Report 3070, January 15, 2001, p. 2. available at 

https://www.treasury.gov/press-center/press-rcleases/Documents/rcport30702.doc. 

716 Technical Advice Memorandum 199924060. March 5. 1999, and Rev. Rul. 80-230, 1980-2 C.B. 169. 

1980. 
231 

deductibility of the premium payments. These deductions diminish the General Fund and 

effectively result in a General Fund transfer to the DIF. 

Explanation of Provision 

No deduction is allowed for the applicable percentage of any FDIC premium paid or 

incurred by the taxpayer. For taxpayers with total consolidated assets of $50 billion or more, the 

applicable percentage is 100 percent Otherwise, the applicable percentage is the ratio of the 

excess of total consolidated assets over $10 billion to $40 billion. For example, for a taxpayer 

with total consolidated assets of $20 billion, no deduction is allowed for 25 percent of FDIC 

premiums. The provision does not apply to taxpayers with total consolidated assets (as of the 

close of the taxable year) that do not exceed $10 billion. 

FDIC premium means any assessment imposed under section 7(b) of the Federal Deposit 

Insurance Act 717 The term total consolidated assets has the meaning given such term under 

section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 718 

For purposes of determining a taxpayer's total consolidated assets, members of an 

expanded affiliated group are treated as a single taxpayer. An expanded affiliated group means 

an affiliated group as defined in section 1504(a), determined by substituting "more than 

50 percent" for "at least 80 percent" each place it appears and without regard to the exceptions 

from the definition of includible corporation for insurance companies and foreign corporations. 

A partnership or any other entity other than a corporation is treated as a member of an expanded 

affiliated group if such entity is controlled by members of such group. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

13. Repeal of advance refunding bonds (sec. 13532 of the bill and sec. 149(d) of the Code) 

Present Law 

Section 103 generally provides that gross income does not include interest received on 

State or local bonds. State and local bonds are classified generally as either governmental bonds 

or private activity bonds. Governmental bonds are bonds the proceeds of which are primarily 

used to finance governmental facilities or the debt is repaid with governmental funds. Private 

activity bonds are bonds in which the State or local government serves as a conduit providing 

financing to nongovernmental persons (e.g, private businesses or individuals) 719 Bonds issued 

to finance the activities of charitable organizations described in section 50l(c)(3) ("qualified 

12 U.S. C. sec. 1817(b). 

' 18 Pub. L. No. 111-203. 

719 Sec. 141. 
232 

501 ( c )(3) bonds") are one type of private activity bond. The exclusion from income for interest 

on State and local bonds only applies if certain Code requirements are met. 

The exclusion for income for interest on State and local bonds applies to refunding bonds 

but there are limits on advance refunding bonds. A refunding bond is defined as any bond used 

to pay principal, interest, or redemption price on a prior bond issue (the refunded bond). 

Different rules apply to current as opposed to advance refunding bonds. A current refunding 

occurs when the refunded bond is redeemed within 90 days of issuance of the refunding bonds. 

Conversely, a bond is classified as an advance refunding if it is issued more than 90 days before 

the redemption of the refunded bond. 720 Proceeds of advance refunding bonds are generally 

invested in an escrow account and held until a future date when the refunded bond may be 

redeemed. 

Although there is no statutory limitation on the number of times that tax-exempt bonds 

may be currently refunded, the Code limits advance refundings. Generally, governmental bonds 

and qualified 501(c)(3) bonds may be advance refunded one time721 Private activity bonds, 

other than qualified 501(c)(3) bonds, may not be advance refunded at all. 722 Furthennore, in the 

case of an advance refunding bond that results in interest savings (e.g., a high interest rate to low 

interest rate refunding), the refunded bond must be redeemed on the first call date 90 days after 

the issuance of the refunding bond that results in debt service savings. 723 

Reasons for Change 

The ability to issue advance refunding bonds allows State and local governments to issue 

and have outstanding two sets of Federally subsidized debt associated with the same activity. 

The Committee believes that a single activity should have a maximum of only one set of 

Federally subsidized debt, and so believes removing the ability to issue tax-advantaged advance 

refunding bonds is appropriate. 

Explanation of Provision 

The provision repeals the exclusion from gross income for interest on a bond issued to 

advance refund another bond. 

Effective Date 

The provision applies to advance refunding bonds issued after December 31, 2017. 

" 0 Sec. J49(d)(5). 

- 21 Sec. 149(d)(3). Bonds issned before 1986 and pursuant to certain transition ntles contained in the Tax 

Reform Act of 1986 may be advance refunded more than one time in certain cases. 

Sec. 149(d)(2). 

'

23 Sec. !49(d)(3)(A)(iii) and(B): Trcas. Reg. sec. l.l49(d)-l(l)(3). A "call" provision provides the issuer 

of a bond with the right to redeem the bond prior to the stated maturity. 
233 

14. Cost basis of specified securities determined without regard to identification (sec. 13533 

of the bill and sec. 1012 of the Code) 

Present Law 

In general 

Gain or loss generally is recognized for Federal income tax purposes on realization of 

that gain or loss (for example, as the result of sale of property). The taxpayer's gain or loss on a 

disposition of property is the difference between the amount realized on the sale and the 

taxpayer's adjusted basis in the property disposed of724 

To compute adjusted basis, a taxpayer must first determine the property's unadjusted or 

original basis and then make adjustments prescribed by the Code. 725 The original basis of 

property is its cost, except as otherwise prescribed by the Code (for example, in the case of 

property acquired by gift or bequest or in a tax-free exchange). Once determined, the taxpayer's 

original basis generally is adjusted downward to take account of depreciation or amortization, 

and generally is adjusted upward to reflect income and gain inclusions or capital improvements 

with respect to the property. 

Basis computation rules 

If a taxpayer has acquired stock in a corporation on different dates or at different prices 

and sells or transfers some of the shares of that stock, and the lot from which the stock is sold or 

transferred is not adequately identified, the shares sold are deemed to be drawn from the earliest 

acquired shares (the "first-in-first-out rule"). 726 However, if a taxpayer makes an adequate 

identification ("specific identification") of shares of stock that it sells, the shares of stock treated 

as sold are the shares that have been identified. 727 A taxpayer who owns shares in a regulated 

investment company ("RIC") generally is permitted to elect, in lieu of the specific identification 

or first-in-first-out methods, to detennine the basis of RIC shares sold under one of two averagecost-basis methods described in Treasury regulations (together, the "average basis method")728 

In the case of the sale, exchange, or other disposition of a specified security (defined 

below) to which the basis reporting requirement described below applies, the first-in-first-out 

rule, specific identification, and average basis method conventions are applied on an account by 

Sec. 1001. 

'

2

' Sec. 1016. 

706 Treas. Reg. sec. 1.1012-l(c)(l). 

Treas. Reg. sec. 1.1012-l(c)(2). 

"" Treas. Reg. sec. 1.1012-l(e). 
234 

account basis729 To facilitate the determination of the cost of RIC stock under the average basis 

method, RIC stock acquired before January l, 2012, generally is treated as a separate account 

from RIC stock acquired on or after that date unless the RIC (or a broker holding the stock as a 

nominee) elects otherwise with respect to one or more of its stockholders, in which case all the 

RIC stock with respect to which the election is made is treated as a single account and the basis 

reporting requirement described below applies to all that stock. 730 

The basis of stock acquired after December 31, 2010, in connection with a dividend 

reinvestment plan ("DRP") is determined under the average basis method for as long as the stock 

is held as part of that plan. 731 

Basis reporting 

A broker is required to report to the IRS a customer's adjusted basis in a covered security 

that the customer has sold and whether any gain or loss from the sale is long-term or shortterm732 

A covered security is, in general, any specified security acquired after an applicable date 

specified in the basis reporting rules. A specified security is any share of stock of a corporation 

(including stock of a RIC); any note, bond, debenture, or other evidence of indebtedness; any 

commodity, or contract or derivative with respect to such commodity, if the Treasury Secretary 

determines that adjusted basis reporting is appropriate; and any other financial instrument with 

respect to which the Treasury Secretary detennines that adjusted basis reporting is appropriate. 

For purposes of satisfying the basis reporting requirements, a broker must detennine a 

customer's adjusted basis in accordance with rules intended to ensure that the broker's reported 

adjusted basis numbers are the same numbers that customers must use in filing their tax 

returns. 733 

Reasons for Change 

The Committee believes that the specific identification method is inappropriate for 

taxpayers other than RICs. FIFO and, where permitted, average basis, provide accurate 

measures of income and are less prone to manipulation than specific identification. Nonetheless, 

the Committee believes that RICs should continue to be able to use specific identification so as 

to avoid (1) undermining a RICs ability to attract new investors (who may not want to be taxed 

on gain that accrued prior to their purchase of an interest in the RIC) and (2) banning Jess 

Sec. 1012(c)(l). 

730 Sec. l012(c)(2). 

Sec. 1012(d)(l). Other special niles apply to DRP stock. See sec. 1012(d)(2) and (3). 

Sec. 6045(g): Treas. Reg. sec. 1.6045-l(d). 

See sec. 6N5(g)(2). 
235 

wealthy investors in RICs, who would be less able to mitigate the impact of the change than their 

wealthier counterparts. 

Explanation of Provision 

The provision requires that the cost of any specified security sold, exchanged, or 

otherwise disposed of on or after January l, 2018, be determined on a first-in first-out basis 

except to the extent the average basis method is otherwise allowed (as in the case of a taxpayer 

holding shares in a RIC). The provision does not apply to sales, exchanges, or other dispositions 

of specified securities by RlCs. 

The provision includes several conforming amendments, including a rule restricting a 

broker's basis reporting method to the first-in first-out method in the case of the sale of any stock 

for which the average basis method is not permitted. 

Effective Date 

The provision applies to sales, exchanges, and other dispositions after December 31, 

2017. 

15. Expansion of qualifying beneficiaries of an electing small business trust (sec. 13541 of 

the bill and sec. 1361 of the Code) 

Present Law 

An electing small business trust ("ESBT") may be a shareholder of an S corporation. 734 

Generally, the eligible beneficiaries of an ESBT include individuals, estates, and certain 

charitable organizations eligible to hold S corporation stock directly. A nonresident alien 

individual may not be a shareholder of an S corporation and may not be a potential current 

beneficiary of an ESBT. 735 

The portion of an ESBT which consists of the stock of an S corporation is treated as a 

separate trust and generally is taxed on its share of the S corporation's income at the highest rate 

of tax imposed on individual taxpayers. This income (whether or not distributed by the ESBT) is 

not taxed to the beneficiaries of the ESBT. 

Reasons for Change 

An ESBT that is an S corporation shareholder is taxed on its share of the S corporation's 

income at the highest rate of tax imposed on individual taxpayers. For that reason, the 

Committee believes that allowing a nonresident alien individual to be a potential current 

beneficiary of an ESBT presents little risk of tax avoidance. 

Sec. 136l(c)(2)(A)(v). 

Sec. 136l(b)(l)(C) and (c)(2)(B)(v). 
236 

Explanation of Provision 

The provision allows a nonresident alien individual to be a potential current beneficiary 

ofanESBT. 

Effective Date 

The provision takes effect on January 1, 2018. 

16. Charitable contribution deduction for electing small business trusts (sec. 13542 of the 

bill and sec. 642(c) of the Code) 

Present Law 

An electing small business trust ("ESBT") may be a shareholder of an S corporation. 736 

The portion of an ESBT that consists of the stock of an S corporation is treated as a separate trust 

and generally is taxed on its share of the S corporation's income at the highest rate of tax 

imposed on individual taxpayers. This income (whether or not distributed by the ESBT) is not 

taxed to the beneficiaries of the ESBT. In addition to nonseparately computed income or loss, an 

S corporation reports to its shareholders their pro rata share of certain separately stated items of 

income, loss, deduction, and credit. 737 For this purpose, charitable contributions (as defined in 

section 170(c)) of an S corporation are separately stated and taken by the shareholder. 

The treatment of a charitable contribution passed through by an S corporation depends on 

the shareholder. Because an ESBT is a trust, the deduction for charitable contributions 

applicable to trusts, 738 rather than the deduction applicable to individuals, 739 applies to the trust. 

Generally, a trust is allowed a charitable contribution deduction for amounts of gross income, 

without limitation, which pursuant to the terms of the governing instrument are paid for a 

charitable purpose. No carryover of excess contributions is allowed. An individual is allowed a 

charitable contribution deduction limited to certain percentages of adjusted gross income 

generally with a five-year carryforward of amounts in excess of this limitation. 

Reasons for Change 

When an S corporation makes a charitable contribution, the rules governing the timing 

and extent of the shareholder's deduction depend on the type of shareholder. The Committee 

believes that a single set of rules should govern when S corporation shareholders may deduct 

charitable contributions passed through to them. 

Sec. 136l(c)(2)(A)(v). 

737 Sec. 1366(a)(l). 

738 Sec. 642(c). 

Sec. 170. 
237 

Explanation of Provision 

The provision provides that the charitable contribution deduction of an ESBT is not 

determined by the rules generally applicable to trusts but rather by the rules applicable to 

individuals. Thus, the percentage limitations and carryforward provisions applicable to 

individuals apply to charitable contributions made by the portion of an ESBT holding 

S corporation stock. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 
238 

PART VII- EMPLOYMENT 

1. Modification of limitation on excessive employee remuneration (sec. 13601 of the hill 

and sec. 162(m) of the Code) 

Present Law 

In general 

An employer generally may deduct reasonable compensation for personal services as an 

ordinary and necessary business expense. Section 162(m) provides an explicit limitation on the 

deductibility of compensation expenses in the case of publicly traded corporate employers. The 

otherwise allowable deduction for compensation with respect to a covered employee of a 

publicly held corporation 740 is limited to no more than $1 million per year. 741 The deduction 

limitation applies when the deduction attributable to the compensation would otherwise be taken. 

Covered employees 

Section 162(m) defines a covered employee as (I) the chief executive officer of the 

corporation (or an individual acting in such capacity) as of the close of the taxable year and 

(2) any employee whose total compensation is required to be reported to shareholders under the 

Securities Exchange Act of 1934 ("Exchange Act") by reason of being among the corporation's 

four most highly compensated officers for the taxable year (other than the chief executive 

officer). 742 Treasury regulations under section 162(m) provide that whether an employee is the 

chief executive officer or among the four most highly compensated officers should be 

determined pursuant to the executive compensation disclosure rules promulgated under the 

Exchange Act. 

In 2006, the Securities and Exchange Commission amended certain rules relating to 

executive compensation, including which officers' compensation must be disclosed under the 

Exchange Act. Under the new rules, such officers are(!) the principal executive officer (or an 

individual acting in such capacity), (2) the principal financial officer (or an individual acting in 

such capacity), and (3) the three most highly compensated officers, other than the principal 

executive officer or principal financial officer. 

In response to the Securities and Exchange Commission's new disclosure rules, the 

Internal Revenue Service issued updated guidance on identifying which employees are covered 

·.w A corporation is treated as publicly held if it bas a class of common equity securities that is required to 

be registered under section 12 of the Securities Exchange Act of 1934. Section 162(m)(2). 

Sec. 162(m). This deduction limitation applies for purposes of the regular income tax and the 

altemativc mininuun tax. 

Sec. 162(m)(3). 
239 

by section 162(m). 743 The new guidance provides that "covered employee" means any employee 

who is(!) as of the close of the taxable year, the principal executive officer (or an individual 

acting in such capacity) defined in reference to the Exchange Act, or (2) among the three most 

highly compensated officers 744 for the taxable year (other than the principal executive officer or 

principal financial officer), again defined by reference to the Exchange Act. Thus, under current 

guidance, only four employees are covered under section 162(m) for any taxable year. Under 

Treasury regulations, the requirement that the individual meet the criteria as of the last day of the 

taxable year applies to both the principal executive officer and the three highest compensated 

officers. 745 

Definition of publicly held corporation 

For purposes of the deduction disallowance of section 162(m), a publicly held 

corporation means any corporation issuing any class of common equity securities required to be 

registered under section 12 of the Securities Exchange Act of 1934746 All U.S. publicly traded 

companies are subject to this registration requirement, including their foreign affiliates. A 

foreign company publicly traded through American depository receipts ("A DRs") is also subject 

to this registration requirement if more than 50 percent of the issuer's outstanding voting 

securities are held, directly or indirectly, by residents of United States and either (i) the majority 

of the executive officers or directors are United States citizens or residents, (ii) more than 

50 percent of the assets of the issuer are located in the United States, or (iii) the business of the 

issuer is administered principally in the United States. Other foreign companies are not subject 

to the registration requirement. 

Remuneration subject to the deduction limitation 

In general 

Unless specifically excluded, the deduction limitation applies to all remuneration for 

services, including cash and the cash value of all remuneration (including benefits) paid in a 

medium other than cash. If an individual is a covered employee for a taxable year, the deduction 

limitation applies to all compensation not explicitly excluded from the deduction limitation, 

regardless of whether the compensation is for services as a covered employee and regardless of 

when the compensation was earned. The $1 million cap is reduced by excess parachute 

payments (as defined in section 280G) that are not deductible by the corporation. 747 

Notice 2007-49. 2007-25 I.R.B. 1429. 

By reason of being among the officers whose total compensation is required to be reported to 

shareholders under the Securities Exchange Act of 1934. 

Treas. Reg. sec. 1.162-27(c)(2). 

Sec. 162(m)(2). 

Sec. 162(m)(4)(F). 
240 

Certain types of compensation are not subject to the deduction limit and are not taken 

into account in determining whether other compensation exceeds $1 million. The following 

types of compensation are not taken into account: (I) remuneration payable on a commission 

basis 748; (2) remuneration payable solely on account of the attainment of one or more 

performance goals if certain outside director and shareholder approval requirements are met 

("performance-based compensation")749; (3) payments to a tax-favored retirement plan 

(including salary reduction contributions); (4) amounts that are excludable from the executive's 

gross income (such as employer-provided health benefits and miscellaneous fringe benefits 750); 

and (5) any remuneration payable under a written binding contract which was in effect on 

February 17, 1993. In addition, remuneration does not include compensation for which a 

deduction is allowable after a covered employee ceases to be a covered employee. Thus, the 

deduction limitation often does not apply to deferred compensation that is otherwise subject to 

the deduction limitation (e.g., is not performance-based compensation) because the payment of 

compensation is deferred until after termination of employment. 

Performance-based compensation 

Compensation qualifies for the exception for perfonnance-based compensation only if 

(I) it is paid solely on account of the attainment of one or more performance goals, (2) the 

performance goals are established by a compensation committee consisting solely of two or more 

outside directors, 751 (3) the material terms under which the compensation is to be paid, including 

the performance goals, are disclosed to and approved by the shareholders in a separate majorityapproved vote prior to payment, and (4) prior to payment, the compensation committee certifies 

that the performance goals and any other material terms were in fact satisfied. 

Compensation (other than stock options or other stock appreciation rights ("SARs")) is 

not treated as paid solely on account of the attainment of one or more performance goals unless 

the compensation is paid to the particular executive pursuant to a pre-established objective 

performance formula or standard that precludes discretion. A stock option or SAR with an 

exercise price not less than the fair market value, on the date the option or SARis granted, of the 

stock subject to the option or SAR, generally is treated as meeting the exception for 

performance-based compensation, provided that the requirements for outside director and 

shareholder approval are met (without the need for certification that the performance standards 

have been met). This is the case because the amount of compensation attributable to the options 

or SARs received by the executive is based solely on an increase in the corporation's stock price. 

748 Sec. 162(rn)(4)(B). 

719 Sec. 162(rn)(-+)(C). 

Sees. 105. 106. and 132. 

751 A director is considered an outside director if he or she is not a current employee of !he corporation (or 

related entities). is not a former employee of the corporation (or related entities) who is receiving compensation for 

prior services (other than benefits under a qualified retirement plan). was not an officer of the corporation (or related 

entities) at any time. and is not currently receiving compensation for personal scn·ices in any capacity (e.g., for 

services as a consultant) other than as a director. 
241 

Stock-based compensation is not treated as performance-based if it depends on factors other than 

corporate performance. 

Reasons for Change 

The Committee believes that the significant exceptions to the limit on deductible 

executive compensation by publicly traded corporations have resulted in a shift away from cash 

compensation paid to senior executives in favor of stock options and other forms of performance 

pay. The Committee further believes this shift has led to perverse consequences resulting from 

the focus of such executives and businesses on quarterly results, rather than the long-term 

success of the company and its rank-and-file workers. Additionally, the Committee believes that 

aligning the deductibility limit between domestically traded publicly traded corporations and all 

foreign companies that trade ADRs in the United States, as well as certain private C corporations 

and S corporations, promotes fair tax treatment across similarly situated businesses. The 

Committee believes the law should be clarified to override administrative guidance, Notice 

2007-49, 2007-25 I.R.B. 1429, which, contrary to the statute, limits the number of covered 

employees to four. 

Explanation of Provision 

Definition of covered employee 

The provision revises the definition of covered employee to include both the principal 

executive officer and the principal financial officer. Further, an individual is a covered employee 

if the individual holds one of these positions at any time during the taxable year. The provision 

also defines as a covered employee the three (rather than four) most highly compensated officers 

for the taxable year (other than the principal executive officer or principal financial officer) who 

are required to be reported on the company's proxy statement (i.e., the statement required 

pursuant to executive compensation disclosure rules promulgated under the Exchange Act) for 

the taxable year (or who would be required to be reported on such a statement for a company not 

required to make such a report to shareholders). This includes such officers of a corporation not 

required to file a proxy statement but which otherwise falls within the revised definition of a 

publicly held corporation, as well as such officers of a publicly traded corporation that would 

otherwise have been required to file a proxy statement for the year (for example, but for the fact 

that the corporation delisted its securities or underwent a transaction that resulted in the 

nonapplication of the proxy statement requirement). 

In addition, if an individual is a covered employee with respect to a corporation for a 

taxable year beginning after December 31, 2016, the individual remains a covered employee for 

all future years. Thus, an individual remains a covered employee with respect to compensation 

otherwise deductible for subsequent years, including for years during which the individual is no 

longer employed by the corporation and years after the individual has died. Compensation does 

not fail to be compensation with respect to a covered employee and thus subject to the deduction 

limit for a taxable year merely because the compensation is includible in the income of, or paid 

to, another individual, such as compensation paid to a beneficiary after the employee's death, or 

to a former spouse pursuant to a domestic relations order. 
242 

Definition of publicly held corporation 

The provision extends the applicability of section 162(m) to include all domestic publicly 

traded corporations and all foreign companies publicly traded through ADRs. The proposed 

definition may include certain additional corporations that are not publicly traded, such as large 

private C or S corporations. 

Performance-based compensation and commissions exceptions 

The provision eliminates the exceptions for commissions and performance-based 

compensation from the definition of compensation subject to the deduction limit. Thus, such 

compensation is taken into account in determining the amount of compensation with respect to a 

covered employee for a taxable year that exceeds $1 million and is thus not deductible under 

section 162. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. A transition 

rule applies to remuneration which is pursuant to a written binding contract which was in effect 

on November 2, 2017, and which was not modified in any material respect on or after such date. 

2. Excise tax on excess tax-exempt organization executive compensation (sec. 13602 of the 

bill and new sec. 4960 of the Code) 

Present Law 

Taxable employers and other service recipients generally may deduct reasonable 

compensation expenses. 752 However, in some cases, compensation in excess of specific levels is 

not deductible. 

A publicly held corporation generally cannot deduct more than $1 million of 

compensation (that is not compensation otherwise excepted from this limit) in a taxable year for 

each "covered employee." 753 For this purpose, a covered employee is the corporation's 

principal executive officer (or an individual acting in such capacity) defined in reference to the 

Securities Exchange Act of 1934 ("Exchange Act") as of the close of the taxable year, or any 

employee whose total compensation is required to be reported to shareholders under the 

Exchange Act by reason of being among the corporation's three most highly compensated 

officers for the taxable year (other than the principal executive officer or principal financial 

officer). 754 

Sec. 162(a)(l). 

' 53 Sec. 162(m)(l). Under section 162(m)(6). limits apply to deductions for compensation of individtmls 

perfonning services for certain health insurance providers. 

Notice 2007-49, 2007-2 T.R.B. 1429. 
243 

Unless an exception applies, generally a corporation cannot deduct that portion of the 

aggregate present value of a "parachute payment" which equals or exceeds three times the "base 

amount" of certain service providers. The nondeductible excess is an "excess parachute 

payment." 755 A parachute payment is generally a payment of compensation that is contingent on 

a change in corporate ownership or control made to certain officers, shareholders, and highly 

compensated individuals. 756 An individual's base amount is the average annualized 

compensation includible in the individual's gross income for the five taxable years ending before 

the date on which the change in ownership or control occurs 757 Certain amounts are not 

considered parachute payments, including payments under a qualified retirement plan, a 

simplified employee pension plan, or a simple retirement account. 758 

These deduction limits generally do not affect a tax-exempt organization. 

Reasons for Change 

The Committee believes that tax-exempt organizations enjoy a tax subsidy from the 

Federal government because contributions to such organizations are generally deductible and 

such organizations are generally not subject to tax (except on unrelated business income). As a 

result, such organizations are subject to the requirement that they use their resources for specific 

purposes, and the Committee believes that excessive compensation (including excessive 

severance packages) paid to senior executives of such organizations diverts resources from those 

particular purposes. The Committee further believes that alignment of the tax treatment of 

excessive executive compensation between for-profit and tax-exempt employers furthers the 

Committee's broader tax reform effort of making the system fairer for all businesses. 

Explanation of Provision 

Under the provision, an employer is liable for an excise tax equal to 20 percent of the 

sum of the(!) remuneration (other than an excess parachute payment) in excess of $1 million 

paid to a covered employee by an applicable tax-exempt organization for a taxable year, and 

(2) any excess parachute payment (under a new definition for this purpose that relates solely to 

separation pay) paid by the applicable tax-exempt organization to a covered employee. 

Accordingly, the excise tax applies as a result of an excess parachute payment, even if the 

covered employee's remuneration does not exceed $1 million. 

For purposes of the provision, a covered employee is an employee (including any former 

employee) of an applicable tax-exempt organization if the employee is one of the five highest 

compensated employees of the organization for the taxable year or was a covered employee of 

Sec. 280G(a) and (b)(l). 

Sec. 280G(b)(2) and (c). 

75' Sec. 280G(b)(3). 

Sees. 40 l(a). 403(a). 408(k), and 408(p). 
244 

the organization (or a predecessor) for any preceding taxable year beginning after December 31, 

2016. An "applicable tax-exempt organization" is an organization exempt from tax under 

section 501(a), an exempt farmers' cooperative, 759 a Federal, State or local governmental entity 

with excludable income, 760 or a political organization. 761 

Remuneration means wages as defined for income tax withholding purposes, 762 but does 

not include any designated Roth contribution 763 and includes amounts required to be included in 

gross income under section 457(f). 764 Remuneration of a covered employee includes any 

remuneration paid with respect to employment of the covered employee by any person or 

governmental entity related to the applicable tax-exempt organization. A person or 

governmental entity is treated as related to an applicable tax-exempt organization if the person or 

governmental entity (1) controls, or is controlled by, the organization, (2) is controlled by one or 

more persons that control the organization, (3) is a supported organization 765 during the taxable 

year with respect to the organization, ( 4) is a supporting organization 766 during the taxable year 

with respect to the organization, or (5) in the case of a voluntary employees' beneficiary 

association ("VEBA"), 767 establishes, maintains, or makes contributions to the VEBA. 

However, remuneration of a covered employee that is not deductible by reason of the $1 million 

limit on deductible compensation is not taken into account for purposes of the provision. 

Under the provision, an excess parachute payment is the amount by which any parachute 

payment exceeds the portion of the base amount allocated to the payment. A parachute payment 

is a payment in the nature of compensation to (or for the benefit of a covered employee) if the 

payment is contingent on the employee's separation from employment and the aggregate present 

" 9 Sec. 52l(b). 

760 Sec. 115(1). 

'

61 Sec. 527(e)(l). 

Sec. 340l(a). 

763 Under section 402A(c), a designated Roth contribution is an elective deferral (that is, a contribution to a 

tax-favored employer-sponsored retirement plan made at the election of an employee) that the employee designates 

as not being cxclndable from income. 

"·' Sec. 457(1) applies to an "ineligible" deferred compensation plan of a State and local government and 

tax-exempt employer (that is. a plan that does not meet the requirements to be an eligible plan under section 457(b)). 

Under an ineligible plmL deferred amonnts are treated as nonqualified deferred compensation and includible in 

income for the first taxable year in which there is no substantial risk of forfeiture of the rights to such compensation. 

For litis purpose, a person's rights to compensation are subject to a substantial risk of forfeiture if the rights are 

conditioned on the future performance of substantial services by any individual. Earninf,>s post vesting are generally 

taxed when paid. 

"' Sec. 509(1)(3). 

766 Sec. 509(a)(3). 

Sec. 50l(c)(9). 
245 

value of all such payments is three times or more the base amount. The base amount is the 

average annual compensation includible in the covered employee's gross income for the five 

taxable years ending before the date of the employee's separation from employment. Parachute 

payments do not include payments under a qualified retirement plan, a simplified employee 

pension plan, a simple retirement account, a tax-deferred annuity, 768 or an eligible deferred 

compensation plan of a State or local government employer. 769 

The employer of a covered employee is liable for the excise tax. If remuneration of a 

covered employee from more than one employer is taken into account in determining the excise 

tax, each employer is liable for the tax in an amount that bears the same ratio to the total tax as 

the remuneration paid by that employer bears to the remuneration paid by all employers to the 

covered employee. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

3. Treatment of qualified equity grants (sec. 13603 of the bill and new sec. 83(i) of the 

Code) 

Present Law 

Income tax treatment of employer stock transferred to an employee 

Specific rules apply to property, including employer stock, transferred to an employee in 

connection with the perfonnance of services. 770 These rules govern the amount and timing of 

income inclusion by the employee and the amount and timing of the employer's compensation 

deduction. 

Under these rules, an employee generally must recognize income in the taxable year in 

which the employee's right to the stock is transferable or is not subject to a substantial risk of 

forfeiture, whichever occurs earlier (referred to herein as "substantially vested"). Thus, if the 

employee's right to the stock is substantially vested when the stock is transferred to the 

employee, the employee recognizes income in the taxable year of such transfer, in an amount 

equal to the fair market value of the stock as of the date of transfer (less any amount paid for the 

stock). If at the time the stock is transferred to the employee, the employee's right to the stock is 

not substantially vested (referred to herein as "non vested"), the employee does not recognize 

income attributable to the stock transfer until the taxable year in which the employee's right 

becomes substantially vested. In this case, the amount includible in the employee's income is 

7

'*' Sec. 403(b) 

769 Sec. 457(b). 

Sec. 83. Section 83 applies generally to transfers of any property. not just employer stock, iu 

connection with the pcrfonnance of services by any service provider, not just an employee. However_ the provision 

described herein applies only with respect to certain employer stock transferred to employees. 
246 

the fair market value of the stock as of the date that the employee's right to the stock is 

substantially vested (less any amount paid for the stock). However, if the employee's right to 

the stock is non vested at the time the stock is transferred to employee, under section 83(b ), the 

employee may elect within 30 days of transfer to recognize income in the taxable year of 

transfer, referred to as a "section 83(b )" election. m If a proper and timely election under section 

83(b) is made, the amount of compensatory income is capped at the amount equal to the fair 

market value of the stock as of the date of transfer (less any amount paid for the stock). A section 

83(b) election is available with respect to grants of"restricted stock" (nonvested stock), and does 

not generally apply to the grant of options. 

In general, an employee's right to stock or other property is subject to a substantial risk of 

forfeiture if the employee's right to full enjoyment of the property is subject to a condition, such 

as the future performance of substantial services. 772 An employee's right to stock or other 

property is transferable if the employee can transfer an interest in the property to any person 

other than the transferor of the property773 Thus, generally, employer stock transferred to an 

employee by an employer is not transferable merely because the employee can sell it back to the 

employer. 

In the case of stock transferred to an employee, the employer is allowed a deduction (to 

the extent a deduction for a business expense is otherwise allowable) equal to the amount 

included in the employee's income as a result of transfer of the stock. 774 The employer 

deduction generally is permitted in the employer's taxable year in which or with which ends the 

employee's taxable year when the amount is included and properly reported in the employee's 

income. 775 

These rules do not apply to the grant of a nonqualified option on employer stock unless 

the option has a readily ascertainable fair market value. 776 Instead, these rules apply to the 

transfer of employer stock by the employee on exercise of the option. That is, if the right to the 

stock is substantially vested on transfer (the time of exercise), income recognition applies for the 

taxable year of transfer. If the right to the stock is nonvested on transfer, the timing of income 

inclusion is determined under the rules applicable to the transfer of nonvested stock. In either 

Under Treas. Reg. sec. 1.83-2, the employee makes an election by filing with the Internal Revenue 

Service a written statement that includes the fair market value of the property at the time of transfer and the amount 

(if any) paid for U1e property. The employee must also provide a copy of the statement to the employer. 

See section 83( c )(I) and Treas. Reg. sec. 1.83-3( c) for the definition of substantial risk of forfeiture. 

Treas. Reg. sec. 1.83-:l(d). In addition, under section 83(c)(2). the right to stock is transferable only if 

any transferee· s right to the stock would not be subject to a substantial risk of forfeiture. 

Sec. 83(h). 

Treas. Reg. sec. 1.83-6. 

See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A nonqualified option is an option on employer stock 

that is not a statutory option, discussed below. 
247 

case, the amount includible in income by the employee is the fair market value of the stock as of 

the required time of income inclusion, less the exercise price paid by the employee. A section 

83(b) election generally does not apply to the grant of options. If upon the exercise of an option, 

nonvested stock is transferred to the employee, a section 83(b) election may apply. The 

employer's deduction is generally determined under the rules that apply to transfers of restricted 

stock, but a special accrual rule may apply under Treasury regulations when the transferred stock 

is substantially vested. 777 

Employment taxes and reporting 

Employment taxes generally consist of taxes under the Federal insurance Contributions 

Act ("FICA"), tax under the Federal Unemployment Tax Act ("FUTA"), and income taxes 

required to be withheld by employers from wages paid to employees ("income tax 

withholding"). 778 Unless an exception applies under the applicable rules, compensation provided 

to an employee constitutes wages subject to these taxes. 

FICA imposes tax on employers and employees, generally based on the amount of wages 

paid to an employee during the year. Special rules as to the timing and amount of FICA taxes 

apply in the case of nonqualified deferred compensation, as defined for FICA purposes. 779 

The tax imposed on the employer and on the employee is each composed of two parts: (1) 

the Social Security or old age, survivors, and disability insurance ("OASDI") tax equal to 6.2 

percent of covered wages up to the OASDI wage base ($127,200 for 2017); and (2) the Medicare 

or hospital insurance ("HI") tax equal to 1.45 percent of all covered wages. 780 The employee 

portion of FICA tax generally must be withheld and, along with the employer portion, remitted 

to the Federal government by the employer. FICA tax withholding applies regardless of whether 

compensation is provided in the form of cash or a noncash form, such as a transfer of property 

(including employer stock) or in-kind benefits. 781 

,., Treas. Reg. sec. 1.83-6(a)(3). 

Sees. 3101-3128 (FICA), 3301-3311 (FUTA). and 3401-3404 (income tax withholding). Instead of 

FICA taxes. railroad employers and employees are subject. under the Railroad Retirement Tax Act ("RRT A''). 

sections 3201-3241. to taxes equivalent to FICA taxes with respect to compensation as defined for RRTA purposes. 

Sections 3501-3510 provide additional rules relating to all these taxes. 

Sec. 312l(v): Treas. Reg. sec. 3!.312l(v)(2). 

The employee portion of the HI tax under FICA (not the employer portion) is increased by an additional 

tax of 0.9 percent on wages received in excess of a threshold amount. The threshold amount is $250.000 in the case 

of a joint return. $125,000 in the case of a Inarried individual filing a separate return, and $200.000 in any other 

case. 

781 Under section 350 l(b ). employmenl taxes with respect to noncash fringe benefits arc to be collected (or 

paid) by the employer at the time and in the mmmer prescribed by the Secretary of the Treasury ("Treasury"). 

A1mouncement 85-113, 1985-31 LR.B. 31, provides guidance on the application of employment taxes with respect 

to noncash fringe benefits. 
248 

FUT A imposes a tax on employers of six percent of wages up to the FUT A wage base of 

$7,000. 

Income tax withholding generally applies when wages are paid by an employer to an 

employee, based on graduated withholding rates set out in tables published by the Internal 

Revenue Service ("IRS"). 782 Like FICA tax withholding, income tax withholding applies 

regardless of whether compensation is provided in the form of cash or a noncash form, such as a 

transfer of property (including employer stock) or in-kind benefits. 

An employer is required to furnish each employee with a statement of compensation 

information for a calendar year, including taxable compensation, FICA wages, and withheld 

income and FICA taxes. 783 In addition, information relating to certain nontaxable items must be 

reported, such as certain retirement and health plan contributions. The statement, made on 

Form W-2, Wage and Tax Statement, must be provided to each employee by January 31 of the 

succeeding year784 

Statutory options 

Two types of statutory options apply with respect to employer stock: incentive stock 

options ("ISOs'') and options provided under an employee stock purchase plan ("ESPP"). 785 

Stock received pursuant to a statutory option is subject to special rules, rather than the rules for 

nonqualified options, discussed above. No amount is includible in an employee's income on the 

grant, vesting, or exercise of a statutory option. 786 In addition, generally no deduction is allowed 

to the employer under section 162 with respect to the option or the stock transferred to an 

employee. 

If a holding requirement is met with respect to the stock transferred on exercise of a 

statutory option and the employee later disposes of the stock, the employee's gain generally is 

treated as capital gain rather than ordinary income. Under the holding requirement, the 

employee must not dispose of the stock within two years after the date the option is granted and 

also must not dispose of the stock within one year after the date the option is exercised. If a 

disposition occurs before the end of the required holding period (a "disqualifying disposition"), 

the employee recognizes ordinary income in the taxable year in which the disqualifying 

Sec. 3402. Specific withholding rates apply in the case of supplemental wages. 

Sees. 6041 and 605 L 

" 4 Employers send Form W -2 information to the Social Security Administrdtion, which records 

iufonnation relating to Social Security and Medicare and forwards the Form W -2 information to the IRS. 

Employees include a copy of Form W-2 with their income tax returns. 

"' Sections 421-424 govern statutory options. Section 423(b)(5) requires that under the terms of an 

ESPP, all employees granted options generally must have the same rights and privileges. 

" 6 U ndcr section 56(b )(3), tllis income tax treatment with respect to stock received on exercise of an ISO 

does not apply for purposes of the alternative minimum tax under section 55. 
249 

disposition occurs and the employer may be allowed a corresponding deduction in the taxable 

year in which such disposition occurs. The amount of ordinary income recognized when a 

disqualifying disposition occurs generally equals the fair market value of the stock on the date of 

exercise (that is, when the stock was transferred to the employee) less the exercise price paid. 

Employment taxes do not apply with respect to the grant or vesting of a statutory option, 

transfer of stock pursuant to the option, or a disposition (including a disqualifying disposition) of 

the stock. 787 However, certain special reporting requirements apply. 

Nongualified deferred compensation 

Compensation is generally includible in an employee's income when paid to the 

employee. However, in the case of a nonqualified deferred compensation plan, 788 unless the 

arrangement either is exempt from or meets the requirements of section 409A, the amount of 

deferred compensation is first includible in income for the taxable year when not subject to a 

substantial risk of forfeiture (as defined789), even if payment will not occur until a later year. 790 

In general, to meet the requirements of section 409A, the time when nonqualified deferred 

compensation will be paid, as well as the amount, must be specified at the time of deferral with 

limits on further deferral after the time for payment. Various other requirements apply, including 

that payment can only occur on specific defined events. 

Various exemptions from section 409A apply, including transfers of property subject to 

section 83 791 Nonqualified options are not automatically exempt from section 409A, but may be 

structured so as not to be considered nonqualified deferred compensation. 792 A restricted stock 

unit ("RSU") is a term used for an arrangement under which an employee has the right to receive 

at a specified time in the future an amount determined by reference to the value of one or more 

shares of employer stock. An employee's right to receive the future amount may be subject to a 

condition, such as continued employment for a certain period or the attainment of certain 

787 Sees. 3121 (a)(22). 3306(b)(l9), and the last sentence of section42l(b). 

'

88 Compensation earned by an employee is generally paid to the employee shortly after being earned. 

However. in some cases, payment is deferred to a later period, referred to as "deferred compensation.·· Deferred 

compensation may be provided through a plan that receives tax-favored treatment, such as a qualified retirement 

plan under section 40l(a). Deferred compensation provided through a plan that is not eligible for tax-favored 

treatment is referred to as "nonqualified'' deferred compensation. 

'

89 Trcas. Reg. sec. l.409A-l(d). 

790 Section 409 A and the rct,>ulations thereunder provide mles for nonqualified deferred compensation. 

Compensation that fails to meet the requirements of section 409A is also subject to an additional income tax of 20% 

on amounts includible in income and a potential interest factor tax ("409A taxes"). Section 409A and the additional 

409A taxes apply to increases in the value of the failed compensation each year until it is paid. 

- 91 Treas. Reg. sec. IA09A-l(b)(6). 

Treas. Reg. sec. 1.409A-l(b)(5). luaddition, statutory option arrangements arc not nonqualified 

deferred compensation arrangements. 
250 

performance goals. The payment to the employee of the amount due under the arrangement is 

referred to as settlement of the RSU. The arrangement may provide for the settlement amount to 

be paid in cash or as a transfer of employer stock (or either). An arrangement providing RSUs is 

generally considered a nonqualified deferred compensation plan and is subject to the rules, 

including the limits, of section 409A. The employer deduction generally is permitted in the 

employer's taxable year in which or with which ends the employee's taxable year when the 

amount is included and properly reported in the employee's income793 

Reasons for Change 

Employer stock may provide a valuable form of employee compensation. In some cases, 

the transfer of employer stock with a high fair market value may result in compensation income, 

and a related tax liability, that is disproportionately large in comparison to an employee's regular 

salary or wages. In the case of publicly traded employer stock, an employee may sell some of 

the stock to provide funds to cover that tax liability. However, that approach often is not 

available in the case of a closely held company that restricts the transferability of its stock. This 

may make employer stock a less attractive form of compensation. In the case of stock options, 

the inability to pay the tax liability that would result from the stock received on exercise of the 

option may mean employees let options lapse, thus losing compensation they have already 

earned. The Committee wishes to address these situations by allowing employees to elect to 

defer recognition of income attributable to stock received on exercise of an option or settlement 

of an RSU until an opportunity to sell some of the stock arises, but in no event longer than five 

years from the date that the employee's right to the stock becomes substantially vested. 

Explanation of Provision 

In general 

The provision allows a qualified employee to elect to defer, for income tax purposes, the 

inclusion in income of the amount of income attributable to qualified stock transferred to the 

employee by the employer. An election to defer income inclusion ("inclusion deferral election") 

with respect to qualified stock must be made no later than 30 days after the first time the 

employee's right to the stock is substantially vested or is transferable, whichever occurs earlier. 

If an employee elects to defer income inclusion under the provision, the income must be 

included in the employee's income for the taxable year that includes the earliest of (l) the first 

date the qualified stock becomes transferable, including, solely for this purpose, transferable to 

the employer; 794 (2) the date the employee first becomes an excluded employee (as described 

below); (3) the first date on which any stock of the employer becomes readily tradable on an 

Sec. 404(a)(5). 

'

9

'

1 Thus. for this purpose. the qualified stock is considered transferable if the employee has the ability to 

sell the stock to the employer (or any other person). 
251 

established securities market; 795 (4) the date five years after the first date the employee's right to 

the stock becomes substantially vested; or (5) the date on which the employee revokes her 

inclusion deferral election. 796 

An inclusion deferral election is made in a manner similar to the manner in which a 

section 83(b) election is made. 797 The provision does not apply to income with respect to 

nonvested stock that is includible as a result of a section 83(b) election. The provision clarifies 

that Section 83 (other than the provision), including subsection (b), shall not apply to RSUs. 

Therefore, RSUs are not eligible for a section 83(b) election. This is the case because, absent 

this provision, RSUs are nonqualified deferred compensation and therefore subject to the rules 

that apply to nonqualified deferred compensation. 

An employee may not make an inclusion deferral election for a year with respect to 

qualified stock if, in the preceding calendar year, the corporation purchased any of its 

outstanding stock unless at least 25 percent of the total dollar amount of the stock so purchased is 

stock with respect to which an inclusion deferral election is in effect ("defetTal stock") and the 

determination of which individuals from whom deferral stock is purchased is made on a 

reasonable basis798 For purposes of this requirement, stock purchased from an individual is not 

treated as deferral stock (and the purchase is not treated as a purchase of deferral stock) if, 

immediately after the purchase, the individual holds any deferral stock with respect to which an 

inclusion deferral election has been in effect for a longer period than the election with respect to 

the purchased stock. Thus, in general, in applying the purchase requirement, an individual's 

deferral stock with respect to which an inclusion deferral election has been in effect for the 

longest periods must be purchased first. A corporation that has deferral stock outstanding as of 

the beginning of any calendar year and that purchases any of its outstanding stock during the 

calendar year must report on its income tax return for the taxable year in which, or with which, 

the calendar year ends the total dollar amount of the outstanding stock purchased during the 

calendar year and such other information as the Secretary may require for purposes of 

administering this requirement. 

A qualified employee may make an inclusion deferral election with respect to qualified 

stock attributable to a statutory option. 799 In that case, the option is not treated as a statutory 

An established securities market is determined for this purpose by the Secretary, but does not include 

any market unless the market is recognized as an established securities market for purposes of another Code 

provision. 

796 An inclusion deferral election is revoked at the time and in the manner as the Secretary provides. 

Thus. as in the case of a section 83(b) election under present law, the employee must file with the IRS 

the inclusion deferral election and provide the employer with a copy. 

•

98 This requirement is met if the stock purchased by the corporation includes all the corporation's 

outstanding deferral stock. 

799 For purposes of the requirement that au ESPP provide employees with the same rights and privileges, 

the mles of the provision apply in determining which employees have the right to make an inclusion deferral 

election with respect to stock received under the ESPP. 
252 

option and the rules relating to statutory options and related stock do not apply. In addition, an 

arrangement under which an employee may receive qualified stock is not treated as a 

nonqualitied deferred compensation plan solely because of an employee's inclusion deferral 

election or ability to make an election. 

Deferred income inclusion applies also for purposes of the employer's deduction of the 

amount of income attributable to the qualified stock. That is, if an employee makes an inclusion 

deferral election, the employer's deduction is deferred until the employer's taxable year in which 

or with which ends the taxable year of the employee for which the amount is included in the 

employee's income as described in (1)-(5) above. 

Qualified employee and qualified stock 

Under the provision, a qualified employee means an individual who is not an excluded 

employee and who agrees, in the inclusion deferral election, to meet the requirements necessary 

(as determined by the Secretary) to ensure the income tax withholding requirements of the 

employer corporation with respect to the qualified stock (as described below) are met. For this 

purpose, an excluded employee with respect to a corporation is any individual (1) who was a 

one-percent owner of the corporation at any time during the I 0 preceding calendar years, soo 

(2) who is, or has been at any prior time, the chief executive officer or chief financial officer of 

the corporation or an individual acting in either capacity, (3) who is a family member of an 

individual described in (1) or (2), 801 or ( 4) who has been one of the four highest compensated 

officers of the corporation for any of the 10 preceding taxable years. 802 

Qualified stock is any stock of a corporation if--

• an employee receives the stock in connection with the exercise of an option or in 

settlement of an RSU, and 

• the option or RSU was granted by the corporation to the employee in connection with 

the performance of services and in a year in which the corporation was an eligible 

corporation (as described below) 

However, qualified stock does not include any stock if, at the time the employee's right 

to the stock becomes substantially vested, the employee may sell the stock to, or otherwise 

receive cash in lieu of stock from, the corporation. Qualified stock can only be such if it relates 

to stock received in connection with options or RSUs, and does not include stock received in 

"'' One-percent owner status is detennined under the top-heavy rules for qualified retirement plans. that is. 

section 416(i)(l)(B)(ii). 

801 Tn the case of one-percent owners, this results from application of the attribution rules of section 318 

under section 416(i)(l)(B)(i)(Tl). Fmnily members are detennined under section 318(a)(l) and generally include an 

individual's spouse, children. grandchildren and parents. 

802 These officers are detennined on the basis of shareholder disclosure rules for compensation under the 

Securities Exchange Act of 1934. as if such rules applied to the corporation. 
253 

connection with other forms of equity compensation, including stock appreciation rights or 

restricted stock. 

A corporation is an eligible corporation with respect to a calendar year if (1) no stock of 

the employer corporation (or any predecessor) is readily tradable on an established securities 

market during any preceding calendar year, 803 and (2) the corporation has a written plan under 

which, in the calendar year, not less than 80 percent of all employees who provide services to the 

corporation in the United States (or any U.S. possession) are granted stock options, or restricted 

stock units ("RSUs"), with the same rights and privileges to receive qualified stock ("SO-percent 

requirement"). 804 For this purpose, in general, the determination of rights and privileges with 

respect to stock is determined in a similar manner as provided under the present-law ESPP 

rules. 805 However, employees will not fail to be treated as having the same rights and privileges 

to receive qualified stock solely because the number of shares available to all employees is not 

equal in amount, provided that the number of shares available to each employee is more than a 

de minimis amount. In addition, rights and privileges with respect to the exercise of a stock 

option are not treated for this purpose as the same as rights and privileges with respect to the 

settlement of an RSU. 806 

For purposes of the provision, corporations that are members of the same controlled 

group807 are treated as one corporation. 

Notice, withholding and reporting requirements 

Under the provision, a corporation that transfers qualified stock to a qualified employee 

must provide a notice to the qualified employee at the time (or a reasonable period before) the 

employee's right to the qualified stock is substantially vested (and income attributable to the 

stock would first be includible absent an inclusion deferral election). The notice must (1) certify 

to the employee that the stock is qualified stock, and (2) notify the employee (a) that the 

employee may be eligible to elect to defer income inclusion with respect to the stock and (b) that, 

if the employee makes an inclusion deferral election, the amount of income required to be 

included at the end of the deferral period will be based on the value of the stock at the time the 

employee's right to the stock first becomes substantially vested, notwithstanding whether the 

803 This requirement continues to apply up to the time an inclusion deferral election is made. That is. tmder 

the provision. no inclusion deferral election may be made with respect to qualified stock if any stock of the 

corporation is readily tradable on an established securities market at any time before the election is made. 

804 In applying the requirement that 80 percent of employees receive stock options or RSUs, excluded 

employees and part-time employees are not taken into account. For tltis purpose. part-time employee is defined 

under section 4980E(d)(4), as an employee who is customarily employed for fewer than 30 hours per week. 

80' Sec. 423(b)(5). 

8116 Under a transition mle, in the case of a calendar year beginning before January I. 2018. the 80-percent 

requirement is applied without regard to whether the rights and privileges with respect to the qualified stock are the 

same. 

807 As defined in sec. 414(b ). 
254 

value of the stock has declined during the deferral period (including whether the value of the 

stock has declined below the employee's tax liability with respect to such stock), and the amount 

of income to be included at the end of the deferral period will be subject to withholding as 

provided under the provision, as well as of the employee's responsibilities with respect to 

required withholding. Failure to provide the notice may result in the imposition of a penalty of 

$100 for each failure, subject to a maximum penalty of$50,000 for all failures during any 

calendar year. 

An inclusion deferral election applies only for income tax purposes. The application of 

FICA and FUTA are not affected. The provision includes specific income tax withholding and 

reporting requirements with respect to income subject to an inclusion deferral election. 

For the taxable year for which income subject to an inclusion deferral election is required 

to be included in income by the employee (as described above), the amount required to be 

included in income is treated as wages with respect to which the employer is required to 

withhold income tax at a rate not less than the highest income tax rate applicable to individual 

taxpayers808 The employer must report on Form W-2 the amount of income covered by an 

inclusion deferral election (1) for the year of deferral and (2) for the year the income is required 

to be included in income by the employee. In addition, for any calendar year, the employer must 

report on Form W -2 the aggregate amount of income covered by inclusion deferral elections, 

determined as of the close of the calendar year. 

Effective Date 

The provision generally applies with respect to stock attributable to options exercised or 

RSUs settled after December 31, 2017. Under a transition rule, until the Secretary (or the 

Secretary's delegate) issues regulations or other guidance implementing the 80-percent and 

employer notice requirements under the provision, a corporation will be treated as complying 

with those requirements (respectively) if it complies with a reasonable good faith interpretation 

of the requirements. The penalty for a failure to provide the notice required under the provision 

applies to failures after December 31, 2017. 

''~ That is. the maximum rate of tax in effect for the year under section 1. The provision specifics that 

qualified stock is treated as a noncash fringe benefit for income tax withholding purposes. 
255 

4. Increase in excise tax rate for stock compensation of insiders in expatriated corporations 

(sec. 13604 of the bill and sec. 4985 of the Code) 

Present Law 

Income tax treatment of employee stock compensation 

In general 

Employers may grant various forms of stock compensation to employees, 809 including 

nonstatutory and statutory stock options, restricted stock, restricted stock units, and stock 

appreciation rights. The tax treatment of these various forms of stock compensation depends on 

the specific terms and conditions of the arrangement and applicable rules. 

Stock compensation treated as property transferred in connection with the performance of 

services 

Section 83 generally governs the taxation of transfers of any property in connection with 

the performance of services by any service provider. Typically, this encompasses the transfer of 

stock to an employee which is subject to conditions that amount to a substantial risk of forfeiture, 

called "restricted stock." Section 83 also generally governs the taxation of nonstatutory (or 

nonqualified) stock options. In general, an employee's right to stock or other property is subject 

to a substantial risk offorfeiture if the employee's right to full enjoyment of the property is 

subject to a condition, such as the future performance of substantial services. 810 

Generally, an employee must recognize income in the taxable year in which the 

employee's right to the stock is transferable or is not subject to a substantial risk of forfeiture, 

whichever occurs earlier (referred to herein as "substantially vested"). Thus, if the employee's 

right to the stock is substantially vested when the stock is transferred to the employee, the 

employee recognizes income in the taxable year of such transfer, in an amount equal to the fair 

market value of the stock as of the date of transfer (less any amount paid for the stock). If at the 

time the stock is transferred to the employee, the employee's right to the stock is not 

substantially vested (referred to herein as "nonvested"), the employee does not recognize income 

attributable to the stock transfer until the taxable year in which the employee's right becomes 

substantially vested. In this case, the amount includible in the employee's income is the fair 

market value of the stock as of the date that the employee's right to the stock is substantially 

vested (less any amount paid for the stock). 811 

"" The tenus "employee·· and "employer" are used. although the provision herein also applies to 

individuals who are not employees and the service recipients of such non-employee individuals. 

810 See section 83(c)(l) and Trcas. Reg. sec. 1.83-3(c) for the definition of substantial risk of forfeiture. 

" 1 Under section 83(b ). the employee may elect within 30 days of transfer to recognize income in the 

taxable year of transfer. referred to as a "section 83(b)" election. If a proper and timely election under section 83(b) 
256 

These rules do not apply to the grant of a nonqualified option unless the option has a 

readily ascertainable fair market value. 812 Instead, these rules generally apply to the transfer of 

employer stock by the employee on exercise of the option. That is, if the right to the stock is 

substantially vested on transfer (the time of exercise), income recognition applies for the taxable 

year of transfer. If the right to the stock is nonvested on transfer, the timing of income inclusion 

is determined under the rules applicable to the transfer of nonvested stock. In either case, the 

amount includible in income by the employee is the fair market value of the stock as of the 

required time of income inclusion, less the exercise price paid by the employee. 

Statutory stock options 

Two types of statutory options apply with respect to employer stock: incentive stock 

options ("ISOs") and options provided under an employee stock purchase plan ("ESPP"). 813 

Stock received pursuant to a statutory option is subject to special rules, rather than the rules for 

nonqualified options, discussed above. Unlike nonstatutory options, statutory options may only 

be considered as such if granted to employees. 814 No amount is includible in an employee's 

income on the grant, vesting, or exercise of a statutory option. 

If a holding requirement is met with respect to the stock transferred on exercise of a 

statutory option and the employee later disposes of the stock, the employee's gain generally is 

treated as capital gain rather than ordinary income. Under the holding requirement, the 

employee must not dispose of the stock within two years after the date the option is granted and 

also must not dispose of the stock within one year after the date the option is exercised. If a 

disposition occurs before the end of the required holding period (a "disqualifying disposition"), 

the employee recognizes ordinary income in the taxable year in which the disqualifying 

disposition occurs. The amount of ordinary income recognized when a disqualifying disposition 

occurs generally equals the fair market value of the stock on the date of exercise (that is, when 

the stock was transferred to the employee) less the exercise price paid. 

Stock compensation treated as deferred compensation 

A restricted stock unit ("RSU") is a term used for an arrangement under which an 

employee has the right to receive at a specified time in the future an amount determined by 

reference to the value of one or more shares of employer stock. An employee's right to receive 

the future amount may be subject to a condition, such as continued employment for a certain 

period or the attainment of certain performance goals. The payment to the employee of the 

is made. the amount of compensatory income is capped at the amount equal to the fair market value of the stock as 

of the date of transfer (less any amount paid for the stock). 

812 See section 83(c)(3) and Treas. Reg. sec. 1.83-7. A nonqualified option is an option on employer stock 

that is not a statutory option. discussed below. 

813 Sections 421-424 govern statutory options. Section 423(b)(5) requires that. under the tern1s of an 

ESPP. all employees granted options generally must have the same rights and privileges. 

814 Sees. 422(a)(2) and 423(a)(2). 
257 

amount due under the arrangement is referred to as settlement of the RSU. The arrangement 

may provide for the settlement amount to be paid in cash or as a transfer of employer stock. An 

arrangement providing RSUs is generally considered a nonqualified deferred compensation plan 

and is subject to the rules, including the limits, of section 409A, 815 unless it meets an exemption 

from section 409A. If the RSU either is exempt from or complies with section 409A, the 

employee is subject to income taxation on receipt of cash or the transfer of shares attributable to 

theRSU. 

A stock appreciation right ("SAR") is a term used for an arrangement under which an 

employee has the right to receive an amount (in the form of cash or stock) determined by 

reference to the appreciation in value of one or more shares of employer stock, based on the 

difference in the stock's value when the employee chooses to exercise the right and the value of 

the stock on the date of grant of the SAR. An SARis generally taxable at the time of exercise on 

the amount of cash or value of stock transferred at the time of exercise of the SAR. 816 

Various exemptions from section 409A apply, including transfers of property subject to 

section 83, such as restricted stock. 817 Nonqualified options and SARs are not automatically 

exempt from section 409A, but may be structured so as not to be considered nonqualified 

deferred compensation. 818 In addition, ISOs and ESPPs are exempt from section 409A. 819 

Section 4985 excise tax on stock compensation of insiders of expatriated corporations 

Under section 4985, certain holders of stock options and other stock-based compensation 

are subject to an excise tax upon certain transactions that result in an expatriated corporation820 

"' Section 409A and the regulations thereunder provide rules for nonqualified deferred compensation. 

Unless an arrangement either is exempt from or meets the requirements of section 409 A. the amount of deferred 

compensation is first includible in income for the taxable year when not subject to a substantial risk of forfeiture (as 

defined). even if payment will not occur tmtil a later year. In generaL to meet the requirements of section 409 A, the 

time when nonqualified deferred compensation will be paid, as well as the amount, must be specified at the time of 

deferral with limits on further deferral after the time for payment. Various other requirements apply. including that 

payment can only occur on specific defined events. Compensation that fails to meet the requirements of section 

409 A is also subject to an additional income tax of 20% on amounts includible in income and a potential interest 

factor tax ('409A taxes"). Section 409A and the additional409A taxes apply to increases in the value of the failed 

compensation each year until it is paid. 

816 Rev. Rul. 80-300. 1980-2 C.B. 165. 

sn Treas. Reg. sec. 1.409A-l(b)(6). 

818 Treas. Reg. sec. 1.409A-l(b)(5). 

819 Treas. Reg. sec. 1.409A-l(b)(5)(ii). 

Sec. 7874(a)(2). 
258 

(also referred to as corporate inversions). 821 The provision imposes an excise tax, currently at 

the rate of 15 percent, on the value of specified stock compensation held (directly or indirectly) 

by or for the benefit of a disqualified individual, or a member of such individual's family, at any 

time during the 12-month period beginning six months before the corporation's expatriation date. 

Specified stock compensation is treated as held for the benefit of a disqualified individual if such 

compensation is held by an entity, e.g., a partnership or trust, in which the individual, or a 

member of the individual's family, has an ownership interest 

A disqualified individual is any individual who, with respect to a corporation, is, at any 

time during the 12-month period beginning on the date which is six months before the 

expatriation date, subject to the requirements of section 16(a) of the Securities and Exchange Act 

of 1934 with respect to the corporation, or any member of the corporation's expanded affiliated 

group, 822 or would be subject to such requirements if the corporation (or member) were an issuer 

of equity securities referred to in section 16(a). Disqualified individuals generally include 

officers (as defined by section 16(a)), 823 directors, and 10-percent owners of private and 

publicly-held corporations. 

The excise tax is imposed on a disqualified individual of an expatriated corporation (as 

defined) only if gain (if any) is recognized in whole or part by any shareholder by reason of the 

acquisition resulting in the corporate inversion. 824 

Specified stock compensation subject to the excise tax includes any payment825 (or right 

to payment) granted by the expatriated corporation (or any member of the corporation's 

expanded affiliated group) to any person in connection with the performance of services by a 

disqualified individual for such corporation (or member of the corporation's expanded affiliated 

group) if the value of the payment or right is based on, or determined by reference to, the value 

or change in value of stock of such corporation (or any member of the corporation's expanded 

affiliated group). In determining whether such compensation exists and valuing such 

compensation, all restrictions, other than non-lapse restrictions, are ignored. Thus, the excise tax 

applies, and the value subject to the tax is detennined, without regard to whether such specified 

stock compensation is subject to a substantial risk offorfeiture or is exercisable at the time of the 

801 For filfther discussion of the tax treatment of e"1Jalriated entities before the effective date of section 

7874 and concerns that led to the enactment of sections 7874 and 4985, sec Joint Committee on Taxation General 

Explanation ofT ax Legislation Enacted in the 108th Congress (JCS-5-05), May 2005. 

An expanded affiliated group is an affiliated group (under section 1504) except that such group is 

determined without regard to the exceptions for certain corporations and is detennined applying a greater than 50 

percent threshold, in lieu of the 80 percent test. 

823 An officer is defined as the president, principal financial officer. principal accounting officer (or, if 

there is no such accounting officer. the controller), any vice-president in charge of a principal business unit division 

or function (such as sales, administration or finance), any other officer who pcrfonns a policy-making function or 

any other person who performs similar policy-making functions. 

824 As referred to in section 7874(a)(2)(B)(i). 

82' Under the provision. any transfer of property is treated as a payment and any right to a transfer of 

property is treated as a right to a payment 
259 

corporate inversion. Specified stock compensation includes compensatory stock and restricted 

stock grants, compensatory stock options, and other forms of stock-based compensation, 

including stock appreciation rights, restricted stock units, phantom stock, and phantom stock 

options. Specified stock compensation also includes nonqualified deferred compensation that is 

treated as though it were invested in stock or stock options of the expatriating corporation (or 

member). For example, the provision applies to a disqualified individual's nonqualified deferred 

compensation if company stock is one of the actual or deemed investment options under the 

nonqualified deferred compensation plan. 

Specified stock compensation includes a compensation arrangement that gives the 

disqualified individual an economic stake substantially similar to that of a corporate shareholder. 

A payment directly tied to the value of the stock is specified stock compensation. 

The excise tax applies to any such specified stock compensation previously granted to a 

disqualified individual but cancelled or cashed-out within the six-month period ending with the 

expatriation date, and to any specified stock compensation awarded in the six-month period 

beginning with the expatriation date. As a result, for example, if a corporation cancels 

outstanding options three months before the transaction and then reissue comparable options 

three months after the transaction, the tax applies both to the cancelled options and the newly 

granted options. 

Specified stock compensation subject to the tax does not include a statutory stock option 

or any payment or right from a qualified retirement plan or annuity, a tax-sheltered annuity, a 

simplified employee pension, or a simple retirement account. In addition, under the provision, 

the excise tax does not apply to any stock option that is exercised during the six-month period 

before the expatriation date or to any stock acquired pursuant to such exercise, if income is 

recognized under section 83 on or before the expatriation date with respect to the stock acquired 

pursuant to such exercise. The excise tax also does not apply to any specified stock 

compensation that is exercised, sold, exchanged, distributed, cashed out, or otherwise paid 

during such period in a transaction in which income, gain, or loss is recognized in full. 

For specified stock compensation held on the expatriation date, the amount of the tax is 

determined based on the value of the compensation on such date. The tax imposed on specified 

stock compensation cancelled during the six-month period before the expatriation date is 

determined based on the value of the compensation on the day before such cancellation, while 

specified stock compensation granted after the expatriation date is valued on the date granted. 

Under the provision, the cancellation of a non-lapse restriction is treated as a grant. 

The value of the specified stock compensation on which the excise tax is imposed is the 

fair value in the case of stock options (including warrants and other similar rights to acquire 

stock) and stock appreciation rights and the fair market value for all other forms of 

compensation. For purposes of the tax, the fair value of an option (or a warrant or other similar 

right to acquire stock) or a stock appreciation right is determined using an appropriate optionpricing model, as specified or permitted by the Treasury Secretary, that takes into account the 

stock price at the valuation date; the exercise price under the option; the remaining term of the 

option; the volatility of the underlying stock and the expected dividends on it; and the risk-free 

interest rate over the remaining term of the option. Options that have no intrinsic value (or 
260 

"spread") because the exercise price under the option equals or exceeds the fair market value of 

the stock at valuation nevertheless have a fair value and are subject to tax under the provision. 

The value of other forms of compensation, such as phantom stock or restricted stock, is the fair 

market value of the stock as of the date of the expatriation transaction. The value of any deferred 

compensation that can be valued by reference to stock is the amount that the disqualified 

individual would receive if the plan were to distribute all such deferred compensation in a single 

sum on the date of the expatriation transaction (or the date of cancellation or grant, if applicable). 

The excise tax also applies to any payment by the expatriated corporation or any member 

of the expanded affiliated group made to an individual, directly or indirectly, in respect of the 

tax. Whether a payment is made in respect of the tax is determined under all of the facts and 

circumstances. Any payment made to keep the individual in the same after-tax position that the 

individual would have been in had the tax not applied is a payment made in respect of the tax. 

This includes direct payments of the tax and payments to reimburse the individual for payment 

of the tax. Any payment made in respect of the tax is includible in the income of the individual, 

but is not deductible by the corporation. 

To the extent that a disqualified individual is also a covered employee under section 

162(m), the limit on the deduction allowed for employee remuneration for such employee is 

reduced by the amount of any payment (including reimbursements) made in respect of the tax 

under the provision. As discussed above, this includes direct payments of the tax and payments 

to reimburse the individual for payment of the tax. 

The payment of the excise tax has no effect on the subsequent tax treatment of any 

specified stock compensation. Thus, the payment of the tax has no effect on the individual's 

basis in any specified stock compensation and no effect on the tax treatment for the individual at 

the time of exercise of an option or payment of any specified stock compensation, or at the time 

of any lapse or forfeiture of such specified stock compensation. The payment of the tax is not 

deductible and has no effect on any deduction that might be allowed at the time of any future 

exercise or payment. 

Reasons for Change 

The Committee notes that the rate of the excise tax imposed by section 4985 has not been 

updated since 2013, when the applicable tax rate for long term capital gains (the rate on which 

the excise tax is based) increased to 20 percent, and wishes to update the excise tax rate to reflect 

the applicable long term capital gains rate under present law. 

Explanation of Provision 

The provision increases the 15 percent rate of excise tax, imposed on the value of stock 

compensation held by insiders of an expatriated corporation, to 20 percent. 

Effective Date 

The provision applies to corporations first becoming expatriated corporations after the 

date of enactment. 
261 

5. Conformity of contribntion limits for employer-sponsored retirement plans (sec. 13611 

of the bill and sees. 402,403,415, and 457 of the Code) 

Present Law 

Account-based tax-favored employer-sponsored retirement plans include a qualified 

defined contribution plan, a tax-sheltered annuity plan (referred to as a "section 403(b) plan"), 

and an eligible deferred compensation plan of a State or local government (referred to as a 

"governmental section 457(b) plan"). 826 A qualified defined contribution plan may include a 

qualified cash or deferred arrangement (referred to as a "section 401(k) plan"), under which an 

employee elects to have contributions made to the plan (referred to as "elective deferrals") rather 

than receiving the same amount as cash compensation. 827 Elective deferrals are generally made 

on a pretax basis unless designated by the employee as Roth contributions, which are made on an 

after-tax basis. A defined contribution plan may also provide for after-tax employee 

contributions and for employer nonelective contributions and matching contributions. A 

section 403(b) plan may also provide for these ditferent types of contributions. Although a 

governmental section 457(b) plan may provide for employer contributions, these plans generally 

provide only for elective deferrals. 

In the case of a section 401(k) plan or a section 403(b) plan, specific annual limits apply 

to elective deferrals by an employee and additional annual limits apply to aggregate 

contributions for the employee. For 2017, elective deferrals are generally limited to the lesser of 

(1) $18,000 plus an additional $6,000 catch-up contribution limit for employees at least age 50 

and (2) the employee's compensation. 828 If an employee participates in both a section 40 l(k) 

plan and a section 403(b) plan of the same employer, a single limit applies to elective deferrals 

under both plans. For this purpose, members of a controlled group or affiliated service group are 

treated as a single employer. 829 However, under a special rule, in the case of employees who 

have completed 15 years of service, additional elective deferrals are permitted under a section 

403(b) plan maintained by an educational organization, hospital, home health service agency, 

health and welfare service agency, church, or convention or association of churches. 830 In this 

case, the annual limit is increased by the least of (1) $3,000, (2) $15,000 reduced by the 

employee's additional elective deferrals for previous years, and (3) $5,000 multiplied by the 

employee's years of service and reduced by the employee's elective deferrals for previous years. 

For 2017, the limit on aggregate contributions to a qualified defined contribution plan 

(including a section 401(k) plan) or a section 403(b) plan is the lesser of (I) $54,000 and (2) the 

826 Sees. 40l(a), 403(a). 403(b), 457(b). 

Sec. 40l(k). 

828 Sees. 402(g) and 414(v). 

829 Sees. 414(b). (c). (m) and (o). Controlled group status under section414(b) or (c) is generally based on 

ownership of at least 80 percent. 

830 Sec. 402(g)(7). 
262 

employee's compensation831 Because employees generally do not receive compensation for 

years after they have tenninated employment, contributions generally cannot be made for former 

employees. However, under a special rule, employer contributions to a section 403(b) plan can 

be made for up to five years after termination of employment. 832 

The limit described above on aggregate contributions to a qualified defined contribution 

plan applies to contributions for an employee to any defined contribution plans maintained by the 

same employer (including any members of a controlled group or affiliated service group). 833 

Similarly, the limit on aggregate contributions to a section 403(b) plan applies to contributions 

for an employee to any section 403(b) plan maintained by the same employer. However, 

contributions to a qualified defined contribution plan and to a section 403(b) plan maintained by 

the same employer are subject to separate limits unless the employee in the section 403(b) plan is 

in control of the employer maintaining the qualified defined contribution plan. 834 In addition, 

deferrals under a governmental section 457(b) plan are not taken into account in applying this 

limit. 

In the case of a governmental section 457(b) plan, all contributions are subject to a single 

limit, generally for 2017, the lesser of(!) $18,000 plus an additional $6,000 catch-up 

contribution limit for employees at least age 50 and (2) the employee's compensation. 835 This 

limit is separate from the limit on elective deferrals to section 401 (k) and section 403(b) plans. 

Thus, for example, if an employee participates in both a section 403(b) plan and a governmental 

section 457(b) plan of the same employer, the employee may contribute up to $18,000 (plus 

$6,000 catch-up contributions if at least age 50) to the section 403(b) plan and up to $18,000 

(plus $6,000 catch-up contributions if at least age 50) to the section 457(b) plan. In addition, 

under a special rule, catch-up contributions may be made by an employee to a governmental 

section 457(b) for the last three years before attainment of normal retirement age. Additional 

contributions may be made up to the lesser of (I) two times the otherwise applicable dollar limit 

for the year (two times $18,000 for 2017, or $36,000) and (2) the employee's otherwise 

applicable limit for the year plus the amount by which the limit applicable to the employee for 

previous years exceeded the employee's deferrals for the previous years. 836 If a higher limit 

"' Sec. 415( c). Employee contributions to qualified defined benefit plans are also taken into account in 

applying this limit. 

sJz Sec. 403(b)(3), pemutting compensation received up to five years previously to be treated as 

compensation for the current year. In addition, under a special rule in section 415( c)(7). certain contribution 

amounts arc permitted for church employees and foreign missionaries. 

833 For tins purpose, controlled group status is based on ownership of more than 50 percent. mther than at 

least 80 percent. 

834 This could occur, for example, if the employee in the section 403(b) plan owns a sepamte business that 

maintains a qualified defined contribution plan. In that case, a single linnt applies to the contributions for the 

employee to the section 403(b) plan and the defined contribution plan. 

815 Sees. 414(v) and 457(b)(2) and (c)(l5). 

836 Sec. 457(b)(3). 
263 

applies to an employee for a year under this special rule than under the general catch-up rule 

($6,000 for 20 17), the general catch-up rule does not apply for the year. 

Reasons for Change 

The rules for qualified retirement plans, section 403(b) plans, and governmental 

section 457(b) plans developed separately over time, which led to discrepancies between the 

types of plans. These discrepancies can create complexity for employers and plan 

administrators, as well as confusion for employees, and result in disparate treatment of taxpayers. 

Legislation in recent years has therefore sought to bring greater consistency to the rules 

applicable to different types of plans. The Committee wishes to conform the rules further, and 

provide more consistent treatment of taxpayers, by applying the same contribution limits to all 

types of plans. 

Explanation of Provision 

The provision applies a single aggregate limit to contributions for an employee in a 

governmental section 457(b) plan and elective deferrals for the same employee under a 

section 40l(k) plan or a section 403(b) plan of the same employer. Thus, the limit for 

governmental section 457(b) plans is coordinated with the limit for section 40l(k) and 403(b) 

plans in the same manner as the limits are coordinated under present law for elective deferrals to 

section 40l(k) and section 403(b) plans. 

The provision repeals the special rules allowing additional elective deferrals and catch-up 

contributions under section 403(b) plans and governmental section 457(b) plans. Thus, the same 

limits apply to elective deferrals and catch-up contributions under section 40l(k) plans, section 

403(b) plans and governmental section 457(b) plans. 

The provision repeals the special rule allowing employer contributions to section 403(b) 

plans for up to five years after termination of employment. 837 

The provision also revises application of the limit on aggregate contributions to a 

qualified defined contribution plan or a section 403(b) plan (that is, the lesser of(!) $54,000 (for 

2017) and (2) the employee's compensation). As revised, a single aggregate limit applies to 

contributions for an employee to any defined contribution plans, any section 403(b) plans, and 

any governmental section 457(b) plans maintained by the same employer, including any 

members of a controlled group or affiliated service group. 838 

The pro\ision docs not repeal the special mlc in section 415( c)(7), under which certain contribution 

amounts arc permitted for church employees and foreign missionaries. 

" 8 As under present law. employee contributions to qualified defined benefit plans are also taken into 

account iu applying tllis limit. 
264 

Effective Date 

The provision is effective for plan years and taxable years beginning after 

December 31, 2017. 

6. Repeal of special rule permitting recharacterizatiou of IRA contributions (sec. 13612 of 

the bill and sec. 408A of the Code) 

Present Law 

Individual retirement arrangements 

There are two basic types of individual retirement arrangements ("IRAs") under present 

law: traditional IRAs, 839 to which both deductible and nondeductible contributions may be 

made, 840 and Roth lRAs, to which only nondeductible contributions may be made. 841 The 

principal difference between these two types of IRAs is the timing of income tax inclusion. 

An annual limit applies to contributions to IRAs. The contribution limit is coordinated so 

that the aggregate maximum amount that can be contributed to all of an individual's IRAs (both 

traditional and Roth) for a taxable year is the lesser of a certain dollar amount ($5,500 for 2017) 

or the individual's compensation. In the case of a married couple, contributions can be made up 

to the dollar limit for each spouse if the combined compensation of the spouses is at least equal 

to the contributed amount. The dollar limit is increased annually ("indexed") as needed to reflect 

increases in the cost-ofliving. An individual who has attained age 50 before the end of the 

taxable year may also make catch-up contributions up to $1,000 to an lRA. The IRA catch-up 

contribution limit is not indexed. 

Traditional IRAs 

An individual may make deductible contributions to a traditional IRA up to the IRA 

contribution limit (reduced by any contributions to Roth IRAs) if neither the individual nor the 

individual's spouse is an active participant in an employer-sponsored retirement plan. If an 

individual (or the individual's spouse) is an active participant in an employer-sponsored 

retirement plan, the deduction is phased out for taxpayers with adjusted gross income(" AGI") 

for the taxable year over certain indexed levels. 842 To the extent an individual cannot or does not 

make deductible contributions to a traditional IRA or contributions to a Roth IRA for the taxable 

year, the individual may make nondeductible after-tax contributions to a traditional IRA (that is, 

no AGI limits apply), subject to the same contribution limits as the limits on deductible 

839 Sec. 408. 

'·" Sec. 219. 

841 Sec. 408A. 

Sec. 219(g). 
265 

contributions, including catch-up contributions. An individual who has attained age 70Yz before 

to the close of a year is not permitted to make contributions to a traditional IRA for that year. 

Amounts held in a traditional IRA are includible in income when withdrawn, except to 

the extent the withdrawal is a return of the individual's basis. 843 All traditional IRAs of an 

individual are treated as a single contract for purposes of recovering basis in the IRAs. 

Roth IRAs 

Individuals with AGI below certain levels may make nondeductible contributions to a 

Roth IRA The maximum annual contribution that can be made to a Roth IRA is phased out for 

taxpayers with AGI for the taxable year over certain indexed levels. 

Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not 

includible in income. A qualified distribution is a distribution that (1) is made after the fivetaxable-year period beginning with the first taxable year for which the individual first made a 

contribution to a Roth IRA, and (2) is made after attainment of age 59Yz, on account of death or 

disability, or is made for first-time homebuyer expenses of up to $10,000. 

Distributions from a Roth IRA that are not qualified distributions are includible in 

income to the extent attributable to earnings; amounts that are attributable to a return of 

contributions to the Roth IRA are not includible in income. All Roth lRAs are treated as a single 

contract for purposes of detennining the amount that is a return of contributions. 

Separation of traditional and Roth IRA accounts and conversions 

Contributions to traditional IRAs and to Roth IRAs must be segregated into separate 

IRAs, meaning arrangements with separate trusts, accounts, or contracts, and separate IRA 

documents. Except in the case of a conversion or recharacterization, amounts cannot be 

transferred or rolled over between the two types of IRAs. 

Taxpayers generally may convert an amount in a traditional IRA to a Roth IRA 

(sometimes referred to as a "conversion contribution"). 844 The amount converted is includible in 

the taxpayer's income as if a withdrawal had been made. 845 The conversion is accomplished by 

'"3 Basis results from after-tax contributions to traditionaliRAs or a rollovers to traditiooaliRAs of aftertax amounts from another eligible retirement plan. 

844 Although an individual with AGI exceeding certain limits is not permitted to make a contribution 

directly to a Roth IRA. the individual can make a contribution to a traditional IRA and convert the traditional IRA to 

a Roth IRA. 

'"15 Subject to various exceptions. distributions from an IRA before age 59\1, that arc includible in income 

are subject to a 10-percent early withdrawal tax under section 72(t). An exception applies to an amount includible in 

income as a result of the conversion from a traditionallRA into a Roth IRA. However, under a recapture rule. the 

early withdrawal tax applies if the taxpayer wit11draws the amount within five years of the conversion. 
266 

a trustee-to-trustee transfer of the amount from the traditional IRA to the Roth IRA, or by a 

distribution from the traditional IRA and contribution to the Roth IRA within 60 days. 

Roll overs to IRAs of distributions from tax-favored employer-sponsored retirement plans 

(that is, qualified retirement plans, section 403(b) plans, and governmental section 457(b) plans) 

are also permitted. For tax-free roll overs, distributions from pretax accounts under an employersponsored plan generally must be contributed to a traditional IRA, and distributions from a 

designated Roth account under an employer-sponsored plan must be contributed only to a Roth 

IRA. However, a distribution from an employer-sponsored plan that is not from a designated 

Roth account is also permitted to be rolled over into a Roth IRA, subject to the rules that apply to 

conversions from a traditional IRA into a Roth IRA. Thus, a rollover from a tax-favored 

employer-sponsored plan to a Roth IRA is includible in gross income (except to the extent it 

represents a return of after-tax contributions). 846 

Recharacterization of IRA contributions 

If an individual makes a contribution to an IRA (traditional or Roth) for a taxable year, 

the individual is permitted to recharacterize the contribution as a contribution to the other type of 

IRA (traditional or Roth) by making a trustee-to-trustee transfer to the other type of IRA before 

the due date for the individual's income tax return for that year. 847 In the case of a 

recharacterization, the contribution will be treated as having been made to the transferee IRA 

(and not the original, transferor IRA) as of the date of the original contribution. Both regular 

IRA contributions and conversion contributions to a Roth IRA can be recharacterized as having 

been made to a traditional IRA. 

The amount transferred in a recharacterization must be accompanied by any net income 

allocable to the contribution. In general, even if a recharacterization is accomplished by 

transferring a specific asset, net income is calculated as a pro rata portion of income on the entire 

account rather than income allocable to the specific asset transferred. However, when doing a 

Roth conversion of an amount for a year, an individual may establish multiple Roth IRAs, for 

example, Roth IRAs with different investment strategies, and divide the amount being converted 

among the IRAs. The individual can then choose whether to recharacterize any of the Roth IRAs 

as a traditional IRA by transferring the entire amount in the particular Roth IRA to a traditional 

IRA. 848 For example, if the value of the assets in a particular Roth TRA declines after the 

conversion, the conversion can be reversed by recharacterizing that IRA as a traditional IRA. 

The individual may then later convert that traditional IRA to a Roth IRA (referred to as a 

reconversion), including only the lower value in income. Treasury regulations prevent the 

reconversion from taking place immediately after the recharcterization, by requiring a minimum 

8·16 As in the case of a conversion of an ammmt from a traditional IRA to a Roth IRA the I 0-pcrccnt early 

withdrawal tax does not apply to income resulting from a rollover from a tax-favored employer-sponsored plan to a 

Roth IRA subject to the recapture mlc for distributions made from the Roth IRA within five years of the rollover. 

Sec. 408A( d)(6). 

' 48 Treas. Reg. sec. l.408A-5, Q&A-2(b). 
267 

period to elapse before the reconversion. Generally the reconversion cannot occur sooner than 

the later of30 days after the recharacterization or a date during the taxable year following the 

taxable year of the original conversion 849 

Reasons for Change 

Recharactetization of IRA contributions may enable an individual to avoid tax by 

retroactively manipulating the amount of income that must be recognized for tax purposes. The 

Committee wishes to repeal the recharacterization rule in order to prevent such manipulation. 

Explanation of Provision 

The provision repeals the special rule that allows IRA contributions to one type of IRA 

(either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus, 

for example, under the provision, a conversion contribution establishing a Roth IRA during a 

taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby 

unwinding the conversion). 850 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

7. Modification of rules applicable to length of service award programs for bona fide 

public safety volunteers (sec. 13613 of the bill and sec. 457(e) of the Code) 

Present Law 

Special rules apply to deferred compensation plans of State and local government and 

private, tax-exempt employers. 851 However, an exception to these rules applies in the case of a 

plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on 

account of qualified services performed by the volunteers. For this purpose, qualified services 

consist offirefighting and fire prevention services, emergency medical services, and ambulance 

services. An individual is treated as a bona fide volunteer for this purpose if the only 

compensation received by the individual for performing qualified services is in the form of 

( 1) reimbursement or a reasonable allowance for reasonable expenses incurred in the 

performance of such services, or (2) reasonable benefits (including length of service awards) and 

nominal fees for the services, customarily paid in connection with the performance of such 

services by volunteers. The exception applies only if the aggregate amount of length of service 

849 Trcas. Reg. sec. 1.408A-5, Q&A-9. 

8'

0 The provision does not preclude an individual from making a contribution to a traditional IRA and 

converting the traditional IRA to a Roth IRA Rather. the provision would preclude the individual from later 

unwinding the conversion through a recharacteriz.ation. 

851 Sec. 457. 
268 

awards accruing for a bona fide volunteer with respect to any year of service does not exceed 

$3,000. 

Reasons for Change 

Many communities rely on volunteer firefighters, emergency medical technicians, and 

ambulance drivers to support and supplement the services of public safety employees. In return, 

some communities award benefits to these volunteers based on a volunteer's years of service. 

However, under present law, the amount awarded cannot exceed $3,000 per year of service. The 

Committee wishes to facilitate the recruitment and retention of such volunteers by increasing that 

limit 

Explanation of Provision 

The provision increases the aggregate amount of length of service awards that may 

accrue for a bona fide volunteer with respect to any year of service to $6,000 and adjusts that 

amount in $500 increments to reflect changes in cost-of-living for years after the first year the 

provision is effective. In addition, under the provision, if the plan is a defined benefit plan, the 

limit applies to the actuarial present value of the aggregate amount oflength of service awards 

accruing with respect to any year of service. Actuarial present value is to be calculated using 

reasonable actuarial assumptions and methods, assuming payment will be made under the most 

valuable form of payment under the plan with payment commencing at the later of the earliest 

age at which unreduced benefits are payable under the plan or the participant's age at the time of 

the calculation. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

8. Extended rollover period for plan loan offset amounts (sec. 13614 of the bill and 

sec. 402( c) of the Code) 

Present Law 

Taxation of retirement plan distributions 

A distribution from a tax-favored employer-sponsored retirement plan (that is, a qualified 

retirement plan, section 403(b) plan, or a governmental section 457(b) plan) is generally 

includible in gross income, except in the case of a qualified distribution from a designated Roth 

account or to the extent the distribution is a recovery of basis under the plan or the distribution is 

contributed to another such plan or an IRA (referred to as eligible retirement plans) in a tax-free 

rollover. 852 In the case of a distribution from a retirement plan to an employee under age 59Y:z 

802 Sees. 402(a) and (c), 402A(d), 403(a) and (b). 457(a) and (c)(l6). 
269 

(other than a distribution from a governmental section 457(b) plan), the distribution is also 

subject to a 1 0-percent early withdrawal tax unless an exception applies. 853 

A distribution from a tax-favored employer-sponsored retirement plan that is an eligible 

rollover distribution may be rolled over to an eligible retirement plan (referred to as a rollover 

contribution)854 The rollover generally can be achieved by direct rollover (direct payment from 

the distributing plan to the recipient plan) or by contributing the distribution to the eligible 

retirement plan within 60 days of receiving the distribution ("60-day rollover"). 

Employer-sponsored retirement plans are required to offer an employee a direct rollover 

with respect to any eligible rollover distribution before paying the amount to the employee. If an 

eligible rollover distribution is not directly rolled over to an eligible retirement plan, the taxable 

portion of the distribution generally is subject to mandatory 20-percent income tax 

withholding. 855 Employees who do not elect a direct rollover but who roll over eligible 

distributions within 60 days of receipt also defer tax on the rollover amounts; however, the 

20 percent income tax withheld will remain taxable unless the employee substitutes funds within 

the 60-day period. 

Plan loans 

Employer-sponsored retirement plans may provide loans to employees. However, the 

amount of a loan is a deemed distribution from the retirement plan unless the loan satisfies 

certain requirements in both form and operation, including that the terms of the loan (other than a 

loan specifically to purchase a home) provide for a repayment period of not more than five years 

and for level amortization of loan payments with payments not less frequently than quarterly. 856 

Thus, if an employee stops making payments on a loan before the loan is repaid, a deemed 

distribution of the outstanding loan balance generally occurs. A deemed distribution of an 

unpaid loan balance is generally taxed as though an actual distribution occurred, including being 

subject to the 10-percent early withdrawal tax, if applicable. A deemed distribution is not 

eligible for rollover to another eligible retirement plan. 

A plan may also provide that, in certain circumstances (for example, if an employee 

terminates employment), an employee's obligation to repay a loan is accelerated and, if the loan 

is not repaid, the loan is cancelled and the amount in employee's account balance is offset by the 

amount of the unpaid loan balance, referred to as a loan offset. A loan offset is treated as an 

actual distribution from the plan equal to the unpaid loan balance (rather than a deemed 

distribution), and (unlike a deemed distribution) the amount of the distribution is eligible for 

tax-free rollover to another eligible retirement plan within 60 days. However, the plan is not 

required to offer a direct rollover with respect to a plan loan offset amount that is an eligible 

'" Sec. 72(t). 

85'

1 Certain distributions are not eligible rollover distributions. such as annuity payments. required 

minimum distributions. hardship distributions. and loans that arc treated as deemed distributions under section 72(p ). 

8" Trcas. Reg. sec. 1.402(c)-2, Q&A-l(b)(3). 

856 Sec. 72(p). 
270 

rollover distribution, and the plan loan offset amount is generally not subject to 20-percent 

income tax withholding. 

Reasons for Change 

A plan loan offset does not involve the current payment of funds to a participant. Thus, in 

order to roll over a plan offset amount, a participant must have otber funds in that amount 

available. If a loan offset occurs at the time of a participant's termination of employment, the 

participant might not have funds immediately available for the rollover, particularly in the case 

of an involuntary termination. In addition, the participant may not know the precise date when 

the 60-day rollover period begins. The Committee believes that providing a longer rollover 

period with respect to plan loan offsets may result in more roll overs, thus preserving retirement 

savings. 

Explanation of Provision 

Under the provision, the period during which a qualified plan loan offset amount may be 

contributed to an eligible retirement plan as a rollover contribution is extended from 60 days 

after the date of the offset to the due date (including extensions) for filing the Federal income tax 

return for the taxable year in which the plan loan offset occurs, that is, the taxable year in which 

the amount is treated as distributed from the plan. Under the provision, a qualified plan loan 

offset amount is a plan loan offset amount that is treated as distributed from a qualified 

retirement plan, a section 403(b) plan or a governmental section 457(b) plan solely by reason of 

the termination of the plan or the failure to meet the repayment terms of the loan because of the 

employee's severance from employment. As under present law, a loan offset amount under the 

provision is the amount by which an employee's account balance under the plan is reduced to 

repay a loan from the plan. 

Effective Date 

The provision applies to plan loan offset amounts treated as distributed in taxable years 

beginning after December 31, 2017. 
271 

PART VIJI- EXEMPT ORGANIZATIONS 

1. Excise tax based on investment income of private colleges and universities (sec. 13701 of 

the bill and new sec. 4968 of the Code) 

Present Law 

Public charities and private foundations 

An organization qualifying for tax-exempt status under section 50l(c)(3) is further 

classified as either a public charity or a private foundation. An organization may qualify as a 

public charity in several ways. RS 7 Certain organizations are classified as public charities per se, 

regardless of their sources of support. These include churches, certain schools, hospitals and 

other medical organizations, certain organizations providing assistance to colleges and 

universities, and governmental units. 858 Other organizations qualify as public charities because 

they are broadly publicly supported. First, a charity may qualify as publicly supported if at least 

one-third of its total support is from gifts, grants or other contributions from governmental units 

or the general public. 859 Alternatively, it may qualify as publicly supported if it receives more 

than one-third of its total support from a combination of gifts, grants, and contributions from 

governmental units and the public plus revenue arising from activities related to its exempt 

purposes (e.g., fee for service income). In addition, this category of public charity must not rely 

excessively on endowment income as a source of support. 860 A supporting organization, i.e., an 

organization that provides support to another section 50l(c)(3) entity that is not a private 

foundation and meets the requirements of the Code, also is classified as a public charity. 861 

85" The Code does not expressly define the term "public charity." but rather provides exceptions to those 

entities that are treated as private foundations. 

858 Sec. 509(a)(l) (referring to sections 170(b)(l)(A)(i) through (iv) for a description of these 

organizations). 

859 Treas. Reg. sec. 1.170A-9(!)(2). Failing tl1is mechanical test the organization may qualify as a public 

charity if it passes a "facts and circumstances" test. Treas. Reg. sec. l.l70A-9(!)(3). 

860 To meet this requirement, the organization must normally receive more than one-tl1ird of its support 

from a combination of (l) gifts. grants. contributions, or membership fees and (2) certain gross receipts from 

admissions, sales of merchandise, performance of services. and fumishing of facilities in co1mcction with activities 

that are related to the organi71ltion's exempt purposes. Sec. 509(a)(2)(A). In addition, the organi71!tion must not 

normally receive more than one-t11ird of its public support in each ta-mble year from the sum of (I) gross investment 

income and (2) the excess of unrelated business taxable iucome as determined uuder section 512 over the amount of 

unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B). 

861 Sec. 509(a)(3). Supporting org;mizations arc further classified as Type I, II, or III depending on the 

relationship they have with the organizations they support. Supporting organiz11tions must support public charities 

listed in one of the other categories (i.e .. per se public charities. broadly supported public charities, or revenue 

generating public charities). and they are not pennitted to support other supporting organizations or testing for 

public safety organizations. 
272 

A section 501 ( c )(3) organization that does not fit within any of the above categories is a 

private foundation. In general, private foundations receive funding from a limited number of 

sources (e.g., an individual, a family, or a corporation). 

The deduction for charitable contributions to private foundations is in some instances less 

generous than the deduction for charitable contributions to public charities. In addition, private 

foundations are subject to a number of operational rules and restrictions that do not apply to 

public charities. 862 

Excise tax on investment income of private foundations 

Under section 4940(a), private foundations that are recognized as exempt from Federal 

income tax under section 501 (a) (other than exempt operating foundations )

863 are subject to a 

two-percent excise tax on their net investment income. Net investment income generally 

includes interest, dividends, rents, royalties (and income from similar sources), and capital gain 

net income, and is reduced by expenses incurred to earn this income. The two-percent rate of tax 

is reduced to one-percent in any year in which a foundation exceeds the average historical level 

of its charitable distributions. Specifically, the excise tax rate is reduced if the foundation's 

qualifying distributions (generally, amounts paid to accomplish exempt purposes) 864 equal or 

exceed the sum of (1) the amount of the foundation's assets for the taxable year multiplied by the 

average percentage of the foundation's qualifying distributions over the five taxable years 

immediately preceding the taxable year in question, and (2) one percent of the net investment 

income of the foundation for the taxable year. 865 In addition, the foundation cannot have been 

Organizations organized and operated exclusively for testing for public safety also are classified as public 

charities. Sec. 509(a)(4). Such organizations. however. arc not eligible to receive deductible charitable 

contributions under section 170. 

862 Unlike public charities, private foundations are subject to tax on their net investment income at a rate of 

two percent (one percent in some cases). Sec. 4940. Private foundations also are subject to more restrictions on 

their activities than are public charities. For example, private foundations are prohibited from engaging in selfdealing transactions (sec. 4941). are required to make a minimum amount of chmitablc distributions each year. (sec. 

4942), arc limited in the exient to which they may control a business (sec. 4943), may not make speculative 

investments (sec. 49-14). and may not make certain expenditures (sec. 4945). Violations of these rules result in 

excise taxes on the foundation and, in some cases, may result in excise taxes on the mamgers of the foundation. 

860 Exempt operating foundations are exempt from the section 4940 tax. Sec. 4940(d)(l). Exempt 

operating foundations generally include organizations such as museums or libraries that devote their assets to 

operating chmitable programs but have difficulty meeting the "public support" tests necessary not to be classified as 

a private foundation. To be an exempt operating foundation, an organization must: (1) be an operating foundation 

(as defined in section 4942(j)(3)): (2) be publicly supported for at least 10 taxable years: (3) have a governing body 

uo more tlmu 25 percent of whom are disqualified persons and that is broadly representative oftl1e general public: 

and (4) have uo officers who are disqualified persons. Sec. 4940(d)(2). 

864 Sec. 4942(g). 

865 Sec. 4940(e). 
273 

subject to tax in any of the five preceding years for failure to meet minimum qualifying 

distribution requirements in section 4942. 

Private foundations that are not exempt from tax under section SOI(a), such as certain 

charitable trusts, are subject to an excise tax under section 4940(b ). The tax is equal to the 

excess of the sum of the excise tax that would have been imposed under section 4940(a) if the 

foundation were tax exempt and the amount of the tax on unrelated business income that would 

have been imposed if the foundation were tax exempt, over the income tax imposed on the 

foundation under subtitle A of the Code. 

Private foundations are required to make a minimum amount of qualifying distributions 

each year to avoid tax under section 4942. The minimum amount of qualifying distributions a 

foundation has to make to avoid tax under section 4942 is reduced by the amount of section 4940 

excise taxes paid. R

66 

Private colleges and universities 

Private colleges and universities generally are treated as public charities rather than 

private foundations 867 and thus are not subject to the private foundation excise tax on net 

investment income. 

Reasons for Change 

ln recent years, the endowment balances at many private colleges and universities have 

increased dramatically. At the same time, college tuition has risen at rates in excess of the rate of 

inflation. Where the endowment of a private college or university has grown so large that it is 

not commensurate with the scope of the institution's activities in educating students, and where 

the significant portion of the student population does not receive scholarships, the Committee 

believes it is appropriate to impose a modest excise tax on the investment income derived from 

the endowment. 

Explanation of Provision 

The provision imposes an excise tax on an applicable educational institution for each 

taxable year equal to 1.4 percent of the net investment income of the institution for the taxable 

year. Net investment income is determined using rules similar to the rules of section 4940( c) 

(relating to the net investment income of a private foundation). 

For purposes of the provision, an applicable educational institution is an institution: (1) 

that has at least 500 tuition-paying students during the preceding taxable year; (2) that is an 

866 Sec. 4942(d)(2). 

86' Sees. 509(a)(l) and 170(b)(l)(A)(ii). 
274 

eligible educational institution as described in section 25A of the Code 868; (3) that is not 

described in the first section of section 5ll(a)(2)(B) of the Code (generally describing State 

colleges and universities); and (4) the aggregate fair market value of the assets of which at the 

end of the preceding taxable year (other than those assets which are used directly in carrying out 

the institution's exempt purpose869) is at least $250,000 per student. For these purposes, the 

number of students of an institution is based on the daily average number of full-time students 

attending the institution, with part-time students being taken into account on a full-time student 

equivalent basis. 

For purposes of determining whether an educational institution meets the asset-perstudent threshold and for purposes of detennining net investment income, assets and net 

investment income of a related organization are treated as assets and net investment income, 

respectively, of the educational institution, except that: 

1. No such amount is taken into account with respect to more than one educational 

institution; and 

2. Unless the related organization is controlled by the educational institution or is a 

supporting organization (described in section 509(a)(3)) with respect to the institution 

for the taxable year, assets and investment income that are not intended or available 

for the use or benefit of the educational institution are not taken into account. For 

example, assets of a related organization that are earmarked or restricted for (or fairly 

attributable to) the educational institution would be treated as assets of the educational 

institution, whereas assets of a related organization that are held for unrelated purposes 

(and are not fairly attributable to the educational institution) would be disregarded. 

The term "related organization" means, with respect to any educational institution, any 

organization that: (I) controls, or is controlled by, the institution; (2) is controlled by one or 

more persons that also control the institution; or (3) is a supported organization870 or a 

supporting organization871 during the taxable year with respect to the institution. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

8(,, Section 25A defines an eligible educational institution as an institution (1) which is described in section 

481 of the Higher Education Act of 1965 (20 U.S. C. sec. 1088), as in effect on AugustS. 1977, and (2) which is 

eligible to participate in a program under title IV of such Act. 

869 Assets used directly in carrying out the institution's exempt purpose include. for example. classroom 

buildings and physical facilities used for educational activities and office equipment or other administrative assets 

used by employees of the institution in carrying out exempt activities, among other assets. 

8'0 Sees. 509(f)(3). 

8' 1 Sees. 509(a)(3). 
275 

2. Name and logo royalties treated as nnrelated bnsiness taxable income (sec. 13702 of the 

bill and sees. 512(b) and 513 of the Code) 

Present Law 

Tax exemption for certain organizations 

Section SOI(a) exempts certain organizations from Federal income tax. Such 

organizations include:(!) tax-exempt organizations described in section SOI(c) (including 

among others section 50 l(c)(3) charitable organizations and section 501(c)(4) social welfare 

organizations); (2) religious and apostolic organizations described in section SOI(d); and (3) 

trusts forming part of a pension, profit-sharing, or stock bonus plan of an employer described in 

section 401(a). 

Unrelated bnsiness income tax, in general 

An exempt organization generally may have revenue from four sources: conttibutions, 

gifts, and grants; trade or business income that is related to exempt activities (e.g., program 

service revenue); investment income; and trade or business income that is not related to exempt 

activities. The Federal income tax exemption generally extends to the first three categories, and 

does not extend to an organization's unrelated trade or business income. In some cases, 

however, the investment income of an organization is taxed as if it were unrelated trade or 

business income. 872 

The unrelated business income tax ("UBIT'') generally applies to income derived from a 

trade or business regularly carried on by the organization that is not substantially related to the 

performance of the organization's tax-exempt functions. 873 An organization that is subject to 

UBIT and that has $1,000 or more of gross unrelated business taxable income must report that 

income on Form 990-T (Exempt Organization Business Income Tax Return). 

Most exempt organizations may operate an unrelated trade or business so long as the 

organization remains primarily engaged in activities that further its exempt purposes. Therefore, 

an organization may engage in a substantial amount of unrelated business activity without 

jeopardizing exempt status. A section 501(c)(3) (charitable) organization, however, may not 

operate an unrelated trade or business as a substantial part of its activities. 874 Therefore, the 

unrelated trade or business activity of a section 501 ( c )(3) organization must be insubstantial. 

This is the case for social clubs (sec. 501 (c)(7)), voluntary employees' beneficiary associations (sec. 

50l(c)(9)). and organizations and trusts described in sections 50l(c)(l7) and 50l(c)(20). Sec. 512(a)(3). 

n Sees. 511-514. 

Treas. Reg. sec. l.501(c)(3)-l(e). 
276 

Organizations subject to tax on unrelated business income 

Most exempt organizations are subject to the tax on unrelated business income. 

Specifically, organizations subject to the unrelated business income tax generally include: (1) 

organizations exempt from tax under section 501(a), including organizations described in section 

501 (c) (except for U.S. instrumentalities and certain charitable trusts) '

875 (2) qualified pension, 

profit-sharing, and stock bonus plans described in section 40l(a); 876 and (3) certain State 

colleges and universities. 877 

Exclusions from Unrelated Business Taxable Income 

Certain types of income are specifically exempt from unrelated business taxable income, 

such as dividends, interest, royalties, and certain rents, 878 unless derived from debt-financed 

property or from certain 50-percent controlled subsidiaries. 879 Other exemptions from UBIT are 

provided for activities in which substantially all the work is performed by volunteers, for income 

from the sale of donated goods, and for certain activities carried on for the convenience of 

members, students, patients, officers, or employees of a charitable organization. In addition, 

special UBIT provisions exempt from tax activities of trade shows and State fairs, income from 

bingo games, and income from the distribution of low-cost items incidental to the solicitation of 

charitable contributions. Organizations liable for tax on unrelated business taxable income may 

be liable for alternative minimum tax determined after taking into account adjustments and tax 

preference items. 

Reasons for Change 

The Committee has learned that tax-exempt organizations are engaging in more 

commercial activity than ever and are using more complex organization structures to do so. 

Many organizations, for example, are now earning significant income by licensing their own 

names and logos to for-profit businesses to avoid directly engaging in a taxable business in a 

manner that would cause UBIT liability. The Committee believes that such income should not 

be excluded from UBIT. 

Explanation of Provision 

The provision modifies the UBIT treatment of the licensing of an organization's name or 

logo generally to subject royalty income derived from such a license to UBIT. Specifically, the 

provision amends section 513 (regarding unrelated trades or businesses) to provide that any sale 

Sec. 5ll(a)(2)(A). 

Sec. 5!l(a)(2)(A). 

Sec. 5ll(a)(2)(B). 

'" Sees. 511-514. 

8'9 Sec. 512(b)(l3). 
277 

or licensing by an organization of any name or logo of the organization (including any trademark 

or copyright related to a name or logo) is treated as an unrelated trade or business that is 

regularly carried on by the organization. In addition, the provision amends section 512 

(regarding unrelated business taxable income) to provide that income derived from any such 

licensing of a name or logo of the organization is included in the organization's gross unrelated 

business taxable income, notwithstanding the provisions of section 512 that otherwise exclude 

certain types of passive income (including royalties) from unrelated business taxable income. 880 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

3. Unrelated business taxable income separately computed for each trade or business 

activity (sec.I3703 of the bill and sec. 512(a) of the Code) 

Present Law 

Tax exemption for certain organizations 

Section 50l(a) exempts certain organizations from Federal income tax. Such 

organizations include: (I) tax-exempt organizations described in section 50l(c) (including 

among others section 50 l(c)(3) charitable organizations and section 50l(c)(4) social welfare 

organizations); (2) religious and apostolic organizations described in section 50l(d); and (3) 

trusts forming part of a pension, profit-sharing, or stock bonus plan of an employer described in 

section 40l(a). 

Unrelated business income tax, in general 

An exempt organization generally may have revenue from four sources: contributions, 

gifts, and grants; trade or business income that is related to exempt activities (e.g., program 

service revenue); investment income; and trade or business income that is not related to exempt 

activities. The Federal income tax exemption generally extends to the first three categories, and 

does not extend to an organization's unrelated trade or business income. In some cases, 

however, the investment income of an organization is taxed as if it were unrelated trade or 

business income. 881 

The unrelated business income tax ("UBIT") generally applies to income derived from a 

trade or business regularly carried on by the organization that is not substantially related to the 

performance of the organization's tax-exempt functions. 882 An organization that is subject to 

" 0 Specifically. the proposal references sections 512(b)(l). (2), (3) and (5). 

"' This is the case for social clubs (sec. 50 l(c)(7)). voluntary employees· beneficiary associations (sec. 

501 (c)(9)). and organizations and trusts described in sections SOl( c)( 17) and 501(c)(20). Sec. 512(a)(3). 

"' Sees. 511-514. 
278 

UBIT and that has $1,000 or more of gross unrelated business taxable income must report that 

income on Form 990-T (Exempt Organization Business Income Tax Return). 

Most exempt organizations may operate an unrelated trade or business so long as the 

organization remains primarily engaged in activities that further its exempt purposes. Therefore, 

an organization may engage in a substantial amount of unrelated business activity without 

jeopardizing exempt status. A section 50l(c)(3) (charitable) organization, however, may not 

operate an unrelated trade or business as a substantial part of its activities. 883 Therefore, the 

unrelated trade or business activity of a section 50l(c)(3) organization must be insubstantial. 

Organizations subject to tax on unrelated business income 

Most exempt organizations are subject to the tax on unrelated business income. 

Specifically, organizations subject to the unrelated business income tax generally include: (I) 

organizations exempt from tax under section 50l(a), including organizations described in section 

50l(c) (except for U.S. instrumentalities and certain charitable trusts)' 884 (2) qualified pension, 

profit-sharing, and stock bonus plans described in section 401 (a); 885 and (3) certain State 

colleges and universities 886 

Exclusions from Unrelated Business Taxable Income 

Certain types of income are specifically exempt from unrelated business taxable income, 

such as dividends, interest, royalties, and certain rents, 887 unless derived from debt-financed 

property or from certain 50-percent controlled subsidiaries. 888 Other exemptions from UBIT are 

provided for activities in which substantially all the work is performed by volunteers, for income 

from the sale of donated goods, and for certain activities carried on for the convenience of 

members, students, patients, officers, or employees of a charitable organization. In addition, 

special UBIT provisions exempt from tax activities of trade shows and State fairs, income from 

bingo games, and income from the distribution of! ow-cost items incidental to the solicitation of 

charitable contributions. Organizations liable for tax on unrelated business taxable income may 

be liable for alternative minimum tax determined after taking into account adjustments and tax 

preference items. 

883 Treas. Reg. sec. 1.50l(c)(3)-l(e). 

884 Sec. 5ll(a)(2)(A). 

885 Sec. 5ll(a)(2)(A). 

886 Sec. 5ll(a)(2)(B). 

88' Sees. 511-514. 

888 Sec. 512(b)(l3). 
279 

Specific deduction against unrelated business taxable income 

In computing unrelated business taxable income, an exempt organization may take a 

specific deduction of$1,000. This specific deduction may not be used to create a net operating 

loss that will be carried back or forward to another year. 889 

In the case of a diocese, province or religious order, or a convention or association of 

churches, a specific deduction is allowed with respect to each parish, individual church, district, 

or other local unit. The specific deduction is equal to the lower of $1,000 or the gross income 

derived from any unrelated trade or business regularly carried on by the local unit. 890 

Operation of multiple unrelated trades or businesses 

An organization determines its unrelated business taxable income by subtracting from its 

gross unrelated business income deductions directly connected with the unrelated trade or 

business. 891 Under regulations, in determining unrelated business taxable income, an 

organization that operates multiple unrelated trades or businesses aggregates income from all 

such activities and subtracts from the aggregate gross income the aggregate of deductions. 892 As 

a result, an organization may use a deduction from one unrelated trade or business to offset 

income from another, thereby reducing total unrelated business taxable income. 

Reasons for Change 

The Committee has learned that tax-exempt organizations are engaging in more 

commercial activity than ever and are using more complex organization structures to do so. In a 

recent study of colleges and universities, for example, the IRS issued a report detailing how 

some institutions improperly claim losses from non-exempt activities that lack a profit motive 

and thus are not truly trades or businesses. These losses are used to offset UBIT income from 

profitable business activities in the current year or future years. The Committee believes this 

behavior should be prohibited. 

Explanation of Provision 

For an organization with more than one unrelated trade or business, the provision requires 

that unrelated business taxable income first be computed separately with respect to each trade or 

business and without regard to the specific deduction generally allowed under section 

512(b )(12). The organization's unrelated business taxable income for a taxable year is the sum 

of the amounts (not less than zero) computed for each separate unrelated trade or business, less 

889 Sec. 512(b)(l2). 

890 Ibid. 

891 Sec. 512(a). 

892 Treas. Reg. sec. 1.5!2(a)-l(a). 
280 

the specific deduction allowed under section 512(b)(l2). A net operating loss deduction is 

allowed only with respect to a trade or business from which the loss arose. 

The result of the provision is that a deduction from one trade or business for a taxable 

year may not be used to offset income from a different unrelated trade or business for the same 

taxable year. The provision generally does not, however, prevent an organization from using a 

deduction from one taxable year to offset income from the same unrelated trade or business 

activity in another taxable year, where appropriate. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. Under a 

special transition rule, net operating losses arising in a taxable year beginning before January 1, 

2018, that are carried forward to a taxable year beginning on or after such date are not subject to 

the rule of the provision. 

4. Repeal of tax-exempt status for professional sports leagues (sec. 13704 of the bill and 

sec. 50t(c)(6) of the Code) 

Present Law 

Tax exemption for section 501(c)(6) organizations 

Section 50l(c)(6) provides tax exempt status for business lea~:,>ues and certain other 

organizations not organized for profit, no part of the net earnings of which inures to the benefit 

of any private shareholder or individual. A business league is an association of persons having 

some common business interest, the purpose of which is to promote such common interest and 

not to engage in a regular business of a kind ordinarily carried on for profit R

93 Such an 

organization may not have as its primary activity performing "particular services" for 

members. 894 Contributions to these types of organizations are not deductible as charitable 

contributions; however, they may be deductible as trade or business expenses if ordinary and 

necessary in the conduct of the taxpayer's business. Many organizations known as "trade 

associations" may qualify for exempt status under this provision. 

Professional sports leagues 

Since 1966, section 50l(c)(6) has included language exempting from tax "professional 

football leagues (whether or not administering a pension fund for football players)." The 

Internal Revenue Service has interpreted this language as applying not only to professional 

football leagues, but to all professional sports leagues. 895 

""' Treas. Reg. sec. L501(c)(6)-L 

1 Treas. Reg. sec. 1.50l(c)(6)-l. 

895 Sec General Counsel Memorandum 38179. November 29. 1979 ("We continue to believe that 

professional sports leagues, including football leagues. do not qualify for exemption if the ordinary standards of 
281 

Reasons for Change 

Professional sports leagues are highly profitable businesses that promote the specific 

brand of a sports leas>ue, rather than an industry or a profession as a whole. The Committee does 

not believe that it is appropriate for the taxpayers to subsidize this activity through tax-exempt 

status. 

Explanation of Provision 

The provision strikes from section 50l(c)(6) the phrase "professional football leagues 

(whether or not administering a pension fund for football players)." In addition, the provision 

amends section 501(c)(6) to provide that section 501(c)(6) "shall not apply to any professional 

sports league (whether or not administering a pension fund for players)." 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

5. Modification of taxes on excess benefit transactions (intermediate sanctions) (sec. 13705 

of the bill and sec. 4958 of the Code) 

Present Law 

Excess benefit transactions 

The Code imposes excise taxes on excess benefit transactions between disqualified 

persons and charitable organizations (other than private foundations) or social welfare 

organizations (as described in section 501(c)(4))896 The excess benefit transaction tax 

commonly is referred to as "intermediate sanctions." 897 An excess benefit transaction generally 

is a transaction in which an economic benefit is provided, directly or indirectly, by a charitable or 

social welfare organization to or for the use of a disqualified person if the value of the economic 

section 50 l(c)(6) are applied. However, while the answer is far from clear, we have concluded upon reflection that 

the specific exemption of football leagues in 1966 can be viewed as providing support for recognition of exemption 

of all professional sports leagues as a unique category of organizations under section 50 l(c)(6). Since other 

professional sports leagues are indistinguishable in any meaningful way from football leagues, we think it is fair to 

conclude that by fonnally blessing the exemption it knew footballlcagnes had historically eJ]joyed, Congress 

implicitly recogni?.cd a uniqne historical category of exemption under section 50 l( c )(6). The specific enumeration 

of football leagues can be viewed as merely exemplary of the category thus recognized, and as necessitated only by 

the problem of insuring that football's pension and merger arrangement would not endanger its exemption"). 

896 Sec. 4958. 

897 The excess benefit transaction rules were enacted in 1996 to provide a sanction short of revocation of 

tax exemption. an "intermediate"' sanction. for abusive self-dealing transactions (i.e._ private inurement) between an 

organization insider and the orgm1ization. Prior to enactment of the excess benefit transaction nlles, there was no 

sanction in the Code on organization insiders or disqualified persons for engaging in self-dealing transactions with 

respect to a public charity. 
282 

benefit provided exceeds the value of the consideration (including the performance of services) 

received for providing such benefit. The excise tax is imposed on any such excess. 

Disqualified persons 

Disqualified persons generally include: (1) persons who were, at any time during the 

five-year period ending on the date of the transaction, in a position to exercise substantial 

influence over the affairs of the organization (including officers and directors); (2) a member of 

the family of such a person; and (3) certain 35-percent or more controlled entities. 898 

Special rules apply with respect to charities that are sponsoring organizations of donor 

advised funds. For such organizations, the term "disqualified person" also includes: (1) donors 

and certain other persons appointed by a donor to provide advice with respect to the fund (donor 

advisors); (2) investment advisors; and (3) members of the family and certain 35-percent or more 

controlled entities of a person described in (1) or (2). 899 An investment advisor is a person (other 

than an employee of the sponsoring organization) compensated by the organization for managing 

the investment of, or providing investment advice with respect to, assets maintained in donor 

advised funds owned by the organization 900 

Rebuttable presumption of reasonableness 

Under the intermediate sanctions regulations, in certain cases an exempt organization 

may avail itself of a rebuttable presumption with respect to compensation arrangements and 

property transfers. Payments under a compensation arrangement are presumed to be reasonable, 

and a transfer of property, or the right to use property, is presumed to be at fair market value, if: 

(I) the arrangement or terms of transfer are approved in advance by an authorized body of the 

organization (as defined below) composed entirely of individuals who do not have a conflict of 

interest with respect to the arrangement or transfer; (2) the authorized body obtained and relied 

upon appropriate data as to comparability prior to making its determination; and (3) the 

authorized body adequately documented the basis for its determination concurrently with making 

that determination901 If these requirements are satisfied, the IRS may overcome the 

presumption of reasonableness if it develops sufficient contrary evidence to rebut the probative 

value of the comparability data relied upon by the authorized body902 

An authorized body is defined as: (I) the governing body of the organization; (2) a 

committee of the governing body, which may be composed of any individuals permitted under 

State law to serve on such a committee, to the extent that the committee is permitted by State law 

898 Sec. 4958(!)(1). 

"' Sees. 4958(l)(l)(E) and (F). 

901 Sec. 4958(!)(8). 

901 Treas. Reg. sec. 53.4958-6(a). See also H. Rep. No. 506, 1041

h Congress, 2d Scss. 1996, pp. 53, 56-7. 

902 Treas. Reg. sec. 53.4958-6(b). 
283 

to act on behalf of the governing body; or (3) to the extent permitted by State law, other parties 

authorized by the governing body of the organization to act on its behalf by following procedures 

specified by the governing body in approving compensation arrangements or property 

transfers. 903 

In general, an authorized body has appropriate data as to comparability if, given the 

knowledge and expertise of its members, it has information sufficient to determine whether the 

arrangement is reasonable in its entirety or the transfer is at fair market value. 904 In the case of 

compensation, relevant information includes, but is not limited to, compensation levels paid by 

similarly situated organizations, both taxable and tax-exempt, for functionally comparable 

positions; the availability of similar services in the geographic area of the applicable tax-exempt 

organization; current compensation surveys compiled by independent firms; and actual written 

offers from similar institutions competing for the services of the disqualified person. In the case 

of property, relevant information includes, but is not limited to, current independent appraisals of 

the value of all property to be transferred, and offers received as part of an open and competitive 

bidding process. For organizations with annual gross receipts (including contributions) of less 

than $1 million, the authorized body is considered to have appropriate data as to comparability if 

it has data on compensation paid by three comparable organizations in the same or similar 

communities for similar services. There is no inference with respect to whether circumstances 

falling outside this safe harbor will meet the requirement with respect to the collection of 

appropriate data. 905 

In general, for a decision to be documented adequately, the written or electronic records 

of the authorized body must note: (1) the terms of the transaction that was approved and the date 

it was approved; (2) the members of the authorized body who were present during debate on the 

transaction that was approved and those who voted on it; (3) the comparability data obtained and 

relied upon by the authorized body and how the data was obtained; and ( 4) any actions taken 

with respect to consideration of the transaction by anyone who is otherwise a member of the 

authorized body but who had a conflict of interest with respect to the transaction906 

Amount of the excise tax 

The excess benefit tax is imposed on the disqualified person and, in certain cases, on the 

organization's managers, but is not imposed on the exempt organization. 

An initial tax of25 percent of the excess benefit amount is imposed on the disqualified 

person that receives the excess benefit. An additional tax on the disqualified person of 200 

percent of the excess benefit applies if the violation is not corrected. A tax of 10 percent of the 

903 Treas. Reg. sec. 53.4958-6(c)(l)(i). 

9

" 1 Trcas. Reg. sec. 53.4958-6(c)(2)(i). 

905 Treas. Reg. sec. 53.4958-6(c)(2)(ii). 

90" Treas. Reg. sec. 53.4958-6(c)(3). 
284 

excess benefit (not to exceed $20,000 with respect to any excess benefit transaction) is imposed 

on an organization manager who knowingly participated in the excess benefit transaction, if the 

manager's participation was willful and not due to reasonable cause, and if the initial tax was 

imposed on the disqualified person. 907 If more than one person is liable for the tax on 

disqualified persons or on management, all such persons are jointly and severally liable for the 

tax908 

Standard for knowing violations 

A manager participates in a transaction knowingly only if the manager: (I) has actual 

knowledge of sufficient facts indicating that, based solely upon those facts, such transaction 

would be an excess benefit transaction; (2) is aware that such a transaction under these 

circumstances may violate the provisions of Federal tax law governing excess benefit 

transactions; and (3) negligently fails to make reasonable attempts to ascertain whether the 

transaction is an excess benefit transaction, or the manager is in fact aware that it is such a 

transaction909 The burden of proof in a Tax Court proceeding as to whether an organization 

manager (or foundation manager) acted knowingly is on the Secretary. 910 

Knowing does not mean having a reason to know. 911 However, evidence tending to show 

that an organization manager has reason to know of a particular fact or particular rule is relevant 

in determining whether the manager had actual knowledge of such a fact or rule. Thus, for 

example, evidence tending to show that a manager has reason to know of sufficient facts 

indicating that, based solely upon such facts, a transaction would be an excess benefit transaction 

is relevant in determining whether the manager has actual knowledge of such facts. 912 

Participation by an organization manager is willful if it is voluntary, conscious, and 

intentional. No motive to avoid the restrictions of the law or the incurrence of any tax is 

necessary to make the participation willful. Participation by an organization manager is not 

willful if the manager does not know that the transaction in which the manager is participating is 

an excess benefit transaction. 913 An organization manager's pa11icipation is due to reasonable 

907 Sec. 4958(d)(2). Taxes imposed may be abated if certain conditions are met. Sees. 4961 and 4962. 

908 Sec. 4958(d)(l). 

9

'" Treas. Reg. sec. 53.4958-l(d)(4)(i). 

910 Sec. 7454(b). 

911 Trcas. Reg. sec. 53.4958-l(d)(4)(ii). 

912 Ibid. 

913 Treas. Reg. sec. 53.4958-l(d)(S). 
285 

cause if the manager has exercised responsibility on behalf of the organization with ordinary 

business care and prudence914 

Special rules 

An organization manager's reliance on professional advice generally means that the 

manager has not knowingly participated in an excess benefit transaction. Under Treasury 

regulations, an organization manager's participation in a transaction ordinarily is not considered 

knowing, even though the transaction subsequently is held to be an excess benefit transaction, to 

the extent that, after full disclosure of the factual situation to an appropriate professional, the 

organization manager relies on a reasoned written opinion of that professional with respect to 

elements of the transaction within the professional's expertise. A written opinion is considered 

as reasoned even though it reaches a conclusion that is subsequently determined to be incorrect 

so long as the opinion addresses itself to the facts and the applicable standards. A written 

opinion is not considered to be reasoned if it does nothing more than recite the facts and express 

a conclusion. The absence of a written opinion of an appropriate professional with respect to a 

transaction does not, by itself, give rise to any inference that an organization manager 

participated in the transaction knowingly. 

Appropriate professionals on whose written opinion an organization manager may rely, 

are: (I) legal counsel, including in-house counsel; (2) certified public accountants or accounting 

firms with expertise regarding the relevant tax law matters; and (3) independent valuation 

experts who hold themselves out to the public as appraisers or compensation consultants, 

perform the relevant valuations on a regular basis, are qualified to make valuations of the type of 

property or services involved, and include in the written opinion a certification that the three 

preceding requirements are met. 915 

An organization manager's participation in a transaction ordinarily is not considered 

knowing even though the transaction subsequently is held to be an excess benefit transaction, if 

an appropriate authorized body that approved the transaction meets the requirements of the 

rebuttable presumption of reasonableness with respect to the transaction. 916 

Reasons for Change 

The intermediate sanctions regime was enacted in 1996 to provide a sanction short of 

revocation of tax exemption in cases where the assets of a public charity or social welfare 

organization are used to benefit insiders. Since the enactment of intermediate sanctions, 

however, there continue to be reports of abuses by insiders and managers of such organizations. 

Compensation packages, loans, sales of property to insiders, joint ventures, and other 

transactions increasingly raise questions about the extent to which excess benefits are being 

provided to insiders of exempt organizations. Transactions with insiders create widespread 

914 Treas. Reg. sec. 53.4958-l(d)(6). 

915 Treas. Reg. sec. 53.4958-l(d)(4)(iii). 

916 Treas. Reg. sec. 53.4958-l(d)(4)(iv). 
286 

opportunities for abuse, especially when the determination of whether a transaction passes 

muster depends upon a subjective determination of fair market value or reasonableness of 

compensation. Given the practical difficulties of addressing valuation questions, the continued 

report of abuses, and the critical importance of ensuring that charitable assets are not used for 

private purposes, the Committee believes it is necessary to address specific aspects of the 

intermediate sanctions regime that impede enforcement. 

Explanation of Provision 

Entity-level tax in the event of an excess benefit transaction 

Under the provision, if an initial tax is imposed on a disqualified person under the 

intermediate sanctions rules, 917 the organization is subject to an excise tax equal to 10 percent of 

the excess benefit, unless the participation of the organization in the transaction is not willful and 

is due to reasonable cause. No tax on the organization is imposed if the organization: (I) 

establishes that the minimum standards of due diligence (described below) were met with respect 

to the transaction; or (2) establishes to the satisfaction of the Secretary that other reasonable 

procedures were used to ensure that no excess benefit was provided. 

Eliminate rebuttable presumption and establish due diligence procedures 

The provision eliminates the rebuttable presumption of reasonableness contained in the 

intermediate sanctions regulations. Under the provision, the procedures that presently provide an 

organization with a presumption of reasonableness (i.e., advance approval by an authorized 

body, reliance upon data as to comparability, and adequate and concurrent documentation) 

generally will establish instead that an organization has performed the minimum standards of due 

diligence with respect to an arrangement or transfer involving a disqualified person. Satisfaction 

of these minimum standards will not result in a presumption of reasonableness with respect to 

the transaction. 

Eliminate certain special rules for knowing behavior by organization managers 

The provision eliminates the special rule that provides that an organization manager's 

participation ordinarily is not "knowing" for purposes of the intermediate sanctions excise taxes 

if the manager relied on professional advice. Although the provision eliminates the special rule, 

whether an organization manager relies on professional advice is a relevant consideration in 

determining the manager knowingly participated in an excess benefit transaction. 

The provision also eliminates the special regulatory rule that provides that an 

organization manager ordinarily does not act knowingly for purposes of the excess benefit 

transaction excise tax if the organization has met the requirements of the rebuttable presumption 

procedure. 

Sec. 4958(a)(l). 
287 

Treat investment advisors and certain athletic coaches as disqualified persons 

The provision modifies the definition of a disqualified person for purposes of the 

intermediate sanctions rules. First, a person who performs services as an athletic coach for an 

organization that is an eligible educational institution (within the meaning of section 25A of the 

Code918) and is subject to the intermediate sanctions rules is treated as a disqualified person with 

respect to the organization. Second, the provision (1) expands to all organizations that are 

subject to the intermediate sanctions rules the present-law rule that treats investment advisors to 

donor advised funds as disqualified persons, and (2) modifies the definition of investment 

advisor for this purpose. For all applicable tax-exempt organizations (including sponsoring 

organizations of donor advised funds), the tenn investment advisor means, with respect to an 

organization, any person compensated by the organization, and who is primarily responsible, for 

managing the investment of, or providing investment advice with respect to, assets of the 

organization. 919 For a sponsoring organization of a donor advised fund, the term investment 

advisor also includes any person who is an investment advisor with respect to a sponsoring 

organization under present law, i.e., a person (other than an employee of the organization) 

compensated by such organization for managing the investment of, or providing investment 

advice with respect to, assets maintained in donor advised funds owned by the sponsoring 

organization. 

Application of intermediate sanctions rules to section 501(c)(5) and section 501(c)(6) 

organizations 

The provision extends application of the section 4958 intermediate sanctions rules to taxexempt organizations described in sections 501(c)(5) (labor and certain other organizations) and 

501(c)(6) (business leagues and certain other organizations). 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

9" Section 25A defines an eligible educational institution as an institution (1) which is described in section 

481 of the Higher Education Act ofl965 (20 U.S.C. sec. 1088). as in effect on August 5, 1977, and (2) which is 

eligible to participate in a program under title IV of such Act. 

919 Under the provisioiL the existing mles that treat as disqualified persons certain family members and 35-

percent controlled entities of investment advisors to sponsoring organizations of donor advised funds will apply 

more broadly to investment advisors that are disqualified persons with respect to any organization subject to the 

intcnncdiatc sanctions ntlcs. 
288 

6. Exception from private foundation excess business holding tax for independentlyoperated philanthropic business holdings (sec. 13706 of the bill and sec. 4943 of the Code) 

Present Law 

Public charities and private foundations 

An organization qualifying for tax-exempt status under section 50l(c)(3) of the Internal 

Revenue Code of 1986, as amended (the "Code") is further classified as either a public charity or 

a private foundation. An organization may qualify as a public charity in several ways920 

Certain organizations are classified as public charities per se, regardless of their sources of 

support. These include churches, certain schools, hospitals and other medical organizations 

(including medical research organizations), certain organizations providing assistance to colleges 

and universities, and governmental units. 921 Other organizations qualify as public charities 

because they are broadly publicly supported. First, a charity may qualify as publicly supported if 

at least one-third of its total support is from gifts, grants or other contributions from 

governmental units or the general public. 922 Alternatively, it may qualify as publicly supported 

if it receives more than one-third of its total support from a combination of gifts, grants, and 

contributions from governmental units and the public plus revenue arising from activities related 

to its exempt purposes (e.g., fee for service income). In addition, this category of public charity 

must not rely excessively on endowment income as a source of support. 923 A supporting 

organization, i.e., an organization that provides support to another section 501(c)(3) entity that is 

not a private foundation and meets certain other requirements of the Code, also is classified as a 

public charity924 

920 The Code docs not expressly define the term "public charity." but rather provides exceptions to those 

entities that are treated as private foundations. 

921 Sec. 509(a)( I) (referring to sections 170(b)(l)(A)(i) through (iv) for a description of these 

organizations). 

Treas. Reg. sec. 1.1 70A-9(l)(2). Failing this mechanical test the organi7lltion may qualify as a public 

charity if it passes a "facts and circnmstanccs'' test. Treas. Reg. sec. 1.170A-9(f)(3). 

To meet this requirement. the organi7lltion must normally receive more than one-third of its support 

from a combination of (I) gifts, grants, contributions. or membership fees and (2) certain gross receipts from 

admissions. sales of merchandise. performance of services. and fumishing of facilities in connection with activities 

that arc related to the organiz11tion's exempt purposes. Sec. 509(a)(2)(A). In addition, the organization must not 

normally receive more than one-third of its public support in each taxable year from the sum of (I) gross investment 

income and (2) the excess oftmrelated business taxable income as determined under section 512 over the amount of 

unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B). 

92'

1 Sec. 509(a)(3). Organi?~tions organized and operated exclusively for testing for public safety also are 

classified as public charities. Sec. 509(a)( 4 ). Such organizations. however. are not eligible to receive deductible 

charitable contributions under section 170. 
289 

A section 50 l(c)(3) organization that does not fit within any of the above categories is a 

private foundation. In general, private foundations receive funding from a limited number of 

sources (e.g., an individual, a family, or a corporation). 

The deduction for charitable contributions to private foundations is in some instances less 

generous than the deduction for charitable contributions to public charities. In addition, private 

foundations are subject to a number of operational rules and restrictions that do not apply to 

public charities, as well as a tax on their net investment income. 925 

Excess business holdings of private foundations 

Private foundations are subject to tax on excess business holdings. 926 In general, a 

private foundation is permitted to hold 20 percent of the voting stock in a corporation, reduced 

by the amount of voting stock held by all disqualified persons (as defined in section 4946). lf it 

is established that no disqualified person has effective control of the corporation, a private 

foundation and disqualified persons together may own up to 35 percent of the voting stock of a 

corporation. A private foundation shall not be treated as having excess business holdings in any 

corporation if it owns (together with certain other related private foundations) not more than two 

percent of the voting stock and not more than two percent in value of all outstanding shares of all 

classes of stock in that corporation. Similar rules apply with respect to holdings in a partnership 

(substituting "profits interest" for "voting stock" and "capital interest" for "nonvoting stock") 

and to other unincorporated enterprises (by substituting "beneficial interest" for "voting stock"). 

Private foundations are not permitted to have holdings in a proprietorship. Foundations 

generally have a five-year period to dispose of excess business holdings (acquired other than by 

purchase) without being subject to tax 927 This five-year period may be extended an additional 

five years in limited circumstances. 928 The excess business holdings rules do not apply to 

holdings in a functionally related business or to holdings in a trade or business at least 95 percent 

of the gross income of which is derived from passive sources 929 

The initial tax is equal to five percent of the value of the excess business holdings held 

during the foundation's applicable taxable year. An additional tax is imposed if an initial tax is 

925 Unlike public charities, private foundations are subject to tax on their net investment income at a rate of 

two percent (one percent in some cases). Sec. 4940. Private foundations also arc subjeello more restrictions on 

their activities than are public chmitics. For example, private foundations are prohibited from enga1,>ing in selfdealing transactions (sec. 4941), are required to make a minimum amount of charitable distributions each year (sec. 

4942). are limited in the exient to which they may control a business (sec. 4943). may not make speculative 

investments (sec. 4944). and may not make certain e"1Jenditures (sec. 4945). Violations of these mles result in 

excise taxes on the foundation and. in some cases. may result in excise taxes ou the managers of the foundation. 

926 Sec. 4943. Taxes imposed may be abated if certain conditions arc met. Sees. 4961 and 4962. 

9" Sec. 4943(c)(6). 

9

" Sec. 4943(c)(7). 

929 Sec. 4943(d)(3). 
290 

imposed and at the close of the applicable taxable period, the foundation continues to hold excess 

business holdings. The amount of the additional tax is equal to 200 percent of such holdings. 

Reasons for Change 

In recent years, a new type of philanthropy has combined private sector entrepreneurship 

with charitable giving, such as through the donation of a private company's after-tax profits to 

charity. The Committee believes it is appropriate to encourage this form of philanthropy by 

eliminating certain legal impediments to its use, while also ensuring that private individuals 

cannot improperly benefit from amounts intended for a charitable purpose or inappropriately 

manage a taxable business. The Committee therefore believes it is appropriate to create an 

exception to the present-law private foundation excess business holdings rules for certain 

philanthropic business holdings. By so doing, the law will permit private philanthropists to 

bequeath an entire business to a private foundation, provided that the after-tax profits of the 

business will be paid to the foundation and certain other requirements are satisfied, while also 

ensuring that the donor's heirs cannot improperly benefit from the arrangement 

Explanation of Provision 

The provision creates an exception to the excess business holdings rules for certain 

philanthropic business holdings. Specifically, the tax on excess business holdings does not apply 

with respect to the holdings of a private foundation in any business enterprise that, for the 

taxable year, satisfies the following requirements: (I) the ownership requirements; (2) the "all 

profits to charity" distribution requirement; and (3) the independent operation requirements. 

The ownership requirements are satisfied if: (1) all ownership interests in the business 

enterprise are held by the private foundation at all times during the taxable year; and (2) all the 

private foundation's ownership interests in the business enterprise were acquired not by 

purchase. 

The "all profits to charity" distribution requirement is satisfied if the business enterprise, 

not later than 120 days after the close of the taxable year, distributes an amount equal to its net 

operating income for such taxable year to the private foundation. For this purpose, the net 

operating income of any business enterprise for any taxable year is an amount equal to the gross 

income of the business enterprise for the taxable year, reduced by the sum of: (1) the deductions 

allowed by chapter l of the Code for the taxable year that are directly connected with the 

production of the income; (2) the tax imposed by chapter 1 on the business enterprise for the 

taxable year; and (3) an amount for a reasonable reserve for working capital and other business 

needs of the business enterprise. 

The independent operation requirements are met if, at all times during the taxable year, 

the following three requirements are satisfied. First, no substantial contributor to the private 

foundation, or family member of such a contributor, is a director, officer, trustee, manager, 

employee, or contractor of the business enterprise (or an individual having powers or 

responsibilities similar to any of the foregoing). Second, at least a majority of the board of 

directors of the private foundation are not also directors or officers of the business enterprise or 

members of the family of a substantial contributor to the private foundation. Third, there is no 
291 

loan outstanding from the business enterprise to a substantial contributor to the private 

foundation or a family member of such contributor. For purposes of the independent operation 

requirements, "substantial contributor" has the meaning given to the term under section 

4958(c)(3)(C), and family members are determined under section 4958(f)(4)_ 

The provision does not apply to the following organizations: (1) donor advised funds or 

supporting organizations that are subject to the excess business holdings rules by reason of 

section 4943(e) or (f); (2) any trust described in section 4947(a)(l) (relating to charitable trusts); 

or (3) any trust described in section 4947(a)(2) (relating to split-interest trusts). 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

7. Repeal of deduction for amounts paid in exchange for college athletic seating rights 

(sec. 13707 of the bill and sec. 170(1) of the Code) 

Present Law 

In general 

The Internal Revenue Code allows taxpayers to reduce their income tax liability by 

taking deductions for contributions to certain organizations, including charities, Federal, State, 

local and Indian tribal governments, and certain other organizations. 

To be deductible, a charitable contribution generally must meet several threshold 

requirements. First, the recipient of the transfer must be eligible to receive charitable 

contributions (i.e., an organization or entity described in section 170(c)). Second, the transfer 

must be made with gratuitous intent and without the expectation of a benefit of substantial 

economic value in return. Third, the transfer must be complete and generally must be a transfer 

of a donor's entire interest in the contributed property (i.e., not a contingent or partial interest 

contribution). To qualify for a current year charitable deduction, payment of the contribution 

must be made within the taxable year. 93° Fourth, the transfer must be of money or propertycontributions of services are not deductible. 931 Finally, the transfer must be substantiated and in 

the proper form. 

Special rules limit a taxpayer's charitable contributions in a given year to a percentage of 

income, and those rules, in part, turn on whether the organization receiving the contributions is a 

public charity or a private foundation. Other special rules determine the deductible value of 

contributed property for each type of property. 

930 Sec. 170(a)(l)_ 

931 For example, the value of time spent volunteering for a charitable orgmrizatiou is not deductible. 

Incidental e"-penses such as mileage, supplies. or other expenses incurred while volunteering for a charitable 

organization. however, may be deductible. 
292 

College athletic seating rights 

In general, where a taxpayer receives or expects to receive a substantial return benefit for 

a payment to charity, the payment is not deductible as a charitable contribution. However, 

special rules apply to certain payments to institutions of higher education in exchange for which 

the payor receives the right to purchase tickets or seating at an athletic event. Specifically, the 

payor may treat 80 percent of a payment as a charitable contribution where: (1) the amount is 

paid to or for the benefit of an institution of higher education (as defined in section 3304(f)) 

described in section (b )(1 )(A)(ii) (generally, a school with a regular faculty and curriculum and 

meeting certain other requirements), and (2) such amount would be allowable as a charitable 

deduction but for the fact that the taxpayer receives (directly or indirectly) as a result of the 

payment the right to purchase tickets for seating at an athletic event in an athletic stadium of 

such institution. 932 

Reasons fm· Change 

The Committee believes that a robust charitable sector is vital to our economy, and that 

charitable giving is critical to ensuring that the sector thrives. For this reason, the Committee 

believes that it is desirable to provide additional incentives for taxpayers to provide monetary 

and volunteer support to charities. At the same time, the Committee believes that taxpayers 

should only be permitted a charitable deduction commensurate with the value of assets given to 

charity. For this reason, the provision eliminates the special rule under present law that allows 

taxpayers to take a charitable deduction for 80 percent of an amount contributed to a college or 

university in exchange for the right to purchase stadium seating and denies a deduction for such 

contribution. 

Explanation of Provision 

The provision amends section 170(1) to provide that no charitable deduction shall be 

allowed for any amount described in paragraph 170(1)(2), generally, a payment to an institution 

of higher education in exchange for which the payor receives the right to purchase tickets or 

seating at an athletic event, as described in greater detail above. 

Effective Date 

The provision is effective for contributions made in taxable years beginning after 

December 31, 2017. 

Sec. 170(1). 
293 

8. Repeal charitable contribution substantiation exception for contributions reported by 

donee organization (sec.13708 of the bill and sec. 170(f)(8) of the Code) 

Present Law 

Charitable contributions 

The Internal Revenue Code allows taxpayers to reduce their income tax liability by 

taking deductions for contributions to certain organizations, including charities, Federal, State, 

local and Indian tribal governments, and certain other organizations. 

To be deductible, a charitable contribution generally must meet several threshold 

requirements. First, the recipient of the transfer must be eligible to receive charitable 

contributions (i.e., an organization or entity described in section 170( c)). Second, the transfer 

must be made with gratuitous intent and without the expectation of a benefit of substantial 

economic value in return. Third, the transfer must be complete and generally must be a transfer 

of a donor's entire interest in the contributed property (i.e., not a contingent or partial interest 

contribution). To qualify for a current year charitable deduction, payment of the contribution 

must be made within the taxable year. 933 Fourth, the transfer must be of money or propertycontributions of services are not deductible. 934 Finally, the transfer must be substantiated and in 

the proper form. 

Substantiation and other formal requirements 

In general 

A donor who claims a deduction for a charitable contribution must maintain reliable 

written records regarding the contribution, regardless of the value or amount of such 

contribution. 935 In the case of a charitable contribution of money, regardless of the amount, 

applicable recordkeeping requirements are satisfied only if the donor maintains as a record of the 

contribution a bank record or a written communication from the donee showing the name of the 

donee organization, the date of the contribution, and the amount of the contribution. In such 

cases, the recordkeeping requirements may not be satisfied by maintaining other written records. 

No charitable contribution deduction is allowed for a separate contribution of $250 or 

more unless the donor obtains a contemporaneous written acknowledgement of the contribution 

933 Sec. 170(a)(l). 

9

" For example, the value of time spent volunteering for a charitable organization is not deductible. 

Incidental e>.-penses such as mileage. supplies, or other c"-penses incurred while volunteering for a charitable 

organization, however, may be deductible. 

935 Sec. 170(!)(17). 
294 

from the charity indicating whether the charity provided any good or service (and an estimate of 

the value of any such good or service) to the taxpayer in consideration for the contribution936 

In addition, any charity receiving a contribution exceeding $75 made partly as a gift and 

partly as consideration for goods or services furnished by the charity (a "quid pro quo" 

contribution) is required to inform the contributor in writing of an estimate of the value of the 

goods or services furnished by the charity and that only the portion exceeding the value of the 

goods or services is deductible as a charitable contribution. 937 

If the total charitable deduction claimed for noncash property is more than $500, the 

taxpayer must attach a completed Form 8283 (Noncash Charitable Contributions) to the 

taxpayer's return or the deduction is not allowed. 938 In general, taxpayers are required to obtain 

a qualified appraisal for donated property with a value of more than $5,000, and to attach an 

appraisal summary to the tax return. 

Exception for certain contributions reported by the donee organization 

Subsection 170(f)(8)(D) provides an exception to the contemporaneous written 

acknowledgment requirement described above. Under the exception, a contemporaneous written 

acknowledgment is not required if the donee organization files a return, on such form and in 

accordance with such regulations as the Secretary may prescribe, that includes the same content. 

"[T]he section 170(f)(8)(D) exception is not available unless and until the Treasury Department 

and the IRS issue final regulations prescribing the method by which donee reporting may be 

accomplished." 939 No such final regulations have been issued. 940 

930 Such acknowledgement mnst include the amount of cash and a description (bnt not value) of any 

property other than cash contributed. whether the donee provided any goods or services in consideration for the 

contribution, and a good faith estimate of the valne of any snch goods or services. Sec. 170(1)(8). 

937 Sec.6115. 

938 Sec. 170(1)(11 ). 

939 See IRS. Notice of Proposed Rule making. Substantiation Requirement for Certain Contributions. REG138344-13 (October 13. 2015). LR.B. 2015-41 (preamble). 

940 In October 20 15, the IRS issued proposed regulations that. if finalized. would have implemented the 

section 170(J)(8)(D) exception to the contemporaneous written acknowledgment requirement. The proposed 

re!,•ulations provided that a return filed by a donee organization under section 170(J)(8)(D) must include, in addition 

to the infonnation genemlly required on a contempomneous written acknowledgment: (1) the name and address of 

the donee organization; (2) the name and address of the donor; and (3) the tmqJayer identification number of the 

donor. In addition, the rettmlmust be filed with the IRS (with a copy provided to the donor) on or before February 

28 of the year following the calendar year in which the contribution was made. Under the proposed regulations. 

donee reporting would have been optional and would have been available solely at the discretion of the donee 

organization The proposed regulations were withdmwn in January 2016. Sec Prop. Treas. Reg. sec 1.170A13(J)(l8). 
295 

Reasons for Change 

The alternative substantiation regime under section 170(f)(8)(D), if implemented by 

regulation, likely would require donee charities to collect and maintain sensitive taxpayer 

identifying information relating to their donors, such as Social Security numbers, thereby 

increasing the risk of identity theft. The Committee believes section 170(f)(8)(D) should be 

repealed to prevent this undesirable result. 

Explanation of Provision 

The provision repeals the section 170(f)(8)(D) exception to the contemporaneous written 

acknowledgment requirement. 

Effective Date 

The provision is effective for contributions made in taxable years beginning after 

December 31, 2016. 
296 

PART IX- OTHER PROVISIONS 

1. Production period for beer, wine, and distilled spirits (sec. 13802 of the bill and sec. 

263A of the Code) 

Present Law 

In general 

The uniform capitalization ("UN I CAP") rules, which were enacted as part of the Tax 

Reform Act of 1986,941 require certain direct and indirect costs allocable to real or tangible 

personal property produced by the taxpayer to be included in either inventory or capitalized into 

the basis of such property, as applicable. 942 For real or personal property acquired by the 

taxpayer for resale, section 263A generally requires certain direct and indirect costs allocable to 

such property to be included in inventory. 

In the case of interest expense, the UNICAP rules apply only to interest paid or incurred 

during the property's production period943 and that is allocable to property produced by the 

taxpayer or acquired for resale which (l) is either real property or property with a class life of at 

least 20 years, (2) has an estimated production period exceeding two years, or (3) has an 

estimated production period exceeding one year and a cost exceeding $1,000,000944 The 

production period with respect to any property is the period beginning on the date on which 

production of the property begins, and ending on the date on which the property is ready to be 

placed in service or held for sale. 945 In the case of property that is customarily aged (e.g., 

tobacco, wine, and whiskey) before it is sold, the production period includes the aging period. 946 

Exceptions from UNICAP 

Section 263A provides a number of exceptions to the general capitalization requirements. 

One such exception exists for certain small taxpayers who acquire property for resale and have 

9

'" Sec. 803(a) of Pub. L. No. 99-514 (1986). 

942 Sec. 263A. 

943 Sec Treas. Reg. sec. 1.263A-12. 

941 Sec. 263A(J). 

945 Sec. 263A(J)(4)(B). 

9

"" See Treas. Reg. sec. 1.263A-12(d)(l). See also TAM 9327007 (Mar. 31, 1993) (holding that producers 

of wine must include the time that wine ages in bottles as part of the production period, which concludes when the 

wine vintage is officially released to the distribution chain). 
297 

$10 million or less of average annual gross receipts for the preceding three-taxable year 

period; 947 such taxpayers are not required to include additional section 263A costs in inventory. 

Another exception exists for taxpayers who raise, harvest, or grow trees. 948 Under this 

exception, section 263A does not apply to trees raised, harvested, or grown by the taxpayer 

(other than trees bearing fruit, nuts, or other crops, or ornamental trees) and any real property 

underlying such trees. Similarly, the UN!CAP rules do not apply to any animal or plant having a 

reproductive period of two years or less, which is produced by a taxpayer in a farming business 

(unless the taxpayer is required to use an accrual method of accounting under section 447 or 

448(a)(3))949 

Freelance authors, photographers, and artists also are exempt from section 263A for any 

qualified creative expenses. 950 Qualified creative expenses are defined as amounts paid or 

incurred by an individual in the trade or business of being a writer, photographer, or artist. 

However, such term does not include any expense related to printing, photographic plates, 

motion picture files, video tapes, or similar items. 

Reasons for Change 

The Committee believes that the present law interest capitalization rules impose overly 

complex recordkeeping requirements that increase compliance costs for the alcoholic beverage 

industry. The Committee also believes that any potential distortion to income caused by not 

applying such rules is not material enough to warrant the application of unduly burdensome rules 

to such industry. Accordingly, the Committee believes that providing an exception to such rules 

for the alcoholic beverage industry will simplify tax administration and taxpayer compliance. 951 

947 Sec. 263A(b)(2)(B). No statutory exception is available for small taxpayers who produce properly 

subject to section 263A. However, a de minimis mlc under Treasmy regulations treats producers that usc the 

simplified production method and incur total indirect costs of $200,000 or less in a taxable year as having no 

additional indirect costs beyond those uonnally capitalized for financial accounting purposes. Treas. Reg. sec. 

1.263A-2(b)(3)(iv). However, the Chainnan's Mark of the "Tax Cuts and Jobs AcC proposes to expand the 

exception for small taxpayers from the uniform capitalization rules. Under the provision, any producer or resellcr 

that meets the $15 million gross receipts test is exempted from the application of section 263A. See section Ill.B.4 

of Description of the Chairman's Mark of the "Tax Cuts and .Jobs Act" (JCX-51-17), November 9. 2017. 

948 Sec. 263A(c)(5). 

949 Sec. 263A(d). See also section Ill.B.3 of Description of the Chairman's Mark of the "Tax Cuts and 

Jobs Act" (JCX-51-17). November 9, 2017, which expands the universe of famting C corporations that may use the 

cash method to include any fanning C corporation that meets the $15 million gross receipts test. 

950 Sec. 263A(h). 

951 For ta>.payers in the craft beverage industl}· that meet the $15 million gross receipts test. such taxpayers 

are exempt from all uniform capitalization rules under section263A. including the interest capitaliz.ation mles. Sec 

section 13104 of the bill (Modification of rules for uniform capitalization of certain expenses). 
298 

Explanation of Provision 

The provision would exclude the aging periods for beer, wine, and distilled spirits from 

the production period for purposes of the UNICAP interest capitalization rules. Thus, under the 

provision, producers of beer, wine and distilled spirits are able to deduct interest expenses 

(subject to any other applicable limitation) attributable to a shorter production period. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision is effective for interest costs paid or incurred after December 31, 2017. 

2. Reduced rate of excise tax on beer (sec. 13803 of the bill and sec. 5051 of the Code) 

Present Law 

Federal excise taxes are imposed at different rates on distilled spirits, wine, and beer and 

are imposed on these products when produced or imported. Generally, these excise taxes are 

administered and enforced by the TTB, except the taxes on imported bottled distilled spirits, 

wine, and beer are collected by the Customs and Border Protection Bureau (the "CBP") of the 

Department of Homeland Security (under delegation by the Secretary of the Treasury). 

Liability for the excise tax on beer also come into existence when the alcohol is produced 

but is not payable until the beer is removed from the brewery for consumption or sale. 

Generally, beer may be transferred between commonly owned breweries without payment of tax; 

however, tax liability follows these products. Imported bulk beer may be released from customs 

custody without payment of tax and transferred in bond to a brewery. Beer may be exported 

without payment of tax and may be withdrawn without payment of tax or free of tax from the 

production facility for certain authorized uses, including industrial uses and non-beverage uses. 

The rate of tax on beer is $18 per barrel (31 gallons)952 Small brewers are subject to a 

reduced tax rate of $7 per barrel on the first 60,000 barrels of beer domestically produced and 

removed each year. 953 Small brewers are defined as brewers producing fewer than two million 

barrels of beer during a calendar year. The credit reduces the effective per-gallon tax rate from 

approximately 58 cents per gallon to approximately 22.6 cents per gallon for this beer. 

In the case of a controlled group, the two million barrel limitation for small brewers is 

applied to the controlled group, and the 60,000 barrels eligible for the reduced rate of tax, are 

apportioned among the brewers who are component members of such group. The term 

"controlled group" has the meaning assigned to it by sec. 1563(a), except that the phrase "more 

Sec. 5051. 

953 Sec. 505l(a)(2). 
299 

than 50 percent" is substituted for the phrase "at least 80 percent" in each place it appears in sec. 

l563(a). 

Individuals may produce limited quantities of beer for personal or family use without 

payment of tax during each calendar year. The limit is 200 gallons per calendar year for 

households of two or more adults and 100 gallons per calendar year for single-adult households. 

Reasons for Change 

The Committee believes that reducing the excise tax rates on producers of beer will 

provide the industry with needed tax relief, create jobs, and contribute to tax reform's goal of 

economic growth. While all producers will benefit from the reduced rates, small producers will 

experience the greatest reduction in their excise tax burden. Further, the Committee seeks to 

provide equitable tax treatment across all producers by allowing importers to qualify for the 

reduced rates. 

Explanation of Provision 

The provision lowers the rate of tax on beer to $16 per barrel on the first six million 

barrels brewed by the brewer or imported by the importer. In general, in the case of a controlled 

group of brewers, the six million barrel limitation is applied and apportioned at the level of the 

controlled group. Beer brewed or imported in excess of the six million barrel limit would 

continue to be taxed at $18 per barrel. In the case of small brewers, such brewers would be 

taxed at a rate of $3.50 per barrel on the first 60,000 barrels domestically produced, and $16 per 

barrel on any further barrels produced. The same rules applicable to controlled groups under 

present law apply with respect to this limitation. 

For barrels of beer that have been brewed or produced outside of the United States and 

imported into the United States, the reduced tax rate may be assigned by the brewer to any 

importer of such barrels pursuant to requirements set forth by the Secretary of the Treasury in 

consultation with the Secretary of Health and Human Services and the Secretary of the 

Department of Homeland Security. These requirements are to include: (1) a limitation to ensure 

that the number of barrels of beer for which the reduced tax rate has been assigned by a brewer 

to any importer does not exceed the number of barrels of beer brewed or produced by such 

brewer during the calendar year which were imported into the United States by such importer; 

(2) procedures that allow a brewer and an importer to elect whether to receive the reduced tax 

rate; (3) requirements that the brewer provide any information as the Secretary of the Treasury 

determines necessary and appropriate for purposes of assignment of the reduced tax rate; and ( 4) 

procedures that allow for revocation of eligibility of the brewer and the importer for the reduced 

tax rate in the case of erroneous or fraudulent information provided in (3) which the Secretary of 

the Treasury deems to be material for qualifying for the reduced tax rate. 

Any importer making an election to receive the reduced tax rate shall be deemed to be a 

member of the controlled group of the brewer, within the meaning of sec. 1563(a), except that 
300 

the phrase "more than 50 percent" is substituted for the phrase "at least 80 percent" in each place 

it appears in sec 1563(a). 954 

Under rules issued by the Secretary of the Treasury, two or more entities (whether or not 

under common control) that produce beer marketed under a similar brand, license, franchise, or 

other arrangement shall be treated as a single taxpayer for purposes of the excise tax on beer. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision is effective for beer removed after December 31, 2017. 

3. Simplification of rules regarding records, statements, and returns (sec. 13804 of the bill 

and sees. 5141 and 5555 of the Code) 

Present Law 

Brewers are required to maintain records and file reports of operations as required by the 

regulations955 and are subject to inspection of their premises and records 956 Special 

occupational taxes had been imposed on alcohol industry members, including wholesale and 

retail dealers, but were effectively repealed for taxes due on or after July !, 2005. However, 

these persons remain subject to registration and recordkeeping requirements that supplement the 

operational reporting rules. Brewers file monthly, quarterly, or annual reports of operations (the 

frequency depends upon the type of operation and its size), which do not include reports of 

inventory, although inventory records must be kept. Wholesalers and some retailers must keep 

records, including inventory, but need only register and need not file reports. Civil and criminal 

penalties, in addition to forfeiture provisions, may apply in the event of non-compliance with the 

laws and regulations. 957 

Reasons for Change 

The Committee believes that brewers should be permitted to employ a unified record 

keeping system for purposes of compliance with the Internal Revenue Code. 

Explanation of Provision 

Under the provision, the Secretary shall pennit a person to employ a unified system for 

any records, statements, and returns required to be kept, rendered or made under section 5555. 

95'

1 Members of the controlled group may include foreign corporations. 

''' Sees. 5414 and 5555. 

956 Sec. 5553. 

Sees. 5601-91. 
301 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to any calendar quarters beginning after December 31, 2017. 

4. Transfer of beer between bonded facilities (sec. 13805 of the bill and sec. 5414 of the 

Code) 

Present Law 

Federal excise taxes are imposed at different rates on distilled spirits, wine, and beer and 

are imposed on these products when produced or imported. Generally, these excise taxes are 

administered and enforced by the TTB, except the taxes on imported bottled distilled spirits, 

wine, and beer are collected by the Customs and Border Protection Bureau (the "CBP") of the 

Department of Homeland Security (under delegation by the Secretary of the Treasury). The rate 

of tax on beeris $18 per barrel (31 gallons )

958 

Liability for the excise tax on beer also come into existence when the alcohol is produced 

but is not payable until the beer is removed from the brewery for consumption or sale. 

Generally, beer may be transferred between commonly owned breweries without payment of tax; 

however, tax liability follows these products. Imported bulk beer may be released from customs 

custody without payment of tax and transferred in bond to a brewery. Beer may be exported 

without payment of tax and may be withdrawn without payment of tax or free ofta," from the 

production facility for certain authorized uses, including industrial uses and non-beverage uses. 

Small domestic brewers are subject to a reduced tax rate of $7 per barrel on the first 

60,000 barrels of beer removed each year. 959 Small brewers are defined as brewers producing 

fewer than two million barrels of beer during a calendar year. The credit reduces the effective 

per-gallon tax rate from approximately 58 cents per gallon to approximately 22.6 cents per 

gallon for this beer. 

Individuals may produce limited quantities of beer for personal or family use without 

payment of tax during each calendar year. The limit is 200 gallons per calendar year for 

households of two or more adults and 100 gallons per calendar year for single-adult households. 

Transfer rules and removals without tax 

Certain removals or transfers of beer are exempt from tax. Beer may be transferred 

without payment of the tax between bonded premises under certain conditions specified in the 

regulations. 960 The tax liability accompanies the beer that is transferred in bond. However, beer 

958 Sec. 5051. 

959 Sec. 505l(a)(2). 

'"' Sec. 5414. 
302 

may only be transferred free of tax between breweries if both breweries are owned by the same 

brewer. 

Reasons for Change 

The Committee believes that the rules relating to the transfer of beer in bond should be 

liberalized, so as to provide more flexibility to brewers in transporting beer between owners and 

facilities. 

Explanation of Provision 

The provision relaxes the shared ownership requirement of section 5414. Thus, under the 

provision, a brewer may transfer beer from one brewery to another without incurring tax, 

provided that: (i) the breweries are owned by the same person; (ii) one brewery owns a 

controlling interest in the other; (iii) the same person or persons have a controlling interest in 

both breweries; or (iv) the proprietors of the transferring and receiving premises are independent 

of each other, and the transferor has divested itself of all interest in the beer so transferred, and 

the transferee has accepted responsibility for payment of the tax. 

For purposes of transferring the tax liability pursuant to (iv) above, such relief from 

liability shall be effective from the time of removal from the transferor's bonded premises, or 

from the time of divestment, whichever is later. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to any calendar quarters beginning after December 31, 2017. 

5. Reduced rate of excise tax on certain wine (sec. 13806 of the bill and sec. 5041 of the 

Code) 

Present Law 

In general 

Under present law, excise taxes are imposed at different rates on wine, depending on the 

wine's alcohol content and carbonation levels. The following table outlines the present rates of 

tax on wine. 
303 

Tax (and Code Section) Tax Rates 

Wines (sec. 5041) 

"Still wines"961 not more than 14 percent $1.07 per wine gallon962 

alcohol 

"Still wines" more than 14 percent, but not more $1.57 per wine gallon 

than 21 percent, alcohol 

"Still wines" more than 21 percent, but not more $3.15 per wine gallon 

than 24 percent, alcohol 

"Still wines" more than 24 percent alcohol $13.50 per proof gallon 

(taxed as distilled spirits) 

Champagne and other sparkling wines $3.40 per wine gallon 

Artificially carbonated wines $3.30 per wine gallon 

Liability for the excise taxes on wine come into existence when the wine is produced but 

is not payable until the wine is removed from the bonded wine cellar or winery for consumption 

or sale. Generally, bulk and bottled wine may be transferred in bond between bonded premises; 

however, tax liability follows these products. Bulk natural wine may be released from customs 

custody without payment of tax and transferred in bond to a winery. Wine may be exported 

without payment of tax and may be withdrawn without payment of tax or free of tax from the 

production facility for certain authorized uses, including industrial uses and non-beverage uses. 

Reduced rates and exemptions for certain wine producers 

Wineries having aggregate annual production not exceeding 250,000 gallons ("small 

domestic producers") receive a credit against the wine excise tax equal to 90 cents per gallon (the 

amount of a wine tax increase enacted in 1990) on the first l 00,000 gallons of wine domestically 

produced and removed during a calendar year. 963 The credit is reduced (but not below zero) by 

one percent for each 1,000 gallons produced in excess of 150,000 gallons; the credit does not 

apply to sparkling wines. In the case of a controlled group, the 250,000 gallon limitation for 

wineries is applied to the controlled group, and the 100,000 gallons eligible for the credit, are 

apportioned among the wineries who are component members of such group. The term 

"controlled group" has the meaning assigned to it by sec. 1563(a), except that the phrase "more 

than 50 percent" is substituted for the phrase "at least 80 percent" in each place it appears in sec 

1563(a). 

Individuals may produce limited quantities of wine for personal or family use without 

payment of tax during each calendar year. The limit is 200 gallons per calendar year for 

households of two or more adults and 100 gallons per calendar year for single-adult households. 

961 A "still wine .. is a non-sparkling \Vine. Most common lablc wines are still \Vines. 

962 A wine gallon is a U.S. liquid gallon. 

963 Sec. 504l(c). 
304 

Reasons for Change 

The Committee believes that reducing the net excise taxes on wine through expansion of 

the available credits for wine production will provide the industry with needed tax relief, create 

jobs, and contribute to tax reform's goal of economic growth. While all producers will benefit 

from the reduced rates, small producers will experience the greatest reduction in their excise tax 

burden. Further, the Committee seeks to provide equitable tax treatment across all producers by 

allowing importers to qualify for the expanded credits. 

Explanation of Provision 

The provision modifies the credit against the wine excise tax for small domestic 

producers, by removing the 250,000 wine gallon domestic production limitation (and thus 

making the credit available for all wine producers and importers). Additionally, under the 

provision, sparkling wine producers and importers are now eligible for the credit. With respect to 

wine produced in, or imported into, the United States during a calendar year, the credit amount is 

(!) $1.00 per wine gallon for the first 30,000 wine gallons of wine, plus; (2) 90 cents per wine 

gallon on the next 100,000 wine gallons of wine, plus; (3) 53.5 cents per wine gallon on the next 

620,000 wine gallons ofwine964 There is no phaseout of the credit. 

In the case of any wine gallons of wine that have been produced outside of the United 

States and imported into the United States, the tax credit allowable may be assigned by the 

person who produced such wine (the "foreign producer") to any electing importer of such wine 

gallons pursuant to requirements established by the Secretary of the Treasury, in consultation 

with the Secretary of Health and Human Services and the Secretary of the Department of 

Homeland Security. These requirement are to include: (1) a limitation to ensure that the number 

of wine gallons of wine for which the tax credit has been assigned by a foreign producer to any 

importer does not exceed the number of wine gallons of wine produced by such foreign 

producer, during the calendar year, which were imported into the United States by such importer; 

(2) procedures that allow the election of a foreign producer to assign, and an importer to receive, 

the tax credit; (3) requirements that the foreign producer provide any information that the 

Secretary of the Treasury determines to be necessary and appropriate for purposes of assigning 

the tax credit; and (4) procedures that allow for revocation of eligibility of the foreign producer 

and the importer for the tax credit in the case of erroneous or fraudulent information provided in 

(3) which the Secretary of the Treasury deems to be material for qualifying for the reduced tax 

rate. 

Any importer making an election to receive the reduced tax rate shall be deemed to be a 

member of the controlled group of the brewer, within the meaning of sec. 1563(a), except that 

the phrase "more than 50 percent" is substitute for the phrase "at least 80 percent" in each place 

it appears in sec 1563(a). 965 

964 The credit rate for hard cider is tiered at the same level of production or importation, but is equal to 6.2 

cents. 5.6 cents and 3.3 cents, respectively. 

965 Members of the controlled group may include foreign corporations. 
305 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to wine removed after December 31, 2017. 

6. Adjustment of alcohol content level for application of excise tax rates (sec. 13807 of the 

bill and sec. 5041 of the Code) 

Present Law 

In general 

Under present law, excise taxes are imposed at different rates on wine, depending on the 

wine's alcohol content and carbonation levels. The following table outlines the present rates of 

tax on wine. 

Tax (and Code Section) Tax Rates 

Wines (sec. 5041) 

"Still wines"966 not more than 14 percent alcohol $1.07 per wine gallon967 

"Still wines" more than 14 percent, but not more $1.57 per wine gallon 

than 21 percent, alcohol 

"Still wines" more than 21 percent, but not more $3.15 per wine gallon 

than 24 percent, alcohol 

"Still wines" more than 24 percent alcohol $13.50 per proof gallon 

(taxed as distilled spirits) 

Champagne and other sparkling wines $3.40 per wine gallon 

Artificially carbonated wines $3.30 per wine gallon 

Liability for the excise taxes on wine come into existence when the wine is produced but 

is not payable until the wine is removed from the bonded wine cellar or winery for consumption 

or sale. Generally, bulk and bottled wine may be transferred in bond between bonded premises; 

however, tax liability follows these products. Bulk natural wine may be released from customs 

custody without payment of tax and transferred in bond to a winery. Wine may be exported 

without payment of tax and may be withdrawn without payment of tax or free of tax from the 

production facility for certain authorized uses, including industrial uses and non-beverage uses. 

966 A "stiU wine·· is a non-sparkling wine. Most common table \vines arc still wines. 

9

" A wine gallon is a U.S. liquid gallon. 
306 

Reduced rates aud exemptions for certain wine producers 

Wineries having aggregate annual production not exceeding 250,000 gallons ("small 

domestic producers") receive a credit against the wine excise tax equal to 90 cents per gallon (the 

amount of a wine tax increase enacted in 1990) on the first I 00,000 gallons of wine domestically 

produced and removed during a calendar year968 The credit is reduced (but not below zero) by 

one percent for each I ,000 gallons produced in excess of 150,000 gallons; the credit does not 

apply to sparkling wines. ln the case of a controlled group, the 250,000 gallon limitation for 

wineries is applied to the controlled group, and the 100,000 gallons eligible for the credit, are 

apportioned among the wineries who are component members of such group. The term 

"controlled group" has the meaning assigned to it by sec. 1563(a), except that the phrase "more 

than 50 percent" is substituted for the phrase "at least 80 percent" in each place it appears in sec. 

l563(a). 

Individuals may produce limited quantities of wine for personal or family use without 

payment of tax during each calendar year. The limit is 200 gallons per calendar year for 

households of two or more adults and 100 gallons per calendar year for single-adult households. 

Reasons for Change 

The Committee believes that it is appropriate to adjust the tiers of alcohol-by-volume 

levels which apply to wine to simplify the excise tax treatment for the majority of table wine. 

Explanation of Provision 

The provision modifies alcohol-by-volume levels of the first two tiers of the excise tax on 

wine, by changing 14 percent to 16 percent. Thus, under the provision, a wine producer or 

importer may produce or import "still wine" that has an alcohol-by-volume level of up to 16 

percent, and remain subject to the lowest rate of $1.07 per wine gallon. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to wine removed after December 31, 2017. 

968 Sec. 504l(c). 
307 

7. Definition of mead and low alcohol by volume wine (sec. 13808 of the bill and sec. 5041 

of the Code) 

Present Law 

In general 

Under present law, excise taxes are imposed at different rates on wine, depending on the 

wine's alcohol content and carbonation levels. The following table outlines the present rates of 

tax on wine. 

Tax (and Code Section) Tax Rates 

Wines (sec. 5041) 

"Still wines"969 not more than 14 percent alcohol $1.07 per wine gallon970 

"Still wines" more than 14 percent, but not more $1.57 per wine gallon 

than 21 percent, alcohol 

"Still wines" more than 21 percent, but not more $3.15 per wine gallon 

than 24 percent, alcohol 

"Still wines" more than 24 percent alcohol $13.50 per proof gallon 

(taxed as distilled spirits) 

Champaf;ne and other sparkling wines $3.40 per wine gall on 

Artificially carbonated wines $3.30 per wine gallon 

Liability for the excise taxes on wine come into existence when the wine is produced but 

is not payable until the wine is removed from the bonded wine cellar or winery for consumption 

or sale. Generally, bulk and bottled wine may be transferred in bond between bonded premises; 

however, tax liability follows these products. Bulk natural wine may be released from customs 

custody without payment of tax and transferred in bond to a winery. Wine may be exported 

without payment of tax and may be withdrawn without payment of tax or free of tax from the 

production facility for certain authorized uses, including industrial uses and non-beverage uses. 

Reduced rates and exemptions for certain wine producers 

Wineries having aggregate annual production not exceeding 250,000 gallons ("small 

domestic producers") receive a credit against the wine excise tax equal to 90 cents per gallon (the 

amount of a wine tax increase enacted in 1990) on the first 100,000 gallons of wine domestically 

produced and removed during a calendar year971 The credit is reduced (but not below zero) by 

one percent for each 1,000 gallons produced in excess of 150,000 gallons; the credit does not 

969 A "sti11 wine"' is a non-sparkling \Vine. Most common table \Vines arc still \Vines. 

970 A wine gallon is a U.S. liquid gallon. 

,., Sec. 504\(c). 
308 

apply to sparkling wines. In the case of a controlled group, the 250,000 gallon limitation for 

wineries is applied to the controlled group, and the 100,000 gallons eligible for the credit, are 

apportioned among the wineries who are component members of such group. The term 

"controlled group" has the meaning assigned to it by sec. 1563(a), except that the phrase "more 

than 50 percent" is substituted for the phrase "at least 80 percent" in each place it appears in sec 

1563(a) 

Individuals may produce limited quantities of wine for personal or family use without 

payment of tax during each calendar year The limit is 200 gallons per calendar year for 

households of two or more adults and 100 gallons per calendar year for single-adult households. 

Reasons for Change 

The Committee believes that reducing the excise tax rate on mead and certain carbonated 

wines will provide the industry with needed tax relief, create jobs, expand beverage choices for 

consumers, and contribute to tax reform's goal of economic growth. 

Explanation of Provision 

The provision designates mead and certain sparkling wines to be taxed at the lowest rate 

applicable to "still wine," of$1.07 per wine gallon of wine. Mead is defined as a wine that 

contains not more than 0.64 grams of carbon dioxide per hundred milliliters ofwine, 972 which is 

derived solely from honey and water, contains no fruit product or fruit flavoring, and contains 

less than 8.5 percent alcohol-by-volume. The sparkling wines eligible to be taxed at the lowest 

rate are those wines that contain not more than 0.64 grams of carbon dioxide per hundred 

milliliters of wine, 973 which are derived primarily from grapes or grape juice concentrate and 

water, which contain no fruit flavoring other than grape, and which contain less than 8.5 percent 

alcohol by volume. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to wine removed after December 31, 2017. 

The Secretary is authorized to prescribe tolerances to this limitation as may be reasonably necessary in 

good commercial practice. 

The Secretary is authorized to prescribe tolerances to this limitation as may be reasonably necessary in 

good cmmnercial practice. 
309 

8. Reduced rate of excise tax on certain distilled spirits (sec. 13809 of the bill and sec. 5001 

of the Code) 

Present Law 

An excise tax is imposed on all distilled spirits produced in, or imported into, the United 

States974 The tax liability legally comes into existence the moment the alcohol is produced or 

imported but payment of the tax is not required until a subsequent withdrawal or removal from 

the distillery, or, in the case of an imported product, from customs custody or bond. 975 

Distilled spirits are taxed at a rate of $13.50 per proof gallon. 976 Liability for the excise 

tax on distilled spirits comes into existence when the alcohol is produced but is not determined 

and payable until bottled distilled spirits are removed from the bonded premises of the distilled 

spirits plant where they are produced. Generally, bulk distilled spirits may be transferred in bond 

between bonded premises; however, tax liability follows these products. Imported bulk distilled 

spirits may be released from customs custody without payment of tax and transferred in bond to 

a distillery. Distilled spirits be exported without payment of tax and may be withdrawn without 

payment of tax or free of tax from the production facility for certain authorized uses, including 

industrial uses and non-beverage uses. 

A portion of the revenues from the distilled spirits excise tax imposed on rum imported or 

brought into977 the United States (less certain administrative costs) is transfen·ed ("covered 

over") to Puerto Rico and the U.S. Virgin lslands978 The amount covered over is $10.50 per 

proof gallon ($13 .25 per proof gallon during the period from July 1, 1999, through December 31, 

2016). 

Eligible distilled spirits wholesale distributors and distillers receive an income tax credit 

for the average cost of carrying previously imposed excise tax on beverages stored in their 

warehouses. 979 

Sees. 5001. 

Sees. 5006. 5043. and 5054. In genernl, proprietors of distilled spirit plants. proprietors ofbonded wine 

cellars. brewers. and importers are liable for tbe tax. 

9'

6 A "proof gallon" is a U.S. liquid gallon of proof spirits. or the alcoholic equivalent thereof. Generally a 

proof gallon is a U.S. liquid gallon consisting of 50 percent alcohol. On lesser quantities. the tax is paid 

proportionately. Credits are allowed for wine content and navors content of distilled spirits. Sec. 5010. 

Because Puerto Rico is inside U.S. customs territory, articles entering the Uuited States from that 

commonwealth are "brought into" rather than "imported into" the U.S. 

9

" Sec. 7652. 

979 Sec. 5011. Section 50 11 is ad1uiuistered and enforced by the IRS. 
310 

Reasons for Change 

The Committee believes that reducing the excise tax rate on distilled spirits will provide 

the industry with needed tax relief, create jobs, and contribute to tax reform's goal of economic 

growth. While all producers will benefit from the reduced rates, small producers will experience 

the greatest reduction in their excise tax burden. Further, the Committee seeks to provide 

equitable tax treatment across all producers by allowing importers to qualify for the reduced 

rates. 

Explanation of Provision 

The provision institutes a tiered rate for distilled spirits. The rate of tax is lowered to 

$2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, $13.34 for all proof 

gallons in excess of that amount but below 22,130,000 proof gallons, and $13.50 for amounts 

thereafter. The provision contains rules so as to prevent members of the same controlled group 

from receiving the lower rate on more than 100,000 proof gallons of distilled spirits. Importers 

of distilled spirits are eligible for the lower rates. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to distilled spirits removed after December 31, 2017. 

9. Bulk distilled spirits (sec. 13810 of the bill and sec. 5212 of the Code) 

Present Law 

An excise tax is imposed on all distilled spirits produced in, or imported into, the United 

States. 980 The tax liability legally comes into existence the moment the alcohol is produced or 

imported but payment of the tax is not required until a subsequent withdrawal or removal from 

the distillery, or, in the case of an imported product, from customs custody or bond. 981 

Distilled spirits are taxed at a rate of $13.50 per proof gallon. 982 Liability for the excise 

tax on distilled spirits comes into existence when the alcohol is produced but is not determined 

and payable until bottled distilled spirits are removed from the bonded premises of the distilled 

spirits plant where they are produced. Generally, bulk distilled spirits may be transferred in bond 

between bonded premises; however, tax liability follows these products. Additionally, in order to 

9

'

0 Sees. 500 L 

981 Sees. 5006, 5043, and 505-l. In general, proprietors of distilled spirit plants. proprietors of bonded wine 

cellars, brewers. and importers arc liable for the tax. 

982 A "proof gallon" is a U.S. liquid gallon of proof spirits. or the alcoholic equivalent thereof. Generally a 

proof gallon is a U.S. liquid gallon consisting of 50 percent alcohol. On lesser quantities, the tax is paid 

proportionately. Credits are allowed for wine content and flavors content of distilled spirits. Sec. 5010. 
311 

transfer such spirits in bond without payment of tax, such spirits may not be transferred in 

containers smaller than one gallon. 983 Imported bulk distilled spirits may be released from 

customs custody without payment of tax and transferred in bond to a distillery. Distilled spirits 

be exported without payment of tax and may be withdrawn without payment of tax or free of tax 

from the production facility for certain authorized uses, including industrial uses and nonbeverage uses. 

A portion of the revenues from the distilled spirits excise tax imposed on rum imported or 

brought into984 the United States (less certain administrative costs) is transferred ("covered 

over") to Puerto Rico and the U.S. Virgin lslands. 985 The amount covered over is $10.50 per 

proof gallon ($13 .25 per proof gallon during the period from July 1, 1999, through December 31, 

2016). 

Eligible distilled spirits wholesale distributors and distillers receive an income tax credit 

for the average cost of carrying previously imposed excise tax on beverages stored in their 

warehouses. 986 

Reasons for Change 

The Committee believes that the rules relating to the transfer of distilled spirits in bond 

should be liberalized, so as to provide more flexibility to distillers in transporting spirits between 

facilities. 

Explanation of Provision 

The provision allows distillers to transfer spirits in approved containers other than bulk 

containers in bond without payment of tax. 

The provision expires for taxable years beginning after December 31, 2019. 

Effective Date 

The provision applies to distilled spirits transferred in bond after December 31, 2017. 

9

" Sec. 5212. 

984 Because Puerto Rico is inside U.S. customs territory. articles entering the United States from that 

commonwealth are "brought into" rather than "imported into" the U.S. 

985 Sec. 7652. 

98" Sec. 50 II. Section 50 II is administered and enforced by the IRS. 
312 

I 0. Modification of tax treatment of Alaska Native Corpm·ations and Settlement Trusts 

(sec. 13821 of the bill and sec. 6039H and new sees. 139G and 247 of the Code) 

Present Law 

The Alaska Native Claims Settlement Act ("ANCSA")987 established Native 

Corporations988 to hold property for Alaska Natives. Alaska Natives are generally the only 

permitted common shareholders of those corporations under section 7(h) of ANCSA, unless a 

Native Corporation specifically allows other shareholders under specified procedures. 

ANCSA permits a Native Corporation to transfer money or other property to an Alaska 

Native Settlement Trust ("Settlement Trust") for the benefit of beneficiaries who constitute all or 

a class of the shareholders of the Native Corporation, to promote the health, education and 

welfare of beneficiaries and to preserve the heritage and culture of Alaska Natives989 

Native Corporations and Settlement Trusts, as well as their shareholders and 

beneficiaries, are generally subject to tax under the same rules and in the same manner as other 

taxpayers that are corporations, trusts, shareholders, or beneficiaries. 

Special tax rules enacted in 2001 allow an election to use a more favorable tax regime for 

transfers of property by a Native Corporation to a Settlement Trust and for income taxation of 

the Settlement Trust. There is also simplified reporting to beneficiaries. 

Under the special tax rules, a Settlement Trust may make an irrevocable election to pay 

tax on taxable income at the lowest rate specified for individuals, (rather than the highest rate 

that is generally applicable to trusts) and to pay tax on capital gains at a rate consistent with 

being subject to such lowest rate of tax. As described further below, beneficiaries may generally 

thereafter exclude from gross income distributions from a trust that has made this election. Also, 

contributions from a Native Corporation to an electing Settlement Trust generally will not result 

in the recognition of gross income by beneficiaries on account of the contribution. An electing 

Settlement Trust remains subject to generally applicable requirements for classification and 

taxation as a trust. 

A Settlement Trust distribution is excludable from the gross income of beneficiaries to 

the extent of the taxable income of the Settlement Trust for the taxable year and all prior taxable 

years for which an election was in effect, decreased by income tax paid by the Trust, plus taxexempt interest from State and local bonds for the same period. Amounts distributed in excess 

of the amount excludable is taxed to the beneficiaries as if distributed by the sponsoring Native 

Corporation in the year of distribution by the Trust, which means that the beneficiaries must 

include in gross income as dividends the amount of the distribution, up to the current and 

43 U.S.C. 1601 el. seq. 

988 Defined at 43 U.S.C. 1602(m). 

989 With certain exceptions, once an Alaska Native Corporation has made a conveyance to a Settlement 

Tmst, the assets conveyed shall not be subject to a1taelunent, distraint. or sale or execution of judgment, except with 

respect to the lawful debts and obligations of the Settlement Trust. 
313 

accumulated earnings and profits of the Native Corporation. Amounts distributed in excess of 

the current and accumulated earnings and profits are not included in gross income by the 

beneficiaries. 

A special loss disallowance rule reduces (but not below zero) any loss that would 

otherwise be recognized upon disposition of stock of a sponsoring Native Corporation by a 

proportion, determined on a per share basis, of all contributions to all electing Settlement Trusts 

by the sponsoring Native Corporation. This rule prevents a stockholder from being able to take 

advantage of a decrease in value of a Native Corporation that is caused by a transfer of assets 

from the Native Corporation to a Settlement Trust. 

The fiduciary of an electing Settlement Trust is obligated to provide certain information 

relating to distributions from the trust in lieu of reporting requirements under Section 6034A. 

The election to pay tax at the lowest rate is not available in certain disqualifying cases 

where transfer restrictions have been modified to allow a transfer of either: (a) a beneficial 

interest that would not be permitted by section 7(h) of the Alaska Native Claims Settlement Act 

if the interest were Settlement common stock, or (b) any stock in an Alaska Native Corporation 

that would not be permitted by section 7(h) if it were Settlement common stock and the Native 

Corporation thereafter makes a transfer to the Trust. Where an election is already in effect at the 

time of such disqualifying transfers, the special rules applicable to an electing trust cease to 

apply and rules generally applicable to trusts apply. In addition, the distributable net income of 

the trust is increased by undistributed current and accumulated earnings and profits of the trust, 

limited by the fair market value of trust assets at the date the trust becomes so disposable. The 

effect is to cause the trust to be taxed at regular trust rates on the amount of recomputed 

distributable net income not distributed to beneficiaries, and to cause the beneficiaries to be 

taxed on the amount of any distributions received consistent with the applicable tax rate bracket. 

Reasons for Change 

The Committee believes that restrictions on the activities and assets of Settlement Trusts 

may discourage contributions by Native Corporations. The Committee further believes that 

Settlement Trusts are effective tools for reducing dependence on state and federal welfare 

programs in Alaska Native communities. More generally, the Committee believes that it is 

desirable to promote the funding of Settlement Trusts as a means to improve the health, 

education, and welfare of the Settlement Trusts' beneficiaries. 

Explanation of Provision 

The provision comprises three separate but related sections. The first section allows a 

Native Corporation to assign certain payments described in ANCSA to a Settlement Trust 

without having to recognize gross income from those payments, provided the assignment is in 

writing and the Native Corporation has not received the payment prior to assignment. The 

Settlement Trust is required to include the assigned payment in gross income when received. 

The second section allows a Native Corporation to elect annually to deduct contributions 

made to a Settlement Trust. If the contribution is in cash, the deduction is in the amount of cash 

contributed. If the contribution is property other than cash, the deduction is the amount of the 
314 

Native Corporation's basis in the contributed property (or the fair market value of such property, 

ifless than the Native Corporation's basis), and no gain or loss can be recognized on the 

contribution. The Native Corporation's deduction is limited to the amount of its taxable income 

for that year, and any unused deduction may be carried forward 15 additional years. The Native 

Corporation's earnings and profits for the taxable year are reduced by the amount of any 

deduction claimed for that year. 

Generally, the Settlement Trust must include income equal to the deduction by the Native 

Corporation. For contributions of property other than cash, the Settlement Trust takes a basis in 

the property equal to its basis in the hands of the Native Corporation immediately before the 

contribution (or the fair market value of such property, if less than the Native Corporation's 

basis), and may elect to defer recognition of income associated with such property until the 

Settlement Trust sells or disposes of the property. In that case, any income that is deferred (i.e., 

the amount of income that would have been included upon contribution absent the election to 

defer) is treated as ordinary income, while any gain in excess of the amount that is deferred takes 

the same character as if the election had not been made. If property subject to this election is 

disposed of within the first taxable year subsequent to the taxable year in which the property was 

contributed to the Settlement Trust, the election is voided with respect to the property, and the 

Settlement Trust is required to pay any tax applicable to the disposition of the property, including 

interest, as well as a penalty of 10 percent of the amount of the tax. The provision provides for a 

four year assessment period in which to assess the tax, interest, and penalty amounts. The 

provision permits the amendment of the terms of any Settlement Trust agreement to allow this 

election within one year of the enactment of the provision, with certain restrictions. 

The third section of the provision requires any Native Corporation which has made an 

election to deduct contributions to a Settlement Trust as described above to furnish a statement to 

the Settlement Trust containing: (1) the total amount of contributions; (2) whether such 

contribution was in cash; (3) for non-cash contributions, the date that such property was acquired 

by the Native Corporation and the adjusted basis of such property on the contribution date; 

( 4) the date on which each contribution was made to the Settlement Trust; and (5) such 

information as the Secretary determines is necessary for the accurate reporting of income relating 

to such contributions. 

Effective Date 

The provision relating to the exclusion for ANCSA payments assigned to Settlement 

Trusts is effective to taxable years beginning after December 31, 2016. 

The provision relating to the deduction of contributions is effective for taxable years for 

which the Native Corporation's refund statute oflimitations period has not expired, and the 

provision provides a one-year waiver of the refund statute of limitations period in the event that 

the limitation period expires before the end of the one-year period beginning on the date of 

enactment. 

The provision relating to the reporting requirement applies to taxable years beginning 

afterDecember31, 2016. 
315 

11. Amounts paid for aircraft management services (sec. 13822 of the bill and sec. 4261 of 

the Code) 

Present Law 

Excise tax on taxable transportation by air 

For domestic passenger transportation, section 4261 imposes an excise tax on amounts 

paid for taxable transportation. ln general, for domestic flights, the tax consists of two parts: a 

7.5 percent ad valorem tax applied to the amount paid and a flat dollar amount for each flight 

segment (consisting of one takeoff and one landing). "Taxable transportation" generally means 

transportation by air which begins and ends in the United States. The tax is paid by the person 

making the payment subject to tax and the tax is collected by the person receiving the payment. 

For commercial freight aviation, the ad valorem tax is 6.25 percent of the amount paid for 

transportation 

In determining whether a flight constitutes taxable transportation and whether the 

amounts paid for such transportation are subject to tax, the Internal Revenue Service ("IRS") has 

looked at who has "possession, command, and control" of the aircraft based on the relevant facts 

and circumstances. 990 

Applicability to aircraft management services 

Generally, an aircraft management services company ("management company") has as its 

business purpose the management of aircraft owned by other corporations or individuals 

("aircraft owners"). In this function, management companies provide aircraft owners, among 

other things, with administrative and support services (such as scheduling, flight planning, and 

weather forecasting), aircraft maintenance services, the provision of pilots and crew, and 

compliance with regulatory standards. Although the arrangement between management 

companies and aircraft owners may vary, it is our understanding that aircraft owners generally 

pay management companies a monthly fee to cover the fixed expenses of maintaining the aircraft 

(such as insurance, maintenance, and recordkeeping) and a variable fee to cover the cost of using 

the aircraft (such as the provision of pilots, crew, and fuel). 

In March 2012, the IRS issued a Chief Counsel Advice determining that a management 

company provided all of the essential elements necessary for providing transportation by air and 

the owner relinquished possession, command and control to the management company. 991 Thus, 

the management company was determined to be providing taxable transportation to the owner 

990 See, e.g., Rev. Rul. 60-311, 1960-2 C. B. 341, which held that since the company in question retains the 

clements of posscssioiL cmmnand, and control of the aircmft and performs all services in connection with the 

opemtion of the aircraft. the company is. in fact, furnishing taxable trJUsportation to the lessee: ~md the tax on the 

transportation of persons applies to the portion of the total payment which is allocable to the transportation of 

persons, provided such allocation is made on a fair and reasonable basis. If no allocation is made. the tax applies to 

the total payment for the lease of the aircraft. 

991 CCA 2012-10026 (March 2012). 
316 

and was required to collect the appropriate federal excise tax from the aircraft owner and remit it 

to the IRS. The Chief Counsel Advice resulted in increased audit activity by the IRS on aircraft 

management companies. 

In May 2013, the IRS suspended assessment of the federal excise tax with respect to 

aircraft management services while it developed guidance on the tax treatment of aircraft 

management issues. In a 2015 opinion, 992 an Ohio district court held that the existing revenue 

rulings (in effect for the tax period April 1, 2005, through June 30, 2009, the period that was the 

subject of the litigation) regarding the possession, command and control test, failed to provide 

precise and not speculative notice of a collection obligation as it related to whole-aircraft 

management contracts. 993 As a result, the court ruled as a matter of law that because precise and 

not speculative notice was not received, the aircraft management company plaintiff did not have 

a collection obligation with respect to the Federal excise tax on payments received for wholeaircraft management services. 

In 2017, the IRS decided not to pursue examination of the issue of whether amounts paid 

to aircraft companies by the owners or lessors of the aircraft are taxable until further guidance is 

made available. According to the IRS, for any exam in suspense the aircraft management fee 

issue was conceded and the taxpayers were notified accordingly. 994 The IRS has not issued 

further guidance on this issue. 

Reasons for Change 

The Committee believes that the ticket tax should not be levied on amounts paid for 

aircraft management services when the management company is providing such services with 

respect to an aircraft owner's own aircraft. 

Explanation of Provision 

The provision exempts certain payments related to the management of private aircraft 

from the excise taxes imposed on taxable transportation by air. Exempt payments are those 

amounts paid by an aircraft owner for management services related to maintenance and support 

of the owner's aircraft or flights on the owner's aircraft. Applicable services include support 

activities related to the aircraft itself, such as its storage, maintenance, and fueling, and those 

related to its operation, such as the hiring and training of pilots and crew, as well as 

administrative services such as scheduling, flight planning, weather forecasting, obtaining 

992 .vet;ets Large Aircrafi Inc. v. United Stales, 116 A.F.T.R. 2d. 2015-6776 (S.D. Ohio. 2015). 

993 The district court held that such notice is required to persons having a deputy tax collection obligation 

under the rationale of the Supreme Comt's holding in Centra/Illinois J'uhlic Service Company v. United States, 

435 U.S. 21 (1978). 

994 See also, Kerry Lynch, IRS To Shelve Pending Audits on Aircrafl };fanagement Fees, AINonline (July 

17, 20 17) http://www.ainonline.com/aviation-ncws/business-aviationl20 17-07-J 7 /irs-shelve-pending-audits-aircraftmanagement-fees. 
317 

insurance, and establishing and complying with safety standards. Aircraft management services 

also include such other services as are necessary to support flights operated by an aircraft owner. 

Payments for flight services are exempt only to the extent that they are attributable to 

flights on an aircraft owner's own aircraft. 995 Thus, if an aircraft owner makes a payment to a 

management company for the provision of a pilot and the pilot provides his services on the 

aircraft owner's aircraft, such payment is not subject to Federal excise tax. However, if the pilot 

provides his services to the aircraft owner on an aircraft other than the aircraft owner's (for 

instance, on an aircraft that is part of a fleet of aircraft available for third-party charter services), 

then such payment is subject to Federal excise tax. 

The provision provides a pro rata allocation rule in the event that a monthly payment 

made to a management company is allocated in part to exempt services and flights on the aircraft 

owner's aircraft, and in part to flights on aircraft other than the aircraft owner's. In such a 

circumstance, Federal excise tax must be collected on that portion of the payment attributable to 

flights on aircraft not owned by the aircraft owner. 

Under the provision, a lessee of an aircraft is considered an aircraft owner provided that 

the lease is not a "disqualified lease." A disqualified lease is any lease of an aircraft from a 

management company (or a related party) for a term of 31 days or less. 

Effective Date 

The provision is effective for amounts paid after the date of enactment. 

9

" Examples of arrangements that cmmot qualify a person as an "aircraft owner" include ownership of 

stock in a connnercial airline and paJticipation in a fractional ownership aircraft program. Ownership of stock in a 

commercial airline c-annot qualify an individual as an ''aircraft mvner"' of a conunercial airline's aircraft and 

amounts paid for transportation on such flights remain subject to the tax under section 4261. Similarly, participation 

in a fractional ownership aircraft program does not constitute "aircraft ownership" for plnposes of this 

standard. Amounts paid to a fractional ownership aircraft program for transportation under such a program are 

exempt from the ticket tax under section H6l(j) if the aircraft is operating under subpart K ofpaJt 91 oftitle 14 of 

the Code of Federal Regulations ("subpaJt K"). and flights under such program arc subject to both the fuel tax levied 

on non-commercial aviatioo an additional fuel surtax under section 4043 of the Code. A business arrangement 

seeking to circumvent that surtax by operating outside of subpart K, allowing an aircraft 0\mer the right to usc any 

of a fleet of aircraft be it through an aircraft interchange agreement through holding nominal shares in a fleet of 

aircraft, or any other arrangement that docs not reflect tme tax ownership of the aircraft being flown upon, is not 

considered ownership for purposes of the provision. 
318 

12. Opportunity zones (sec. 13823 of the bill and new sees. 1400Z-l and 1400Z-2 of the 

Code) 

Present Law 

The Code occasionally has provided several incentives aimed at encouraging economic 

growth and investment in distressed communities by providing Federal tax benefits to businesses 

located within designated boundaries 996 

One of these incentives is a federal income tax credit that is allowed in the aggregate 

amount of 39 percent of a taxpayer investment in a qualified community development entity 

(CDE). 997 In general, the credit is allowed to a taxpayer who makes a "qualified equity 

investment" in a CDE which further invests in a "qualified active low-income community 

business." CDEs are required to make investments in low income communities (generally 

communities with 20 percent or greater poverty rate or median family income less than 80 

percent of statewide median). The credit is allowed over seven years, five percent in each of the 

first three years and six percent in each of the next four years. The credit is recaptured if at any 

time during the seven-year period that begins on the date of the original issue of the investment 

the entity (l) ceases to be a qualified CDE, (2) the proceeds of the investment cease to be used as 

required, or (3) the equity investment is redeemed. The Department of Treasury's Community 

Development Financial Institutions Fund ("CDFI") allocates tbe new markets tax credits. 

The maximum annual amount of qualified equity investments is $3.5 billion for calendar 

years 2010 through 2019. The new markets tax credit is set to expire on December 31, 2019. No 

amount of unused allocation limitation may be carried to any calendar year after 2024. 

Reasons for Change 

The Committee believes this provision will help revitalize economically distressed 

communities which suffer from a lack of investment and business growth, by facilitating new 

incentives for investment in those areas around the country. The Committee believes that this 

provision will attract inactive capital that, when reinvested, will be an important new source for 

catalyzing growih and opportunity. The Committee believes these new dollars will help stem the 

tide of business closures, a lack of access to capital, and absent entrepreneurship in areas that 

need it most. The Committee further believes having the Governors designate the qualifying 

996 Such designated areas were referred to as empowerment zones. the District of Columbia Enterprise 

('"DC") Zone, and the Gulf Opportunity ("'GO") Zone, and each of these designations and attendant tax incentives 

have el<pired. The designations and tax incentives for the DC Zone, and the GO Zone genemlly expired after 

December 31. 2011. 1400(f). 1400N(h). 1400N(c)(5), 1400N(a)(2)(D). 1400N(a)(7)(C). 1400N(d). The 

empowennent zones progmm and attendant tax incentives e"vired as of December 31, 2016. Sees. 1391(d)(l), 

There are also areas that were designated as renewal communities under section 1400E which received tax benefits 

that all expired as of December 31. 2009. except that a zero-percent capital gains rate applies with respect to gain 

from the sale through December 31. 2014 of a qualified community asset acquired after December 31, 2001. and 

before January I. 2010 and held for more than five years. For more infonnation on these programs and attendant tax 

incentives, see Joint Committee on TaxatioiLincenrivesjbr Distressed Communities: Empon•erment Zones and 

Renewal Communities (JCX-38-09), October 5. 2009. 

Sec. 45D. 
319 

census tracts will help ensure local needs and opportunities are being met as well as encourage 

concentration of capital in targeted, geographically contiguous zones in each state. 

Explanation of Provision 

The provision provides for the temporary deferral of inclusion in gross income for capital 

gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains 

from the sale or exchange of an investment in the qualified opportunity fund. 

The provision allows for the designation of certain low-income community population 

census tracts as qualified opportunity zones, where low-income communities are defined in 

Section 45D(e). The designation of a population census tract as a qualified opportunity zone 

remains in effect for the period beginning on the date of the designation and ending at the close 

of the tenth calendar year beginning on or after the date of designation. 

Governors may submit nominations for a limited number of opportunity zones to the 

Secretary for certification and designation. If the number of low-income communities in a State 

is less than 100, the Governor may designate up to 25 tracts, otherwise the Governor may 

designate tracts not exceeding 25 percent of the number of low-income communities in the State. 

Governors are required to provide particular consideration to areas that: (I) are currently the 

focus of mutually reinforcing state, local, or private economic development initiatives to attract 

investment and foster startup activity; (2) have demonstrated success in geographically targeted 

development programs such as promise zones, the new markets tax credit, empowerment zones, 

and renewal communities; and (3) have recently experienced significant layoffs due to business 

closures or relocations. The Secretary must designate zones if a governor fails to submit 

nominations within a specified period of time. 

The provision provides two main tax incentives to encourage investment in qualified 

opportunity zones. First, it allows for the temporary deferral of inclusion in gross income for 

capital gains that are reinvested in a qualified opportunity fund. A qualified opportunity fund is 

an investment vehicle organized as a corporation or a partnership for the purpose of investing in 

qualified opportunity zone property (other than another qualified opportunity fund) that holds at 

least 90 percent of its assets in qualified opportunity zone property. The provision intends that 

the certification process for a qualified opportunity fund will be done in a manner similar to the 

process for allocating the new markets tax credit. The provision provides the Secretary authority 

to carry out the process. 

If a qualified opportunity fund fails to meet the 90 percent requirement and unless the 

fund establishes reasonable cause, the fund is required to pay a monthly penalty of the excess of 

the amount equal to 90 percent of its aggregate assets, over the aggregate amount of qualified 

opportunity zone property held by the fund multiplied by the underpayment rate in the Code. If 

the fund is a partnership, the penalty is taken into account proportionately as part of each 

partner's distributive share. 

Qualified opportunity zone property includes: any qualified opportunity zone stock, any 

qualified opportunity zone partnership interest, and any qualified opportunity zone business 

property. 
320 

The maximum amount of the deferred gain is equal to the amount invested in a qualified 

opportunity fund by the taxpayer during the 180-day period beginning on the date of sale of the 

asset to which the deferral pertains. For amounts of the capital gains that exceed the maximum 

deferral amount, the capital gains must be recognized and included in gross income as under 

present law. 

If the investment in the qualified opportunity zone fund is held by the taxpayer for at least 

five years, the basis on the original gain is increased by 10 percent of the otiginal gain. If the 

opportunity zone asset or investment is held by the taxpayer for at least seven years, the basis on 

the original gain is increased by an additional 5 percent of the original gain. The deferred gain is 

recognized on the earlier of the date on which the qualified opportunity zone investment is 

disposed of or December 31, 2026. Only taxpayers who rollover capital gains of non-zone assets 

before December 31, 2026, will be able to take advantage of the special treatment of capital 

gains for non-zone and zone realizations under the provision. 

The basis of an investment in a qualified opportunity zone fund immediately after its 

acquisition is zero. If the investment is held by the taxpayer for at least five years, the basis on 

the investment is increased by 10 percent of the deferred gain. If the investment is held by the 

taxpayer for at least seven years, the basis on the investment is increased by an additional five 

percent of the deferred gain. If the investment is held by the taxpayer until at least December 31, 

2026, the basis in the investment increases by the remaining 85 percent of the deferred gain. 

The second main tax incentive in the bill excludes from gross income the post-acquisition 

capital gains on investments in opportunity zone funds that are held for at least 10 years. 

Specifically, in the case of the sale or exchange of an investment in a qualified opportunity zone 

fund held for more than 10 years, at the election of the taxpayer the basis of such investment in 

the hands of the taxpayer shall be the fair market value of the investment at the date of such sale 

or exchange. Taxpayers can continue to recognize losses associated with investments in 

qualified opportunity zone funds as under current law. 

The Secretary or the Secretary's delegate is required to report annually to Congress on 

the opportunity zone incentives beginning 5 years after the date of enactment. The report is to 

include an assessment of investments held by the qualified opportunity fund nationally and at the 

State level. To the extent the information is available, the report is to include the number of 

qualified opportunity funds, the amount of assets held in qualified opportunity funds, the 

composition of qualified opportunity fund investments by asset class, and the percentage of 

qualified opportunity zone census tracts designated under the provision that have received 

qualified opportunity fund investments. The report is also to include an assessment of the 

impacts and outcomes of the investments in those areas on economic indicators including job 

creation, poverty reduction and new business starts, and other metrics as determined by the 

Secretary. 

Effective Date 

The provision is effective on the date of enactment. 
321 

D. International Tax Provisions 

PRESENT LAW 

The following discussion provides an overview of general principles of taxation of crossborder activity as well as a detailed explanation of provisions in present law that are relevant to 

the provisions in the bill. 

A. General Overview of International Principles of Taxation 

International law generally recognizes the tight of each sovereign nation to prescribe 

rules to regulate conduct with a sufficient nexus to the sovereign nation. The nexus may be 

based on nationality of the actor, i.e., a nexus between said conduct and a person (whether 

natural or juridical) with a connection to the sovereign nation, or it may be territorial, i.e., a 

nexus between the conduct to be regulated and the territory where the conduct occurs998 For 

example, most legal systems respect limits on the extent to which their measures may be given 

extraterritorial effect. The broad acceptance of such norms extends to authority to regulate crossborder trade and economic dealings, including taxation. 

The exercise of sovereign jurisdiction is usually based on either nationality of the person 

whose conduct is regulated or the territory in which the conduct or activity occurs. These 

concepts have been refined and, in varying combinations, adapted to form the principles for 

determining whether sufficient nexus with a jurisdiction exists to conclude that the jurisdiction 

may enforce its right to impose a tax. The elements of nexus and the nomenclature of the 

principles may differ based on the type of tax in question. Taxes are categorized as either direct 

taxes or indirect taxes. The former category generally refers to those taxes that are imposed 

directly on a person ("capitation tax"), property, or income from property and that cannot be 

shifted to another person by the taxpayer. In contrast, indirect taxes are taxes on consumption or 

production of goods or services, for which a taxpayer may shift responsibility to another person. 

Such taxes include sales or use taxes, value-added taxes, or customs duties. 999 

Although governments have imposed direct taxes on property and indirect taxes and 

duties on specific transactions since ancient times, the history of direct taxes in the form of an 

income tax is relatively recent. 1000 When determining how to allocate the right to tax a particular 

998 American Law Institute. Restatement (Third) <?{Foreign Relations Law of the United States, sees. 402 

and 403. (1987). 

999 MariaS. Cox, Fritz Neumark, et aL ''Taxation" Encyclopedia Britannica, 

https://www.britannica.com/topic/taxation/Classcs-of-taxcs. accessed May 16. 2017. Whether a tax is considered a 

direct tax or indirect tmc has varied over time. and no single definition is used. For a review of the significance of 

these terms in Fedemltax history. see Alan 0. Dixler. "Direct Taxes Under the Constitution: A Review of the 

Precedents." Tax Histo~v Project, Tax Analvsts. available at 

http://www. taxhistmY.org/lhplrcadings.nsfl ArtWcb/2B34C7FBDA-+l D9D A85257308000670 17'10pcnDocumcnt. 

accessed May 17, 2017. 

1000 The earliest western income tax system is traceable to the British Tax Act of 1798. enacted in 1799 to 

raise funds needed to prosecute the Napoleonic Wars, and rescinded in 1816. See, A.M. Bardopoulos, eCommerce 

and the 1<.1fects of Technology on Taxation, Law. Governance and Techoology Series 22. DO! 10.1007/978-3-319-
322 

item of income, most jurisdictions consider principles based on either source (territory or situs of 

the income) or residence (nationality of the taxpayer). 1001 By contrast, when the authority to 

collect indirect taxes in the form of sales taxes or value added taxes is under consideration, 

jurisdictions analyze the taxing rights in terms of the origin principle or destination principle. 1002 

The balance of this Part LA describes the principles in more detail and how jurisdictions resolve 

claims of overlapping jurisdiction. 

l. Origin and destination principles 

Indirect taxes that are imposed based on the place where production of goods or services 

occur, irrespective of the location of the persons who own the means of production, and where 

the goods and services go after being produced, are examples of origin-based taxes. If, instead, 

authority to tax a transaction or service is dependent on the location of use or consumption of the 

goods or services, the tax system is an example of a destination-based tax. The most common 

form of a destination-based tax is the destination-based value-added tax ("VAT"). Over 160 

countries have adopted a VAT, 1003 which is generally a tax imposed and collected on the "value 

added" at every stage in the production and distribution of a good or service. Although there are 

several ways to compute the taxable base for a VAT, the amount of value added can generally be 

thought of as the difference between the value of sales (outputs) and purchases (inputs) of a 

business. 1004 The United States does not have a VAT, nor is there a Federal sales or use tax. 

15449-7 _2, (Springer 2015). at Section 2.2. "History of Tax." pp. 23-24. See also, 

http:/ h,Y\V\Y .parliattlent. uk/about/lidng-hcritagc/transfornlingsocict v /private-lh ·cs/taxation/ oven ·icw/incomctax/. 

1001 Bret J. Wells and Cym H. Lowell. Tax Base Erosion and Homeless Income: Collection at Source is 

the LinchpiiL 65 Tax L Rev. 535 (20 12). 

1002 Itai Grinberg. Implementing a Progressive Consumption Tax: Advantages of Adopting the VAT 

Credit-Method System, 59 Nat'! Tax J. 929 (2006). 

1

"'3 Alan Schenk. Victor Thuronyi, and Wei Cui. Value Added Tax: A Comparative Approach. Cambridge 

University Press, 2015. Staff Report on Comprehensive Tax Reform for 2015 and Beyond. Prepared by the 

Republican Staff of the Committee on Finance United States Senate. S. Prt. No. 113-31 (Dec. 2014). at -P-55. 

Consistent with the OECD International f<.J'J:GST Guidelines, supra, the tenu VAT is used to refer to all broadbased final consumption taxes. regardless of the acronym used to identify. Thus, tnany countries that denominate 

their national consumption tax as a GST (general sales tax) arc included in the estimate of the number of countries 

with a VAT. 

1004 Nearly all countries usc the credit-invoice method of calculating v·alue added to determine VAT 

liability. Under the credit-invoice method, a tax is imposed on the seller for all of its sales. The tax is calculated by 

applying the tax rate to the sales price of the good or service. and the amount of tax is generally disclosed on the 

sales invoice. A business credit is provided for all VAT levied on purchases of taxable goods and services (i.e .. 

"inputs") used in the seller's business. The ultimate consumer (i.e .. a non-business purchaser), however. does not 

receive a credit with respect to his or her purchases. The VAT credit for inputs prevents the imposition of multiple 

layers of tax with respect to the total final purchase price (i.e., a "cascading·· of the VAT). As a result. the net tax 

paid at a particular stage of production or distribution is based on the valne added by that taxvaycr at that stage of 

production or distribution. In theory, the total amount of tax paid with respect to a good or service from all levels of 

production and distribution should equal the sales price of the good or service to the ultimate consumer multiplied 

by the VAT rate. 
323 

However, the majority of the States have enacted sales or use taxes, including both origin-based 

taxes and destination-based taxes. 1005 

With respect to cross-border transactions, the OECD has recommended that the 

destination principle be adopted for all indirect taxes, in part to conform to the treatment of such 

transactions for purposes of customs duties. The OECD defines the destination principle as "the 

principle whereby, for consumption tax purposes, internationally traded services and intangibles 

should be taxed according to the rules of the jurisdiction of consumption." 1006 A jurisdiction 

may determine the place of use or consumption by adopting the convention that the place of 

business or residence of a customer is the place of consumption. Use of such proxies are needed 

to determine the location of businesses that are juridical entities, which are more able than 

natural persons to move the location of use of goods, services or intangibles in response to 

imposition of tax. 

2. Source and residence principles 

Exercise of taxing authority based on a person's residence may be based on status as a 

national, resident, or domiciliary of a jurisdiction and may reach worldwide activities of such 

persons. As such, it is the broadest assertion of taxing authority. For individuals, the test for 

residence may depend upon nationality, or a physical presence test, or some combination of the 

two. For all other persons, determining residency may require more complex consideration of 

the level of activities within a jurisdiction, management, control or place of incorporation. Such 

rules generally reflect a policy decision about the requisite level of activity within, or contact 

with, a jurisdiction by a person that is sufficient to warrant assertion of taxing jurisdiction. 

Source-based exercise of taxing authority taxes income from activities that occur, or 

property that is located, within the territory of the taxing jurisdiction. If a person conducts 

business or owns property in a jurisdiction, or if a transaction occurs in whole or in part in a 

jurisdiction, the resulting taxation may require allocation and apportionment of expenses 

attributable to the activity in order to ensure that only the portion of profits that have the required 

nexus with the territory are subject to tax. Most jurisdictions, including the United States, have 

rules for determining the source of items of income and expense in a broad range of categories 

such as compensation for services, dividends, interest, royalties and gains. 

In order to receive an input credit with respect to any purchase, a business purchaser is generally required 

to possess an invoice from a seller that contains the name of the purchaser and indicates the amount of tax collected 

by the seller on the sale of the input to the purchaser. At the end of a reporting period, a taxpayer may calculate its 

tax liability by subtracting the cumulative amount of tax stated on its purchase invoices from the cumulative amount 

of ta-x stated on its sales invoices. 

1005 EY, Worldwide VAT GST and Sales Tax Guide 2015, 

1006 Sec. OECD. '"Recommendation of the Council on the application of value added tax/goods and 

services tax to the international trade in services and intangibles as approved on September 27. 2016.'' 

[C(2016)120]. appendix. page 3. reproduced in the appendix, OECD. International r;u>GSTGuide/ines, OECD 

Publishing, 2017. 
324 

Regardless of which of these two bases of taxing authority is chosen by a jurisdiction, a 

jurisdiction's determination of whether a transaction, activity or person is subject to tax requires 

that the jurisdiction establish the limits on its assertion of authority to tax. 

3. Resolving overlapping or conflicting jurisdiction to tax 

Countries have developed nonns about what constitutes a reasonable regulatory action by 

a sovereign state that will be respected by other sovereign states. Consensus on what constitutes 

a reasonable limit on the extent of one state's jurisdiction helps to minimize the risk of conflicts 

arising as a result of extraterritorial action by a state or overlapping exercise of authority by 

states. Mechanisms to eliminate double taxation have developed to address those situations in 

which the source and residency determinations of the respective jurisdictions result in duplicative 

assertion of taxing authority. For example, asymmetry between different standards adopted in 

two countries for determining residency of persons, source of income, or other basis for taxation 

may result in income that is subject to taxation in both jurisdictions. 

When the rules of two or more countries overlap, potential double taxation is usually 

mitigated by operation of bilateral tax treaties or by legislative measures permitting credit for 

taxes paid to another jurisdiction. The United States is a partner in numerous bilateral 

agreements that have as their objective the avoidance of international double taxation and the 

prevention of tax avoidance and evasion. Another related objective of U.S. tax treaties is the 

removal of the barriers to trade, capital flows, and commercial travel that may be caused by 

overlapping tax jurisdictions and by the burdens of complying with the tax laws of a jurisdiction 

when a person's contacts with, and income derived from, that jurisdiction are minimal. The 

United States Model Income Tax Convention ("U.S. Model Treaty of2016") with an 

accompanying Preamble by the Department of Treasury, reflects the most recent comprehensive 

statement of U.S. negotiating position with respect to tax treaties. 1007 Bilateral agreements are 

also used to permit limited mutual administrative assistance between jurisdictions. 1008 

In addition to entering into bilateral treaties, countries have worked in multilateral 

organizations to develop common principles to alleviate double taxation. Those principles are 

The current U.S. Model treaty was published February 17.2016. and is available at 

https://wmY.1rcasurv.gm-Jrcsourcc-ccntcr/tax-policYi1reatiesiDocuments/TrcatY-US%,20Model-2016.pdf: the 

Preamble is available at ht!ps:/ /wwYY .trcastlrv. govlrcsourcc-centcr/tax-policy/treaties/Doctnnents/PrcambleUS%20Modcl-20 l6.pdf. The U.S. Model treaty is updated periodically to reflect developments in the negotiating 

position of the United States. Such changes include provisions that were successfully included in bilateral treaties 

concluded by the U nitcd States. as well as new proposed measures not yet included in a bilateral agreement. 

rwg Although U.S. courts e"1end comity to foreign judgments in some instances. they are not required to 

recognize or assist in enforcement of foreign judgments for collection of taxes. consistent with the conunon law 

"revenue rule'' iullolman v. Johnson. 1 Cowp. 341. 98 Eng. Rep. 1120 (K.B.l775). American Law Institute, 

Restatement !Third) o{Foreign Relations Law of the United States. sec. 483. (1987). The rule retains vitality in U.S. 

case law. Pasquantino v. United States, 544 U.S. 349: 125 S. Ct. 1766; 161 L. Ed. 2d 619 (2005) (a com·iction for 

criminal wire fraud arising from an intent to defraud Canadian ta:x authorities was found not to conflict "with auy 

well-established revenue rule principle[.]" and thus was not in derogation of the revenue mle). To the extent it is 

abrogated, it is done so in bilateral treaties. to ensure reciprocity. At present. the United Stales has such agreements 

in force with five jmisdictions: Canada; Demnark: France: Netherlands; and Sweden. 
325 

generally reflected in the provisions of the Model Tax Convention on Income and on Capital of 

the Organization for Economic Cooperation and Development (the "OECD Model treaty"), 1009 a 

precursor of which was first developed by a predecessor organization in 1958, which in tum has 

antecedents from work by the League of Nations in the 1920s. 1010 As a consensus document, the 

OECD Model treaty is intended to serve as a model for countries to use in negotiating a bilateral 

treaty that would settle issues of double taxation as well as to avoid inappropriate double 

nontaxation. The provisions have developed over time as practice with actual bilateral treaties 

leads to unexpected results and new issues are raised by parties to the treaties. 1011 

4. International principles as applied in the U.S. system 

Present law combines taxation of all U.S. persons on their worldwide income, whether 

derived in the United States or abroad, with limited deferral of taxation of income earned by 

foreign subsidiaries of U.S. companies and source-based taxation of the U.S.-source income of 

nonresident aliens and foreign entities. Under this system (sometimes described as the U.S. 

hybrid system), the application of the Code differs depending on whether income arises from 

outbound investment or inbound investment. Outbound investment refers to the foreign 

activities of U.S. persons, while inbound investment is investment by foreign persons in U.S. 

assets or activities, although certain rules are common to both inbound and outbound activities. 

B. Principles Common to Inbound and Outbound Taxation 

Although the U.S. tax rules differ depending on whether the activity in question is 

inbound or outbound, there are certain concepts that apply to both inbound and outbound 

investment. Such areas include the transfer pricing rules, entity classification, the rules for 

determination of source, and whether a corporation is foreign or domestic. 

1. Residence 

U.S. persons are subject to tax on their worldwide income. The Code defines U.S. person 

to include all U.S. citizens and residents as well as domestic entities such as partnerships, 

1009 OECD (2014), Model Tax Convention on Income and on Capital: Condensed Version 2014. OECD 

Publishing. 20U. available at h!tp:l/dx.doi.org/1 0.1787//mtc cond-20 14-cn. TI1c multinational orgartization was 

first established in 1961 by the Urtitcd States. Canada and 18 European countries, dedicated to global development, 

and has since expanded to 35 members. 

1010 "Report by the Exverts on Double Taxation." League of Nation Document E.F.S. 73\F19 (1923). a 

report commissioned by the League at its second assembly. Sec also. Lara Friedlander and Scott Wilkie. "Policy 

Fonun: The History of Tax Treaty Provisions--And Why It Is Important to Know About It," 54 Canadian Tax 

Journal No. 4 (2006). 

1011 For example, the OECD initiated a multi-year study on base-erosion and profit shifting in response to 

concerns of multiple members. For an overview of that project. see Joint Committee on Taxation. Background, 

Summary, and Implications of the OECD;G20 Base Erosion and Profit Shijiing Project (JCX-139-15). November 

30, 2015. Tllis document can also be found on the Joint C01mnittee on Taxation website at" ww.jct.gov. 
326 

corporations, estates and certain trusts. 1012 The term "resident" is defined only with respect to 

natural persons. Noncitizens who are lawfully admitted as permanent residents of the United 

States in accordance with immigration laws (colloquially referred to as green card holders) are 

treated as residents for tax purposes. In addition, noncitizens who meet a substantial presence 

test and are not otherwise exempt from U.S. taxation are also taxable as U.S. residents. 1013 

For legal entities, the Code determines whether an entity is subject to U.S. taxation on its 

worldwide income on the basis of its place of organization. For purposes of U.S. tax law, a 

corporation or partnership is treated as domestic if it is organized or created under the laws of the 

United States or of any State, unless, in the case of a partnership, the Secretary prescribes 

otherwise by regulation. 1014 All other partnerships and corporations (that is, those organized 

under the laws of foreign countries) are treated as foreign. 1015 In contrast, place of organization 

is not determinative of residence under taxing jurisdictions that use factors such as situs, 

management and control to determine residence. As a result, legal entities may have more than 

one tax residence, or, in some case, no residence. 1016 Only domestic corporations are subject to 

U.S. tax on a worldwide basis. Foreign corporations are taxed only on income that has a 

sufficient connection with the United States. 

Tax benefits otherwise available to a domestic corporation that migrates its tax home 

from the United States to foreign jurisdiction may be denied to such corporation, in which case it 

continues to be treated as a domestic corporation for ten years following such migration. 1017 

These sanctions generally apply to a transaction in which, pursuant to a plan or a series of related 

transactions: (I) a domestic 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 domestic corporation hold (by reason of 

the stock they had held in the domestic corporation) at least 60 percent but less than 80 percent 

(by vote or value) of the stock of the foreign-incorporated entity after the transaction (this stock 

often being referred to as "stock held by reason of'); and (3) the foreign-incorporated entity, 

considered together with all companies connected to it by a chain of greater than 50 percent 

ownership (that is, the "expanded affiliated group"), does not have substantial business activities 

1012 Sec. 770l(a)(30). 

1013 Sec. 770l(b). 

101 ·' Sec. 770l(a)(4). 

1015 Sees. 770l(a)(5) and 770l(a)(9). Entities organized in a possession or territory ofthe United Stales are 

not considered to have been organized under the laws of the United Slates. 

1016 ''The notion of corporate residence is an important touchstone of taxation, however, in many foreign 

income tax systems[,]" with the result that the bilateral treaties are often relied upon to resolve eonfiicting claims of 

taxing jurisdiction. Joseph Iscnbergh, Vol. 1 U.S. Taxation o{Forei!(n Persons and Forei!(n Income. Para. 7.1 

(Fomth Ed. 2016). 

101 ' Sec. 7874. 
327 

in the entity's country of incorporation, compared to the total worldwide business activities of 

the expanded affiliated group. 1018 

The Treasury Department and the IRS have promulgated detailed guidance, through both 

regulations and several notices, addressing these requirements under section 7874 since the 

section was enacted in 2004, 1019 and have sought to expand the reach of the section or reduce the 

tax benefits of inversion transactions. For example, Notice 2014-52 announced Treasury's and 

the IRS's intention to issue regulations and took a two-pronged approached. First, it addressed 

the treatment of cross-border combination transactions themselves. Second, it addressed posttransaction steps that taxpayers may undertake with respect to US-owned foreign subsidiaries 

making it more difficult to access foreign earnings without incurring added U.S. tax. On 

November 19, 2015, Treasury and the IRS issued Notice 2015-79, which announced their intent 

to issue further regulations to limit cross-border merger transactions, expanding on the guidance 

issued in Notice 2014-52. In 2016, Treasury and the IRS issued proposed and temporary 

regulations that incorporate the rules previously announced in Notice 2014-52 and Notice 2015-

79 and a new multiple domestic entity acquisition rule. 1020 

In early 2017, Treasury issued final and temporary regulations 1021 that adopt, with few 

changes, the 2016 temporary and proposed regulations. 

2. Entity classification 

Certain entities are eligible to elect their classification for Federal tax purposes under the 

"check-the-box" regulations adopted in 1997. 1022 Those regulations simplified the entity 

classification process for both taxpayers and the IRS by making the entity classification of 

unincorporated entities explicitly elective in most instances. 1023 The eligibility to elect and the 

1018 Section 7874(a). In addition, an excise tax may be imposed on certain stock compensation of 

executives of companies tlmt undertake inversion transactions. Sec. 4985. 

1019 Notice 2015-79. 2015 I.R.B. LEXIS 583 (Nov. 19, 2015), which announced their intentto issue further 

regulations to limit cross-border merger transactions. expanding on the guidance issued in Notice 2014-52. On 

April4, 2016, Treasury and the IRS issued proposed and temporal}' regulations (T.D. 9761) that incorporate the 

rules previously announced in Notice 20 14-52 and Notice 2015-79 and a new multiple domestic entity acquisition 

rule. On January 13. 2017, Treasury and the IRS issued final and temporary regulations under section 7874 (T.D. 

9812), which adopt with few changes. prior temporary and proposed regulations, which identify certain stock of an 

acquiring foreign corporation that is disregarded in calculating the ownership of the foreign corporation for purposes 

of section 7874. 

1020 T.D. 9761. April4, 2016. But see. Chamber of Commerce v Internal Revenue Sen•ice. Cause No 1:16-

CV-944-LY (W.D. Tex. Sept. 29. 2017). granting summary judgment to plaintiff in challenge to temporary 

regulations based on lack of compliance with Adruinistrativc Procedure Requirements. 

1021 T.D. 9812, January 13,2017. 

Treas. Reg. sec. 301.7701-L et seq. 

1023 The check-the-box regulations replaced Treas. Reg. sec. 301.7701-2. as in effect prior to 1997. under 

which the classification of unincorporated entities for Federal tax purposes was detcnnincd on the basis of a four 

characteristics indicative of status as a corporation: continuity of life, centralization of management liruited 
328 

breadth of an entity's choices depend upon whether it is a "per se corporation" and its number of 

beneficial owners. Foreign as well as domestic entities may make the election. As a result, it is 

possible for an entity that operates across countries to be treated as a hybrid entity. A hybrid 

entity is one which is treated as a flow-through or disregarded entity for U.S. tax purposes but as 

a corporation for foreign tax purposes. For "reverse hybrid entities," the opposite is true. The 

election can affect the determination of the source of the income, availability of tax credits, and 

other tax attributes. 

3. Source of income rules 

The rules for detem1ining the source of certain types of income are specified in the Code 

and described briefly below. Various factors determine the source of income for U.S. tax 

purposes, including the status or nationality of the payor, the status or nationality of the recipient, 

the location of the recipient's activities that generate the income, and the location of the assets 

that generate the income. To the extent that the source of income is not specified by statute, the 

Treasury Secretary may promulgate regulations that explain the appropriate treatment. However, 

many items of income are not explicitly addressed by either the Code or Treasury regulations, 

sometimes resulting in nontaxation of the income. On several occasions, courts have determined 

the source of such items by applying the rule for the type of income to which the disputed 

income is most closely analogous, based on all facts and circumstances. 1024 

Interest is derived from U.S. sources if it is paid by the United States or any agency or 

instrumentality thereof, a State or any political subdivision thereof, or the District of Columbia. 

Interest is also from U.S. sources if it is paid by a resident or a domestic corporation on a bond, 

note, or other interest-bearing obligation. 1025 Special rules apply to treat as foreign-source 

certain amounts paid on deposits with foreign commercial banking branches of U.S. corporations 

or partnerships and certain other amounts paid by foreign branches of domestic financial 

liability. and free transferability of interests. An entity that possessed three or more of these clmracteristics was 

treated as a corporation; if it possessed two or fewer. then it was treated as a partnership. Thus. to achieve 

clmracterization as a partnership under tlris system. taJ.'])ayers needed to arrange the governing instruments of an 

entity in such a way as to clinrinate two of these corporate characteristics. The advent and proliferation oflimited 

liability companies ("LLCs") under State laws allowed business owners to create customized entities that possessed 

a critical conunon feature-linrited liability for investors-as well as other corporate characteristics the owners 

found desirable. As a consequence. classification was effectively elective for well-advised taxpayers. 

1024 See. e.g .. Hun tv. Commissioner, 90 T.C. 1289 (1988). 

1025 Sec. 861(a)(I); Treas. Reg. sec. 1.861-2(a)(l). 
329 

institutions. 1026 Interest paid by the U.S. branch of a foreign corporation is also treated as U.S.-

source income. 1027 

Dividends 

Dividend income is generally sourced by reference to the payor's place of 

incorporation. 1028 Thus, dividends paid by a domestic corporation are generally treated as 

entirely U.S.-source income. Similarly, dividends paid by a foreign corporation are generally 

treated as entirely foreign-source income. Under a special rule, dividends from certain foreign 

corporations that conduct U.S. businesses are treated in part as U.S.-source income. 1029 

Rents and royalties 

Rental income is sourced by reference to the location or place of use of the leased 

property. 1030 The nationality or the country of residence of the lessor or lessee does not affect 

the source of rental income. Rental income from property located or used in the United States 

(or from any interest in such property) is U.S.-source income, regardless of whether the property 

is real or personal, intangible or tangible. 

Royalties are sourced in the place of use of (or the place of privilege to use) the property 

for which the royalties are paid. 1031 This source rule applies to royalties for the use of either 

tangible or intangible property, including patents, copyrights, secret processes, formulas, 

goodwill, trademarks, trade names, and franchises. 

Income from sales of personal property 

Subject to significant exceptions, income from the sale of personal property is sourced on 

the basis of the residence of the seller. 1032 For this purpose, special definitions of the terms "U.S. 

resident" and "nonresident" are provided. A nonresident is defined as any person who is not a 

U.S. resident, 1033 while the term "U.S. resident" comprises any juridical entity which is a U.S. 

person, all U.S. citizens, as well as any individual who is a U.S. resident without a tax home in a 

1

"'" Sees. 861(a)(l) and 862(a)(l). For purposes of certain reporting and withholding obligations the 

source rule in section 861(a)(l)(B) does not apply to interest paid by the foreign branch of a domestic financial 

institution. This results in the payment being treated as a withholdable payment. Sec. 1473(l)(C). 

1027 Sec. 884([)(1). 

1028 Sees. 861(a)(2), 862(a)(2). 

1029 Sec. 861 (a)(2)(B). 

1030 Sec. 861(a)(4). 

10'1 Ibid 

Sec. 865(a). 

1033 Sec. 865(g)(1)(B). 
330 

foreign country or a nonresident alien with a tax home in the United States. 1034 As a result, 

nonresident includes any foreign corporation. 1035 

Several special rules apply. For example, income from the sale of inventory property is 

generally sourced to the place of sale, which is determined by where title to the property 

passes. 1036 However, if the sale is by a nonresident and is attributable to an office or other fixed 

place of business in the United States, the sale is treated as income from U.S. sources without 

regard to the place of sale, unless it is sold for use, disposition, or consumption outside the 

United States and a foreign office materially participates in the sale. 1037 Income from the sale of 

inventory property that a taxpayer produces (in whole or in part) in the United States and sells 

outside the United States, or that a taxpayer produces (in whole or in part) outside the United 

States and sells in the United States, is treated as partly U.S.-source and partly foreign-source. 1038 

In determining the source of gain or loss from the sale or exchange of an interest in a 

foreign partnership, the IRS has taken the position that to the extent that there is unrealized gain 

attributable to partnership assets that are effectively connected with the U.S. business, the foreign 

person's gain or loss from the sale or exchange of a partnership interest is effectively connected 

gain or loss to the extent of the partner's distributive share of such unrealized gain or loss, and 

not capital gain or loss. Similarly, to the extent that the partner's distributive share of unrealized 

gain is attributable to a permanent establishment of the partnership under an applicable treaty 

provision, it may be subject to U.S. tax under a treaty. 1039 

Gain on the sale of depreciable property is divided between U.S.-source and foreignsource in the same ratio that the depreciation was previously deductible for U.S. tax purposes. 1040 

103'1 Sec. 865(g)(l)(A). 

1035 Sec. 865(g). 

1036 Sees. 865(b), 86l(a)(6), 862(a)(6): Treas. Reg. sec. l.861-7(c). 

10" Sec. 865(e)(2). 

1

"

38 Sec. 863(b). A taxpayer may elect one of three methods for allocating and apportioning income as 

U.S.- or foreign-source: (l) the 50-50 method nuder which 50 percent of the income from the sale of inventory 

property in such a situation is attributable to the production activities and 50 percent to the sales activities. with the 

income sourced based on the location of those activities; (2) independent factory price ("IFP'') method under which. 

in certain circumstances. an IFP may be established by the taxpayer to determine income from production activities: 

(3) the books and records method under which, with advance pennissio!l the ta"Jlayer may use books of account to 

detail the allocation of receipts and expenditures between production and sales activities. Trcas. Reg. sec. l.863-

3(b ), (c). If production activity occurs only within the U tilted States, or only within foreign countries. then all 

income is sourced to where the production activity occurs: when production activities occur in both the United 

States and one or more foreign countries. the income attributable to production activities must be split between U.S. 

and foreign sources. Treas. Reg. sec. 1.863-3(c)(l). The sales activity is generally sourced based on where title to 

the property passes. Treas. Reg. sees. l.863-3(c)(2). 1.861-7(c). 

1039 Rev. Rul. 91-32, 1991-l C.B. 107. But sec. Grecian Magnesite Milling. Industrial & Shipping Co. SA 

v Commissioner, 1.\9 T.C. No.3 (2017). 

1040 Sec. 865(c). 
331 

Payments received on sales of intangible property are sourced in the same manner as royalties to 

the extent the payments are contingent on the productivity, use, or disposition of the intangible 

property. 1041 

Personal services income 

Compensation for labor or personal services is generally sourced to the place-ofperformance. Thus, compensation for labor or personal services performed in the United States 

generally is treated as U.S.-source income, subject to an exception for amounts that meet certain 

de minimis criteria. 1042 Compensation for services performed both within and without the United 

States is allocated between U.S.-and foreign-source. 1043 

Insurance income 

Underwriting income from issuing insurance or annuity contracts generally is treated as 

U.S.-source income if the contract involves property in, liability arising out of an activity in, or 

the lives or health of residents of, the United States. 1044 

Transportation income 

Transportation income is any income derived from, or in connection with, the use (or 

hiring or leasing for use) of a vessel or aircraft (or a container used in connection therewith) or 

the performance of services directly related to such use. l045 That definition does not encompass 

land transport except to the extent that it is directly related to shipping by vessel or aircraft, but 

regulations extend a similar rule for determining the source of income from transportation 

services other than shipping or aviation. Sources rules generally provide that income from 

furnishing transportation that both begins and ends in the United States is U.S.-source 

income, 1046 and 50-percent of income attributable to transportation that either begins or the ends 

in the United States is treated as U.S.-source income. However, to the extent that the operator of 

a shipping or cruise line is foreign, its ownership structure and the maritime law1047 applicable 

1

''11 Sec. 865(d). 

Hie Sec. 861 (a)(3). Gross income of a nonresident alien individmL who is present in the United States as a 

member of the regular crew of a foreign vessel. from the performance of personal services in connection with the 

international operation of a ship is generally treated as foreign-source income. 

1°4' Treas. Reg. sec. l.86l-4(b). 

10.14 Sec. 86l(a)(7). 

1045 Sec. 863(c)(3). 

10'16 Sec. 863(c). 

104' U.S. law on navigation is codified in U.S. Code at title 33. and is consistent with the body of 

intcnm1ional maritime law. The normative principles of international maritime law for determining the maritime 

zones and territorial sovereignty over seas are embodied in the United Nations Convention on the Law of the Sea. 

first opened for signature iu 1982. Since 1983. the Executive Bmnch has agreed that the treaty is genemlly 

consistent with existing intemational norms of the law of the sea and that the United States wonld act in confom1ity 
332 

for determining what constitutes international shipping as well as specific income tax provisions 

combine to create an industry-specific departure from the rules generally applicable. 1048 

A subcategory of transportation income, "US. source gross transportation income" is 

subject to taxation on a gross basis at the rate of four percent 1049 Income is within the scope of 

this special tax if it is considered to be U.S. source because travel begins or ends in the United 

States, is not effectively connected, and is not of a kind to which the exemption from tax 

applies. Ioso 

An exemption from U.S. tax is provided for transportation income of foreign persons 

from countries that extend reciprocal relief to U.S. persons. A nonresident alien individual with 

income from the international operation of a ship may qualify, provided that the foreign country 

in which such individual is resident grants an equivalent exemption to individual residents of the 

United States. 1051 A similar exemption from US. tax is provided for gross income derived by a 

foreign corporation from the international operation of an aircraft, provided that the foreign 

country in which the corporation is organized grants an equivalent exemption to corporations 

organized in the United States. 1052 To determine whether income from shipping or aviation is 

eligible for an exemption under section 883, one must examine the extent to which the foreign 

jurisdiction has extended reciprocity for US. businesses; whether the party claiming an 

exemption is eligible for the tax relief; and the nature of the activities that give rise to the 

income. 

Income from space or ocean activities or international communications 

to the principles of the treaty other than those portions regarding deep seabed exploitatioR even in the absence of 

mtificatio n of the treaty. 

1048 Due to the regulatory fmmework for aviatioR an international flight must either originate or conclude 

in the country of residence of the airline's owner_ where income tax for the international flight is assessed. In 

contrast to international shipping. international aviation cmmot be canied out using flags-of-convenience. Thus, 

although tax law treats shipping and aviation similarly, the differences between the two industries and the applicable 

regulatory regimes produce different tax outcomes. Full tenitorial sovereignty applies within 12 nautical miles of 

one's coast: the contiguous waters beyond 12 nautical miles but up to 24 nautical miles are subject to some 

regulation. Within 200 nautical miles. a country may assert an economic zone for exploitation of liYing marine 

resources and some minerals. Beyond 200 nautical miles are the "high seas" in which no sovereign state may assert 

exclusive jurisdiction. 

1049 Sec. 887(a). Special mles for detennining whether transportation income is effectively connected with 

the conduct of a U.S. trade or business arc also provided, and for coordinating the application of sections 871, 882, 

and 887. 

105" Sec. 887(b)(l). 

1001 Sec. 872(b)(l). 

Sec. 883(a)(2). 
333 

In the case of a foreign person, generally no income from a space or ocean activity or 

from international communications is treated as U.S.-source income. 1053 With respect to the 

latter, an exception is provided if the foreign person maintains an office or other fixed place of 

business in the United States, in which case the international communications income 

attributable to such fixed place of business is treated as U.S.-source income. 1054 For U.S. 

persons, all income from space or ocean activities and 50 percent of income from international 

communications is treated as U.S.-source income. 

Amounts received with respect to guarantees of indebtedness 

Amounts received, directly or indirectly, from a noncorporate resident or from a domestic 

corporation for the provision of a guarantee of indebtedness of such person are income from U.S. 

sources. ross This includes payments that are made indirectly for the provision of a guarantee. 

For example, U.S.-source income under this rule includes a guarantee fee paid by a foreign bank 

to a foreign corporation for the foreign corporation's guarantee of indebtedness owed to the bank 

by the foreign corporation's domestic subsidiary, where the cost of the guarantee fee is passed on 

to the domestic subsidiary through, for instance, additional interest charged on the indebtedness. 

In this situation, the domestic subsidiary has paid the guarantee fee as an economic matter 

through higher interest costs, and the additional interest payments made by the subsidiary are 

treated as indirect payments of the guarantee fee and, therefore, as income from U.S. sources. 

Such U.S.-source income also includes amounts received from a foreign person, whether 

directly or indirectly, for the provision of a guarantee of indebtedness of that foreign person if 

the payments received are connected with income of such person that is effectively connected 

with the conduct of aU. S. trade or business. Amounts received from a foreign person, whether 

directly or indirectly, for the provision of a guarantee of that person's debt, are treated as foreignsource income if they are not from sources within the United States under section 861(a)(9). 

4. Intercompany transfers 

Transfer pricing 

A basic U.S. tax principle applicable in dividing profits from transactions between related 

taxpayers is that the amount of profit allocated to each related taxpayer must be measured by 

reference to the amount of profit that a similarly situated taxpayer would realize in similar 

1053 Sec. 863(d). 

10" Sec. 863(c). 

1055 Sec. 86l(a)(9). This provision eiTects a legislative override of the opinion in Container Corp. v. 

Commissioner, 134 T.C. 122 (Febrmuy !7. 2010). aff'd 2011 WL1664358. 107 A.F.T.R.2d 2011-1831 (5th Cir. 

May 2, 20 11), in which the Tax Court held that fees paid by a domestic corporation to its foreign parent with respect 

to guarantees issued by the parent for the debts oft he domestic corporation were more closely analogous to 

compensation for setvices than to interest, and detennined that the source of the fees should be determined by 

reference to the residence of the foreign parent-guarantor. As a result. the income was treated as income from 

foreign sources. 
334 

transactions with unrelated parties. The transfer pricing rules of section 482 and the 

accompanying Treasury regulations are intended to preserve the U.S. tax base by ensuring that 

taxpayers do not shift income properly attributable to the United States to a related foreign 

company through pricing that does not reflect an arm's-length result. 1056 Similarly, the domestic 

laws of most US. trading partners include rules to limit income shifting through transfer pricing. 

The arm' s-1 ength standard is difficult to administer in situations in which no unrelated party 

market prices exist for transactions between related parties. When a foreign person with U.S. 

activities has transactions with related U.S. taxpayers, the amount of income attributable to U.S. 

activities is determined in part by the same transfer pricing rules of section 482 that apply when 

U.S. persons with foreign activities transact with related foreign taxpayers. 

Section 482 authorizes the Secretary of the Treasury to allocate income, deductions, 

credits, or allowances among related business entities 1057 when necessary to clearly reflect 

income or otherwise prevent tax avoidance, and comprehensive Treasury regulations under that 

section adopt the arm's-length standard as the method for determining whether allocations are 

appropriate. 1058 The regulations generally attempt to identify the respective amounts of taxable 

income of the related parties that would have resulted if the parties had been unrelated parties 

dealing at arm's length. For income from intangible property, section 482 provides "in the case 

of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), 

the income with respect to such transfer or license shall be commensurate with the income 

attributable to the intangible." By requiring inclusion in income of amounts commensurate with 

the income attributable to the intangible, Congress was responding to concerns regarding the 

effectiveness of the arm's-length standard with respect to intangible property-including, in 

particular, high-profit-potential intangibles. 1059 

Gain recognition on outbound transfers 

If a transfer of intangible property to a foreign affiliate occurs in connection with certain 

corporate transactions, nonrecognition rules that may otherwise apply are suspended. The 

transferor of intangible property must recognize gain from the transfer as though he had sold the 

intangible (regardless of the stage of development of the intangible property) in exchange for 

payments contingent on the use, productivity or disposition of the transferred property in 

amounts that would have been received either annually over the useful life of the property or 

1050 For a detailed description of the U.S. transfer pricing rules. see Joint Committee on Taxation. Present 

Law and Background Related to Possible Income Shifting and Transfer Pricing (JCX-37-10), July 20. 2010. pp. 18-

50. 

105' The tenn "related" as used herein refers to relationships described in section 482. which refers to "two 

or more organizatious, trades or businesses (whether or not incorporated. whether or not organized in the United 

States. and whether or not affiliated) owned or controlled directly or indirectly by tllC same interests." 

1058 Section J059A buttresses section 482 by limiting the extent to which costs used to detennine custom 

valuation can also be used to determine basis in property imported from a related party. A taxpayer that imports 

property from a related party may not assign a value to the property for cost purposes that exceeds its customs value. 

1ow H.R. Rep. No. 99-426, p. 423. 
335 

upon disposition of the property after the transfer. 1060 The appropriate amounts of those imputed 

payments are determined using transfer-pricing principles. Final regulations issued in 2016 

eliminate an exception under temporary regulations that permitted nonrecognition of gain from 

outbound transfers of foreign goodwill and going concern value. However, the Secretary 

announced that reinstatement of an exception for active trade or business is under consideration 

for cases with little potential for abuse and administrative difficulties. 1061 

C. U.S. Tax Rules Applicable to Nonresident Aliens 

and Foreign Corporations (Inbound) 

Nonresident aliens and foreign corporations are generally subject to U.S. tax only on their 

U.S.-source income. Thus, the source and type of income received by a foreign person generally 

determines whether there is any U.S. income tax liability and the mechanism by which it is 

taxed. The U.S. tax rules for U.S. activities of foreign taxpayers apply differently to two broad 

types of income: U.S.-source income that is "fixed or determinable annual or periodical gains, 

profits, and income" ("FDAP income") or income that is "effectively connected with the conduct 

of a trade or business within the United States" ("ECI"). FDAP income generally is subject to a 

30-percent gross-basis tax withheld at its source, while ECI is generally subject to the same U.S. 

tax rules that apply to business income derived by U.S. persons. That is, deductions are 

pennitted in determining taxable ECI, which is then taxed at the same rates applicable to U.S. 

persons. Much FDAP income and similar income is, however, exempt from tax or is subject to a 

reduced rate of tax under the Code 1062 or a bilateral income tax treaty. 1063 

1. Gross-basis taxation of U.S.-source income 

Non-business income received by foreign persons from U.S. sources is generally subject 

to tax on a gross basis at a rate of 30 percent, which is collected by withholding at the source of 

the payment. As explained below, the categories of income subject to the 30-percent tax and the 

categories for which withholding is required are generally coextensive, with the result that 

determining the withholding tax liability detennines the substantive liability. 

'~0 Sec. 367(d). 

1061 Sec, T.D. 9803.81 F.R. 91012 (December 17. 2016). Treas. Reg. sec. 1.367(d)-l(b) now provides that 

the rules of section 367(d) apply to transfers of intangible property as defined under Treas. Sec. 1.367(a)-1(d)(5) 

after September 14, 2015. and to any transfers occurring before that date resulting from entity classification 

elections filed on or after September 15, 2015. Noting that commenters on the re1,>ulations had cited legislative 

history that contemplated active business exceptions. Trcastuy mmounccd the reconsideration of the rule. U.S. 

Treasury Department, Second Report to rhe President on Identifi.-·ing and Reducing Tax Regulatory Burdens, 

Executive Order I 3789 October 2, 2017. TNT Doc 2017-72131. The relevant legislative history is found at in H.R. 

Rep. No. 98-432. 98'" Cong., 2d Sess. 1318-1320 (March 5. 1984) and Conference Report, H.R. Rep. No. 98-861, 

98'" Cong. 2d Sess. 951-957 (June 23. 1984). 

1062 E.g., the portfolio interest exception in section 871 (h) (discussed below). 

1063 Because each treaty reflects considerations unique to the relationship between the two treaty countries. 

treaty withholding tax rates on each category of income are not tmiform across treaties. 
336 

The income of non-resident aliens or foreign corporations that is subject to tax at a rate of 

30-percent includes FDAP income that is not effectively connected with the conduct of a U.S. 

trade or business. 1064 The items enumerated in defining FDAP income are illustrative; the 

common characteristic of types ofFDAP income is that taxes with respect to the income may be 

readily computed and collected at the source, in contrast to the administrative difficulty involved 

in determining the seller's basis and resulting gain from sales ofproperty. 1065 The words "annual 

or periodical" are "merely generally descriptive" of the payments that could be within the 

purview of the statute and do not preclude application of the withholding tax to one-time, lump 

sum payments to nonresident aliens. 1066 

With respect to income from shipping, the gross basis tax potentially applicable is four 

percent, 1067 unless the income is effectively connected with a U.S. trade or business, and thus 

subject to the graduated rates, as detennined under rules specific to U.S.-source gross 

transportation income rather than the more broadly applicable rules defining effectively 

connected income in section 864(c). Even if the income is within the purview of those special 

rules, it may nevertheless be exempt if the income is derived from the international operation of 

a ship or aircraft by a foreign entity organized in a jurisdiction which provides a reciprocal 

exemption to U.S. entities. 1068 

Types ofFDAP income 

FDAP income encompasses a broad range of types of gross income, but has limited 

application to gains on sales of property, including market discount on bonds and option 

premiums. 1069 Capital gains received by nonresident aliens present in the United States for fewer 

than 183 days are generally treated as foreign source and are thus not subject to U.S. tax, unless 

the gains are effectively connected with a U.S. trade or business; capital gains received by 

106-1 Sees. 871(a). 881. If the FDAP income is also ECI. it is taxed on a net basis, at graduated rates. 

1065 Commissioner v. Wodehouse. 337 U.S. 369. 388-89 (1949). After reviewing legislative history of the 

Revenue Act of 1936. the Supreme Court noted that Congress expressly intended to limit taxes on nonresident aliens 

to tm<es that could be readily collectible. i.e .. subject to withholding. in response to "a theoretical system impractical 

of administration ina great number of cases. H.R. Rep. No. 2475. 74th Cong .. 2d Sess. 9-10 (1936)." In doing so, 

the Court rejected P.G. Wodehousc's aq,•uments that an adYance royalty payment was not within the pmview of the 

statutory definitionofFDAP income. 

1066 Commissioner v. Wodehouse, 337 U.S. 369. 393 (19-19). 

ux,· Sec. 887. 

1068 Sec. 883(a)(l). In addition. to the extent proYided in regulations, income from shipping and aviation is 

not subject to the four-percent gross basis tax if the income is of a type that is not subject to the reciprocal 

exemption for net basis taxation. See sec. 887(b)(l). Comparable mles under section 872(b)(l) apply to income of 

nonresident alien individuals from shipping operations. 

1069 Although technically insurance premiums paid to a foreign insurer or reinsurer are FDAP income. they 

are exempt from withholding tmder Treas. Reg. sec. 1.1441-2(a)(7) if the insurance contract is subject to the excise 

tax under section ~371. Treas. Reg. sees. l.l441-2(b)(l)(i) and l.l441-2(b)(2). 
337 

nonresident aliens present in the United States for 183 days or more 1070 that are treated as income 

from U.S. sources are subject to gross-basis taxation. 1071 In contrast, U.S-source gains from the 

sale or exchange of intangibles are subject to tax and withholding if they are contingent upon the 

productivity of the property sold and are not effectively connected with a U.S. trade or 

business. 1072 

Interest on bank deposits may qualify for exemption on two grounds, depending on where 

the underlying principal is held on deposit. Interest paid with respect to deposits with domestic 

banks and savings and Joan associations, and certain amounts held by insurance companies, are 

U.S.-source income but are not subject to the U.S. tax when paid to a foreign person, unless the 

interest is effectively connected with a U.S. trade or business of the recipient. 10n Interest on 

deposits with foreign branches of domestic banks and domestic savings and loan associations is 

not treated as U.S.-source income and is thus exempt from U.S. tax (regardless of whether the 

recipient is engaged in a U.S. trade or business). 1074 Similarly, interest and original issue 

discount on certain short-term obligations is also exempt from U.S. tax when paid to a foreign 

person. 1075 Additionally, there is generally no information reporting required with respect to 

payments of such amounts. 1076 

Although FDAP income includes U.S.-source portfolio interest, such interest is 

specifically exempt from the 30-percent gross-basis tax. Portfolio interest is any interest 

(including original issue discount) that is paid on an obligation that is in registered form and for 

which the beneficial owner has provided to the U.S. withholding agent a statement certifying that 

the beneficial owner is not a U.S. person. 1077 For obligations issued before March 19, 2012, 

portfolio interest also includes interest paid on an obligation that is not in registered form, 

provided that the obligation is shown to be targeted to foreign investors under the conditions 

107° For purposes of this rule. whether a person is considered a resident in the United States is detenuined 

by application of the rules uuder section 770l(b). 

1071 Sec. 87l(a)(2). In addition. certain capital gains from sales of U.S. real property interests arc subject to 

tax as effectively connected income (or in some instances as dividend income) under the Foreign Investment in Real 

Property Tax Act of 1980 ("F!RPT A"). 

10'

2 Sees. 87l(a)(l)(D), 88l(a)(4). 

Hm Sees. 87l(i)(2)(A), 88l(d): Treas. Reg. sec. l.1441-l(b)(4)(ii). 

"''" Sec. 86l(a)(l)(B); Treas. Reg. sec. 1.144l-l(b)(4)(iii). 

""5 Sees. 87l(g)(l)(B), 88l(a)(3): Treas. Reg. sec. l.l441-l(b)(4)(iv). 

10" 6 Treas. Reg. sec. 1. \46l-l(c)(2)(ii)(A). (B). Regulations require a bank to report interest if the recipient 

is a nonresident alien who resides in a com1try with which the United States lms a satisfactory exchange of 

information program under a bilateral agreement and the deposit is maintained at an office in the United States. 

Treas. Reg. sees. l.6049-4(b)(5) and 1.6049-8. The IRS publishes lists of the countries whose residents are subject 

to the reporting requirements, and those countries with respect to which the reported information will be 

automatically exchanged. Rev. Proc. 2017-3 L available at https:/ /wm.-.irs.govlpub/irs-drop/rp-17 -3 l.pdf, 

supplementing Rev. Proe. 2014-64. 

Sec. 87l(h)(2). 
338 

sufficient to establish deductibility of the payment of such interest. 1078 Portfolio interest, 

however, does not include interest received by a 1 0-percent shareholder, 1079 certain contingent 

interest, 1080 interest received by a controlled foreign corporation from a related person, 1081 or 

interest received by a bank on an extension of credit made pursuant to a loan agreement entered 

into in the ordinary course of its trade or business. 1082 

Imposition of gross-basis tax and reporting by U.S. withholding agents 

The 30-percent tax on FDAP income is generally collected by means ofwithholding. 1083 

Withholding on FDAP payments to foreign payees is required unless the withholding agent, 1084 

i.e., the person making the payment to the foreign person receiving the income, can establish that 

the beneficial owner of the amount is eligible for an exemption from withholding or a reduced 

rate of withholding under an income tax treaty. 1085 The principal statutory exemptions from the 

30-percent tax apply to interest on bank deposits, and portfolio interest, described above. 1086 

In many instances, the income subject to withholding is the only income of the foreign 

recipient that is subject to any U.S. tax. No U.S. Federal income tax return from the foreign 

recipient is generally required with respect to the income from which tax was withheld, if the 

recipient has no ECI income and the withholding is sufficient to satisfy the recipient's liability. 

Accordingly, although the 30-percent gross-basis tax is a withholding tax, it is also generally the 

final tax liability of the foreign recipient (unless the foreign recipients files for a refund). 

A withholding agent that makes payments ofU.S.-source amounts to a foreign person is 

required to report and pay over any amounts of U.S. tax withheld. The reports are due to be filed 

'"'' Sec. 163(l)(2)(B). The exception to the registration requirements for foreign targeted securities was 

repealed in 2010, effective for obligations issued two years after enactment, thus narrowing the portfolio interest 

exemption for obligations issued after March 18. 2012. See Hiring Incentives to Restore Employment Law of 2010, 

Pub. L. No. lll-147, sec. 502(b). 

1079 Sec. 87l(h)(3). 

1080 Sec. 87l(h)(4). 

1081 Sec. 881(c)(3)(C). 

1082 Sec. 88l(c)(3)(A). 

1083 Sees. 1441. 1442. 

1084 Withholding agent is defined broadly to include any U.S. or foreign person that has the control, receipt, 

custody. disposal. or payment of an item of income of a foreif,>u person subject to withholding. Treas. Reg. sec. 

l.I4·H-7(a). 

1085 Sees. 871.881. 1441, 1442: Treas. Reg. sec. 1.1441-1(b). 

ws6 A reduced rate of withholding of 14 percent applies to certain scholarships and fellowships paid to 

individuals temporarily present in the United States. Sec. 1441(b). In addition to statutory exemptions. the 30-

pcrcent tax with respect to interest. dividends and royalties may be reduced or eliminated by a tax treaty between the 

United States and the country in which the recipient of income othenvise subject to tax is resident. 
339 

with the IRS by March 15 of the calendar year following the year in which the payment is made. 

Two types of reports are required: (1) a summary of the total U.S.-source income paid and 

withholding tax withheld on foreign persons for the year and (2) a report to both the IRS and the 

foreign person of that person's U.S.-source income that is subject to reporting. 1087 The 

nonresident withholding rules apply broadly to any financial institution or other payor, including 

foreign financial institutions. 1088 

To the extent that the withholding agent deducts and withholds an amount, the withheld 

tax is credited to the recipient of the income. 1089 If the agent withholds more than is required, 

and results in an overpayment of tax, the excess may be refunded to the recipient of the income 

upon filing of a timely claim for refund. 

Excise tax on foreign reinsurance premiums 

An excise tax applies to premiums paid to foreign insurers and reinsurers covering U.S. 

risks. 1090 The excise tax is imposed on a gross basis at the rate of one percent on reinsurance and 

life insurance premiums, and at the rate of four percent on property and casualty insurance 

premiums. The excise tax does not apply to premiums that are effectively connected with the 

conduct of a U.S. trade or business or that are exempted from the excise tax under an applicable 

income tax treaty. The excise tax paid by one party cannot be credited if, for example, the risk is 

reinsured with a second patty in a transaction that is also subject to the excise tax. 

Many U.S. tax treaties provide an exemption from the excise tax, including the treaties 

with Germany, Japan, Switzerland, and the United Kingdom. 1091 To prevent persons from 

inappropriately obtaining the benefits of exemption from the excise tax, the treaties generally 

include an anti-conduit rule. The most common anti-conduit rule provides that the treaty 

exemption applies to the excise tax only to the extent that the risks covered by the premiums are 

not reinsured with a person not entitled to the benefits of the treaty (or any other treaty that 

provides exemption from the excise tax). 1092 

1087 Treas. Reg. sec. l.l46l-l(b), (c). 

1088 Sec Treas. Reg. sec. 1.1441-7(a) (definition of withholding agent includes foreigo persons). 

1089 Sec. 1462. 

1

'"0 Sees. 4371-4374. 

1091 Generally. when a foreign person qualifies for benefits under such a treaty, the United States is not 

permitted to collect the insurance pre1niums excise tax from that person. 

109' In Rev. Rul. 2008-15. 2008-1 C. B. 633, the IRS provided l,'uidance to the effect that the excise tax is 

imposed separately on each reinsurance policy covering a U.S. risk. Thus. if a U.S. insurer or reinsurer reinsures a 

U.S. risk with a foreign reinsurer, and that foreign reinsurer in turn reinsures the risk with a second foreign reinsurer. 

the excise tax applies to both the premium to the first foreign reinsurer and the premium to the second foreign 

reinsurer. In addition. if the first foreign reinsurer is resident in a jurisdiction with a tax treaty containing an excise 

tax exemption. the revenue mling provides that the excise tax still applies to both payments to the e>-ient that the 

transaction violates an anti-conduit mle in the applicable ta'< tteaty. Even if no violation of an anti-conduit mlc 
340 

2. Net-basis taxation of U.S.-source income 

The United States taxes on a net basis the income of foreign persons that is "effectively 

connected" with the conduct of a trade or business in the United States. 1093 Any gross income 

derived by the foreign person that is not effectively connected with the person's U.S. business is 

not taken into account in determining the rates of U.S. tax applicable to the person's income 

from the business. 1094 

U.S. trade or business 

A foreign person is subject to US. tax on a net basis if the person is engaged in a U.S. 

trade or business. Partners in a partnership and beneficiaries of an estate or trust are treated as 

engaged in the conduct of a trade or business within the United States if the partnership, estate, 

or trust is so engaged. 1095 

The question whether a foreign person is engaged in a U.S. trade or business is factual 

and has generated much case law. Basic issues include whether the activity constitutes business 

rather than investing, whether sufficient activities in connection with the business are conducted 

in the United States, and whether the relationship between the foreign person and persons 

performing functions in the United States in respect of the business is sufficient to attribute those 

functions to the foreign person. 

The trade or business rules differ from one activity to another. The term "trade or 

business within the United States" expressly includes the performance of personal services 

within the United States. 1096 If, however, a nonresident alien individual performs personal 

services for a foreign employer, and the individual's total compensation for the services and 

period in the United States are minimal ($3,000 or less in total compensation and 90 days or 

fewer of physical presence in a year), the individual is not considered to be engaged in a US. 

trade or business. 1097 Detailed rules govern whether trading in stocks or securities or 

commodities constitutes the conduct of a U.S. trade or business. 1098 A foreign person who trades 

in stock or securities or commodities in the United States through an independent agent generally 

is not treated as engaged in a U.S. trade or business if the foreign person does not have an office 

or other fixed place of business in the United States through which trades are carried out. A 

foreign person who trades stock or securities or commodities for the person's own account also 

occurs, under the revenue ruling. the excise tax still applies to the premiums paid to the second foreign reinsurer. 

unless the second foreign reinsurer is itself entitled to an excise tax exemption. 

1093 Sees. 87l(b). 882. 

1091 Sees. 87l(b)(2), 882(a)(2). 

1095 Sec. 875. 

1096 Sec. 864(b). 

1097 Sec. 864(b)(l). 

1098 Sec. 864(b)(2). 
341 

generally is not considered to be engaged in a U.S. business so long as the foreign person is not a 

dealer in stock or securities or commodities. 

For eligible foreign persons, U.S. bilateral income tax treaties restrict the application of 

net-basis U.S. taxation. Under each treaty, the United States is permitted to tax business profits 

only to the extent those profits are attributable to a U.S. permanent establishment of the foreign 

person. The threshold level of activities that constitute a pennanent establishment is generally 

higher than the threshold level of activities that constitute a U.S. trade or business. For example, 

a permanent establishment typically requires the maintenance of a fixed place of business over a 

significant period of time. 

Effectively connected income 

A foreign person that is engaged in the conduct of a trade or business within the United 

States is subject to U.S. net-basis taxation on the income that is "effectively connected" with the 

business. Specific statutory rules govern whether income is ECI. 1099 

ln the case ofU.S.-source capital gain and U.S.-source income of a type that would be 

subject to gross basis U.S. taxation, the factors taken into account in determining whether the 

income is ECI include whether the income is derived from assets used in or held for use in the 

conduct of the U.S. trade or business and whether the activities of the trade or business were a 

material factor in the realization of the amount (the "asset use" and "business activities" 

tests). 1 100 Under the asset use and business activities tests, due regard is given to whether the 

income, gain, or asset was accounted for through the U.S. trade or business. All other 

U.S.-source income is treated as ECL 1101 

A foreign person who is engaged in a U.S. trade or business may have limited categories 

of foreign-source income that are considered to be ECI. 1102 Foreign-source income not included 

in one of these categories (described next) generally is exempt from U.S. tax. 

A foreign person's income from foreign sources generally is considered to be ECI only if 

the person has an office or other fixed place of business within the United States to which the 

income is attributable and the income is in one of the following categories: (I) rents or royalties 

for the use of patents, copyrights, secret processes or formulas, good will, trade-marks, trade 

brands, franchises, or other like intangible properties derived in the active conduct of the trade or 

business; (2) interest or dividends derived in the active conduct of a banking, financing, or 

similar business within the United States or received by a corporation the principal business of 

which is trading in stocks or securities for its own account; or (3) income derived from the sale 

1

"'9 Sec. 864(c). 

1100 Sec. 864(c)(2). 

1101 Sec. 864(c)(3). 

1102 This income is subject to net-basis U.S. taxation after allowance of a credit for any foreign income tax 

imposed on the income. Sec. 906. 
342 

or exchange (outside the United States), through the U.S. office or fixed place of business, of 

inventory or property held by the foreign person primarily for sale to customers in the ordinary 

course of the trade or business, unless the sale or exchange is for use, consumption, or 

disposition outside the United States and an office or other fixed place of business of the foreign 

person in a foreign country participated materially in the sale or exchange.n°3 Foreign-source 

dividends, interest, and royalties are not treated as ECI if the items are paid by a foreign 

corporation more than 50 percent (by vote) of which is owned directly, indirectly, or 

constructively by the recipient of the income. 1104 

In determining whether a foreign person has a U.S. office or other fixed place of 

business, the office or other fixed place of business of an agent generally is disregarded. The 

place of business of an agent other than an independent agent acting in the ordinary course of 

business is not disregarded, however, if the agent either has the authority (regularly exercised) to 

negotiate and conclude contracts in the name of the foreign person or has a stock of merchandise 

from which he regularly fills orders on behalf of the foreign person. 1105 If a foreign person has a 

U.S. office or fixed place of business, income, gain, deduction, or loss is not considered 

attributable to the office unless the office was a material factor in the production of the income, 

gain, deduction, or loss and the office regularly carries on activities of the type from which the 

income, gain, deduction, or loss was derived. 1106 

Special rules apply in determining the ECI of an insurance company. The foreign-source 

income of a foreign corporation that is subject to tax under the insurance company provisions of 

the Code is treated as ECI if the income is attributable to its United States business. 1107 

Income, gain, deduction, or loss for a particular year generally is not treated as ECI if the 

foreign person is not engaged in a U.S. trade or business in that year. 1108 u: however, income or 

gain taken into account for a taxable year is attributable to the sale or exchange of property, the 

performance of services, or any other transaction that occurred in a prior taxable year, the 

determination whether the income or gain is taxable on a net basis is made as if the income were 

taken into account in the earlier year and without regard to the requirement that the taxpayer be 

engaged in a trade or business within the United States during the later taxable year. 1109 If any 

property ceases to be used or held for use in connection with the conduct of a U.S. trade or 

business and the property is disposed of within 10 years after the cessation, the determination 

1103 Sec. 864(c)(4)(B). 

1104 Sec. 864(c)(4)(D)(i). 

1105 Sec. 864(c)(5)(A). 

1106 Sec. 864(c)(5)(B). 

1107 Sec. 864(c)(4)(C). 

1108 Sec. 864(c)(l)(B). 

1109 Sec. 864(c)(6). 
343 

whether any income or gain attributable to the disposition of the property is taxable on a net 

basis is made as if the disposition occurred immediately before the property ceased to be used or 

held for use in connection with the conduct of a U.S. trade or business and without regard to the 

requirement that the taxpayer be engaged in a U.S. business during the taxable year for which the 

income or gain is taken into account 1110 

Transportation income from US. sources is treated as effectively connected with a 

foreign person's conduct of a U.S. trade or business only if the foreign person has a fixed place 

of business in the United States that is involved in the earning of such income and substantially 

all of such income of the foreign person is attributable to regularly scheduled transportation. 1111 

If the transportation income is effectively connected with conduct of a US. trade or business, the 

transportation income, along with transportation income that is from U.S. sources because the 

transportation both begins and ends in the United States, may be subject to net-basis taxation. 

Income from the international operation of a ship or aircraft may be eligible for an exemption 

under section 883, provided that the foreign jurisdiction has extended reciprocity for US. 

businesses; 1112 whether the party claiming an exemption is eligible for the tax relief; 1113 and the 

activities that give rise to the income qualify under relevant regulations. 

Allowance of deductions 

Taxable ECI is computed by taking into account deductions associated with gross ECI. 

For this purpose, the apportionment and allocation of deductions is addressed in detailed 

regulations. The regulations applicable to deductions other than interest expense set forth 

general guidelines for allocating deductions among classes of income and apportioning 

deductions between ECI and non-ECI. In some circumstances, deductions may be allocated on 

the basis of units sold, gross sales or receipts, costs of goods sold, profits contributed, expenses 

incurred, assets used, salaries paid, space used, time spent, or gross income received. More 

specific guidelines are provided for the allocation and apportionment of research and 

experimental expenditures, legal and accounting fees, income taxes, losses on dispositions of 

property, and net operating losses. Detailed regulations under section 861 address the allocation 

and apportionment of interest deductions. In general, interest is allocated and apportioned based 

on assets rather than income. 

1110 Sec. 864(c)(7). 

1111 Sec. 887(b)(4). 

111 ' The most recent compilation of countries that the United States recognizes as providing exemptions 

lists countries in three groups: Twenty-seven countries are eligible for exemption on the basis of a review of the 

legislation in the foreign jurisdiction: 39 nations exchanged diplomatic notes with the United States that grant 

exemption to some extent: and more than 50 nations are parties with the United States to bilateral income tax treaties 

that include a shipping article. Rev. RuL 2008-17, 2008-l C.B. 626. modified by Ann. 2008-57, 2008-C.B. 1192, 

2008. 

1113 Sec. 883(c) and regulations thereunder. 
344 

3. Special rules 

A foreign person's gain or loss from the disposition of a U.S. real property interest 

("USRPI") is treated as ECI and, therefore, as taxable at the income tax rates applicable to U.S. 

persons, including the rates for net capital gain. A foreign person subject to tax on this income is 

required to file a U.S. tax return under the normal rules relating to receipt ofECI. 1114 In the case 

of a foreign corporation, the gain from the disposition of a USRPI may also be subject to the 

branch profits tax at a 30-percent rate (or lower treaty rate). 

The payor of income that FIRPTA treats as ECI ("FIRPTA income") is generally 

required to withhold U.S. tax from the payment. 1115 The foreign person can request a refund 

with its U.S. tax return, if appropriate, based on that person's total ECI and deductions (if any) 

for the taxable year. 

Branch profits taxes 

A domestic corporation owned by foreign persons is subject to U.S. income tax on its net 

income. The earnings of the domestic corporation are subject to a second tax, this time at the 

shareholder level, when dividends are paid. As described previously, when the shareholders are 

foreign, the second-level tax is imposed at a flat rate and collected by withholding. Unless the 

portfolio interest exemption or another exemption applies, interest payments made by a domestic 

corporation to foreign creditors are likewise subject to U.S. tax. To approximate these secondlevel withholding taxes imposed on payments made by domestic subsidiaries to their foreign 

parent corporations, the United States taxes a foreign corporation that is engaged in a U.S. trade 

or business through a U.S. branch on amounts of U.S. earnings and profits that are shifted out of, 

or amounts of interest that are deducted by, the U.S. branch of the foreign corporation. These 

branch taxes may be reduced or eliminated under an applicable income tax treaty. 1116 

Under the branch profits tax, the United States imposes a tax of 30 percent on a foreign 

corporation's "dividend equivalent amount." 1117 The dividend equivalent amount generally is 

the earnings and profits of a U.S. branch of a foreign corporation attributable to its ECL 1118 

1114 Sec. 897(a). 

1115 Sec. 1445 and Treasury regulations thereunder. 

1116 See Treas. Reg. sec. 1.884-l(g), -5. 

1w Sec. 884(a). 

1118 Sec. 884(b). 
345 

Limited categories of earnings and profits attributable to a foreign corporation's ECI are 

excluded in calculating the dividend equivalent amount. 1119 

In arriving at the dividend equivalent amount, a branch's effectively connected earnings 

and profits are adjusted to reflect changes in a branch's U.S. net equity (that is, the excess of the 

branch's assets over its liabilities, taking into account only amounts treated as connected with its 

U.S. trade or business). 1120 The first adjustment reduces the dividend equivalent amount to the 

extent the branch's earnings are reinvested in trade or business assets in the United States (or 

reduce U.S. trade or business liabilities). The second adjustment increases the dividend 

equivalent amount to the extent prior reinvested earnings are considered remitted to the home 

office of the foreign corporation. 

Interest paid by a U.S. trade or business of a foreign corporation generally is treated as if 

paid by a domestic corporation and therefore is subject to U.S. 30-percent withholding tax (if the 

interest is paid to a foreign person and a Code or treaty exemption or reduction would not be 

available if the interest were actually paid by a domestic corporation). 1121 Certain "excess 

interest" of a U.S. trade or business of a foreign corporation is treated as if paid by a U.S. 

corporation to a foreign parent and, therefore, is subject to U.S. 30-percent withholding tax. 1122 

For this purpose, excess interest is the excess of the interest expense of the foreign corporation 

apportioned to the U.S. trade or business over the amount of interest paid by the trade or 

business. 

Earnings stripping 

Taxpayers are limited in their ability to reduce the U.S. tax on the income derived from 

their U.S. operations through certain earnings stripping transactions that involve interest 

payments. If the payor's debt-to-equity ratio exceeds 1.5 to I (a debt-to-equity ratio of 1.5 to I 

or less is considered a "safe harbor"), a deduction for disqualified interest paid or accrued by the 

payor in a taxable year is generally disallowed to the extent of the payor's excess interest 

expense. 1123 Disqualified interest includes interest paid or accrued to related parties when no 

Federal income tax is imposed with respect to such interest; 1124 to unrelated parties in certain 

instances in which a related party guarantees the debt ("guaranteed debt"); or to a REIT by a 

1119 See sec. 884(d)(2) (excluding, for example. eamings and profits attributable to gain from the sale of 

domestic corporation stock that constitutes a U.S. real property interest described in section 897. 

1120 Sec. 884(b). 

1121 Sec. 884(f)(l)(A). 

1 "' Sec. 884(1)(1 )(B). 

1123 Sec. 163(j). 

1124 If a tax treaty reduces the rate of tax on interest paid or accmed by the taxpayer, the interest is treated 

as interest on which no Federal income tax is imposed to the extent of the same proportion of such interest as the 

rate of tax imposed without regard to the treaty, reduced by the rate of tax imposed under the treaty, bears to the rate 

oft,'L'< imposed without regard to the treaty. Sec. 163(j)(5)(B). 
346 

taxable REIT subsidiary of that REIT. Excess interest expense is the amount by which the 

payor's net interest expense (that is, the excess of interest paid or accrued over interest income) 

exceeds 50 percent of its adjusted taxable income (generally taxable income computed without 

regard to deductions for net interest expense, net operating losses, domestic production activities 

under section 199, depreciation, amortization, and depletion). Interest amounts disallowed under 

these rules can be carried forward indefinitely and are allowed as a deduction to the extent of 

excess limitation in a subsequent tax year. In addition, any excess limitation (that is, the excess, 

if any, of 50 percent of the adjusted taxable income of the payor over the payor's net interest 

expense) can be carried forward three years. 

1. In general 

D. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons 

(Outbound) 

In general, income earned directly by a U.S. person from the conduct of a foreign 

business is taxed on a current basis, 1125 but income earned indirectly from a separate legal entity 

operating the foreign business is not. Instead, active foreign business income earned by a U.S. 

person indirectly through an interest in a foreign corporation generally is not subject to U.S. tax 

until the income is distributed as a dividend to the U.S. person. Certain anti-deferral regimes 

may cause the U.S. owner to be taxed on a current basis in the United States on ce1tain categories 

of passive or highly mobile income earned by the foreign corporation regardless of whether the 

income has been distributed as a dividend to the U.S. owner. The main anti-deferral regimes that 

provide such exceptions are the controlled foreign corporation ("CFC") rules of subpart F 1126 and 

the passive foreign investment company ("PFIC") rules. 1127 A foreign tax credit generally is 

available to offset, in whole or in part, the U.S. tax owed on foreign-source income, whether the 

income is earned directly by the domestic corporation, repatriated as an actual dividend, or 

included in the domestic parent corporation's income under one of the anti-deferral regimes. 1128 

2. Anti-deferral regimes 

Subpart F 

Subpart F, 1129 applicable to CFCs and their shareholders, is the main anti-deferral regime 

of relevance to a U.S.-based multinational corporate group. A CFC generally is defined as any 

''" A U.S. citizen or resident living abroad may be eligible to exclude from U.S. taxable income certain 

foreign earned income and foreign housing costs under section 911. For a description of tllis exclusion. see Present 

Law and Issues in U.S. It1xation of Cross-Border Income (JCX-42-11), Seplcmber6, 2011. p. 52. 

1126 Sees. 951-964. 

"'' Sees. 1291-1298. 

"" Sees. 901, 902, 960, 1293(f). 

"" Sees. 951-964. 
347 

foreign corporation if US. persons own (directly, indirectly, or constructively) more than 50 

percent of the corporation's stock (measured by vote or value), taking into account only those 

U.S. persons that are within the meaning of the term "United States shareholder," which refers 

only to those US. persons who own at least 10 percent of the stock (measured by vote only). mo 

Subpart F income 

Under the subpart F rules, the United States generally taxes the 1 0-percent US. 

shareholders of a CFC on their pro rata shares of certain income of the CFC (referred to as 

"subpart F income"), without regard to whether the income is distributed to the shareholders. 1131 

In effect, the United States treats the 1 0-percent US. shareholders of a CFC as having received a 

current distribution of the corporation's subpart F income. With exceptions described below, 

subpart F income generally includes passive income and other income that is readily movable 

from one taxing jurisdiction to another. Subpart F income consists of foreign base company 

income, 1132 insurance income, II33 and certain income relating to international boycotts and other 

violations of public policy. 1134 

Foreign base company income consists of foreign personal holding company income, 

which includes passive income such as dividends, interest, rents, and royalties, and a number of 

categories of income from business operations, including foreign base company sales income, 

foreign base company services income, and foreign base company oil-related income. 1135 

Insurance income subject to current inclusion under the subpart F rules includes any 

income of a CFC attributable to the issuing or reinsuring of any insurance or annuity contract in 

connection with risks located in a country other than the CFC's country of organization. 

Subpart F insurance income also includes income attributable to an insurance contract in 

connection with risks located within the CFC' s country of organization as the result of an 

arrangement under which another corporation receives a substantially equal amount of 

consideration for insurance of other country risks. Finally, special rules apply under subpart F 

with respect to related person insurance income 1136 in order to address captive insurance 

1130 Sees. 95l(b), 957, 958. The tenn ··United States shareholder" is used interchangeably herein with 

"U.S. shareholder." 

1131 Sec. 95l(a). 

me Sec. 954. 

1133 Sec. 953. 

1134 Sec. 952(a)(3)-(5). 

1135 Sec. 954. 

m 6 Sec. 953(c). Related person insurance income is defined for this purpose to mean any insurance 

income attributable to a policy of insurance or reinsumnce with respect to which the primary insured is either a U.S. 

shareholder (within the meaning of the provision) in the foreign corpomtion receiving the income or a person related 

to such a shareholder. 
348 

companies. 1137 Under these rules, the threshold for determining control is reduced to 25 percent, 

and any level of stock ownership by a U.S. person in such corporation is sufficient for the person 

to be treated as aU. S. shareholder. 

Investments in U.S. property 

The 1 0-percent U.S. shareholders of a CFC also are required to include currently in 

income for U.S. tax purposes their pro rata shares of the corporation's untaxed earnings invested 

in certain items ofU.S. property.m8 This U.S. property generally includes tangible property 

located in the United States, stock of aU. S. corporation, an obligation of a U.S. person, and 

certain intangible assets, such as patents and copyrights, acquired or developed by the CFC for 

use in the United States. 1139 There are specific exceptions to the general definition of U.S. 

property, including for bank deposits, certain export property, and certain trade or business 

obligations. 1140 The inclusion rule for investment of earnings in U.S. property is intended to 

prevent taxpayers from avoiding U.S. tax on dividend repatriations by repatriating CFC earnings 

through non-dividend payments, such as loans to U.S. persons. 

Subpart F exceptions 

Several exceptions to the broad definition of subpart F income permit continued deferral 

for income from certain transactions, dividends, interest and certain rents and royalties received 

by a CFC from a related corporation organized and operating in the same foreign country in 

which the CFC is organized. 1141 The same-country exception is not available to the extent that 

the payments reduce the subpart F income of the payor. A second exception from foreign base 

company income and insurance income is available for any item of income received by a CFC if 

the taxpayer establishes that the income was subject to an effective foreign income tax rate 

greater than 90 percent of the maximum U.S. corporate income tax rate (that is, more than 90 

percentof35 percent, or31.5 percent). 1142 

A provision colloquially referred to as the "CFC look-through" rule excludes from 

foreign personal holding company income dividends, interest, rents, and royalties received or 

accrued by one CFC from a related CFC (with relation based on control) to the extent 

attributable or properly allocable to non-subpart-F income of the payor.u43 The look-through 

"" Joint Committee on Taxation. General i'.xplanattnn of the Tax &form Act of 1986 (JCS-10-87). May 

4. 1987. p. 968. 

113' Sees. 951 (a)(! )(B). 956. 

1139 Sec. 956(c)(l). 

1Hu Sec. 956(c)(2). 

"'1 Sec. 954(c)(3). 

1141 Sec. 954(b)(4). 

1143 Sec. 954(c)(6). 
349 

rule applies to taxable years of foreign corporations beginning before January I, 2020, and to 

taxable years of U.S. shareholders with or within which such taxable years of foreign 

corporations end. 1144 

There is also an exclusion from subpart F income for certain income of a CFC that is 

derived in the active conduct of banking or financing business ("active financing income"), 

which applies to all taxable years of the foreign corporation beginning after December 31, 2014, 

and for taxable years of the shareholders that end during or within such taxable years of the 

corporation. 1145 With respect to income derived in the active conduct of a banking, financing, or 

similar business, a CFC is required to be predominantly engaged in such business and to conduct 

substantial activity with respect to such business in order to qualify for the active financing 

exceptions. In addition, certain nexus requirements apply, which provide that income derived by 

a CFC or a qualified business unit ("QBU") of a CFC from transactions with customers is 

eligible for the exceptions if, among other things, substantially all of the activities in connection 

with such transactions are conducted directly by the CFC or QBU in its home country, and such 

income is treated as earned by the CFC or QBU in its home country for purposes of such 

country's tax laws. Moreover, the exceptions apply to income derived from certain cross border 

transactions, provided that certain requirements are met. 

In the case of a securities dealer, an exception from foreign personal holding company 

income applies to any interest or dividend (or certain equivalent amounts) from any transaction, 

including a hedging transaction or a transaction consisting of a deposit of collateral or margin, 

entered into in the ordinary course of the dealer's trade or business as a dealer in securities 

within the meaning of section 475. 1146 In the case of a QBU of the dealer, the income is required 

to be attributable to activities of the QBU in the country of incorporation, or to a QBU in the 

country in which the QBU both maintains its principal office and conducts substantial business 

activity. A coordination rule provides that, for securities dealers, this exception generally takes 

precedence over the exception for active financing income. 

Income is treated as active financing income only if, among other requirements, it is 

derived by a CFC or by a QBU of that CFC. Certain activities conducted by persons related to 

the CFC or its QBU are treated as conducted directly by the CFC or QBU. 1147 An activity 

qualifies under this rule if the activity is performed by employees of the related person and if the 

related person is an eligible CFC, the home country of which is the same as the home country of 

1144 Sec section 144 of the Protecting Americans from Tax Hikes Act of2015 (Division Q of Pub. L. No. 

114-113). H.R. 2029 !"the PATH Act of2015"], which extended section 954(c)(6) for five years. Congress has 

previously exiended the applicationofsection954(c)(6) several times, most recently in the Tax Increase Prevention 

Actof2014. Pub. L. No. 113-295: Pub. L. No. 107-147. sec. 614.2002: Pub. L. No. 106-170. sec. 503. 1999: Pub. 

L. No. 105-277. 1998. 

" 45 Sec. 954(h). See section 128 of the PATH Act of2015. which made the active financing exception 

permanent 

"'" Sec. 954(c)(2)(C). 

" 4' Sec. 954(h)(3)(E). 
350 

the related CFC or QBU; the activity is performed in the home country of the related person; and 

the related person receives arm's-length compensation that is treated as earned in the home 

country. Income from an activity qualifying under this rule is excluded from subpart F income 

so long as the other active financing requirements are satisfied. 

Certain income of a qualifying branch of a qualifying insurance company with respect to 

risks located within the home country of the branch or within the CFC' s country of creation or 

organization are also excepted from foreign personal holding company income, provided that 

certain requirements are met. Further, additional exceptions from insurance income and from 

foreign personal holding company income apply for certain income of certain CFCs or branches 

with respect to risks located in a country other than the United States, provided that the 

requirements for these exceptions, including reserve requirements, are met. 1148 

Exclusion of previously taxed earnings and profits 

A 1 0-percent U.S. shareholder of a CFC may exclude from its income actual distributions 

of earnings and profits from the CFC that were previously included in the 1 0-percent U.S. 

shareholder's income under subpart F. 1149 Any income inclusion (under section 956) resulting 

from investments in U.S. property may also be excluded from the 10-percent U.S. shareholder's 

income when such earnings are ultimately distributed. 1150 Ordering rules provide that 

distributions from a CFC are treated as coming first out of earnings and profits of the CFC that 

have been previously taxed under subpart F, then out of other earnings and profits. 1151 

Basis adjustments 

In general, a 1 0-percent U.S. shareholder of a CFC receives a basis increase with respect 

to its stock in the CFC equal to the amount of the CFC's earnings that are included in the 

10-percent U.S. shareholder's income under subpart F. 1152 Similarly, a 10-percent U.S. 

shareholder of a CFC generally reduces its basis in the CFC's stock in an amount equal to any 

1148 Subject to approval by the IRS, a tm.;payer may establish that the reserve of a life insurance company 

for life insurance and anuuity contracts is the amount taken into accmmt in determining the foreign statement reserve 

for the contract (reduced by catastrophe, equalization, or deficiency reserve or any similar reserve). IRS approval is 

to be based on whether the method. the interest rate, the mortality and morbidity assumptions, and any other factors 

taken into account in detennining foreign statement reserves (taken togctl1er or separately) provide an appropriate 

means of measuring income for Federal income tax purposes. 

1" 9 Sec. 959(a)(l). 

1150 Sec. 959(a)(2). 

1151 Sec. 959(c). 

m 2 Sec. 96l(a). 
351 

distributions that the 10-percent U.S. shareholder receives from the CFC that are excluded from 

its income as previously taxed under subpart F. 1153 

Passive foreign investment companies 

The Tax Reform Act of 19861154 established the PFIC anti-deferral regime. A PFIC is 

generally defined as any foreign corporation if 75 percent or more of its gross income for the 

taxable year consists of passive income, or 50 percent or more of its assets consists of assets that 

produce, or are held for the production of, passive income. 1155 Alternative sets of income 

inclusion rules apply to U.S. persons that are shareholders in a PFIC, regardless of their 

percentage ownership in the company. One set of rules applies to PFICs that are qualified 

electing funds, under which electing U.S. shareholders currently include in gross income their 

respective shares of the company's earnings, with a separate election to defer payment of tax, 

subject to an interest charge, on income not currently received. 1156 A second set of rules applies 

to PFICs that are not qualified electing funds, under which U.S. shareholders pay tax on certain 

income or gain realized through the company, plus an interest charge that is attributable to the 

value of deferral. 1157 A third set of rules applies to PFIC stock that is marketable, under which 

electing U.S. shareholders currently take into account as income (or loss) the difference between 

the fair market value of the stock as of the close of the taxable year and their adjusted basis in 

such stock (subject to certain limitations), often referred to as "marking to market." 1158 

Under the PFIC regime, passive income is any income which is of a kind that would be 

foreign personal holding company income, including dividends, interest, royalties, rents, and 

certain gains on the sale or exchange of property, commodities, or foreign currency. However, 

among other exceptions, passive income does not include any income derived in the active 

conduct of an insurance business by a corporation that is predominantly engaged in an insurance 

business and that would be subject to tax under subchapter L if it were a domestic 

corporation. 1159 In applying the insurance exception, the IRS analyzes whether risks assumed 

under contracts issued by a foreign company organized as an insurer are truly insurance risks, 

Sec. 961(b). 

1154 Pub. L. No. 99-514. 

1155 Sec. 1297. 

1156 Sees. 1293-1295. 

115' Sec. 1291. 

1158 Sec. 1296. 

1159 Sec. 1297(b)(2)(B). 
352 

whether the risks are limited under the terms of the contracts, and the status of the company as an 

insurance company. 1160 

Other anti-deferral rules 

The subpart F and PFIC rules are not the only anti-deferral regimes. Other rules that 

impose current U.S. taxation on income earned through corporations include the accumulated 

earnings tax rules 1161 and the personal holding company rules. 

Rules for coordination among the anti-deferral regimes are provided to prevent U.S. 

persons from being subject to U.S. tax on the same item of income under multiple regimes. For 

example, a corporation generally is not treated as a PFIC with respect to a particular shareholder 

if the corporation is also a CFC and the shareholder is a 10-percent U.S. shareholder. Thus, 

subpart F is allowed to trump the PFIC rules. 

3. Foreign tax credit 

Subject to certain limitations, U.S. citizens, resident individuals, and domestic 

corporations are allowed to claim credit for foreign income taxes they pay. A domestic 

corporation that owns at least 10 percent of the voting stock of a foreign corporation is allowed a 

"deemed-paid" credit for foreign income taxes paid by the foreign corporation that the domestic 

corporation is deemed to have paid when the related income is distributed as a dividend or is 

included in the domestic corporation's income under the anti-deferral rules.u 62 

The foreign tax credit generally is limited to a taxpayer's U.S. tax liability on its foreignsource taxable income (as determined under U.S. tax accounting principles). This limit is 

intended to ensure that the credit serves its purpose of mitigating double taxation of foreignsource income without offsetting U.S. tax on U.S.-source income. 1163 The limit is computed by 

multiplying a taxpayer's total U.S. tax liability for the year by the ratio of the taxpayer's foreignsource taxable income for the year to the taxpayer's total taxable income for the year. If the total 

amount of foreign income taxes paid and deemed paid for the year exceeds the taxpayer's 

foreign tax credit limitation for the year, the taxpayer may carry back the excess foreign taxes to 

the previous year or carry forward the excess taxes to one of the succeeding I 0 years. 1164 

The computation of the foreign tax credit limitation requires a taxpayer to determine the 

amount of its taxable income from foreign sources in each limitation category (described below) 

1160 Notice 2003-34, 2003-C.B. 1990. June 9, 2003. See also. Prop. Treas. Reg. sec. 1.1297-4,26 CFR 

Part 1, REG-108214-15, Apri124. 2015. 

1161 Sees. 531-537. 

1162 Sees. 901. 902, 960, 129l(g). 

" 63 Sees. 901, 904. 

" 64 Sec. 904(c). 
353 

by allocating and apportioning deductions between U.S.-source gross income, on the one hand, 

and foreign-source gross income in each limitation category, on the other. In general, deductions 

are allocated and apportioned to the gross income to which the deductions factually relate. 1165 

However, subject to certain exceptions, deductions for interest expense and research and 

experimental expenses are apportioned based on taxpayer ratios. 1166 In the case of interest 

expense, this ratio is the ratio of the corporation's foreign or domestic (as applicable) assets to its 

worldwide assets. In the case of research and experimental expenses, the apportionment ratio is 

based on either sales or gross income. All members of an affiliated group of corporations 

generally are treated as a single corporation for purposes of determining the apportionment 

ratios. 1167 

The term "affiliated group" is determined generally by reference to the rules for 

determining whether corporations are eligible to file consolidated returns. 1168 These rules 

exclude foreign corporations from an affiliated group. 1169 Interest expense allocation rules 

permitting a U.S. affiliated group to apportion the interest expense of the members of the U.S. 

affiliated group on a worldwide-group basis were modified in 2004, and initially effective for 

taxable years beginning after December 31, 2008. 1170 The effective date of the modified rules 

has been delayed to January 1, 2021. 1171 A result of this rule is that interest expense of foreign 

members of a U.S. affiliated group is taken into account in determining whether a portion of the 

interest expense of the domestic members of the group must be allocated to foreign-source 

income. An allocation to foreign-source income generally is required only if, in broad terms, the 

domestic members of the group are more highly leveraged than is the entire worldwide group. 

The new rules are generally expected to reduce the amount of the U.S. group's interest expense 

that is allocated to foreign-source income. 

The foreign tax credit limitation is applied separately to passive category income and to 

general category income. 1172 Passive category income includes passive income, such as portfolio 

1165 Treas. Reg. sec. L861-8(b), Temp. Treas. Reg. sec. 1.861-8T(c). 

" 66 Temp. Treas. Reg. sec. L861-9T. Treas. Reg. sec. 1.861-17. 

"" Sec. 86-t(e)(l), (6); Temp. Treas. Reg. sec. L861-14T(e)(2). 

""8 Sees. 864(e)(5). 150-t. 

m 9 Sec. 1504(b)(3). 

1170 Sec. 864(f): ''American Jobs Creation Act of2004'' ("AJCA"). Pub. L. 108-357. sec. 40\(a). 

w 1 Hiring Incentives to Restore Employment Act Pub. L. No. 111-1-:17. sec. 55l(a). 

1172 Sec. 904(d). AJCA generally reduced the number of income categories from nine to two, effective for 

tax years beginning in 2006. Before AJCA, the foreign tax credit limitation was applied separately to the following 

categories of income: (I) passive income, (2) high withholding tax interest, (3) financial services income, (4) 

shipping income, (5) certain dividends received from noncoutrolled section 902 foreign corporations (also known as 

"I 0/50 companies"), (6) certain dividends from a domestic intemational sales corporation or former domestic 

intemational sales corporation, (7) taxable income atlributablc to certaiu foreign trade income. (8) certain 

distributions from a foreign sales corporation or former foreign sales corporation. and (9) any other income not 
354 

interest and dividend income, and certain specified types of income. All other income is in the 

general category. Passive income is treated as general category income if it is earned by a 

qualifying financial services entity. Passive income is also treated as general category income if 

it is highly taxed (that is, if the foreign tax rate is determined to exceed the highest rate of tax 

specified in Code section l or 11, as applicable). Dividends (and subpart F inclusions), interest, 

rents, and royalties received by a 1 0-percent U.S. shareholder from a CFC are assigned to a 

separate limitation category by reference to the category of income out of which the dividends or 

other payments were made. 1173 Dividends received by a 1 0-percent corporate shareholder of a 

foreign corporation that is not a CFC are also categorized on a look-through basis. 1174 

Special rules apply to the allocation of income and losses from foreign and U.S. sources 

within each category of income. 1175 Foreign losses from one category will first be used to offset 

income from foreign sources of other categories. If there remains an overall foreign loss, it will 

be deducted against income from U.S. sources. The same principle applies to losses from U.S. 

sources. In subsequent years, the losses that were deducted against another category or source of 

income will be recaptured. That is, an equal amount of income from the same category or source 

that generated a loss in the prior year will be recharacterized as income from the other category 

or source against which the loss was deducted. Up to 50 percent of income from one source in 

any subsequent year will be recharacterized as income from the other source, whereas foreignsource income in a particular category can be fully recharacterized as income in another category 

until the losses from prior years are fully recaptured. 1176 

In addition to the foreign tax credit limitation just described, a taxpayer's ability to claim 

a foreign tax credit may be further limited by a matching rule that prevents the separation of 

creditable foreign taxes from the associated foreign income. Under this rule, a foreign tax 

generally is not taken into account for U.S. tax purposes, and thus no foreign tax credit is 

available with respect to that foreign tax, until the taxable year in which the related income is 

taken into account for U.S. tax purposes. 1177 

described in items ( l) through (8) (so-called "general basket" income). A number of other provisions of the Code, 

including several enacted in 2010 as part of Pub. L. No. lll-226, create additional separate categories in specific 

circumstances or limit the availability of the foreign tax credit iu other ways. See, e.g.. sees. 865(h). 90 l(j), 

904(d)(6). 904(h)(IO). 

1173 Sec. 904(d)(3). The subpart F mlcs applicable to CFCs and their 10-percent U.S. shareholders are 

described below. 

1174 Sec. 904(d)(4). 

Sees. 904(1). (g). 

1" 6 Sees. 904(f)(l), (g)( I). 

Sec. 909. 
355 

4. Special rules 

Dual consolidated loss rules 

Under the rules applicable to corporations filing consolidated returns, a dual consolidated 

loss ("DCL") is any net operating loss of a domestic corporation if the corporation is subject to 

an income tax of a foreign country without regard to whether such income is from sources in or 

outside of such foreign country, or if the corporation is subject to such a tax on a residence basis 

(a "dual resident corporation"). 1178 A DCL generally cannot be used to reduce the taxable 

income of any member of the corporation's affiliated group. Losses of a separate unit of a 

domestic corporation (a foreign branch or an interest in a hybrid entity owned by the 

corporation) are subject to this limitation in the same manner as if the unit were a wholly owned 

subsidiary of such corporation. An exemption is available under Treasury regulations in the case 

ofDCLs for which a domestic use election (that is, an election to use the loss only for domestic, 

and not foreign, tax purposes) has been made. 1179 Recapture is required, however, upon the 

occurrence of certain triggering events, including the conversion of a separate unit to a foreign 

corporation and the transfer of 50 percent or more of the assets of a separate unit within a twelvemonth period. 1180 

Temporary dividends-received deduction for repatriated foreign earnings 

AJCA section 421 added to the Code section 965, a temporary provision intended to 

encourage U.S. multinational companies to repatriate foreign earnings. Under section 965, for 

one taxable year certain dividends received by a U.S. corporation from its CFCs were eligible for 

an 85-percent dividends-received deduction. At the taxpayer's election, this deduction was 

available for dividends received either during the taxpayer's first taxable year beginning on or 

after October 22, 2004, or during the taxpayer's last taxable year beginning before such date. 

The temporary deduction was subject to a number of general limitations. First, it applied 

only to cash repatriations generally in excess of the taxpayer's average repatriation level 

calculated for a three-year base period preceding the year of the deduction. Second, the amount 

of dividends eligible for the deduction was generally limited to the amount of earnings shown as 

permanently invested outside the United States on the taxpayer's recent audited financiaJ 

statements. Third, to qualify for the deduction, dividends were required to be invested in the 

United States according to a domestic reinvestment plan approved by the taxpayer's senior 

management and board of directors. 1181 

ws Sec. 1503(d). 

11 "' Treas. Reg. sec. 1.1503(d)-6(d). 

118" See Treas. Reg. sec. 1.1503(d)-6(e)(l). 

1181 Section 965(b )( 4 ). The plan was required to provide for the reim·estment of the repatriated dividends 

in the United States, including as a source for the funding of worker hiring and training. infrastmcture, research and 

development capital investments, and the financial stabilization of the corporation for the purposes of job retention 

or creation. 
356 

No foreign tax credit (or deduction) was allowed for foreign taxes attributable to the 

deductible portion of any dividend. 1182 For this purpose, the taxpayer was permitted to 

specifically identify which dividends were treated as carrying the deduction and which dividends 

were not. In other words, the taxpayer was allowed to choose which of its dividends were 

treated as meeting the base-period repatriation level (and thus carry foreign tax credits, to the 

extent otherwise allowable), and which of its dividends were treated as part of the excess eligible 

for the deduction (and thus subject to proportional disallowance of any associated foreign tax 

credits). 1183 Deductions were disallowed for expenses that were directly allocable to the 

deductible portion of any dividend. 1184 

Domestic international sales corporations 

A domestic international sales corporations ("DISC") is a domestic corporation that 

satisfies the following conditions: 95 percent of its gross receipts must be qualified export 

receipts; 95 percent of the sum of the adjusted bases of all its assets must be attributable to the 

sum of the adjusted bases of qualified export assets; the corporation must have no more than one 

class of stock; the par or stated value of the outstanding stock must be at least $2,500 on each 

day of the taxable year; and an election must be in effect to be taxed as a DISC. 1185 In general, a 

DISC is not subject to corporate-level tax and offers limited deferral of tax liability to its 

shareholders. 1186 DISC income attributable to a maximum of $10 million annually of qualified 

export receipts is generally exempt from income tax at both the corporate and shareholder level. 

Shareholders must pay interest to account for the benefit of deferring the tax liability on 

undistributed DISC income related to this $10 million maximum annual amount. 1187 Such 

entities are also referred to as interest charge DISCs, or IC-DISCs. Shareholders of a DISC are 

deemed to receive a dividend out of current earnings and profits from qualified export receipts in 

11 " Sec. 965(d)(l). 

1183 Accordingly. taxpayers generally were expected to pay regular dividends out of high-taxed CFC 

earnings (thereby generating deemed-paid credits available to offset foreign-source income) and section 965 

dividends out of low-taxed CFC earnings (thereby availing themselves of the 85-perccnt deduction). 

1184 Sec. 965(d)(2). 

118' Sees. 992(a) and (b). !fa corporation fails to satis(y eitherorbothofthc 95-percent tests. it is deemed 

to satis~v such tests if it makes a pro rata distribulion of its gross receipts which are not qualified eX'J'Or! receipts and 

the fair market value of its assets wlrich arc not qualified exp01t assets. Sec. 992( c). 

11 " Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98-369), DISCs were eligible for more generous tm' 

benefits that were elinriuated in favor of the since-repealed foreign sales corporation regime ("FSC"). An overview 

of the history of the DISCs and FSCs regimes is provided in Joseph lsenberg!L Vol. 3 U.S. Taxation of Foreign 

Persons and f(Jreign Income. Para. 81. (Fourth Ed. 2016). 

1187 The rate is the averdge of one-year constant maturity Treasury yields. The deferral benefit is the 

excess of the amount of tax for which the shareholder would be liable if deferred DISC income were included as 

ordinary income over the actual tax liability of such shareholder. Sec. 995(f). 
357 

excess of$10 million. 1188 Gain on the sale of DISC stock is treated as a dividend to the extent of 

accumulated DISC income. 1189 The shareholders of a corporation which is not a DISC, but was 

a DISC in a previous taxable year, and which has previously taxed income or accumulated DISC 

income, are also required to pay interest on the deferral benefit, and gain on the sale or exchange 

of stock in such corporation is treated as a dividend. 

1 " 8 The amount of the deemed distribution is the sum of several items. including qualified e"-port receipts 

incxcessof$10 million. See sec. 955(b). 

1189 Sec. 995(c). 
358 

PART I- OUTBOUND TRANSACTIONS 

1. Deduction for foreign-source portion of dividends received by domestic corporations 

from specified 10-percent owned foreign corporations (sec. 14101 of the bill and new sec. 

245A of the Code) 

Reasons for Change 

In moving the U.S. international tax system to a territorial system, a key component is the 

treatment of foreign income earned by U.S. corporations through their foreign affiliates. Under 

current law, foreign income earned by a foreign subsidiary of a US. corporation is not subject to 

U.S. tax until it is distributed to the US. parent corporation as a dividend. Such dividends, minus 

credits for foreign taxes paid, are considered taxable income for the US. parent corporation. In a 

territorial system, income earned outside the United States is not taxed in the United States. In 

this provision, this is accomplished by means of a deduction for the US. portion of dividends 

received by US. corporations from foreign affiliates. 

The provision would allow U.S. companies to compete on a more level playing 

field against foreign multinationals when selling products and services abroad by 

eliminating an additional level of tax. 

The provision would eliminate the "lock-out" effect under current law, which means US. 

businesses avoid bringing their foreign earnings back into the United States to avoid the US. 

residual tax on those earnings. 

Explanation of Provision 

In general 

The provision allows an exemption for certain foreign income. This exemption is 

provided for by means of a 100-percent deduction for the foreign-source portion of dividends 

received from specified 10-percent owned foreign corporations by domestic corporations that are 

United States shareholders of those foreign corporations within the meaning of section 951 (b) 1190 (referred to here as "DRD"). 1191 

1190 Under section 95l(b ), a domestic corporation is a United States shareholder of a foreign corporation if 

it owns, within !he meaning of section 958(a). or is considered as owning by applying the mles of section 958(b), 

10-percent or more of the voting stock of the foreign corporation. 

1191 The Committee intends that in the case of a domestic corporation that is a partner in a domestic 

partoership that is a United States shareholder of a specified foreign corporation, the DRD applies to such partner's 

distributi,·e share of a dividend received by the partnership if the partner would be a United States shareholder of 

such foreign corporation detennincd by applying the mles of section 958(a) and (b) as if the domestic partnership 

were a foreign partnership. 
359 

A specified 10-percent owned foreign corporation is any foreign corporation (other than a 

PFIC that is not also a CFC) with respect to which any domestic corporation is a U.S. 

shareholder. 1192 

Foreign-source portion of a dividend 

The DRD is available only for the foreign-source portion of dividends received by a 

domestic corporation from specified 10-percent owned foreign corporations. The foreign-source 

portion of any dividend is the amount that bears the same ratio to the dividend as the 

undistributed foreign earnings bears to the total undistributed earnings of the foreign corporation. 

Undistributed earnings are the amount of the earnings and profits of a specified 1 0-percent 

owned foreign corporation1193 as of the close of the taxable year of the specified 10-percent 

owned foreign corporation in which the dividend is distributed and not reduced by dividends 1194 

distributed during that taxable year. Undistributed foreign earnings are the portion of the 

undistributed earnings attributable to neither income described in section 245(a)(5)(A) nor 

section 245(a)(5)(B), without regard to section 245(a)(l2). 

Hybrid Dividends 

The DRD is not available for any dividend received by a US. shareholder from a 

controlled foreign corporation if the dividend is a hybrid dividend. A hybrid dividend is an 

amount received from a controlled foreign corporation for which a deduction would be allowed 

under this provision and for which the specified l 0-percent owned foreign corporation received a 

deduction (or other tax benefit) from taxes imposed by a foreign country. 

If a controlled foreign corporation with respect to which a domestic corporation is a US. 

shareholder receives a hybrid dividend from any other controlled foreign corporation with 

respect to which the domestic corporation is also aU S. shareholder, then the hybrid dividend is 

treated for purposes of section 95l(a)(l)(A) as subpart F income of the recipient controlled 

foreign corporation for the taxable year of the controlled foreign corporation in which the 

dividends was received and the US. shareholder includes in gross income an amount equal to the 

shareholder's pro rata share of the subpart F income, determined in the same manner as section 

95l(a)(2) 

Foreign tax credit disallowance 

No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to 

a dividend that qualifies for the DRD. 

For purposes of computing the section 904(a) foreign tax credit limitation, a domestic 

corporation that is a US. shareholder of a specified I 0-percent owned foreign corporation must 

" 92 Sees. 1297. 1298. 

1193 Computed iu accordance with sees. 964(a) and 986. 

1194 Pursmnt to section 959( d), a distribution of pre,iously taxed income does not constitute a dividend 

even if it reduces earnings and profits. 
360 

compute its foreign-source taxable income by disregarding the foreign-source portion of any 

dividend received from that foreign corporation for which the DRD is taken, and any deductions 

properly allocable or apportioned to that foreign-source portion or the stock with respect to 

which it is paid. 

Holding period requirement 

A domestic corporation is not permitted a DRD in respect of any dividend on any share 

of stock that is held by the domestic corporation for 365 days or less during the 731-day period 

beginning on the date that is 365 days before the date on which the share becomes ex-dividend 

with respect to the dividend. For this purpose, the holding period requirement is treated as met 

only if the specified 10-percent owned foreign corporation is a specified 10-percent owned 

foreign corporation at all times during the period and the taxpayer is a U.S. shareholder with 

respect to such specified 10-percent owned foreign corporation at all times during the period. 

Effective Date 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders in which or with which such 

taxable years of foreign corporations end. 

2. Special rules relating to sales or transfers involving specified 10-percent owned foreign 

corporations (sec. 14102 of the bill, and sees. 367(a)(3)(C), 961, 1248 and new sec. 91 of the 

Code) 

Reasons for Change 

A participation exemption system could provide double tax benefits in certain 

circumstances. In particular, a distribution from a foreign subsidiary that is eligible for a DRD 

would reduce the value of the foreign subsidiary, reducing any built-in gain or increasing any 

built-in loss in the shareholder's stock of the subsidiary. Reducing gain in this manner is 

consistent with the application of section 1248(a) (or section 964(e)) to recharacterize gain as a 

dividend for which a DRD may be allowed. Increasing loss in this manner, however, creates a 

double U.S. tax benefit for receiving a tax-free distribution from a foreign subsidiary. 

In addition, taxpayers may arbitrage the application of the participation exemption system 

to foreign subsidiaries but not foreign branches. Specifically, a taxpayer may deduct losses from 

a foreign branch operation against U.S. taxable income and then incorporate that branch once it 

becomes profitable. Present law provides an array of loss recapture rules to address such a fact 

pattern, 1195 but those rules generally rely on the worldwide system of taxation to recapture losses 

in excess of built-in gains by taxing future earnings when repatriated. Instead of only recapturing 

such losses upon a later repatriation of earnings, the Committee wishes to recapture the U.S. tax 

benefits of these losses immediately upon the incorporation of a foreign branch that has 

1195 See. e.g .. sees. 367(a)(3)(C), 904([)(3), l503(d). 
361 

generated losses. This is to avoid the negative tax consequences of the repatriation of foreign 

earnings, which is one of the reasons for moving to a participation exemption system of taxation. 

Explanation of Provision 

Sales by United States persons of stock 

In the case of the sale or exchange by a domestic corporation of stock in a foreign 

corporation held for one year or more, any amount received by the domestic corporation which is 

treated as a dividend for purposes of section 1248, is treated as a dividend for purposes of 

applying the provision 

Reduction in basis of certain foreign stock 

Solely for the purpose of determining a loss, a domestic corporate shareholder's adjusted 

basis in the stock of a specified 10-percent owned foreign corporation (as defined in this 

provision) is reduced by an amount equal to the portion of any dividend received with respect to 

such stock from such foreign corporation that was not taxed by reason of a dividends received 

deduction allowable under section 245A in any taxable year of such domestic corporation. This 

rule applies in coordination with section 1059, such that any reduction in basis required pursuant 

to this provision will be disregarded, to the extent the basis in the specified I 0-percent owned 

foreign corporation's stock has already been reduced pursuant to section 1059. 

Sale by a CFC of a lower-tier CFC 

If for any taxable year of a CFC beginning after December 31, 2017, an amount is treated 

as a dividend under section 964(e)(l) because of a sale or exchange by the CFC of stock in 

another foreign corporation held for a year or more, then: (i) the foreign-source portion of the 

dividend is treated as subpart F income of the selling CFC for purposes of section 95l(a)(1)(A), 

(ii) a United States shareholder with respect to the selling CFC includes in gross income for the 

taxable year of the shareholder with or within the taxable year of the CFC ends, an amount equal 

to the shareholder's pro rata share (determined in the same manner as under section 95l(a)(2)) of 

the amount treated as subpart F income under (i), and (iii) the deduction under section 245A(a) is 

allowable to the United States shareholder with respect to the subpart F income included in gross 

income under (ii) in the same manner as if the subpart F income were a dividend received by the 

shareholder from the selling CFC. 

In the case of a sale or exchange by a CFC of stock in another corporation in a taxable 

year of the selling CFC beginning after December 31, 2017, to which this provision applies if 

gain were recognized, the earnings and profits of the selling controlled foreign corporation is not 

reduced by any loss from the sale or exchange. 

Inclusion of transferred loss amount in certain assets transfers 

Under the provision, if a domestic corporation transfers substantially all of the assets of a 

foreign branch (within the meaning of section 367(a)(3)(C)) to a specified 10-percent owned 

foreign corporation with respect to which it is a U.S. shareholder after the transfer, the domestic 
362 

corporation includes in gross income an amount equal to the transferred loss amount, subject to 

certain limitations. 

The transferred loss amount is the excess (if any) of: (l) losses incurred by the foreign 

branch after December 31, 2017, and before the transfer, for which a deduction was allowed to 

the domestic corporation, over (2) the sum of certain taxable income earned by the foreign 

branch and gain recognized by reason of an overall foreign loss recapture arising out of 

disposition of assets on account of the underlying transfer. For the purposes of (2), only taxable 

income of the foreign branch in taxable years after the loss is incurred through the close of the 

taxable year of the transfer, is included. The transferred loss amount is reduced by the amount of 

gain recognized by the taxpayer (other than gain recognized by reason of an overall foreign loss 

recapture) on account of the transfer. 

The amount of loss included in the gross income of the taxpayer under the proposed rule 

above for any taxable year cannot exceed the amount allowed as a deduction under new section 

245A for the taxable year (taking into account dividends received from all specified 10-percent 

owned foreign corporations with respect to which the taxpayer is a U.S. shareholder). Any 

amount not included in gross income for a taxable year because of this proposed rule is included 

in gross income in the succeeding taxable year. 

Amounts included in gross income by reason of the provision are treated as derived from sources 

within the United States. Consistent with regulations or guidance that the Secretary of the 

Treasury may prescribe, proper adjustments are made in the adjusted basis of the taxpayer's 

stock in the specified 1 0-percent owned foreign corporation to which the transfer is made, and in 

the transferee's adjusted basis in the property transferred, to reflect amounts included in gross 

income under this provision. 

Repeal of active trade or business exception 

Section 367 is amended to provide that in connection with any exchange described in section 

332,351,354,356, or 361, if a U.S. person transfers property used in the active conduct of a 

trade or business to a foreign corporation, such foreign corporation shall be not, for purposes of 

determining the extent to which gain shall be recognized on such transfer, be considered to be a 

corporation. 

Effective Date 

The provision relating to reduction of basis in certain foreign stock for the purposes of 

determining a loss is effective for dividends received in taxable years beginning after December 

31,2017. 

The provision relating to transfer ofloss amounts from foreign branches to certain 

foreign corporations is effective for transfers after December 31, 2017. 

3. Treatment of deferred foreign income upon transition to participation exemption system 

of taxation (sec. 14103 of the bill and sees. 78, 172,904,907, and 965 of the Code) 

Reasons for Change 
363 

In transitioning to a new participation exemption system, the Committee seeks to enhance 

both the global competitiveness of U.S. businesses and to encourage investment in the United 

States. The Committee is aware that many U.S-parented companies have accumulated 

significant untaxed and undistributed foreign earnings as a result. The Committee is also aware 

that such companies are eligible for a I 00-percent dividend-received deduction with respect to 

any distributions made under the new participation exemption system. To ensure that all 

distributions from foreign subsidiaries are treated in the same manner under the participation 

exemption system, the Committee believes that it is appropriate to tax such earnings as if they 

had been repatriated under present law, but at a reduced rate. 

The Committee believes the tax on accumulated foreign earnings should apply without 

requiring an actual distribution of earnings, and further believes that the tax rate should take into 

account the liquidity of the accumulated earnings. Accordingly, the provision establishes a 

bifurcated rate, i.e., 10 percent for earnings held in liquid form and 5 percent for accumulated 

foreign earnings that have been reinvested in the foreign subsidiary's business. Finally, the 

Committee has provided procedures for payment and collection of the transition tax that mitigate 

the burden on taxpayers. 

In response to reports that taxpayers are engaging in tax minimization strategies to 

artificially reduce their tax liability under this section, the Committee provides an extended 

limitations period or assessment of tax. The Committee intends to provide the Internal Revenue 

Service with sufficient time to audit tax minimization transactions and ensure the accuracy of 

amounts (such as accumulated earnings and profits) reported pursuant to this section. 

Explanation of Provision 

In general 

The provision generally requires that, for the last taxable year beginning before January 

1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro 

rata share of the accumulated post-1986 deferred foreign income of the corporation. For 

purposes of this provision, a specified foreign corporation is any foreign corporation that has at 

least one U.S. shareholder. It excludes PFICs that are not also CFCs. A portion of that pro rata 

share of foreign earnings is deductible; the amount of the deductible portion depends upon 

whether the deferred earnings are held in cash or other assets. The deduction results in a reduced 

rate of tax with respect to income from the required inclusion of pre-effective date earnings. A 

corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the 

taxable portion of the included income. The separate foreign tax credit limitation mles of present 

law section 904 apply, with coordinating mles. The increased tax liability generally may be paid 

over an eight-year period. Special mles are provided for S corporations and real estate 

investment tmsts ("REITs"). 

Subpart F 

The mechanism for requiring an inclusion of pre-effective-date foreign earnings is 

subpart F. The provision provides that in the last taxable year of a deferred foreign income 

corporation that begins before January 1, 2018, which is that foreign corporation's last taxable 
364 

year before the transition to the new corporate tax regime elsewhere in the bill goes into effect, 

the subpart F income of the foreign corporation is increased by the greater of the accumulated 

post-1986 deferred foreign income of the corporation, determined as of November 9, 2017, or as 

of December 31, 2017 ("measurement date"). The amount so determined is includible in gross 

income under section 951 (hereinafter, the section 951 inclusion). 

The transition rule applies to all U.S. shareholders 1196 of a deferred foreign income 

corporation. "Deferred foreign income corporation" is any specified foreign corporation with 

accumulated post-1986 deferred income that is greater than zero. A specified foreign 

corporation is defined as any CFC as well as any section 902 corporation, as defined in section 

909(d)(5) prior to date of enactment of this bill, i.e., any foreign corporation in which a U.S. 

person owns 10 percent of the voting stock. Consistent with the general operation of subpart F, 

each U.S. shareholder of a deferred foreign income corporation must include in income the 

shareholder's pro rata share of the foreign corporation's subpart F income attributable to its 

section 951 inclusion. 1197 

Accumulated post-1986 deferred foreign income 

A specified foreign corporation's accumulated post-1986 deferred foreign income on the 

measurement date is based on all post-1986 foreign earnings and profits ("E&P") that are not 

previously taxed and are neither (I) attributable to income that is effectively connected with the 

conduct of a trade or business in the United States and subject to U.S. income tax nor (2) subpart 

F income (determined without regard to the section 951 inclusion) included in the gross income 

of a U.S. shareholder. The potential pool of includible earnings includes all undistributed 

foreign earnings accumulated in taxable years beginning after 1986, computed in accordance 

with sections 964(a) and 986, taking into account only periods when the foreign corporation was 

a specified corporation. The pool ofpost-1986 foreign earnings and profits is not reduced by 

distributions during the taxable year to which section 965 applies. 

Reductions of amounts included in income of U.S. shareholder of foreign 

corporations with deficits in E&P 

The pool of post-1986 earnings and profits taken into consideration in computing the 

section 951 inclusion required of a U.S. shareholder under this transition rule generally is 

reduced by foreign earnings and profits deficits that are properly allocated to that person. The 

U.S. shareholder must determine its aggregate E&P deficit based on its interest in each specified 

foreign corporation with a deficit in post-1986 foreign earnings and profits as of the 

measurement date ("E&P deficit foreign corporation"). 

The U.S. shareholder's aggregate E&P deficit is then allocated among the deferred 

foreign income corporations in the same ratio as the U.S. shareholder's pro rata share of post1196 Sec. 951(b), which defines United Stales shareholder as any U.S. person that owns 10 percent or more 

of combined voting classes of stock of a foreign corporation. 

1197 For purposes oftaking into account its subpart F income under this mlc, a noncontrollcd section 902 

corporation is treated as a CFC. 
365 

1986 deferred income in that corporation bears to the US. shareholder's pro rata share of 

accumulated post-1986 deferred foreign income from all deferred foreign income corporations 

with respect to which the shareholder is a U.S. shareholder. For the portion of aggregate E&P 

deficits that include qualified deficits, the portion of the deficit that is attributable to a qualified 

deficit, and the qualified activity, must be identified. The provision does not permit intragroup 

netting among U.S. shareholders within an affiliated group. 

In taxable years beginning after 2017, amounts by which the section 951 inclusion was 

reduced by aggregate E&P deficits are considered as amounts included in the gross income of 

the U.S. shareholder. The shareholder's pro rata share of the E&P of an E&P deficit foreign 

corporation that used qualified deficits to reduce its section 951 inclusion is increased by the 

amount of such deficit and attributed to the same activity to which the income was attributed. 

Deductions from section 951 inclusion 

To detern1ine the taxable portion of the section 951 inclusion, the U.S. shareholders with 

accumulated deferred foreign income may deduct a portion of the section 951 inclusion in an 

amount that depends upon the proportion of aggregate earnings and profits attributable to cash 

assets rather than noncash assets, in the nature of a partial dividends-received deduction. A U.S. 

shareholder may deduct 71.4 percent of the aggregate earnings and profits attributable to cash 

assets, and 85.7 percent of the remainder of the aggregate earnings and profits in the section 951 

inclusion. 1198 

A U.S. shareholder may elect, no later than with a timely filed return for the taxable year, 

not to apply its net operating loss deduction to the deemed repatriation. If so, neither the section 

951 inclusion nor any related deemed paid foreign tax credits may be taken into account in 

computing the net operating loss deduction for that year. 

Cash position 

The aggregate earnings and profits attributable to cash assets for a U.S. shareholder is the 

greater of the pro rata share of the cash position of all specified foreign corporations as of the last 

day of the last taxable year beginning before January 1, 2018, or the average of the cash position 

determined on the last day of each of the two taxable years ending immediately before 

November 9, 2017. For purposes of this computation, the cash position of certain non-corporate 

entities that would be treated as specified foreign corporations if they were foreign corporations 

is also included. The cash position of an entity consists of all cash, net accounts receivables, and 

the fair market value of similarly liquid assets, specifically including personal property that is 

actively traded on an established financial market (other than stock in the specified foreign 

corporation) government securities, certificates of deposit, commercial paper, and short-term 

obligations. 

1198 The Conunittee intends that the deduction be treated as exempting the deducted income from 

tax. Thus, for example, the deducted income, if earned by a partnership. could giye rise to an increase in a partner's 

basis under section 705(a)(l)(B). 
366 

To avoid double counting of cash assets, a U.S. shareholder may disregard accounts 

receivable and short-term obligations of a specified foreign corporation if that shareholder can 

establish that the amounts were already taken into account by that shareholder with respect to 

another specified foreign corporation. 

The Secretary may identify other assets that are economically equivalent to the 

enumerated assets that are treated as cash. The provision also authorizes the Secretary to 

disregard transactions that are determined to have the principal purpose of reducing the 

aggregate foreign cash position. 

Foreign tax credit 

A portion of foreign income tax that is deemed paid or accrued with respect to the section 

951 inclusion is not creditable or deductible against the Federal income tax attributable to the 

inclusion. The disallowed portion offoreign tax credits is 71.4 percent of foreign taxes paid 

attributable to the portion of the section 965 inclusion attributable to the aggregate cash position 

plus, 85.7 percent offoreign taxes paid attributable to the remaining portion of the section 965 

inclusion. 1199 The provision coordinates the disallowance of foreign tax credits with the 

requirement 1200 that a domestic corporate shareholder is deemed to receive a dividend in an 

amount equal to foreign taxes it is deemed to have paid and for which it claimed a credit. 

Limitations on assessment extended 

The provision also allows an exception to the otherwise applicable limitations period for 

assessment of tax to ensure that the period for assessment of underpayments in tax related to the 

treatment of the pre-effective date foreign earnings does not expire prior to six years from the 

date on which the return initially reflecting the section 951 inclusion was filed. 

Installment payments 

A US. shareholder may elect to pay the net tax liability resulting from the section 951 

inclusion in eight installments. If installment payment is elected, the payments for each of the 

first five years equals 8 percent of the net tax liability. The amount of the sixth installment is 15 

percent of the net tax liability, increasing to 20 percent for the seventh installment and the 

remaining balance of25 percent in the eighth year. 

The net tax liability that may be paid in installments is the excess of the US. 

shareholder's net income tax for the taxable year in which the section 951 inclusion occurs over 

the taxpayer's net income tax for that year determined without regard to the section 951 

inclusion. Net income tax means net income tax as defined for purposes of the general business 

credit, but reduced by the amount of that credit. 

1199 Other foreign tax credits used by a tax-payer against tax liability resulting from the deemed inclusion 

apply in full. 

010 Sec. 78. 
367 

An election to pay tax in installments must be made by the due date for the tax return for 

the taxable year in which the section 951 inclusion is included in income. The Treasury 

Secretary has authority to prescribe the manner of making the election. The first installment 

must be paid on the due date (determined without regard to extensions) for the tax return for the 

taxable year of the income inclusion. Succeeding installments must be paid annually no later 

than the due dates (without extensions) for the income tax return of each succeeding year. If a 

deficiency is later determined with respect to the net tax liability, the additional tax due may be 

prorated among all installment payments in most circumstances. The portions of the deficiency 

prorated to an installment that was due before the deficiency was assessed must be paid upon 

notice and demand. The portion prorated to any remaining installment is payable with the timely 

payment of that installment payment, unless the deficiency is attributable to negligence, 

intentional disregard of rules or regulations, or fraud with intent to evade tax, in which case the 

entire deficiency is payable upon notice and demand. 

The timely payment of an installment does not incur interest. If a deficiency is 

determined that is attributable to an understatement of the net tax liability due under this 

provision, the deficiency is payable with underpayment interest for the period beginning on the 

date on which the net tax liability would have been due, without regard to an election to pay in 

installments, and ending with the payment of the deficiency. Furthermore, any amount of 

det1ciency prorated to a remaining installment also bears interest on the deficiency, but not on 

the original installment amount. 

The provision also includes an acceleration rule. If (1) there is a failure to pay timely any 

required installment, (2)there is a liquidation or sale of substantially all of the U.S. shareholder's 

assets (including in a bankruptcy case), (3) the U.S. shareholder ceases business, or (4) another 

similar circumstance arises, the unpaid portion of all remaining installments is due on the date of 

the event (or, in a bankruptcy proceeding or similar case, the day before the petition is filed). 

Special rule for S corporations 

A special rule permits deferral of the transition net tax liability for shareholders of a U.S. 

shareholder that is a flow-through entity known as an S corporation. 1201 The S corporation is 

required to report on its income tax return the amount includible in gross income by reason of 

this provision, as well as the amount of deduction that would be allowable, and provide a copy of 

such information to its shareholders. Any shareholder of the S corporation may elect to defer 

the net tax liability until the shareholder's taxable year in which a triggering event occurs. The 

election to defer the tax is due not later than the due date for the return of the S corporation for 

its last taxable year that begins before January 1, 2018. 

Three types of events may trigger an end to deferral of the net tax liability. The first type 

of triggering event is a change in the status of the corporation as an S corporation. The second 

category includes liquidation, sale of substantially all corporate assets, termination of the 

company or end of business, or similar event, including reorganization in bankruptcy. The third 

12m Section 1361 defines an S corporation as a domestic small business corporation tl!ilt has an election in 

effect for status as an S corporation. with no more than 100 shareholders, none of whom are nonresident aliens. and 

all of whom arc individuals, estates. tmsts or certain exempt organizations. 
368 

type of triggering event is a transfer of shares of stock in the S corporation by the electing 

taxpayer, whether by sale, death or otherwise, unless the transferee of the stock agrees with the 

Secretary to be liable for net tax liability in the same manner as the transferor. .Partial transfers 

trigger the end of deferral only with respect to the portion of tax properly allocable to the portion 

of stock sold. 

If a shareholder of an S corporation has elected deferral under the special rule for S 

corporation shareholders and a triggering event occurs, the S corporation and the electing 

shareholder are jointly and severally liable for any net tax liability and related interest or 

penalties. The period within which the IRS may collect such liability does not begin before the 

date of an event that triggers the end of the deferraL If an election to defer payment of the net 

tax liability is in effect for a shareholder, that shareholder must report the amount of the deferred 

net tax liability on each income tax return due during the period that the election is in effect 

Failure to include that infonnation with each income tax return will result in a penalty equal to 

five-percent of the amount that should have been reported. 

After a triggering event occurs, a shareholder in the S corporation may elect to pay the 

net tax liability in eight equal installments, subject to rules similar to those generally applicable 

absent deferraL Whether or not a shareholder may elect to pay in installments depends upon the 

type of event that triggered the end of deferraL If the triggering event is liquidation, sale of 

substantially all corporate assets, termination of the company or end of business, or similar 

event, the installment payment election is generally unavailable without the consent of the 

Secretary; instead, the entire net tax liability is due upon notice and demand. The installment 

election is due with the timely return for the year in which the triggering event occurs. The first 

installment payment is required by the due date of the same return, determined without regard to 

extensions of time to file. 

Special rules for REITs 

To alleviate burden of compliance with this section by REITs, special rules are provided 

if a U.S. shareholder is a REIT First, although it must determine its pro rata share of the 

increase in subpart F income in accordance with the rules described above, the REIT is not 

required to take into account the section 951 inclusion for purposes of determining the REIT' s 

amount of qualified REIT gross income. 1202 The section 951 inclusion is, however, taken into 

account for purposes of determining the income potentially required to be included in taxable 

income under section 857(b ). Unlike a regular subchapter C corporation, a REIT is able to 

deduct the portion of its income that is distributed to its shareholders as a dividend or qualifying 

To qualify as a REIT. an entity must meet certain income requirements. A REIT is restricted to 

earning certain types of generally passive income. Among other requirements, at least 75 percent of the gross 

income of a REIT in each taxable year must consist of real estate-related income. Sees. 856. In addition. a REIT is 

required to distribute at least 90 percent of RE!T income (other than net capital gain) annually. Sec. 857. Even if a 

REIT meets the 90-pcrcent income distribution requirement for REIT qualification, more stringent distribution 

requirements must be met in order to avoid an excise tax nuder section .(981. 
369 

liquidating distribution each year. 1203 The distributed income of the REIT is not taxed at the 

entity level; instead, it is taxed once, at the investor level. As a result, a required inclusion under 

this section may trigger a requirement that the REIT distribute an amount equal to 90 percent of 

that inclusion despite the fact that it received no distribution from the deferred foreign income 

corporation. 

To avoid requiring that any distribution requirement be satisfied in one year, an election 

to defer the section 951 inclusion is pennitted. Under a timely election, a REIT may instead take 

the amounts into income over a period of eight years. lt must include 8 percent in each of the 

five years beginning with the initial year in which the section 951 inclusion is determined, 15 

percent in the sixth year, 20 percent in the seventh year and 25 percent in the eighth year. In 

each of those years, it may claim a partial dividends-received deduction in the applicable 

percentages in proportion to the amount included in each of the eight years. Neither the REIT 

nor the recipient of the distribution may elect to use the installment payment. 

In the event that a REIT liquidates, ceases to operate its business, or distributes 

substantially all its assets (or any other similar event occurs), any portion of the required 

inclusion not yet taken into income is accelerated and required to be included as gross income as 

of the day before the event. 

Recapture from expatriated entities 

The provision denies any deduction claimed with respect to the mandatory subpart F 

inclusion and imposes a 35-percent tax on the entire inclusion if a U.S. shareholder becomes an 

expatriated entity within the meaning of section 7874(a)(2) at any point within the ten-year 

period following enactment of the Tax Cuts and Jobs Act. An entity that becomes a surrogate 

foreign corporation that is treated as a domestic corporation under section 7874(b) is not within 

the scope of this recapture provision. Although the amount due is computed by reference to the 

year in which the deemed subpart F income was originally reported, the additional tax arises and 

is assessed for the taxable year in which the U.S. shareholder becomes an expatriated entity. No 

foreign tax credits are permitted with respect to the additional tax due as a result of the recapture 

rule. The Secretary is authorized to prescribe rules necessary to carry out the provision. 

Regulatory authoritv 

A specific grant of regulatory authority to carry out the intent of this provision is 

included. For example, the Secretary may identify instances in which it is appropriate to grant 

relief from potential double-counting of earnings and profits, which may occur due to different 

measurement dates applicable to specified foreign corporations within an affiliated group, or the 

timing of intragroup distributions. It also specifies that the Secretary shall prescribe rules or 

guidance in order to deter tax avoidance through use of entity classification elections and 

accounting method changes, among other possible strategies. 

1203 Liquidating distributions are covered to the exient of earnings and prouts. and arc defined to include 

redemptions of stock that are treated hy shareholders as a sale of stock under section 302. Sees. 857(b)(2)(B). 561. 

and 562(b). 
370 

Effective Date 

The provision is effective for the last taxable year of a foreign corporation that begins 

before January I, 2018, and with respect to U.S. shareholders, for the taxable years in which or 

with which such taxable years of the foreign corporations end. 

4. Current year inclusion of global intangible low-taxed income by United States 

shareholders (sec. 14201 of the bill and new sec. 951A of the Code) 

Reasons for Change 

The Committee recognizes that, without any base protection measures, the participation 

exemption system established by the bill creates an incentive for U.S. corporations to allocate 

income that would otherwise be subject to the full U.S. corporate tax rate to foreign affiliates 

operating in low- or zero-tax jurisdictions, where the income could potentially be distributed 

back to the U.S. corporation with no U.S. tax imposed. As a result, U.S. corporations may have 

an incentive serve the U.S. market and foreign markets through their foreign affiliates rather than 

U.S. affiliates. To address this possible source of erosion of the U.S. tax base, and the potential 

migration of economic activity from the United States to other countries, the provision subjects 

certain income earned by CFCs to current U.S. tax. 1204 Subjecting that income to current U.S. 

tax reduces the tax benefit of allocating that income to low- or zero-tax jurisdictions. However, 

the Committee recognizes that taxing that income at the full U.S. corporate tax rate may hurt the 

competitive position of U.S. corporations relative to their foreign counterparts, and has decided 

to tax that income at a reduced rate (with a portion of foreign tax credits available to offset U.S. 

tax).12os 

The Committee believes the type of income that is most readily allocated to low- or zerotax jurisdictions is income derived from intangible property, or intangible income. Intangible 

income is mobile and constitutes a large portion of the foreign-source income earned by U.S. 

corporations, and significant erosion of the U.S. tax base could result if no base protection 

measure were adopted in a move to a participation exemption system. At the same time, if 

intangible income is located in a jurisdiction with a sufficiently high tax rate, the Committee 

believes there is limited base erosion concern. Consequently, the Committee believes that taxing 

global intangible low-taxed income ("GIL TI") on a current basis addresses the primary source of 

base erosion arising from a move toward a participation exemption system. 

The Committee views the most difficult problem with identifying GIL TI as identifying 

intangible income, and believes that calculating intangible income based on facts and 

circumstances may be both complicated and administratively difficult. As a result, the provision 

adopts a formulaic approach to calculating intangible income to make the determination simpler 

1204 Sec. 14401 of the bilL which establishes a base erosion and anti-abuse tax (new sec. 59 A) that is based 

on a taxpayer's deductible payments to foreign related parties. addresses base erosion that results from U.S. and 

foreign companies serving the U.S. market through foreign affiliates located in low- or zero-tax jurisdictions. rather 

than through U.S. affiliates. 

1205 The reduced rate of tax is achieved in sec. 14202 of the bill and new sec. 250. 
371 

and more administrable. The formula is based on the premise that directly calculating tangible 

income is simpler than calculating intangible income. 

The provision approximates a U.S. corporation's tangible income earned through its 

CFCs as a 10-percent return on the U.S. corporation's aggregate pro rata share of the adjusted 

basis in tangible depreciable property across each CFC with respect to which it is a U.S. 

shareholder. Intangible income is a residual amount generally determined by subtracting 

tangible income from the total amount of certain income earned by each CFC. The Committee 

believes that tangible property, and the associated tangible income, are relatively immobile and 

an indicator of the extent to which a CFC has active business operations and presence in any 

particular jurisdiction. Therefore, the provision exempts tangible income from U.S. tax. 

However, it generally subjects the corporation's GILTI to current U.S. tax at a reduced rate, with 

80 percent of foreign tax credits available to offset U.S. tax. 

GlLTI is calculated at the U.S. shareholder level after aggregating both certain income 

and adjusted basis in tangible depreciable property on a pro rata basis across each CFC with 

respect to which it is a U.S. shareholder. GILTI is treated as subpart F income, and the aggregate 

nature of the GIL TI calculation is a departure from present law, under which subpart F income is 

calculated at the CFC level. The Committee believes that calculating GIL TI on an aggregate 

basis, instead of on a CFC-by-CFC basis, reflects the interconnected nature of a U.S. 

corporation's global operations and is a more accurate way of determining a U.S. corporation's 

global intangible income. 

The provision does not permit full foreign tax credits with respect to GILTI. The 

Committee believes that permitting a full foreign tax credit with respect to GIL TI would make 

taxpayers indifferent between paying U.S. tax and foreign tax, and may reduce the incentive for 

taxpayers to minimize the foreign tax they pay or encourage foreign countries to adopt "soak-up" 

taxes knowing that a taxpayer's combined U.S. and foreign tax liability may remain unchanged 

with the adoption of the soak-up tax if foreign tax credits were allowed in full. The Committee 

believes that allowing for partial foreign tax credits with respect to GIL Tl will result in an 

increase in the amount of US. tax revenue collected and decrease the amount offorei1:,'11 tax 

revenue collected (relative to the case where full foreign tax credits are permitted with respect to 

GILTI). 

The Committee believes that certain items of income earned by CFCs should be excluded 

from the GIL TI, either because they should be exempt from U.S. tax-as they are generally not 

the type of income that is the source of base erosion concerns-or are already taxed currently by 

the United States. Items of income excluded from GIL TI because they are exempt from U.S. tax 

under the bill include foreign oil and gas extraction income (which is generally immobile) and 

income subject to high levels of foreign tax. Items of income excluded from GILTI because they 

are taxed currently by the United States include ECI and subpart F income earned by CFCs. 

CFC look-through payments are also excluded from GIL TI to help implement the dividend 

exemption system established by the bill. 

Explanation of Provision 

In general 
372 

Under the provision, a U.S. shareholder of any CFC must include in gross income for a 

taxable year its global intangible low-taxed income ("GIL TI") in a manner generally similar to 

inclusions of subpart F income. GIL TI means, with respect to any U.S. shareholder for the 

shareholder's taxable year, the excess (if any) of the shareholder's net CFC tested income over 

the shareholder's net deemed tangible income return. The shareholder's net deemed tangible 

income return is an amount equal to 10 percent of the aggregate of the shareholder's pro rata 

share of the qualified business asset investment ("QBAI") of each CFC with respect to which it 

is a U.S. shareholder. 

The formula for GIL Tl, which is calculated at the U.S. shareholder level, is: 

GILT! Net CFC Tested Income- (10% x QBAI) 

Net CFC tested income 

Net CFC tested income means, with respect to any U.S. shareholder, the excess of the 

aggregate of the shareholder's pro rata share of the tested income of each CFC with respect to 

which it is a U.S. shareholder over the aggregate of its pro rata share of the tested loss of each 

CFC with respect to which it is a U.S. shareholder. Pro rata shares are determined under the 

rules of section 95l(a)(2). 

The fonnula for net CFC tested income, which is calculated at the U.S. shareholder level, 

is: 

Net CFC Tested Income= Sum of CFC Tested Income- Sum of CFC Tested Loss 

The tested income of a CFC means the excess (if any) of the gross income of the 

corporation-determined without regard to certain exceptions to tested income-over deductions 

(including taxes) properly allocable to such gross income (referred to in this document as "tested 

gross income"). The exceptions to tested income are: (1) the corporation's ECI under section 

952(b ); (2) any gross income taken into account in determining the corporation's subpart F 

income; (3) any gross income excluded from foreign base company income or insurance income 

by reason of the high-tax exception under section 954(b)(4); (4) any dividend received from a 

related person (as defined in section 954(d)(3)); and (5) any foreign oil and gas extraction 

income (as defined in section 907(c)(l)). 

The tested loss of a CFC means the excess (if any) of deductions (including taxes) 

properly allocable to the corporation's gross income-determined without regard to the tested 

income exceptions-over the amount of such gross income. 

Qualified business asset investment 

QBAI means, with respect to any CFC for a taxable year, the average of the aggregate of 

its adjusted bases, determined as of the close of each quarter of the taxable year, in specified 

tangible property used in its trade or business and of a type with respect to which a deduction is 

generally allowable under section 167. The adjusted basis in any property must be determined 

using the alternative depreciation system under current section 168(g), notwithstanding any 

provision of law (or any other section of this bill) which is enacted after the date of enactment of 
373 

this provision (unless such later enacted law specifically and directly amends this provision's 

definition). 

Specified tangible property means any property used in the production of tested 

income. 1206 If such property was used in the production of both tested income and income that is 

not tested income (i.e., dual-use property), the property is treated as specified tangible property 

in the same proportion that the amount of tested gross income produced with respect to the 

propetty bears to the total amount of gross income produced with respect to the property. 1207 

For purposes of determining QBAI, the Secretary is authorized to issue anti-avoidance 

regulations or other guidance as the Secretary determines appropriate, including regulations or 

other guidance that provide for the treatment of property if the property is transferred or held 

temporarily, or if avoidance was a factor in the transfer or holding of the property. 

Coordination with subpart F 

Although GILTI inclusions do not constitute subpart F income, GIL TI inclusions are 

generally treated similarly to subpart F inclusions. Thus they are generally treated in the same 

manner as amounts included under section 95l(a)(l )(A) for purposes of applying sections 

168(h)(2)(B), 535(b)(10), 904(h)(l), 959, 961, 962, 993(a)(l)(E), 996(f)(l), l248(b)(l), 

l248(d)(l), 650l(e)(l)(C), 6654(d)(2)(D), and 6655(e)(4). However, the Secretary may provide 

rules for coordinating the GIL Tl inclusion with provisions of law in which the determination of 

subpart F income is required to be made at the CFC leveL 

The provision requires that the amount of GIL TI included by a US. shareholder be 

allocated across each CFC with respect to which it is a US. shareholder The portion of GIL TI 

treated as being with respect to a CFC equals zero for a CFC with no tested income and, for a 

CFC with tested income, the portion of GILT! which bears the same ratio to the total amount of 

GIL TI as the U.S. shareholder's pro rata amount oftested income of the CFC bears to the 

aggregate amount of the US. shareholder's pro rata amount of the tested income of each CFC 

with respect to which it is a US. shareholder. For a CFC with tested income, the following 

formula expresses how to determine the portion of GIL Tl treated as being with respect to the 

CFC 

_ (Share of CFC' s Tested Income I ) CFC's GILT! -GILT! x I Share of Agg. CFC Tested Income 

where Share of CFC' s Tested Incomeis the U.S. shareholder's pro rata amount of the 

tested income of a CFC and Share of Agg. CFC Tested Income is the aggregate amount of the 

1206 Specified tangible property docs not include property used in the production of tested loss, so that a 

CFC that has a tested loss in a taxable year docs not have QBA! for the taxable year. 

120' For example. if a building produces $1,000 of tested gross income and $250 of subpart F income for a 

taxable year. then 80 percent (= $1 ,000/$1 ,250) of a domestic corporation's average adjusted basis in the building is 

included in QBAI for that taxable year. 
374 

U.S. shareholder's pro rata amount of the tested income of each CFC with respect to which it is a 

U.S. shareholder. 

For purposes of the GIL TI inclusion, a person is treated as a U.S. shareholder of a CFC 

for any taxable year only if such person owns (within the meaning of section 958(a)) stock in the 

corporation on the last day, in such year, on which the corporation is a CFC. A corporation is 

generally treated as a CFC for any taxable year if the corporation is a CFC at any time during the 

taxable year. 

Deemed-paid credit for taxes properly attributable to tested income 

For any amount ofGILTI included in the gross income of a domestic corporation, the 

corporation's deemed-paid credit equals 80 percent of the product of the corporation's inclusion 

percentage multiplied by the aggregate tested foreign income taxes paid or accrued, with respect 

to tested income, by each CFC with respect to which the domestic corporation is a U.S. 

shareholder. 

The inclusion percentage means, with respect to any domestic corporation, the ratio 

(expressed as a percentage) of such corporation's GIL TI amount divided by the aggregate 

amount of its pro rata share of the tested income of each CFC with respect to which it is a U.S. 

shareholder (referred to as "aggregate tested income" in the formulas below). Tested foreign 

income taxes means, with respect to any domestic corporation that is a U.S. shareholder of a 

CFC, the foreign income taxes paid or accrued by the CFC that are properly attributable to the 

CFC's tested income. 1208 

The deemed-paid credit with respect to the GILTI inclusion can be expressed in the 

following formula: 

Deemed-Paid Credit 

GlLTl = 80% x d x Aggregate Tested Foreign lncome Tax Aggregate Teste Income 

The provision creates a separate foreign tax credit basket for GIL TI, with no 

carryforward or carryback available for excess credits. For purposes of determining the foreign 

tax credit limitation, GIL TI is not general category income, and income that is both GIL TI and 

passive category income is considered passive category income. As described in section 1430 I 

of the bill and new section 78, the taxes deemed to have been paid are treated as an increase in 

GILT I for purposes of section 78, determined by taking into account I 00 percent of the product 

of the inclusion percentage and aggregate tested foreign income taxes (instead of 80 percent in 

the determination of the deemed-paid credit). Therefore, the section 78 gross-up can be 

expressed in the following formula: 

'"'' Tested foreign income taxes do not include any foreign income tax paid or accmcd by a CFC that is 

properly attributable to the CFC's tested loss (if any). 
375 

Section 78 Gross-Up 

GILT! = 100% x -:------=---:-:--- x Aggregate Tested Foreign Income Tax 

Effective Date 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders in which or with which such 

taxable years of foreign corporations end. 

5. Deduction for foreign-derived intangible income and global intangible low-taxed income 

(sec. 14202 of the bill and new sec. 250 of the Code) 

Reasons for Change 

The Committee believes that the current U.S. system of worldwide taxation (with 

deferral), and its 35 percent corporate tax rate, encourages U.S. corporations to locate intangible 

income abroad, particularly in low- or zero-tax jurisdictions. The location of intangible income 

in those jurisdictions may require, or be facilitated by, the location of valuable economic activity 

in those jurisdictions. One of the Committee's goals in tax reform is to remove the tax incentive 

to locate intangible income abroad and encourage U.S. taxpayers to locate intangible income, 

and potentially valuable economic activity, in the United States. 

The Committee believes that offering similar, preferential rates for intangible income 

derived from serving foreign markets, whether through U.S.-based operations or through CFCs, 

reduces or eliminates the tax incentive to locate or move intangible income abroad, thereby 

limiting one margin where the Code distorts business investment decisions. 

In addition, the Committee recognizes that many countries in the OECD have preferential 

tax regimes for income related to certain forms of intellectual property. These regimes, 

sometimes referred to as patent box or intellectual property regimes, put the United States at a 

competitive tax disadvantage. The Committee believes that establishing a deduction for foreignderived intangible income earned by domestic corporations helps the United States compete with 

countries that offer preferential rates for intellectual property. 

Explanation of Provision 

In general 

The provision provides domestic corporations with reduced rates of U.S. tax on their 

foreign-derived intangible income ("FDII") and global intangible low-taxed income 

("GILTI"). 1209 GILTI is defined in section 14201 of the bill and new section 951A, while a 

domestic corporation's FDII is the portion of its intangible income, determined on a formulaic 

basis, that is derived from serving foreign markets. When this provision becomes effective, the 

1209 The deduction for FDII and GIL TI is only available to domestic corporations. U.S. shareholders that 

are not domestic corporations are subject to full U.S. tax on their GILTI. 
376 

effective tax rate on FDII is 12.5 percent and the effective US. tax rate on GlLTl is 10 percent 

For taxable years beginning after December 31, 2025, the effective tax rate on FDII rises to 

15.625 percent, while the effective US. tax rate on GILT! rises to 12.5 percent As described in 

more detail below, since only a portion (80 percent) of foreign tax credits are allowed to offset 

US. tax on GILT!, the minimum foreign tax rate at which no US. residual tax is owed on a 

domestic corporation's GIL TI generally matches the tax rate on FDIL 

Deduction for FDJI and GIL Tl 

Deduction for FDII and GILT! and taxable income limitation 

In the case of domestic corporations for taxable years beginning after December 31, 

2017, and before January 1, 2026, the provision generally allows as a deduction an amount equal 

to the sum of 37.5 percent of its FDII plus 50 percent of its GIL TI (if any). For taxable years 

beginning after December 31, 2025, the deduction for FDII is reduced to 21.875 percent and the 

deduction for GILT! is lowered to 37.5 percent 1210 

If the sum of a domestic corporation's FDU and GILT! amounts exceeds its taxable 

income determined without regard to this provision, then the amount ofFDII and GILT! for 

which a deduction is allowed is reduced by an amount determined by such excess. The reduction 

in FDII for which a deduction is allowed equals such excess multiplied by a percentage equal to 

the corporation's FDII divided by the sum of its FDII and GIL TL The reduction in GIL TI for 

which a deduction is allowed equals the remainder of such excess. 1211 

Effective tax rates on FDII and GILT! 

As a result of the deductions, and with respect to domestic corporations, the effective tax 

rate on FDII is 12.5 percent and the effective US. tax rate on GIL TI is 10 percent for taxable 

years beginning after December 31, 2017, and before January 1, 2026. Since only a portion (80 

percent) offoreign tax credits are allowed to offset US. tax on GIL TI, the minimum foreign tax 

rate, with respect to GIL Tl, at which no U.S. residual tax is owed by a domestic corporation is 

12.5 percent 1212 If the foreign tax rate on GIL TI is zero percent, then the US. residual tax rate 

on GIL TI is I 0 percent Therefore, as foreign tax rates on GIL TI range between zero percent 

1210 The Committee intends that the deduction allowed by new Code section250 be treated as exempting 

UJC deducted income from tax. Thus. for example. the deduction for global intangible low-taxed income could give 

rise to an increase in a domestic corporate partner's basis in a domestic partnership under section 705(a)(l)(B). 

1211 For example. consider a domestic corporation with $1.250 ofFDII, $750 of GILT!. and taxable income 

(detennined without regard to tllis provision) of$ 1.500. The sum of the corporation's FDII and GIL Tl amounts 

is $2.000. wllich exceeds $1,500 by $500. For purposes of this provision. the amount ofFDII for wllich a 

deduction is allowed is reduced by $500 multiplied by $1.250/$2.000. or $312.50. The ammmt of GIL Tl for 

which a deduction is allowed is reduced by the remainder of the excess. or $187.50 (= $500 x $750/$2.000). 

1212 12.5 percent equals the effective GIL TI rate of 10 percent divided by 80 percent If the foreign tax rate 

on GILT! is 12.5 percent. and domestic corporations are allowed a credit equal to 80 percent of foreign taxes paid. 

then the post-credit foreign tax rate on GILT! equals 10 percent(= 12.5 percent x 80 percent). which equals the 

effective GIL Tl rate of 10 percent Therefore, no U.S. residual tax is owed. 
377 

and 12.5 percent, the total combined foreign and U.S. tax rate on GIL TI ranges between 10 

percent and 12.5 percent. At foreign tax rates greater than or equal to 12.5 percent, there is no 

residual U.S tax owed on GlLTI, so that the combined foreign and U.S. tax rate on GIL Tl equals 

the foreign tax rate. 

For taxable years beginning after December 31, 2025, and with respect to domestic 

corporations, the effective tax rate on FDII is 15.625 percent and the effective US. tax rate on 

GTLTl is 12.5 percent. The minimum foreign tax rate, with respect to GiLT!, at which no U.S. 

residual tax is owed is 15.625 percent. 1213 

The FDU of any domestic corporation is the amount which bears the same ratio to the 

corporation's deemed intangible income as its foreign-derived deduction eligible income bears to 

its deduction eligible income. In other words, a domestic corporation's FDH is its deemed 

intangible income multiplied by the percentage of its deduction eligible income that is foreignderived. The calculation can also be expressed as the following: 

Foreign-Derived Deduction Eligible Income 

FDII =Deemed Intangible Income X 1 b Deduction E igi le Income 

The Secretary is authorized to prescribe regulations or other guidance as may be 

necessary or appropriate to carry out this provision. 

Deduction eligible income 

Deduction eligible income means, with respect to any domestic corporation, the excess (if 

any) of the gross income of the corporation-determined without regard to certain exceptions to 

deduction eligible income--over deductions (including taxes) properly allocable to such gross 

income (referred to in this document as "deduction eligible gross income"). The exceptions to 

deduction eligible income are: (1) the subpart F income of the corporation determined under 

section 951; (2) the GIL Tl of the corporation; (3) any dividend received from a CFC with respect 

to which the corporation is a U.S. shareholder; and (4) any domestic oil and gas income of the 

corporation; and (5) any foreign branch income (as defined in section 904(d)(2)(J)) of the 

corporation. 

The formula for deduction eligible income can generally be written as follows: 1214 

1213 If the foreign tax rate on GIL TI is zero percent, then the U.S. residual tax rate on GILT! is 12.5 

percent Therefore, as foreign ta'< rates on GILT! range between zero percent and 15.625 percent. the total 

combined foreign and U.S. tax rate on GILT! ranges between 12.5 percent and 15.625 percent At foreign tax rates 

greater than or equal to 15.625 percent there is no residual U.S. tax on GILT!, and the combined foreign and U.S. 

tax mte on GILT! equals the forei!,'Il tax rate. 

1214 This fonnula assumes that the excess described in the preceding paragraph is positive. O!herwise there 

is no deduction eligible income. 
378 

Deduction Eligible Income = Gross Income Exceptions Allocable Deductions 

where Exceptions refers to the exceptions to deduction eligible income and 

Allocable Deductions encompass all deductions (including taxes) property allocable to deduction 

eligible gross income. 

Deemed intangible income 

The domestic corporation's deemed intangible income means the excess (if any) of its 

deduction eligible income over its deemed tangible income retum. 1215 The deemed tangible 

income return means, with respect to any corporation, an amount equal to I 0 percent of the 

corporation's qualified business asset investment ("QBAf'). Deemed intangible income can be 

calculated as follows: 1216 

Deemed Intangible Income =Deduction Eligible Income- (10% x QBAI) 

For purposes of computing its FDII, a domestic corporation's QBAI is the average of the 

aggregate of its adjusted bases, determined as of the close of each quarter of the taxable year, in 

specified tangible property used in its trade or business and of a type with respect to which a 

deduction is allowable under section 167. The adjusted basis in any property must be determined 

using the alternative depreciation system under section 168(g), notwithstanding any provision of 

law (or any other section of this bill) which is enacted after the date of enactment of this 

provision (unless such later enacted law specifically and directly amends this provision's 

definition). 

Specified tangible property means any tangible property used in the production of 

deduction eligible income. If such property was used in the production of deduction eligible 

income and income that is not deduction eligible income (i.e., dual-use property), the property is 

treated as specified tangible property in the same proportion that the amount of deduction 

eligible gross income produced with respect to the property bears to the total amount of gross 

income produced with respect to the property. 1217 In other words, the percentage of a domestic 

corporation's adjusted basis in dual-use property that is included in QBAI equals the deduction 

eligible gross income produced with respect to the property divided by the total gross income 

produced with respect to the property. 

1215 The calculation of the deemed tangible income return for purposes of determining FDll is intentionally 

similar to the calculation of the net deemed tangible income return for purposes of determining GIL TI under sec. 

14201 of the bill and new sec. 95lA. 

1216 If the quantity in this formula is negative. deemed intangible income is zero. 

Forexamp1e. if a building is used in the production of$1,000 of total gross income for a taxable year. 

$250 of which was domestic oil and gas e>.iraction income and the remaining $750 of which was deduction eligible 

gross income. then75 percent of a domestic corporation's average adjusted basis in the building is included in QBAI 

for that taxable year. 
379 

Foreign-del"ived dednction eligible income 

Foreign-derived deduction eligible income means, with respect to a taxpayer for its 

taxable year, any deduction eligible income of the taxpayer that is derived in connection with (I) 

property that is sold by the taxpayer to any person who is not a United States person and that the 

taxpayer establishes to the satisfaction of the Secretary is for a foreign use 1218 or (2) services 

provided by the taxpayer that the taxpayer establishes to the satisfaction of the Secretary are 

provided to any person, or with respect to property, not located within the United States. Foreign 

use means any use, consumption, or disposition that is not within the United States. 1219 Special 

rules for determining foreign use apply to transactions that involve property or services provided 

to domestic intermediaries or related parties. 

For purposes of the provision, the terms "sold," "sells", and "sale" include any lease, 

license, exchange, or other disposition. 

Property or services provided to domestic intermediaries 

If a taxpayer sells property to another person (other than a related party) for further 

manufacture or modification within the United States, the property is not treated as sold for a 

foreign use even if such other person subsequently uses such property for foreign use. 1220 

Deduction eligible income derived in connection with services provided to another person (other 

than a related party) located within the United States is not treated as foreign-derived deduction 

eligible income, even if the other person uses the services in providing services the income from 

which is considered foreign-derived deduction eligible income. 

Special rules with respect to related party transactions 

If property is sold to a related foreign party, the sale is not treated as for a foreign use 

unless the property is sold by the related foreign party to another person who is unrelated and is 

not a U.S. person and the taxpayer establishes to the satisfaction of the Secretary that such 

property is for a foreign use. Income derived in connection with services provided to a related 

party who is not located in the United States is not treated as foreign-derived deduction eligible 

income unless the taxpayer establishes to the satisfaction of the Secretary that such service is not 

substantially similar to services provided by the related party to persons located within the 

United States. 

1218 If property is sold by a taxpayer to a person who is not a U.S. person. and after such sale the property 

is subject to manufacture, assembly. or other processing (including the incorporation of such property, as a 

component, into a second product by means of production. manufacture, or assembly) outside the United States by 

such person. then the property is for a foreign use. 

1219 The reporting and penalty provision in sec. 15001 of the bill and new sec. 6050Z describes additional 

reporting requirements and penalties related to validating whether a domestic corporation's income is foreignderived deduction eligible income. 

1220 In other words, the fact that a component is included in a piece of property that is eventually sold for a 

foreign use is insufficient for the sale of the component to be considered for a foreign use. 
380 

For purposes of applying these rules, a related party means any member of an affiliated 

group as defined in section 1504(a) determined by substituting "more than 50 percent" for "at 

least 80 percent" each place it appears and without regard to sections 1504(b )(2) and 1504(b )(3). 

Any person (other than a corporation) is treated as a member of the affiliated group if the person 

is controlled by members of the group (including any entity treated as a member of the group by 

reason of this sentence) or controls any member, with control being determined under the rules 

of section 954(d)(3). 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

6. Special rules for transfers of intangible property from controlled foreign corporations to 

United States shareholders (sec. 14203 ofthe bill and new sec. 966 of the Code) 

Reasons for Change 

The Committee believes that innovation is an important source of economic growth and 

seeks to encourage businesses to locate intangible property in the United States. The bill as a 

whole provides reduced corporate tax rates for intangible income and makes a number of 

changes intended to promote tax neutrality with respect to where businesses locate intangible 

property and the income derived from such property. While the Committee believes that these 

changes, by themselves, will encourages U.S. corporations to bring back existing intangible 

property that is currently held by their CFCs, it seeks to facilitate this process by giving 

taxpayers a limited period of time in which they can distribute intangible property held by CFCs 

back to the U.S. parent corporation without triggering tax on the gain from the distribution. 

This provision is intended to serve as a transition rule and is not intended to benefit 

intangible property that is developed or acquired by CFCs after the date of enactment of this 

provision, as the Committee believes that the international tax reforms contained in the bill will 

provide strong incentives for businesses to locate and develop intangible property in the United 

States once those reforms go into effect. 

Explanation of Provision 

For certain distributions of intangible property held by a CFC on the date of enactment of 

this provision, the fair market value of the property on the date of the distribution is treated as 

not exceeding the adjusted basis of the property immediately before the distribution. If the 

distribution is not a dividend, a U.S. shareholder's adjusted basis in the stock of the CFC with 

respect to which the distribution is made is increased by the amount (if any) of the distribution 

that would, but for this provision, be includible in gross income. The adjusted basis of the 

property in the hands of the U.S. shareholder immediately after the distribution is the adjusted 

basis immediately before the distribution, reduced by the amount of the increase (if any) 

described previously. 

For purposes of the provision, intangible property means intangible property as described 

in section 936(h)(3)(B) and computer software as described in section 197(e)(3)(B). 
381 

The provision applies to distributions that are (l) received by a domestic corporation 

from a CFC with respect to which it is a U.S shareholder and (2) made by the CFC before the 

last day of the third taxable year of the CFC beginning after December 31, 2017. 

Effective Date 

The provision is effective for taxable years offoreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders in which or with which such 

taxable years of foreign corporations end. 

7. Elimination of inclusion of foreign base company oil related income (sec. 14211 of the 

bill and sec. 954( a) of the Code) 

Reasons for Change 

The Committee believes that the base protection measure contained in section 14201 of 

the bill and new section 95lA of the Code adequately address any base erosion concerns with 

respect to foreign oil related income, which is a mobile type of income to the extent that oil 

related refining and transportation activities are mobile and capable of being located in low-tax 

jurisdiction. Consequently, the subpart F category of foreign base company oil related income is 

no I onger necessary. 

Explanation of Provision 

The provision eliminates foreign base company oil related income as a category of 

foreign base company income. 

Effective Date 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders with or within which such taxable 

years of foreign corporations end. 

8. Inflation adjustment of de minimis exception for foreign base company income (sec. 

14212 of the bill and sec. 954(b)(3) ofthe Code) 

Reasons for Change 

The Committee believes that the current de minimis amount of $1,000,000 for foreign 

base company income, which was set in 1986 and has not been changed since, no longer serves 

its intended purpose of reducing compliance burdens for taxpayers, and should be adjusted for 

inflation to adapt to changes in the economic environment 

Explanation of Provision 

The provision amends the de minimis exception of present law, which permits a CFC to 

exclude its foreign base company income if the sum of its total foreign base company income 

and gross insurance income is the lesser of 5 percent of its gross income or $1,000,000. In the 
382 

case of any taxable year beginning after 2017, the provision indexes for inflation the $1,000,000 

de minimis amount for foreign base company income, with all increases rounded to the nearest 

multiple of$50,000. 

Effective Date 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders in which or with which such 

taxable years of foreign corporations end. 

9. Repeal of inclusion based on withdrawal of previously excluded subpart F income from 

qualified investment (sec. 14213 of the bill and sec. 955 of the Code) 

Reasons for Change 

The Committee believes that the provisions of section 955 are no longer necessary. In 

the transition to a participation exemption system, foreign earned income that is not subject to 

immediate inclusion in the U.S. shareholder's gross income under the subpart F regime will 

generally be exempt from U.S. taxation upon repatriation through a dividend paid from a 

specified foreign corporation to its U.S. shareholder. Foreign base company shipping income 

was repealed as a type of foreign base company income (and therefore, subpart F income) in 

2004.1221 

Explanation of Provision 

The provision repeals section 955. As a result, a U.S. shareholder in a CFC that invested 

its previously excluded subpart F income in qualified foreign base company shipping operations 

is no longer required to include in income a pro rata share of the previously excluded subpart F 

income when the CFC decreases such investments. 

Effective Date 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders within which or with which such 

taxable years of foreign corporations end. 

10. Modification of stock attribution rules for determining status as a controlled foreign 

corporation (sec. 14214 of the bill sees. 318 and 958 of the Code). 

Reasons for Change 

The Committee is aware of certain transactions used to avoid subpart F provisions. One 

such transaction involves effectuating "de-control" of a foreign subsidiary, by taking advantage 

of the section 958(b)(4) rule that effectively turns off the constructive stock ownership rules of 

318(a)(3) when to do otherwise would result in a U.S. person being treated as owning stock 

American Jobs Creation Acl. Pub. L 108-357, 118 Stat 1511 (Oct. 22, 2004). 
383 

owned by a foreign person. Accordingly, such a transaction converts former CFCs to non-CFCs, 

despite continuous ownership by U.S. shareholders. The Committee believes this provision is 

necessary to render de-controlling transactions ineffective as a means of avoiding the subpart F 

proVISIOnS. 

Explanation of Provision 

The provision amends the ownership attribution rules of section 958(b) so that certain 

stock of a foreign corporation owned by a foreign person is attributed to a related U.S. person for 

purposes of determining whether the related U.S. person is a U.S. shareholder of the foreign 

corporation and, therefore, whether the foreign corporation is a CFC. In other words, the 

provision requires "downward attribution" from a foreign person to a related U.S. person in 

circumstances in which present law does not so provide. The pro rata share of a CFC's subpart F 

income that a United States shareholder is required to include in gross income, however, 

continues to be determined based on direct or indirect ownership of the CFC, without application 

of the new downward attribution rule. 

This provision is not intended to cause a foreign corporation to be treated as a controlled 

foreign corporation with respect to a U.S. shareholder as a result of attribution of ownership 

under section 318(a)(3) to a U.S. person that is not a related person (within the meaning of 

section 954(d)(3)) to such U.S. shareholder as a result of the repeal of section 958(b )(4). 

Effective Date 

The provision is effective for the last taxable year of foreign corporations beginning 

before January 1, 2018, and all subsequent taxable years of such foreign corporations and for the 

taxable years of U.S. shareholders in which or within which such taxable years of foreign 

corporations end. 

11. Modification of definition of United States shareholder (sec. 14215 of the bill and 

sec. 951 of the Code) 

Reasons for Change 

The Committee is aware of certain transactions used to avoid U.S. shareholder status and 

consequently subpart F provisions. One such transaction involves restricting or diluting the 

voting power of a foreign subsidiary through the issuance of different classes of stock. 

Explanation of Provision 

This provision expands the definition of U.S. shareholder under subpart F to include any 

U.S. person who owns I 0 percent or more of the total value of shares of all classes of stock of a 

foreign corporation. 

Effective Date 
384 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders with or within which such taxable 

years of foreign corporations end. 

12. Elimination of requirement that corporation must be controlled for 30 days before 

subpart F inclusions apply (sec. 14216 of the bill and sec. 951(a)(1) of the Code) 

Reasons for Change 

The Committee believes the original purpose for the 30-day rule-to facilitate tax 

administration--is no longer necessary in light of the availability of technology to track owner 

and corporate attributes on a daily basis. At the same time, the Committee believes the 30-day 

rule under present law provides inappropriate opportunities for taxpayers to structure 

transactions to avoid U.S. tax. 

Explanation of Provision 

The provision eliminates the requirement that a corporation must be controlled for an 

uninterrupted period of 30 days before subpart F inclusions apply. 

Effective Date 

The provision is effective for taxable years offoreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders with or within which such taxable 

years of foreign corporations end. 

13. Look-thru rule for related controlled foreign corporations made permanent (sec. 14217 

of the bill and sec. 954 of the Code) 

Reasons for Change 

As was the case when section 954(c)(6) was originally enacted, today most countries 

allow their companies to redeploy active foreign earnings with no additional tax burden. The 

Committee believes that this provision will make U.S. companies and U.S. workers more 

competitive with respect to such countries. By allowing U.S. companies to reinvest their active 

foreign earnings where they are most needed without incurring additional tax that companies 

based in many other countries never incur, the Committee believes that the provision will 

continue to enable U.S. companies to make more sales overseas and thus produce more goods in 

the United States. These benefits should be enhanced by making this provision permanent, 

thereby eliminating uncertainty as to its future application. 

Explanation of Provision 

The provision makes permanent the exclusion from foreign personal holding company 

income for certain dividends, interest (including factoring income that is treated as equivalent to 

interest under section 954(c)(1)(E)), rents, and royalties received or accrued by one CFC from a 

related CFC. 
385 

Effective Date 

The provision is effective for taxable years of foreign corporations beginning after 

December 31, 2017, and for taxable years of U.S. shareholders in which or with which such 

taxable years of foreign corporations end. 

14. Corporations eligible for deductions for dividends exempted from subpart F inclusions 

for increased investments in United States property (sees. 14218 of the bill and sec. 956 of 

the Code) 

Reasons for Change 

The Committee believes that it is unnecessary to apply the requirements of section 956 to 

taxpayers that are entitled to a 100-percent deduction for dividends received by domestic 

corporations from foreign corporations under the new participation exemption system, wben the 

CFC could pay a dividend or distribute property to the domestic corporate shareholder in a 

manner that would be tax-free. The Committee further believes that retention of such a rule 

would needlessly discourage investment in the United States. However, because the 

participation exemption does not extend to individuals, section 956 should remain in effect with 

respect to individuals who are United States shareholders of CFCs. 

Explanation of Provision 

The provision excepts domestic corporations that are U.S. shareholders in the CFC from 

the requirement that they recognize income when the CFC increases its investment in US. 

property. 

Effective Date 

The provision is effective for taxable years of controlled foreign corporations beginning 

after December 31, 2017, and for taxable years of U.S. shareholders in which or with which such 

taxable years of the foreign corporations end. 

15. Denial of deduction for interest expense of United States shareholders which are 

members of worldwide affiliated groups with excess domestic indebtedness (sec. 14221 of 

the bill and new sec. 163(n) of the Code) 

Reasons for Change 

The Committee believes that it is important to provide measures to discourage excessive 

leverage directly in conjunction with the adoption of a participation exemption system. The 

Committee further believes that the provision would prevent multinational companies from 

generating excessive interest deductions in the United States on debt that is issued to foreign 

affiliates or that is incurred to produce exempt foreign income in a dividend exemption system in 

a manner that applies equally to foreign and U.S. companies in order to provide a level playing 

field while recognizing standard non-tax business practices that involve parent corporations 

incurring debt to finance the acquisition or establishment of subsidiaries. The fungibility of 

money and the ease with which multinational enterprises may generally redeploy capital among 
386 

affiliates within the group provides multinational enterprises with significant flexibility in 

locating interest expense within the group. Under present law, this enables multinational 

enterprises to locate significant interest expense in high-tax jurisdictions such as the United 

States in order to maximize the tax benefits of interest deductions, irrespective of the location of 

the operations funded by the debt proceeds. Furthermore, US. subsidiaries offoreign-parented 

multinationals have an incentive to issue related-party debt to increase the interest deductions 

allowed against U.S. taxable income. Present law provides a limited set of rules to combat these 

concerns. 1222 

The provision further addresses base erosion that results from excessive and 

disproportionate borrowing in the United States by limiting the deductibility of interest paid or 

accrued by US. corporations that are members of a worldwide affiliated group. The provision 

reduces the deduction for interest paid or accrued by U.S. members of a worldwide affiliated 

group by the product of the US. corporation's net interest expense and the "debt to equity 

differential percentage" of the worldwide affiliated group. In applying such a limitation, the 

Committee is cognizant of the imperative to provide US. and foreign companies with a level 

playing field. Accordingly, the Committee's approach applies equally to U.S.- and foreignparented multinationals. 

Explanation of Provision 

For any domestic corporation that is a member of a worldwide affiliated group 

(hereinafter referred to as the "US. corporate members"), the provision reduces the deduction for 

interest paid or accrued by the corporation by the product of the net interest expense of the 

domestic corporation multiplied by the debt-to-equity differential percentage of the worldwide 

affiliated group. Net interest expense means the excess (if any) of: (1) interest paid or accrued 

by the taxpayer during the taxable year, over (2) the amount of interest includible in the gross 

income of the taxpayer for the taxable year. 1223 

A worldwide affiliated group is one or more chains of corporations, connected through 

stock ownership with a common parent that would qualify as an affiliated group under section 

1504(a), with two differences. First, the ownership threshold of section 1504(a)(2) is applied 

using 50 percent rather than 80 percent Second, the restrictions on inclusion described in 

sections 1504(b )(2), (b )(3) and (b)( 4) are disregarded for purposes of identifying the worldwide 

affiliated group. 

1222 With respect to the fonner concem. interest expense allocation mlcs generally limit the availability of foreign 

tax credits to the extent a U.S. shareholder deducts interest to fund the operations of its foreign subsidiaries. Sec 

Treas. Reg. sees. 1.861-8 through -l3T. With respect to the latter concem, sections 163(j), 267(a)(3). and 482 limit 

the deductibility of related-party interest payments in certain circumstances, and the subpart F mles limit the U.S. tax 

benefits of issuing debt to a foreign subsidiary. Additionally. recent regulations issued under section 385 limit the 

deductibility of related-party interest payments in certain cases by recharacterizing intercompany debt instnunents as 

equity. 

" 23 The Secretary is provided is regulatory authority to provide for adjustments in detcnnining the amount 

of net interest expense. 
387 

The debt-to-equity differential percentage means, with respect to any worldwide 

affiliated group, the excess domestic indebtedness of the group divided by the total indebtedness 

of the domestic corporations that are members of the group. All U.S. corporate members of the 

worldwide affiliated group are treated as one member when determining whether the group has 

excess domestic indebtedness as a result of a debt-to-equity differential. Excess domestic 

indebtedness is the amount by which the total indebtedness of the U.S. corporate members 

exceeds 110 percent of the total indebtedness those members would hold if their total 

indebtedness to total equity ratio equaled the ratio of total indebtedness to total equity for the 

worldwide affiliated group. Total equity means, with respect to one or more corporations, the 

excess (if any) of: (I) the money and all other assets of such corporations, over (2) the total 

indebtedness of such corporations. For purposes of this computation, intragroup debt and equity 

interests are disregarded, and assets of the U.S. corporate members of the worldwide affiliated 

group exclude any interest held by any U.S. corporate member in any foreign corporation that is 

a member of the group. 

The amount of any interest not allowed as a deduction for any taxable year by reason of 

this provision or new section 163(j) (depending on whichever imposes the lower limitation with 

respect to such taxable year) can be carried forward indefinitely. 

The Secretary is provided regulatory authority to provide rules for: (1) the prevention of 

the avoidance of this provision, (2) adjustments in the case of corporations which are members of 

an affiliated group as may be appropriate to carry out the purposes of the provision, (3) the 

coordination of this provision with section 884, (4) the treatment of partnership indebtedness, 

allocation of partnership debt, interest, or distributive shares, and (5) the coordination of this 

provision with new section 163(j). 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

16. Limitations on income shifting throngh intangible property transfers (sec. 14222 of the 

bill and sees. 367 and 482 of the Code) 

Reasons for Change 

The Committee is concerned that base erosion continues to occur by means of aggressive 

use of transfer pricing methodologies with respect to income from exploitation or transfers of 

intangibles. In particular, the Committee believes that the identification of intangibles and their 

valuation have presented administrative difficulties that require statutory clarification. 

Explanation of Provision 

The provision addresses recurring definitional and methodological issues that have arisen 

in controversies 1224 in transfers of intangible property for purposes of sections 367(d) and 482, 

122'

1 Veritas v. Commissioner, 133 T.C. No. 14 (December 10, 2009). non-acq .. IRB 2010-49 (December G. 

2010). (stating that including goodwill and going concern value within the definition would "expand[]" that 
388 

both of which use the statutory definition of intangible property in section 936(h)(3)(B). The 

provision revises that definition and confirms the authority to require certain valuation methods. 

It does not modify the basic approach of the existing transfer pricing rules with regard to income 

from intangible property. 

Under the provision, workforce in place, goodwill (both foreign and domestic), and going 

concern value are intangible property within the meaning of section 936(h)(3)(B), as is the 

residual category of"any similar item" the value of which is not attributable to tangible property 

or the services of an individual. The flush lan~:,>uage at the end of that subparagraph is removed, 

to make clear that the source or amount of value is not relevant to whether property that is one of 

the specified types of intangible property is within the scope of the definition. 

The provision clarifies the authority of the Secretary to specify the method to be used to 

determine the value of intangible property, both with respect to outbound restructurings of U.S. 

operations and to intercompany pricing allocations, 1225 by amending 482 as well as the grant of 

regulatory authority under section 367 regarding the use of aggregate basis valuation and the 

application of the realistic alternative principle. 

With respect to aggregate basis valuation, the provision requires use of that method of 

valuation in the case of transfers of multiple intangible properties in one or more related 

transactions if the Secretary determines that an aggregate basis achieves a more reliable result 

than an asset-by-asset approach. The provision is consistent with the position that the additional 

value that results from the interrelation of intangible assets can be properly attributed to the 

underlying intangible assets in the aggregate, where doing so yields a more reliable result. This 

approach is also consistent with Tax Court decisions in cases outside of the section 482 context, 

where collections of multiple, related intangible assets were viewed by the Tax Court in the 

aggregate. 1226 Finally, it is also consistent with the cost-sharing regulations. 1227 

definition, and that "taxpayers are merely rcqnircd to be compliant. not prescient"); Amazon v. Commissioner, 148 

T.C. No. 8 (2017) (holding tlmt "workforce in place, going concern value. goodwill, and what trial witnesses 

described as ·growth options' and corporate 'resources' or 'opportunities'" all fell outside the definition under 

present law). 

Sees. 367(d) and 482. 

1226 Sec, e.g., Krafl f<JOds Co. v, Commissioner. 21 T.C. 513 (1954) (thirty-one related patents must be 

valued as a gronp and the useful life for depreciation should be based ou the average of the patents' useful lives); 

Standard Conveyor Co. v. Commissioner, 25 B.T.A. 281, p. 283 ( 1932) Cfl]t is evident that it is impossible to value 

these seven patents separately. Their value. as in the case of many groups of patents representing improvements on 

tl1e prior art, appears largely to consist of their combination."'); Massey-Ferguson, Inc. v. Commissioner, 59 T. C. 220 

(1972) (taxpayer who abandoned a distribution network of contracts with separate distributorships was entitled to an 

abandonment loss for the entire network in the taxable year during which the last of the contrdcts was tenninatcd 

because that was the year in which the entire intangible value was lost). 

See Treas. Reg. sec. 1.482-7(g)(2)(iv) (if multiple transactions in connection with a cost-sharing 

arrangement involve platform, operating and other contributions of resources, capabilities or rights that are 

reasonably anticipated to be interrelated. then detennination of the ann· s-lcngth charge for platfonn contribution 

transactions and other transactions on an ag!,'I"Cgate basis rnay provide the most reliable measure of an arm's-length 

result). 
389 

The provision codifies use of the realistic alternative principles to determine valuation 

with respect to intangible property transactions. The realistic alternative principle is predicated 

on the notion that a taxpayer will only enter into a particular transaction if none of its realistic 

alternatives is economically preferable to the transaction under consideration. For example, 

under the existing regulations provide the IRS with the ability to determine an arm's-length price 

by reference to a transaction (such as the owner of intangible property using it to make a product 

itself) that is different from the transaction that was actually completed (such as the owner of that 

same intangible property licensing the manufacturing rights and then buying the product from 

the licensee). 

Effective Date 

The provision applies to transfers in taxable years beginning after December 31, 2017. 

No inference is intended with respect to application of section 936(h)(3)(B) or the authority of 

the Secretary to provide by regulation for such application with respect to taxable years 

beginning before January I, 2018. 

17. Certain related party amounts paid or accrued in hybrid transactions or with hybrid 

entities (sec. 14223 of the bill and new sec. 267 A of the Code) 

Reasons for Change 

The tax laws of the United States may treat a particular cross-border arrangement 

differently from the arrangement's treatment under the tax laws of another country and thus 

result in a hybrid arrangement. The Committee believes that hybrid arrangements exploit 

differences in the tax treatment of a transaction or entity under the laws of two or more tax 

jurisdictions to achieve double non-taxation, including long-term deferral. The Committee 

further believes that these types of hybrid arrangements have an overall negative impact on 

competition, efficiency, transparency and fairness. 

The provision matches items of income and expense by denying the deductibility of 

certain interest and royalty payments or accruals to a hybrid transaction or by, or to, a hybrid 

entity. The Committee believes that the provision is consistent with many of the approaches to 

the same or similar problems taken in the Code, the OECD base erosion and profit shifting 

project ("BEPS"), bilateral income tax treaties, and provisions or rules of other countries. 

Explanation of Provision 

The provision denies a deduction for any disqualified related party amount paid or 

accrued pursuant to a hybrid transaction or by, or to, a hybrid entity. A disqualified related party 

amount is any interest or royalty paid or accrued to a related party to the extent that: (1) there is 

no corresponding inclusion to the related party under the tax law of the country of which such 

related party is a resident for tax purposes or is subject to tax, or (2) such related party is allowed 

a deduction with respect to such amount under the tax law of such country. A disqualified 

related party amount does not include any payment to the extent such payment is included in the 

gross income of a U.S. shareholder under section 951(a). A related party for these purposes is 

determined under the rules of section 954(d)(3), except that such section applies with respect to 

the payor as opposed to the CFC otherwise referred to in such section. 
390 

A hybrid transaction is any transaction, series of transactions, agreement, or instrument 

one or more payments with respect to which are treated as interest or royalties for Federal 

income tax purposes and which are not so treated for purposes of the tax law of the foreign 

country of which the recipient of such payment is resident for tax purposes or is subject to tax. 

A hybrid entity is any entity which is either: (l) treated as fiscally transparent for Federal income 

tax purposes but not so treated for purposes of the tax law of the foreign country of which the 

entity is resident for tax purposes or is subject to tax, or (2) treated as fiscally transparent for 

purposes of the tax law of the foreign country of which the entity is resident for tax purposes or 

is subject to tax but not so treated for Federal income tax purposes. 

The provision grants the Secretary authority to issue regulations or other guidance as may 

be necessary or appropriate to carry out the purposes of the provision, including regulations or 

other guidance providing rules for: (1) denying deductions for conduit arrangements that involve 

a hybrid transaction or a hybrid entity, (2) the application of this provision to foreign branches, 

(3) applying this provision to certain structured transactions, (4) denying all or a portion of a 

deduction claimed for an interest or a royalty payment that, as a result of the hybrid transaction 

or entity, is included in the recipient's income under a preferential tax regime of the country of 

residence of the recipient and has the effect of reducing the country's generally applicable 

statutory tax rate by at least 25 percent, (5) denying all of a deduction claimed for an interest or a 

royalty payment if such amount is subject to a participation exemption system or other system 

which provides for the exclusion or deduction of a substantial portion of such amount, (6) rules 

for determining the tax residence of a foreign entity if the foreign entity is otherwise considered a 

resident of more than one country or of no country, (7) exceptions to the general rule set forth in 

the provision, and (8) requirements for record keeping and information in addition to any 

requirements imposed by section 6038A 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

18. Termination of special rules for domestic international sales corporations (sec. 14224 of 

the bill; sees. 991 through 997 of the Code and new section 998 of the Code) 

Reasons for Change 

The Committee is aware that the use of interest charge DISCs has increased in recent 

years, in order to take advantage of a preferential rate of tax applicable to certain qualifying 

dividends under section 1(h). Use of the IC-DISC to achieve a preferential rate on dividend 

income is inconsistent with both the policy underlying the preferential rates in section 1(h) and to 

the continuation of the DISC regime after the reforms in 1984. Accordingly, the Committee 

believes that the DISC provisions are no longer desirable. 

Explanation of Provision 

The provision repeals the special Code rules for DISCs and IC-DISCs, by tenninating 

any corporate election to be treated as a DISC that is in effect for the corporation's last taxable 

year beginning in 2018. The termination is effective for the corporation's immediately 

succeeding taxable year (and all years thereafter). The provision also prohibits any new 
391 

corporate election to be treated as a DISC for any taxable year beginning after December 31, 

2018. 

As a result of the provision's termination of existing corporate DISC elections and its 

prohibition of new DISC elections, the special rules that apply to DISCs, IC-DISCs and their 

shareholders will no longer have effect In particular, corporations will no longer be permitted 

the exemption from corporate level tax allowed under the DISC rules, and individual 

shareholders of corporations for which DISC elections are terminated will be subject to 

shareholder-level taxation in respect of the earnings of the corporations in which they are 

shareholders under all the normal rules for shareholder-level taxation of corporate earnings. 

The provision includes a transition rule for shareholders of corporations the DISC 

elections of which are terminated. Under this transition rule, a shareholder of a corporation 

whose DISC election is terminated is deemed to have received, in the first taxable year for which 

the termination is effective, a distribution to which the section 995(b )(2) deemed distribution 

rules apply. The provision provides that this deemed distribution- and any actual distribution 

after termination of the DISC election to the extent paid out of the corporation's accumulated 

DISC income- is not a qualifying dividend under section 1(h)(11 )(B). Consequently, an 

individual DISC shareholder is not eligible for the preferential tax rate allowed under section 

l(h)(l1) with respect to such distributions. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2018. 

19. Shareholders of surrogate foreign corporations not eligible not eligible for reduced rate 

on dividends (sec. 14225 of the bill and sec. 1 of the Code) 

Reasons for Change 

The reduced tax rate on dividends is intended to encourage certain kinds of equity 

investments. Investments in surrogate foreign corporations is not the kind of investment the 

Committee believes fits within this parameter 

Explanation of Provision 

Any individual shareholder who receives a dividend from a corporation which is a 

surrogate foreign corporation as defined in section 7874(a)(2)(B), other than a foreign 

corporation which is treated as a domestic corporation under section 7874(b ), is not entitled to 

the lower rates on qualified dividends provided for in section 1 (h). 

Effective Date 

The provision is effective for dividends paid in taxable years beginning after December 

31,2017. 
392 

20. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on 

cnrrent year basis (sec. 14301 of the bill and sees. 78, 902 and 960 of the Code) 

Reasons for Change 

The Committee believes that a section 902 credit is not appropriate in a participation 

exemption system under which 100 percent of dividends received by certain domestic corporate 

shareholders of specified foreign corporations are exempt from U.S. taxation. To continue to 

offer section 902 credits for taxes deemed paid would result in a double benefit to the U.S. 

shareholder. by first allowing a dividend to be recognized in income with no U.S. tax liability 

associated therewith, and by further reducing existing U.S. tax liability with a credit for taxes 

paid on foreign source income. Rather. offering deemed paid foreign tax credits on a current year 

basis solely under section 960 reflects what the Committee believes to be a simpler and more 

appropriate application of the foreign tax credit regime in a 100 percent participation exemption 

system. 

Explanation of Provision 

The provision repeals the deemed-paid credit with respect to dividends received by a 

domestic corporation that owns 10 percent or more of the voting stock of a foreign corporation. 

A deemed-paid credit is provided with respect to any income inclusion under subpart F. 

The deemed-paid credit is limited to the amount of foreign income taxes properly attributable to 

the subpart F inclusion. Foreign income taxes under the provision include income, war profits, 

or excess profits taxes paid or accrued by the CFC to any foreign country or possession of the 

United States. The provision eliminates the need for computing and tracking cumulative tax 

pools. 

Additionally, the provision provides rules applicable to foreign taxes attributable to 

distributions from previously taxed earnings and profits, including distributions made through 

tiered-CFCs. 

The Secretary is granted authority under the provision to provide regulations and other 

guidance as may be necessary and appropriate to carry out the purposes of this provision. It is 

anticipated that the Secretary would provide regulations with rules for allocating taxes similar to 

rules in place for purposes of determining the allocation of taxes to specific foreign tax credit 

baskets. 1228 Under such rules, taxes are not attributable to an item of subpart F income if the 

base upon which the tax was imposed does not include the item of subpart F income. For 

example, if foreign law exempts a certain type of income from its tax base, no deemed-paid 

credit results from the inclusion of such income as subpart F. Tax imposed on income that is not 

included in subpart F income, is not considered attributable to subpart F income. 

In addition to the rules described in this section, the provision makes several conforming 

amendments to various other sections of the Code reflecting the repeal of section 902 and the 

1228 See Treas. Reg. sec. 1.904-6(a). 
393 

modification of section 960. These conforming amendments include amending the section 78 

gross-up provision to apply solely to taxes deemed paid under the amended section 960. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 

21. Separate foreign tax credit limitation basket for foreign branch income (sec. 14302 of 

the bill and sec. 904 of the Code) 

Reasons for Change 

Under present law, multinational enterprises have the ability to cross-credit foreign taxes 

attributable to low-tax subpart F income with those attributable to high-tax branch income and 

minimize overall tax liability. Changing the U.S. international tax system from a worldwide 

system of taxation to a participation exemption system of taxation exacerbates the incentive 

under present law to shift profits abroad. The Committee believes that this provision would 

operate to prevent excess foreign taxes credits generated in high-tax branch countries to be used 

to reduce US. tax owed on income generated in a low-tax country. 

Explanation of Provision 

The provision requires foreign branch income to be allocated to a specific foreign tax 

credit basket. Foreign branch income is the business profits of a United States person which are 

attributable to one or more QBUs in one or more foreign countries. 

Under this provision, business profits of a QBU shall be determined under rules 

established by the Secretary. Business profits of a QBU shall not, however, include any income 

which is passive category income. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

22. Acceleration of election to allocate interest, etc., on a worldwide basis (sec. 14303 of the 

bill and sec. 864 of the Code) 

Reasons for Change 

Section 864(f) was added to the Code by the American Jobs Creation Act of 2004 

("AJCA"). !

229 At that time, Congress observed that a U.S.-based multinational corporate group 

with a significant portion of its assets overseas was required to allocate a significant portion of its 

interest expense to foreign-source income, which reduced the foreign tax credit limitation and 

thus the credits allowable, even though the interest expense incurred in the United States would 

not be deductible in computing the actual tax liability under foreign law. Congress believed that 

Pub. L. No. l08-357, 118 Stat. 1418 (October 22. 2004). 
394 

this approach unduly limited such a taxpayer's ability to claim foreign tax credits and left it 

excessively exposed to double taxation offoreign-source income. The AJCA modified the 

interest expense allocation rules by providing a one-time election under which the taxable 

income of the domestic members of an affiliated group from sources outside the United States 

generally would be determined by allocating and apportioning interest expense of the domestic 

members of a worldwide affiliated group on a worldwide-group basis (i.e., as if all members of 

the worldwide group were a single corporation). 

The Committee agrees that interest expense should be allocated using an elective "worldwide fungiblity" approach, under which interest expense incurred in the United States is 

allocated against foreign-source income only if the debt-to-asset ratio is higher for U.S. than 

foreign investments. Accordingly, the provision accelerates the effective date of section 864(f). 

Explanation of Provision 

This provision accelerates the effective date of the worldwide interest allocation rules to 

apply to taxable years beginning after December 31, 2017, rather than to taxable years beginning 

after December 31, 2020. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

23. Source of income from sales of inventory determined solely on basis of production 

activities (sec. 14304 of the bill and sec. 863 of the Code) 

Reasons for Change 

The Committee acknowledges that current administrative guidance, which sources sales 

income, in part, based on the place of destination rather than the place of production, may be 

appropriate in the context of our current tax system. However, the Committee believes this 

approach is not appropriate under a participation exemption system with lower tax rates. Rather 

than providing targeted relief to particular kinds of income, the Committee is instead reducing 

tax rates for all taxpayers, while also modernizing the U.S. system for taxing cross-border 

income. Therefore, the Committee believes changing present law in this area will more 

accurately measure foreign-source taxable income. 

Explanation of Provision 

Under this provision, gains, profits, and income from the sale or exchange of inventory 

property produced partly in, and partly outside, the United States is allocated and apportioned on 

the basis of the location of production with respect to the property. For example, income derived 

from the sale of inventory property to a foreign jurisdiction is sourced wholly within the United 

States if the property was produced entirely in the United States, even if title passage occurred 

elsewhere. Likewise, income derived from inventory property sold in the United States, but 

produced entirely in another country, is sourced in that country even if title passage occurs in the 

United States. [fthe inventory property is produced partly in, and partly outside, the United 

States, however, the income derived from its sale is sourced partly in the United States. 
395 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 
396 

PART II- INBOUND TRANSACTIONS 

1. Tax on base erosion payments of taxpayers with substantial gross receipts (sec. 14401 of 

the bill and sec. 6038A and new sees. 59A and 59B of the Code) 

Reasons for Change 

Foreign-owned U.S. subsidiaries are able to reduce their U.S. tax liability by making 

deductible payments to a foreign parent or foreign affiliates. This can erode the U.S tax base if 

the payments are subject to little or no U.S. withholding tax. Foreign corporations often take 

advantage of deductions from taxable liability in their U.S. affiliates with payments of interest, 

royalties, management fees, or reinsurance payments. This provision aims to tax payments of 

this kind. This type of base erosion has corroded taxpayer confidence in the U.S. tax system. 

Moreover, the current U.S. international tax system makes foreign ownership of almost 

any asset or business more attractive than U.S. ownership. This unfairly favors foreignheadquartered companies over U.S. headquartered companies, creating a tax-driven incentive for 

foreign takeovers of U.S. fim1s. Furthermore, it has created significant financial pressures for 

U.S headquartered companies tore-domicile abroad and shift income to low-tax jurisdictions. 

Since 2000, the number of U.S.-headquartered multinationals among the 500 largest public 

companies has decreased by over 25 percent 

The Committee is also concerned about U.S. and foreign corporations outsourcing their 

U.S. business operations to foreign jurisdictions at the expense of the American worker. In 

certain circumstances, this may have the additional effect of reducing the U.S. income tax 

liability on such companies' profitable operations in the United States. 

This provision aims to level the playing field between U.S. and foreign-owned 

multinational corporations in an administrable way. To the extent that corporations with 

significant gross receipts are able to utilize deductible related party payments to foreign affiliates 

to reduce their U.S. corporate tax liability below l 0-percent, the Committee intends that the base 

erosion and anti-abuse tax function as a minimum tax to preclude such companies from 

significantly reducing their corporate tax liability by virtue of these payments. Significant gross 

receipts is defined as a corporation with $500 million or more in annual gross receipts. 

The Committee also concluded that this minimum tax should limit the extent to which tax 

credits permit large, profitable corporations with significant base erosion payments to avoid 

virtually all tax liability in the reformed corporate tax system. This is to ensure that those 

corporations with significant gross receipts and deductible foreign related party payments pay an 

appropriate amount ofU.S. income tax on an annual basis. 

The provision applies to a corporation irrespective of whether it is owned, directly or 

indirectly, by a parent corporation that is U.S. or foreign-headquartered. The Committee 

believes that this level playing field, along with a globally competitive corporate rate, will 

encourage economically efficient foreign direct investment. Such investment, whether foreign or 

domestic, is in the national interest of the United States and its workers. 

Explanation of Provision 
397 

In general 

Under the provision, an applicable taxpayer is required to pay a tax equal to the base 

erosion minimum tax amount for the taxable year. The base erosion minimum tax amount is the 

excess of 10 percent of the modified taxable income of the taxpayer for the taxable year over an 

amount equal to the regular tax liability (defined in section 26(b )) of the taxpayer for the taxable 

year reduced (but not below zero) by the excess of an amount equal to the credits allowed under 

Chapter !less the credit allowed under section 38 (general business credits) for the taxable year 

allocable to the research credit under section 41 (a). For taxable years beginning after December 

31,2025, two changes are made, (A) the 10-percent provided for above is changed to 12.5-

percent, and (B) the regular tax liability is reduced by the aggregate amount of the credits 

allowed under Chapter 1 (and no other adjustment is made). 

To determine its modified taxable income, the applicable taxpayer computes its taxable 

income for the year without regard to any base erosion tax benefit of a base erosion payment or 

base erosion percentage of any allowable net operating loss deduction. 

Base erosion payments 

A base erosion payment generally includes any amount paid or accrued by a taxpayer to a 

foreign person that is a related party of the taxpayer and with respect to which a deduction is 

allowable under Chapter 1. Such payments also include any amount paid or accrued by the 

taxpayer to the related party in connection with the acquisition by the taxpayer from the related 

party of property of a character subject to the allowance of depreciation (or amortization in lieu 

of depreciation). 

Base erosion payments do not include payments for cost of goods sold (which is not a 

deduction but rather a reduction to income). A base erosion payment includes any amount that 

constitutes reductions in gross receipts of the taxpayer that is paid or accrued by the taxpayer 

with respect to: (1) a surrogate foreign corporation which is a related party of the taxpayer, but 

only if such person first became a surrogate foreigu corporation after November 9, 2017, or (2) a 

foreign person that is a member of the same expanded affiliated group as the surrogate foreign 

corporation. A surrogate foreign corporation has the meaning given in section 7874(a)(2), but 

does not include a foreign corporation treated as a domestic corporation under section 7874(b ). 

A base erosion payment does not apply to any amount paid or accrued by a taxpayer for 

services if such services meet the requirements for eligibility for use of the services cost method 

under section 482, 1230 determined without regard to the requirement that the services not 

contribute significantly to fundamental risks of business success or failure and such amount 

constitutes the total services cost with no markup. 

A base erosion tax benefit means: (i) any deduction allowed under Chapter 1 for the 

taxable year with respect to a base erosion payment, (ii) in the case of a base erosion payment 

with respect to the purchase of property of a character subject to the allowance for depreciation 

(or amortization in lieu of depreciation), any deduction allowed in Chapter 1 for depreciation or 

1230 Described in Treas. Reg. sec. 1.482-9(b). 
398 

amortization in lieu of depreciation with respect to the property acquired with such payment, or 

(iii) any reduction in gross receipts with respect to a payment described above with respect to a 

surrogate foreign corporation (as defined there) in computing gross income of the taxpayer for 

the taxable year. 

Any base erosion tax benefit attributable to any base erosion payment on which tax is 

imposed by sections 871 or 881 and with respect to which tax has been deducted and withheld 

under sections 1441 or 1442, is not taken into account in computing modified taxable income as 

defined above. The amount not taken into account in computing modified taxable income is 

reduced under rules similar to the rules under section 163(j)(5)(B). 1231 

The base erosion percentage means for any taxable year, the percentage determined by 

dividing the aggregate amount of base erosion tax benefits of the taxpayer for the taxable year by 

the aggregate amount of the deductions allowable to the taxpayer under Chapter 1 for the taxable 

year, taking into account base erosion tax benefits described above and by not taking into 

account any deduction allowed under sections 172, 245A or 250 for the taxable year. 

Applicable taxpayers and related parties 

Applicable taxpayer means with respect to any taxable year, a taxpayer: (A) which is a 

corporation other than a regulated investment company, a real estate investment tmst, or an S 

corporation; (B) the average annual gross receipts of the corporation for the three-taxable-year 

period ending with the preceding taxable year are at least $500 million, and (C) the base erosion 

percentage (as defined above) of the corporation for the taxable year is four percent or higher. 

In the case of a foreign person the gross receipts of which are taken into account for 

purposes of this provision, only gross receipts which are taken into account in determining 

income effectively connected with the conduct of a trade or business within the United States is 

taken into account. If a foreign person's gross receipts are aggregated with a U.S. person's gross 

receipts for reasons described in the aggregation mles below, the preceding sentence does not 

apply to the gross receipts of any U.S. person which are aggregated with the taxpayer's gross 

receipts. 

All persons treated as a single employer under section 52( a) are treated as one person for 

purposes of this provision, except that in applying section 1563 for purposes of section 52, the 

exception for foreign corporations under section 1563(b)(2)(C) is disregarded (called the 

"aggregation mles"). 

For purposes of this provision, foreign person has the meaning given in section 

6038A(c)(3) 

Related party means: (i) any 25-percent owner of the taxpayer, (ii) any person who is 

related to the taxpayer or any 25-percent owner of the taxpayer, within the meaning of sections 

267(b) or 707(b )(1), and (iii) any other person related to the taxpayer within the meaning of 

section 482. For these purposes, section 318 regarding constmctive ownership of stock applies 

1231 As in effect before the date of enactment of Tax Cuts and Jobs Act. 
399 

to these related party rules except that 1 0-percent is substituted for 50-percent in section 

318(a)(2)(C), and for these purposes section 318(a)(3)(A), (B) and (C) do not cause a United 

States person to own stock owned by a person who is not a United States person. 

The provision provides that the Secretary of the Treasury is to prescribe such regulations 

or other guidance necessary or appropriate, including regulations providing for such adjustments 

to the application of this section necessary to prevent avoidance of the provision, including 

through: (1) the use of unrelated persons, conduit transactions, or other intermediaries, or (2) 

transactions or arrangements designed in whole or in part: (A) to characterize payments 

otherwise subject to this provision as payments not subject to this provision, or (B) to substitute 

payments not subject to this provision for payments otherwise subject to this provision. 

Information reporting reguirements 1232 

The provision authorizes the Secretary of the Treasury to prescribe additional reporting 

requirements under section 6038A relating to: (A) the name, principal place of business, and 

country or countries in which organized or resident of each person which: (i) is a related party to 

the reporting corporation, and (ii) had any transaction with the reporting corporation during its 

taxable year, (B) the manner of relation between the reporting corporation and the person 

referred to in (A), and (C) transactions between the reporting corporation and each related 

foreign person. 

In addition, for purposes of information reporting under sections 6038A and 6038C, if the 

reporting corporation or the foreign corporation to which section 6038C applies is an applicable 

taxpayer under this provision, the information that may be required includes: (A) base erosion 

payments paid or accrued during the taxable year by the taxpayer to a foreign person which is a 

related party of the taxpayer, (B) such information as the Secretary of the Treasury finds 

necessary to determine the base erosion minimum amount of the taxpayer for the taxable year, 

and (C) such other information as the Secretary of the Treasury determines is necessary. 

The penalties provided for under sections 6038A(D)( 1) and (2) are both increased to 

$25,000. 

Effective Date 

The provision applies to base erosion payments paid or accrued in taxable years 

beginning after December 31, 2017. 

1232 Section 15006 of the bill (and new section 6050Z) establishes certain reporting requirements. These 

reporting requirements arc effective for taxable years beginning after December 31. 2024, and continue to be 

required regardless of whether the revenue requirement is met. Any taxpayer who makes a payment to a foreign 

person who is a related party (as such term is defined in section 14401 of the bill and new section 59 A) of the 

taxpayer during the taxable year is required to make a retum. according to fonns and regulations prescribed by the 

Secretary. setting forth (1) the amount or snch payments by type and separately stated and (2) any amount paid that 

results iu a reduction of gross receipts to the tm,vayer (e.g., cost of goods sold). 
400 

PART III- OTHER PROVISIONS 

1. Taxation of passenger cruise gross income of foreign corporations and nonresident alien 

individuals (sec. 14501 of the bill and sees. 873,882,883, and 887 of the Code) 

Reasons for Change 

The Committee is aware that U.S.-sourced income attributable to passenger cruises 

operated by foreign corporations is generally exempt from U.S. income tax, despite the fact that 

a majority of the passengers are from the United States. In addition, the Committee is aware that 

these corporations rely on services of U.S. government agencies, including the services of the 

U.S. Coast Guard. The Committee believes that it is appropriate to ensure that such firms pay 

taxes toward support of the government resources on which they rely. 

Explanation of Provision 

The provision creates a category of income defined as effectively connected passenger 

cruise gross income, provides specific rules for determining the extent to which such income is 

effectively connected with the conduct of a trade or business in the United States, and removes 

such income from eligibility for the reciprocal exemptions of sections 873 and 883. As a result, 

effectively connected passenger cruise income is subject to net-basis taxation. A conforming 

amendment to the definition of effectively connected income for purposes of the gross-basis tax 

on international shipping income is made. 

Effectively connected passenger cruise gross income is the U.S. territorial waters 

percentage of all gross income from the operation of a commercial vessel on a covered voyage 

(hereafter referred to as "passenger cruise gross income"). A covered voyage is generally 

defined in as a voyage that would be subject to the passenger tax. An anti abuse provision is 

included such that if passengers embark a ship in the United States and more than 10 percent of 

the passengers disembark in the United States, the operation of the ship at all times between such 

events is treated as a covered voyage. A cruise in which all persons who embark in the United 

States later disembark in a foreign port, with no intervening stops, is a covered voyage. 

In determining whether income is from the operation of a passenger cruise, one includes 

all income from actions incidental to the operation, as well as any amounts received with respect 

to any on- or off-board activities, services or sales with respect to passengers, whether or not the 

activities, sales or services are provided onboard the vesseL This includes any income from any 

agreement with any person with respect to the provision of the activities, services, or sales. 

Effectively connected passenger cruise gross income equals the U.S. territorial waters 

percentage multiplied by passenger cruise gross income. With respect to the operation of a ship 

in a covered voyage, the U.S. territorial waters percentage equals the number of days of the 

voyage during which the ship operated in U.S. territorial waters divided by the total number of 

days of the voyage. U.S. territorial waters consists of those waters that are within 12 nautical 

miles from low tide on the U.S. coastline or within the international boundary between the 

United States and a contiguous country. For purposes of this computation, any vessel in a U.S. 

port or within U.S. waters for any portion of a calendar day is considered to be in U.S. waters for 

an entire calendar day. Days during which a ship is out of service in a U.S. port for major repairs 
401 

are not counted. In addition, under no circumstances is a single calendar day to be counted 

twice. Thus, a ship that leaves one US. port, exits US. waters and later the same calendar day 

again enters U.S. waters is in U.S. waters only one day. 

The provision explicitly requires that any passenger cruise gross income considered to be 

effectively connected under general rules without regard to this provision continues to be treated 

as such, even if the U.S. territorial waters percentage of passenger cruise gross income is a lesser 

amount 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

2. Restriction on insurance business exception to the passive foreign investment company 

rules (sec. 14502 ofthe bill and sec. 1297 of the Code) 1233 

Reasons for Change 

The Committee is concerned about a lack of clarity and precision in the exception to the 

passive foreign investment company rules for income derived in the active conduct of an 

insurance business by a corporation that is predominantly engaged in an insurance business. 

This lack of clarity and precision makes the scope of the exception diftlcult to ascertain and to 

enforce. In particular, the Committee is concerned about the lack of precision regarding how 

much insurance or reinsurance business the company must do to qualify under the exception. 

The Committee has been informed of offshore arrangements applying the present-law exception 

that reinsure risks and that invest in U.S. hedge funds, and that have been structured in a manner 

that raises concerns about the potential for base erosion. 1234 The Committee believes that a more 

mechanical, formulaic rule that is more straightforward to enforce and to apply is appropriate 

while still preserving the opportunity for a corporation to present facts and circumstances 

showing it is predominantly engaged in the insurance business, provided the corporation's 

applicable insurance liabilities are at least 10 percent of its total assets. The Committee also 

believes that it is important to separately treat different categories of reserves to more accurately 

determine whether a company meets the insurance exception. 

12·13 For a description of present law, see part D.2 of the description of present law for Title IV of the bill, 

above, relating to passive foreign investment companies. 

123'1 The hedge fund reinsurance arrangement is said to provide indefinite deferral of U.S. taxation of the 

hedge fund's investment earnings, such as interest and dividends. At the time the tm,vayer liquidates the investment, 

ordinary investment earnings arc said to be converted to capital gains, which are subject to a lower mte of tax. Press 

reports have discussed the arrangements. See. e.g., Hal Lux, "The Great Hedge Fund Reinsurance Tax Game,'' 

Institutional Investor. April 200 L 52-58, h!tp:I/\\W\Y.inslitutionalinvcslor.com/ Article/ I 027978ffhc-Grcal-

; Steven Davidoff Solomon. ·'With Lax Regulation. a Risky Industl)' 

Flourishes Offshore,'' Deal Book, New York Times, 2012, 
402 

Explanation of .Provision 

The provision modifies the requirements for a corporation the income of which is not 

included in passive income for purposes of the PFIC rules. The provision replaces the test based 

on whether a corporation is predominantly engaged in an insurance business with a test based on 

the corporation's insurance liabilities. 1235 The requirement that the foreign corporation would be 

subject to tax under subchapter L if it were a domestic corporation is retained. 

Under the provision, passive income for purposes of the PFIC rules does not include 

income derived in the active conduct of an insurance business by a corporation (1) that would be 

subject to tax under subchapter L if it were a domestic corporation; and (2) the applicable 

insurance liabilities of which constitute more than 25 percent of its total assets as reported on the 

company's applicable financial statement for the last year ending with or within the taxable year. 

For the purpose of the provision's exception from passive income, applicable insurance 

liabilities means, with respect to any property and casualty or life insurance business (I) loss and 

loss adjustment expenses, (2) reserves (other than deficiency, contingency, or unearned premium 

reserves) for life and health insurance risks and life and health insurance claims with respect to 

contracts providing coverage for mortality or morbidity risks. This includes loss reserves for 

property and casualty, life, and health insurance contracts and annuity contracts. Unearned 

premium reserves with respect to any type of risk are not treated as applicable insurance 

liabilities for purposes of the provision. For purposes of the provision, the amount of any 

applicable insurance liability may not exceed the lesser of such amount (I) as reported to the 

applicable insurance regulatory body in the applicable financial statement (or, ifless, the amount 

required by applicable law or regulation), or (2) as determined under regulations prescribed by 

the Secretary. 

An applicable financial statement is a statement for financial reporting purposes that (I) 

is made on the basis of generally accepted accounting principles, (2) is made on the basis of 

international financial reporting standards, but only if there is no statement made on the basis of 

generally accepted accounting principles, or (3) except as otherwise provided by the Secretary in 

regulations, is the annual statement required to be filed with the applicable insurance regulatory 

body, but only if there is no statement made on either of the foregoing bases. Unless otherwise 

123' Treasury regulations proposed in 2015 have taken a different approach that is based on the current 

statutory mle. Prop. Treas. Reg. sec. 1.1297-·t 26 CFR Part I. REG-108214-15. April24. 2015. The proposed 

regulations pro;ide that "the term insurance business means the business of issuing insurance and annuity contracts 

and the reinsuring of risks underwritten by insurance companies. together with those investment activities and 

administrative services that arc required to support or are substantially related to insurance and annuity contracts 

issued or reinsured by the foreign corporation." The proposed regulations provide that an investment activity is an 

activity producing foreign personal holding company income, and that is "required to support or lis] substantially 

related to insurance and ammity contracts issued or reinsured by the foreign corporation to the extent that income 

from the activities is earned from assets held by the foreign corporation to meet obligations under the contracts." 

The preamble to the proposed regulations specifically requests cOJmnents on the proposed regulations "with regard 

to how to detemtine the portion of a foreign insurance company's assets that are held to meet obligations under 

insurance contracts issued or reinsured by the company," for example, if the assets "do not exceed a specified 

percentage of the corporation's total insurance liabilities for the year." Ibid. 
403 

provided in regulations, it is intended that generally accepted accounting principles means U.S. 

GAAP. 

The applicable insurance regulatory body means, with respect to any insurance business, 

the entity established by law to license, authorize, or regulate such insurance business and to 

which the applicable financial statement is provided. For example, in the United States, the 

applicable insurance regulatory body is the State insurance regulator to which the corporation 

provides its annual statement. 

If a corporation fails to qualify solely because its applicable insurance liabilities 

constitute 25 percent or less of its total assets, a United States person who owns stock of the 

corporation may elect in such manner as the Secretary prescribes to treat the stock as stock of a 

qualifying insurance corporation if(l) the corporation's applicable insurance liabilities 

constitute at least 10 percent of its total assets, and (2) based on the applicable facts and 

circumstances, the corporation is predominantly engaged in an insurance business, and its failure 

to qualify under the 25 percent threshold is due solely to runoff-related or rating-related 

circumstances involving such insurance business. 

Facts and circumstances that tend to show the firm may not be predominantly engaged in 

an insurance business include a small number of insured risks with low likelihood but large 

potential costs; workers focused to a greater degree on investment activities than underwriting 

activities; and low loss exposure. Additional relevant facts for determining whether the firm is 

predominantly engaged in an insurance business include: claims payment patterns for the current 

and prior years; the firm's loss exposure as calculated for a regulator such as the SEC or for a 

rating agency, or if those are not calculated, for internal pricing purposes; the percentage of gross 

receipts constituting premiums for the current and prior years; and the number and size of 

insurance contracts issued or taken on through reinsurance by the firm. The fact that a firm has 

been holding itself out as an insurer for a long period is not determinative either way. 

Runoff-related or rating-related circumstances include, for example, the fact that the 

company is in runoff, that is, it is not taking on new insurance business (and consequently has 

little or no premium income), and is using its remaining assets to pay off claims with respect to 

pre-existing insurance risks on its books. Such circumstances also include, for example, the 

application to the company of specific requirements with respect to capital and surplus relating to 

insurance liabilities imposed by a rating agency as a condition of obtaining a rating necessary to 

write new insurance business for the current year. 

Effective Date 

The provision applies to taxable years beginning after December 31, 2017. 
404 

3. Repeal of fair market value of interest expense apportionment (sec. 14503 of the bill 

sec. 864 of the Code) 

Reasons for Change 

The Committee believes that the ability to elect to allocate interest expense under section 

864 on the basis of fair market value of assets has led to inappropriate results and needless 

complexity. 

Explanation of Provision 

The provision prohibits members of a U.S. affiliated group from allocating interest 

expense on the basis of the fair market value of assets for purposes of section 864(e). Instead, 

the members must allocate interest expense based on the adjusted tax basis of assets. 

Effective Date 

The provision is efiective for taxable years beginning after December 31, 2017. 

4. Modification to source rules involving possessions (sec. 14504 of the bill and sees. 865 

and 937 of the Code) 

Present Law 

In general 

The U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands 

have income tax systems that "mirror" the U.S. Code, with the latter two possessions being 

permitted under current law to del ink and use their own tax systems provided certain conditions 

are met. The U.S. Virgin Islands may also impose certain local income taxes in addition to taxes 

imposed by the mirror Code. The Code provides rules for coordination of United States and 

U.S. Virgin Islands taxation. 1236 It permits the U.S. Virgin Islands to reduce or remit tax 

otherwise imposed by the mirror code if the tax is attributable to U.S. Virgin Islands source 

income or income effectively connected to the conduct of a trade or business in U.S. Virgin 

Islands. 1237 The U.S. Virgin Islands has exercised that authority to provide development 

incentives for certain types of businesses operating within its borders. Under such initiatives, 

companies can receive a 90 percent reduction in their tax liability on certain income. 

Taxation of individuals 

Under the mirror Code, U.S. Virgin Islands citizens and residents are taxable on their 

worldwide income. A foreign tax credit is allowed for income taxes paid to the United States, 

1236 Sees. 932 and 934. 

'"' Sec. 934. In general, a bona fide resident of the U.S. Virgin Islands is required to file and pay tax only 

to the possession. Persons incurring income tm< liability in both the United States and the U.S. Virgin Islands arc 

required to file tax returns and pay income tax to both jurisdictions. 
405 

foreign countries, and other possessions of the United States. In general, a bona fide resident of 

the U.S. Virgin Islands is required to file and pay tax only to the possession; compliance with 

that obligation satisfies any Federal income tax filing obligation. All other U.S. residents or 

citizens with income from U.S. Virgin Island sources are subject to a dual filing requirement. 

In the case of an individual who is a U.S. citizen or alien residing in the United States or 

the U.S. Virgin Islands, only one tax is computed under the Code. If an individual is a bona fide 

resident of U.S. Virgin Islands for the entire taxable year, such tax is payable to the U.S. Virgin 

fslands and no U.S. tax is imposed. Otherwise, a citizen or resident of the United States who has 

income from sources within the U.S. Virgin Islands must determine the portion of income 

attributable to the U.S. Virgin Islands and the related tax payable to the U.S. Virgin Islands. The 

remaining portion is payable to the United States. 1238 

Concerns that U.S. citizens not resident in the U.S. Virgin Islands were improperly 

claiming residence in the U.S. Virgin Islands 1239 or forming entities in the U.S. Virgin Islands in 

order to recharacterize income earned in the United States as sourced in the U.S. Virgin Islands 

and claim the 90 percent economic development credit led to legislative changes in 2004. 1240 

These changes provided a definition of bona tlde residence in a possession and rules to 

determine source of income from possessions. They also impose a requirement that individuals 

report any change in residency status with respect to a possession during a taxable year. 1241 

Taxation of corporations 

If a corporation is formed in U.S. Virgin Islands, it is classified as a domestic corporation 

for U.S. Virgin Islands purposes and a foreign corporation for U.S. tax purposes. Such a 

corporation is only subject to U.S. tax if it has U.S.-source income or income effectively 

connected with the conduct of a trade or business in the United States. U.S. Virgin Islands taxes 

a domestic corporation on its worldwide income, but the company is allowed a foreign tax credit 

against U.S. Virgin Islands tax for taxes imposed by the United States, foreign countries and 

other possessions. A corporation that is not formed in U.S. Virgin Islands is treated as a foreign 

corporation under the U.S. Virgin Islands mirror Code. A company not formed in U.S. Virgin 

wg Sec. 932(b). See, Internal Revenue Service. Tax Guide for Individuals with Income from 

U.S. Possessions(Pub. 570), 2011, pp. 17-18. 

1239 In Notice 2004-45, 2004-2 C.B. 33 (2004), the IRS described several scenarios in which U.S. persons 

claimed to have satisfied U.S. liabilities by having filed a return with the U.S. Virgin Islands. 

1040 McHenrv v. Commissioner, 2012 U.S. App. LEXIS 7562 (Apri116, 2012) and FTuffv. Commissioner. 

135 T.C. 605 (20l0). 

1241 Sec. 937. In the preamble to final rq,•ulations issued in 2008, certain de minimis exceptions arc 

provided for the U.S. citizen or resident with income from U.S. Virgin Island sources, iu recognition that "the 

interaction of section 937 and other sections of the Code relating to the territories requires a balance between 

implementing the policies Congress intended in section 937(b) while recognizing the territories· efforts to retain and 

attract workers and businesses." T.D. 9391,73 F.R. 19350 (April9, 2008): Treas. Reg. Sec. 1.937-2. Those 

required to report changes in residency status must use Fonn 8898, "Statement for Individuals Who Begin or End 

Bona Fide Residence in aU. S. Possession." 
406 

Islands is only subject to U.S. Virgin Islands tax if it has U.S. Virgin Islands source income or 

income etiectively connected with the conduct of a trade or business in U.S. Virgin Islands. The 

United States taxes its domestic corporations on their worldwide income, but allows a foreign tax 

credit for taxes imposed by foreign jurisdictions, including U.S. Virgin Islands. 

Sourcing rules 

As a general rule, the principles for determining whether income is U.S. source are 

applicable for purposes of determining whether income is possession source. In addition, the 

principles for determining whether income is effectively connected with the conduct of a 

U.S. trade or business are applicable for purposes of determining whether income is effectively 

connected to the conduct of a possession trade or business. However, except as provided in 

regulations, any income treated as U.S. source income or as effectively connected with the 

conduct of a U.S. trade or business is not treated as income from within any possession or as 

effectively connected with a trade or business within any such possession. 1242 This rule applies 

regardless of where the office or fixed place of business connected to such trade or business is 

located. 

Section 865(j)(3) was added by the Technical and Miscellaneous Revenue Act of 1988 

("TAMRA"), 1243 and states that Treasury is authorized to waive the requirements imposed by 

sections 865(e)(l)(B) and 865(g)(2) (both of which impose a 10 percent foreign tax requirement 

for source treatment of sales of personal property) for the purposes of determining Guam, 

American Samoa, Commonwealth of the Northern Mariana Islands, and Puerto Rico-source 

income (sections 931 and 933, respectively). 

Reasons for Change 

The Committee believes that personal property sales within the U.S. Virgin Islands 

should be treated the same as personal property sales in other possessions. 

Explanation of Provision 

The provision modifies the sourcing rule in section 937(b)(2) by modifying the 

U.S. income limitation to exclude only U.S. source (or effectively connected) income attributable 

to a U.S. office or fixed place of business. The provision also modifies section 865(j)(3) by 

providing Treasury with the authority to waive the 10% foreign tax requirement for source 

treatment of capital gains income earned by a U.S. Virgin Islands resident. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2018. 

Sec. 937(b). 

1243 P.L. 100-647. 
407 

5. Repeal exclusion applicable to certain passenger aircraft operated by a foreign 

corporation (sec. 14505 of the bill and sec. 883 of the Code) 

Reasons for Change 

The Committee is aware of countries in which U.S. airlines are not permitted to compete 

on certain international routes that begin or end in the United States due to restrictions in the 

other country. As a result, their competitors are able to monopolize such routes, earning 

transportation income from U.S. sources that is exempted from tax under the reciprocal 

exemption in section 883. That exemption is based on the existence of similar tax exemption in 

the laws of their country of organization. Although nominally reciprocal, the tax exemption is 

not of benefit to the U.S. companies that are not permitted to operate on the routes beginning or 

ending in the jurisdiction offering the exemption. Accordingly, the Committee believes it is 

appropriate to bar grant of an exemption to the foreign airlines in such circumstances. 

Explanation of Provision 

This provision modifies the conditions for granting a reciprocal exemption from U.S. tax 

for gross income derived by a foreign corporation from the international operation of a passenger 

airline. Under the provision, a foreign passenger airline is ineligible for the reciprocal exemption 

under section 883 if it is owned by a corporation organized in a country in which (1) residents 

are ineligible for reductions in rates of taxes under sections 881 or 882 and (2) there are fewer 

than two arrivals and departures per week by U.S.-owned passenger airline carriers that have 

gross operational revenues exceeding $1,000,000,000. The threshold of$1,000,000,000 is 

intended to assure that only arrivals or departures of major carriers 1244 are counted in 

determining the frequency of arrivals and departures by U.S.-owned carriers. 

For purposes of this provision, an aircraft that lands in one country and subsequently 

departs from that country is treated as having engaged in one arrival and depa.t1ure. 

The provision indexes the operating revenues threshold for U.S. -owned passenger 

airlines for taxable years beginning after 2018, applying the cost-of-living adjustment determined 

under section 1 (h)(3), substituting "2017" for "20 16." The indexed amount is rounded to the 

nearest multiple of $1,000,000. 

Effective Date 

The provision is effective for taxable years beginning after December 31, 2017. 

1241 Both the Department ofTranspm1ation. at hUps:i/www.transportation.goy/policv/aviationpolicYiairlinc-guarterlv-financial-rc;-icw, in its Airline Quarterly Financial Review, and the Federal A;-iation 

Administration at https://\Y\Yw.transportation.gov/policy/aviation-policv/airlinc-guaiicrl\·-financial-rc\·icw, in its 

aerospace fiscal forecasts. use a threshold of annual operating revenues to differentiate among airlines. with 

revenues in excess of $1.000.000.000 used to identify the major airlines. 
408 

E. Revenue Dependent Proposals 

I. Revenue dependent proposals (sees. I 5001-15007 of the bill and new sec. 59 A, 

sec. 172(a)(2), sec. 174, new sec. 250, sec. 274, and new sec. 60SOZ of the Code) 

Present Law 

Provisions that modify or eliminate provisions in the bill 

for present law related to sectiOtl 1500 1 of the bill, see the description of present law for 

section 13302 of the bill, which modifies the deduction for net operating losses. 

for present law related to section 15002 of the bill, see the description of present law for 

section 13304 of the bill, which limits the deduction by employers of expenses for certain fringe 

benefits. 

For present law related to sections 15003 and 15004, see the description of present law 

for SubtitleD of the bill. 

For present law related to section 15005, see the description of present law for section 

13206 of the bill, which amends section 174 to requiJe taxpayers to capitalize and amortize 

specified research or experimental expenditures (including software development) ratably over a 

five-year period (or a IS-year period in the case of foreign research) for amounts paid or incurred 

in taxable years beginning after December 3 1, 2025. 

Reporting and penalty provisions 

Present law imposes a variety of infom1ation reporting requirements on participants in 

certa in transactions.

1245 These requirements are intended to assist taxpayers in preparing their 

income tax retums and to help the IRS detennine whether such income tax returns are correct 

and complete. Failure to comply with a reporting requirement may result in the imposition of a 

penalty.'246 

Revenue requirement 

There is no provision in the Code that depends on whether cumulative aggregate onbudget Federal revenue from all sources, during a certain period of time, reaches a particular 

threshold. 

Reasons for Change 

The Committee believes that the bill will generate economic growth that will increase the 

amount of Federal tax revenue collected. If the increase in Federal receipts attributable to 

economic growth is substantial, the Committee would like to return a portion of that increase to 

2<~ Sees. 603 1 through 6060. 

12·16 Sec, e.g., sec. 6652. 
409 

taxpayers in the fonn of additional tax relief In particular, the Committee believes that 

additional tax relief is warranted if the amount of on-budget revenue raised by the Federal 

government from all sources for the period beginning October I, 2017, and ending on September 

30, 2026, is at least $900,000,000,000 more than what is projected under current law (as 

modified by the bill) and current convention of projecting under an assumption that 

macroeconomic variables such as gross domestic product and employment remain fixed at the 

values they are projected to reach under current law. 

The Committee also believes that certain provisions of the Code, including provisions 

added by the bill, require additional reporting to ensure compliance. 

Explanation of Provision 

Provisions that modify or eliminate provisions in the bill 

If a certain revenue requirement is met, five modifications are made to the bill for taxable 

years beginning after December 31, 2025. 

l. The limitation on net operating loss deductions, contained in section 13302 of the bill, 

is increased to 90 percent. 

2. The denial of the deduction for expenses of the employer associated with providing 

food and beverages to employees through an eating facility that meets requirements 

for de minimis fringes and for the convenience of the employer, contained in section 

13304 of the bill, is eliminated. 

3. The deduction for foreign-derived intangible income and global intangible low-taxed 

income, contained in section 14202 of the bill and new section, is maintained at 37.5 

percent for foreign-derived intangible income and 50 percent for global intangible 

low-taxed income. 

4. The amount of regular tax liability used for purposes of computing the base erosion 

minimum tax amount, contained in section 14401 of the bill and new section 59 A, 

continues to not be reduced by the amount of section 41 research credit claimed. The 

10-percent tax rate applied to modified taxable income (as defined in section 14401 of 

the bill and new section 59 A) used for purposes of computing the base erosion 

minimum tax amount is maintained. 

5. The requirement, contained in section 13206 of the bill, that taxpayers capitalize and 

amortize specified research or experimental expenditures (including software 

development expenditures) ratably over a five-year period (or a 15-year period in the 

case of foreign research) for amounts paid or incurred in taxable years beginning after 

December 31, 2025, is eliminated, and section 174, as in effect before amendment by 

section 13206 of the bill, is reinstated .. 

The revenue requirement is met if cumulative aggregate on-budget Federal revenue from 

all sources for the period beginning on October 1, 2017, and ending on September 30, 2026, as 
410 

determined by the Secretary of the Treasury based on amounts reported in the Financial Report 

of the United States Government, exceeds $27,487,000,000,000 by $900,000,000,000 or more. 

Reporting and penalty provisions 

Section 15006 of the bill (and new section 6050Z) establishes certain reporting 

requirements. These reporting requirements are effective for taxable years beginning after 

December 31, 2024, and continue to be required regardless of whether the revenue requirement 

is met. 

1. Any taxpayer who makes research and experimental expenditures (within the meaning 

of section 174) during a taxable year is required to make a return, according to forms 

and regulations prescribed by the Secretary, setting forth the aggregate amount of such 

expenditures. 

2. Any taxpayer who makes a payment to a foreign person who is a related party (as such 

term is defined in section 14401 of the bill and new section 59 A) of the taxpayer 

during the taxable year is required to make a return, according to forms and 

regulations prescribed by the Secretary, setting forth (1) the amount of such payments 

by type and separately stated and (2) any amount paid that results in a reduction of 

gross receipts to the taxpayer (e.g., cost of goods sold). 

3. Any taxpayer who has foreign-derived intangible income (as defined in section 14202 

of the bill and new section 250) for a taxable year is required to make a return, 

according to the forms and regulations prescribed by the Secretary, setting forth (1) 

the aggregate amount of such income, (2) the amount of forei~:,>n-derived deduction 

eligible income (as defined in section 14202 of the bill and new section 250), and (3) a 

certification that any foreign-derived deduction eligible income does not relate to the 

sale of products for any use, consumption, or disposition within the United States. 

Unless it is shown that such failure is due to reasonable cause, if there is any failure to 

make a return required under this provision containing the information required by this provision 

on the date described therefor (including any extension of time for filing), the person failing to 

file the return is required to pay (on notice and demand by the Secretary and in the same manner 

as tax) an amount equal to $1,000 for each day during which the failure continues (with the total 

amount per return not to exceed $250,000). 

Effective Date 

The provisions that modify or repeal other provisions of the bill are effective for taxable 

years beginning after December 31, 2025, if the revenue requirement is met. 

The reporting requirements are effective for taxable years beginning after December 31, 

2024. 
411 

11. BUDGET EFFECTS OF THE BILL 

D. Committee Estimates 

In compliance with paragraph l l(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 "Tax Cuts and Jobs Act" as reported. 

The bill is estimated to have the following effects on Federal budget receipts for the 

period 20 18-2027: 
JOI:-IT Cm1MlTTF.F. ON TAXA

NcwE'mtter 17, 2017 

JCX-59-17 

tFH :CTS OF 

TilE ''TAX CUTS AND JOBS ACT," 

AS OROF.RW RF.PORTf.O 11\' THF.CO.\IMf rJ"t:f..O.\' FINANCF.ON NOVF.Milf.R 16, 2017 

Fl$(111 Yl"lli"S 2018 . 2027 

f Billions <J/ Dollars} 

i>J'(Wi.sion 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 20 18-

I. Tax R('f()rm fo•· Jndh'ld11:d s 

A. Simplification and Rcfonn orR:.ltCS, Standard Deductions. 

and ExcmptiOnl> 

12%, 22o/o.., 24%, 32%, 35%. nod 38.5% inNmc 

t.nx rntc brnckcts (sunset 12/31t2S) ( 11r21 .............. lyba 12131/17 -89.8 -13o.9 -136.3 -141.7 -147.1 -153.1 -159.0 -165.5 -50.3 (3] -645

2. Modify standard dOOuction (S 12.000 for sing.les.. S24.000 

for m:m icd fihogj()imly. Sl8.000 (or lloH) (suasct 

12131125) [2) .................... tyba 12/3 1/17 -58.3 -84.1 -86.6 -89.1 -92.6 -95.1 -98.1 -101.6 -30.8 [3] -41

3. of OOduetion for personal exemptions 

1213112$) [2] .................................................. ...................... oyba 1213 1117 93.9 138.1 1425 147.4 153 158.8 164.6 1705 51.7 -·· 675

4. Altcmative inllation mt-asure ........ tybal2131/17 0.8 2.2 s.s 8.3 10.4 12.9 16.7 20.1 25.6 31.5 27

n. TrcatmL'•Ilt of Business fnt:ome of 

1. A ltO\" 17.4% deduction of <:("rtnin OOmestic u(m .. savice 

J):.lSSihrough income of individuals.. capped 31 SO pcrccm of 

taXpaycr·s share of total wn¢"C'.S pnid by the business. 

Excqniot!S (I) allow the de<h.1etion for service passthroug.h 

income for i;ldtviduals below tax.'lblc iOCQCnc threshold. 

nnd (2) pro,·idc the wnge cop does noc apply for indi\'idu.1ls 

bc!low taxable income threshold. 11lri!S001d i.s t:n:ablc 

income below SSOO.OOO for joint fil<.·rs, S2SO,OOO for all 

other individu:lls. Jlh .. 'ISCd out over' next SIOO.OOO lOt• joim 

filers and $50.000 for all others (sunset 12/3 tn5) {41, ........ tyba 12131117 ·24.5 ·41.6 ·43.9 -45.3 -46.1 -45.1 -46.1 ·44.5 ·22.0 ·3.1 ·201

2. Oi.sallow netivc puss-through losses in excess ofSSOO,OOO 

fot joint tilen. S250.000 for all others (sunset 12131125) ..... tyba 12131117 10.2 16.5 16.6 17.2 17.8 18.2 18.8 19.5 5.9 -3.5 78

C. Reform of the Child l 'ax. Credit 

I. Modif.ictniou of <:.hild tax. credit: S2.000 r)()C ind¢xed: 

refundable Ull to S 1,000 ind<.-xi.-d up to n .. -arest S I 00 bnse 

yea.r $2.500 rcfundability 1hreshold not 

SSOO other <k."J>en<lents aM)( indexed: phase outS 

SSOOK/SSOOK not indexed: increase to less than 18 )'Cars 

Old($\OIISCl i 2JJI/2$) 121 ....................................................... oyba 121.'1117 -31.9 -68.0 -69.7 -71.0 -72.3 -75.6 -77.0 -78.1 -40.6 ... ·313
l,.t·c.,ision 2018 20 19 2020 202 1 2022 2023 2024 2015 2026 2027 2018-

2. Require \'alid Social Se<:urity number of ea(;b child 

to claim refundable portion uf c.hild c.rcxlit (othcrwi.se 

SSOO dcpc:nd<.·m credit) (sunset 12/31/25) 12J ... tyba 12131117 .... 3.2 3.0 2.9 2.9 2.9 2.9 2.8 2.8 o.s 12

1). Simplific:uioo :uul Rcfonn of l)cduc1ions :md Exclusions 

I. Rei)<:;) I of itc•nizod deductions fot not J)o>id or 

tl<.:¢fut-d iJl a tmde or business. inter..':Sl on home <.-quit)' debt. non-disaslC'f casuulty losses. tux 

pn.'parmion <.-xpcnscs, tmd certain miscdlam"Qus 

cX.JX"IlSCS (sunset 12131125) (2j .......................................... tyb-1 12/31117 58.6 104.9 109. 1 II S.S 121.9 128.7 136.1 143.6 59.2 ... 510

2. lttcrcase (XfftntO'ISC limit for <;harit:tblc coruributions 

of cash to public charities (sunset 12131125) ................... cmi tyba 12131/ 17 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Esti11f<IIC Included in /ten, J.D. I. • • • - • - • • • • • • • • • • • • • • • • 

3. Repeal of overall limitation on ih.'mizcd deductions 

(sunscl 1213 1/25) ... tyba 1213 1117 ·-·-• • ·-·-·-·--·-----·-·-• • • • · - • F.stimote lnduded m Item /.D. I. • • ·-·-·-------- -- • ·--• 

4. Modify exclusio1l of gain from sale of a pfiJlcip.11 

residence (sun'S¢t 12131125) ................................................... Sll<a 12/31117 [51 0.1 0.1 0. 1 0.1 0.1 0.1 0.1 [51 ... 0

S. Repeal exclusion for cmplo)".-r-pro\'idod bicycle <.:Onmluter 

fringe (sunscl J213Jf2S) ... tybn 12131117 151 15] 151 (51 (SI 151 (51 (51 151 ...• l

6. Re-peal exclusion for qualifi .. -d 

moving expense reimbursc.•ments 

(SUIIS<t 12131125) [6)(71 .......................... , ............................ , tyba 12131117 0.4 0.6 M 0.6 0.6 0.6 M 0.7 0.2 ... 2

7. Repeal or dcduclion ror lllO\'ing (othcr 

than mcmlx-n of the Armt:d forc .. 'S) (sunset 

12/31125) ....................... ·········· ············· ........ ··········· ........ tyba 12/31117 0.6 0.8 0.9 0.9 1.0 1.0 1.1 1.1 0.3 -- 4

8. Modjtic;nion to wa.&<:ring losscs (S"Unsct 121'31125) .............. tybal213 1117 [SI (SI (51 [SI (S ( (51 [51 (5 1 (SI ... 0

E. Double Gift and GST Ttax Exemption Amount 

(sunset 12131125) ............................................... .................. dda& gmu 1213 1117 -1.2 ·S.I -8.8 ·9.1 ·9.6 -10.1 · 10.7 ·I 1.1 · 11.0 -3.3 -36

P'. Re-peal of Altcmati\•c Minimum Tax on lndi\'iduals 

($Uit$Ct 12/3 1/25) ......... ........ ................................... tyb.1 12/31/ 17 ·8.0 -97.2 -85.4 ·90.0 -95.0 ·99.5 -104.4 ·1 10.0 -79.7 (3} -375

G. Reduce ACA lndi\'idual Sh:m .. "d 

P.aym<:nl Amount to Zero (2Jr8)(9) ..................................... pdtnebaey2018 ... 6.5 10.2 28.8 37.5 41 .2 44.1 46.8 50.1 53.2 83

I I Other Provisions 

I. Allow for incr .. -ased cont·ributions to An t.f. 

allow sav<:( s crcdn for comributiOI\.S. (sunset 

12131125) ............................................................................... tybio 12131117 (3} (3} 131 (3} (3] 131 (3} (3} 131 (3} 1

2. Allow rollc)\'ers from 529 to ABLE 

nccounLo; (slmsct 1213 JI2S) ......... da 12/31117 (3] 131 131 (3) (31 131 (3) 131 (31 (31 1

3. r.xrend time limit for cont .. -stmg JH:S le\'y (SlUlSCI 12131125) (10) (3} (3 ( 131 (3} (3( (3( [3) 131 (3( (31 1

4. lndividuals held oo impfOJ>Cr levyoo 

r¢tiremcn1 planS (s.uo..sct 12/31125) ........................................ IMitrti:t 12131117 • ··--• • · - • • • • ·-· - ·-·-·-- - - • • ·-·-• • NegllglbleRe''etme!;1fect · · - ·-·-

s. Treatmt,ll o r Ct'ttain pcrfomling s .. Tvices 

in the Sinai Peninsula o f fS)1>1 (sunset 12/3 1125) ... spoln 619/IS (3} (3] [3] (3) (3} 131 (3) 131 131 ... 1

6. Modification fCC$ for anstallmc-nt3grccmt.•111$ 

(S.\11\SCI 12J31/25) .. , ... , .......................................... , .... , ..... , .. .,., [ I I} [5} (5} ISJ [5} (5} 15} [5} (5} 151 (5] I
I)·Nwi d on l::fft"tll\'1.' 2018 2019 2020 2021 2022 2023 1024 2025 2026 2027 20 18-

1. Extc:nd the limitations period with n:spcct to excluding 

amounts. r-.:-cci\'ed by wrongfully incare«:.ltcd individuals 

(sunset 1213 1125) ................................................................... DOE [3} ... ·- ... . .. . .. -· ... . .. . .. 

8. lrttnmcnt of student loans on tH.:<::ount or 

or disability (sunset 12/J 1125) ... doia 12/31/ 17 [3} 131 [3) (3 1 [31 131 131 [31 [31 131 

9. Double the deduction for educator expenses (sun!)ct 

12131125) ............................................................................... tyba 12131/17 131 ·0.2 ·0.2 .0.2 ·0.2 ·0.2 ·0.2 ·0.2 .0.1 -· .

10. SianplifiOO filing tC<Juircn'ICul5o for indi\•iduah. O\'..;r 65 

of a.ge (sunset 12131125) ...... ......... ............... tyba DOE • • • • • • • • • • ••••• •• • ••••• •• •• ••• • ••• • • • 1\ro R6\'CIIIIt Effect • · • · • • • · • • • • • • • • • • • • • • • • • • 

11. Sense of the Scnmc to improve c-ustomer scr..,iee nnd 

protcci'IOn$ for t..'lXpayi!I'S by rcislst:.tillS apprOJ)flat.::: IRS 

fuJldi•lg te"cls (sunsc' 12131125) ........................................... DOE • • • • - • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • ,,,() Rtl·tnue h'ffcct· • - • • · • 

12. Return prt'J)<u-ation progmnl!> for low-income tu.xp.1)'el':) 

(sunS<:t 1213 1/2S) ... DOE • . •.•.•. • . • . ••••••• •••••••••••. • . ••• . !Vo .• 

13. Codify nnd pcm1ancntly extend the J':"rcc Pile P'rogram .... D08 • · - ·-· • · • · • • • • • • • · • • •• •• • • • • • • · • · • • • · :Vo Re\'enuet:jfect- ·-· • · • 14. Allow 529 COllttlbUIIOil$ (()t lh<: in Ut¢t'O (S:UJlS<!' 12/31/25),., tyba 12131/17 (3} 13J 131 (31 131 131 131 131 (3] 131 15. MiSSii!i:;.ipJ>i Ri\'i.-'f Delta flooding relief (sunset 

1213 1125)1 121 ... DOE -0.3 131 [SJ [S} [31 [3} f31 131 [31 131 -O

16. Unify the tax treatment ofwhistlcblowcr aw:ards (sunset 

1213 112$) .............................................................................. r,,c;; 1yb312131117 131 131 131 131 (31 {31 (3) 131 13) ... .0

17, Clal'ific:.uion of IRS whisdcblowcr (2) ..................... [131 [3} 131 [31 [3} 131 (31 131 131 [31 131 

I of 'fnx H<>form for lndi" idual$ . . . ............... ....... ... . ..... . . ....... . . .... 4 9.5 · 157.2 · 142.4 - 12$ .3 -117.7 · 114.3 -110.5 .. JOS.8 .J8.7 7S.J ·592

II.. Uusinl"SS l(<> form 

A. Tax Rutc.'S 

1. 200A corpomtc ta:< r:ue in2019 :md thoo.-..'\Ocr ...................... tyb.' 1213 1118 ·15.2 ·99.0 · 138.6 -141.9 -1 43.2 -147.7 ·152.5 ·1 57.0 ·163.1 ·171.0 ·53

2. Rt-duclion. of dividends roct·in.xl dt.-duclion f>l-TCCntages ... tyba 12131/18 ... 0.4 o.s o.s 0.6 0.6 0.6 0.6 0.6 0.7 

3. Zci'O J)Cl'ceru div1dtnds J)'"'id d\.X1uction :uld r<:pc)tling 

penalty . .................. 1}1>3 12131118 • • • · • • · • · • • • · • · • · • · • • • · • · - · • • • · • · • JVcgligiblc Revenue £Jicct - • · • • • • • · • · • • - • • · • · • · • • • 

B. ReJ)cal of Ahe:m:uive Minimum T3x on Corpc>l'3tions (2j .... tyb312J3 1117 · 15 3 ·8.3 ·4.S -4.7 ·1.3 ·1.3 ·1.3 · 1.3 ·1 .2 ·I. I ·34

C. Small BusinL'SS Reform.-; 

I. Lnctea.sc M.'etiou 179 C:<J)L."LlSing to S I million with a 

phast.'Ol.U range beginning ttl S2.S million and c.':Xp.:md 

ddi1lition of qualiliod prOp<.'t'ly . .......... ppisi tyba 12/3 1117 ·3.5 ·6.3 ·4.3 ·2.6 ·2.0 ·I.S -1.1 ·0.9 .0.9 ·0.8 · 1

2. Simplifi ed ae<:<>unting for $ 01011 business ........................... (141 ·8.7 ·6.9 ·2.6 -I.(, -U ·1.2 · 1.2 -1.3 · 1.4 -1.4 -2

D. Cost Rt<;ovcry. d e. 

I. Limit net intC1\."SI deductions to 300.1'. of adjusted 

taxable in<.:<>mc. cnnyforward of dcnii.-"<1 dL-duetion ... tyba 1213 1117 24 .6 39.2 3o.6 30.4 29.2 28.7 28.4 30.4 32.8 34.2 IS

2. ccmpomry 100% bonu$ dcprcci:nioo J)I>IS3 & 

(sunS<:t 1213 1122) [I S[ ... <ppoga 9127117 -36.2 -40.4 -23.3 ·13.4 -1 1.0 8.8 22.3 14.9 10.6 6.4 -124

3. clis,ibility fot 100'/o expensing to film. television, 

and hvc theater (sunset 12/31/22) . ..... ......................... Ppisa 9127117 -0.8 -1.6 -1.3 -1.0 .0.8 0.3 1.3 1.0 0.7 0.6 -
(Jrovi .. ion Eff('ctiw• 2018 20 19 2020 2021 2022 2023 2024 2025 2026 2027 20 18-2

·'- Modifications to dcprec13tion limitations on luxury 

liUIUnlobiles and pcnonal property .. ............. ................ PJ)iS.1 12/31117 • • • .. • • • • .. • .... • .. • • • • • • • • • • • .. • •• .. • .. Estimate lndud£·tl II D 2. 

s. Modific:nions o(li'C!IInl<!IU or certain f:tnn prQJ>eny ............ PJ)iS.'l. 12/,ll/ 17 131 131 131 -0.1 -0.2 -0.3 .(),2 -0.1 J.lJ 131 -0

6. Modificntion of net opc.'1'3ting loss <k-duction ... lai tyba 12131/17 13.0 12.7 10.0 13.8 21.1 27.0 2$.5 17.4 10.2 7.1 70

7. Rqxallikc-kind cxchnngesexcep' fOt real properly........... 11131/17 0.6 1.0 1.3 1.8 2.3 2.9 4.5 5.6 6.7 7

8. 1\ pphcable rC'COVCf)' pcriod for real property ( 16] .. ............. ppis.'l 12/31/17 -0.4 -0.8 -0.9 -1.0 -1.2 -1.3 -1.2 ·1.4 -1.6 -1 .3 -4

9. Amoniz.:nioo of rese:an:.h expenses. no phase in ................... up<>in 12/31125 -· ·- -· ... -· ... . .. ... 26.3 35.8 - 

10. CO:SlS ot'rt:placing.citru.-. plants 

IOlo-t by rc.ruon of a casualty (sum.e:t 12/1/27) ........................ apoiaDOE 131 131 131 131 131 131 PI 131 131 131 1

E. Busi»C$S·Rcl0ltcd Deductions 

I. Rq>eal of dt.-duetion for income attribuwble to domestic 

produCt lOP l'ICtivttiCS .............................................................. •)1>• 12131118 -0.3 3.4 7.9 8.7 9.1 1().0 10.3 28

2. Limitation on deduction by cmploy .. TS of for 

fongc:bcn<:fit.s: 

a. Mcul.s (with modification) and cnlt.'Tiainmcnt apoi:a 12131/ 17 & 

( 17) .................................................................. U))Oitl 12/3J/2S 1.6 2.0 2. 1 2.1 2.2 2.3 2..4 2.S 2.8 2.9 10

b. Qualified fringe.-. ( 18} .................... ......... :tl)()l:l 1213 1/ 17 1.3 1.7 1.7 1.8 1.8 1.8 1.9 1.9 2.0 7

F. Methods 

l. Cc.1tti11 spcctal rule$ !Or taxable )'e.'lrotinclu.sion (1n 

gen<:ral) . ............................................................... ............... t)i>a 12131/ 17 1.9 2 .0 1.6 1.6 0.6 0.2 0.2 0.2 0.2 0.2 7

2. Ccnain Sp\-"(:ial rules for taxable yt.."3.f 

(related to origin::&! issue disc<M.un) ........................................ •)1>•12131117 I.J 2.1 IS 0.9 02 ().2 0.3 0.3 0.3 7

G. Bu.,.im'Ss Credits 

I. Modific;nion of credit for cxpcnM:S fot 

ca1ain for rare di-.casc.-s or conditions . ......... apoii tyb:l 12/3 1117 OS 1.5 1.9 2.3 2.8 3.2 3.7 4.2 4.7 5.1 9

2. Modify rctwbilitntion credit to )KO\'ide 2001. historic 

credit rotably O\'Cr S ye:t-1'$, repeal credit ror l)fc-1936 

prope11y .................. ........ ......... ......................................... ] 191 JSI 0.3 0.6 0.6 o.s 0.3 (),2 0.2 0.2 0.2 2

J. Rcpcal or dedti>C-1100 ro .. cc;nain uouscd bu.sinCS$ ercdlls ....... l)'b• 12131/17 • ......................................... Effccl • • • • • • • • • • • • • • • • • • • • • • 

4. Provide a tax crcchtto ccrt..,_in who 

prO\ ick l3mjly and mcdi<:oJ leave (sunstt 12/3 1/ 19) ............. l)'b• 12131117 -0.7 ·1.5 ·I. I ·0.3 -0.2 ·- ... ... . .. -4

U. Ranks and F'inancialln...;;trumcnt:s 

I. Limitation on ck:du<:tion for FDIC premiums ... 1}1>al2131117 0.8 1.8 1.4 1.4 1.4 1.5 1.5 1.5 1.6 1.6 6

2. Rc.,)(ol of ad,·a.I'K.-e refunding bondJo. ........... ............ a.rbt312!JIII7 0.4 1.1 1.4 1.7 1.9 2.0 2:.0 2. 1 2.1 2. 1 

3. C06t basis ofspcc1fied detcnninc:d without 

l'tg.1rd to ick:lnification. '' ith fot RJCs .................. '""'"'ln 12131117 0.2 0.4 0.3 0.2 0.2 0.2 (),2 0.2 0.2 0.2 1

I. 

l . Modific:nion oflilnitation on cxecssivcemplo)'.'t 

rcmuncrntion. with n1le (20J ............................ , .... cyba 12JJ 1117 0.1 1.2 0.7 0.7 0.7 0.7 (),7 0.7 0.7 0.7 

2. 20% excise lax on excess ttl.'<-<"Xempt organi..:ation 

C'XIX\Ili\'1! COillpellS.'l.IIOO, ........ , .. ,.,.,.,,.,,.,, .. , ,..,,, .. , .... , .... , ... , .... l)i>• 12/31117 0.3 0.4 0.4 0.4 0.4 0.4 (),4 0.4 0.4 0.3 I 

3. Treatment of qualified equity gmnts . ...................... (211 -0.2 ·0.3 -0.2 -0.2 -0.1 -0.1 1.51 [SJ -0.1 -0.1 -1
Provision Eff«rJn· 2018 2019 2020 2021 2022 202J 2024 20'25 2026 2027 2018-2

J. IM\111lJlCC 

I. Net optnttng losses ofhfe insurance compnnies . ........ lybo12f.ll/17 • - . • •••••••••••• · .-. - •• •• ••••• •• E.fltmole hrcllfdcxl m llem II.D.6- • •• - ·-•• • ·.-. • •• ·.-. - 

2. of small hfe C(llllJ):uly dcd,te•ion ............... lyba 12131117 (5) J5J [51 [51 151 ]51 [5] 151 151 [5J 0

3. Adjuslln<..'flt for ch:Ulgc in computing reservi.-s ..................... 1yba 12131117 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0

4, Rcpe;ll of SJ>«ialrule for disanbutiOilS ro shntcholdcrs 

from pre-1984 policybolck'l'S account ................ 1)1>• 12131117 (5} (5} (5) (51 (5} (5) (51 (5} (5) (SJ (

S. Mo<.lllienlloo of prorotion niles for propMy aod 

casualty insurant'< companies. .................... 1)1>• 12131117 0.2 0.3 o.z 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1

6. Rq>e.'ll of sp«:i:kl cstinuted JXI)'1llellls ............................ lyb•l2f.llll7 (51 (51 [SJ JSI (SJ (51 JSI 151 (SJ JSI (

1. Capitali;r.ation of «'T1ain policy :tCICJUisilion expenses... t)'ba 12/31/ 11 0.4 I.S 2.1 2.2 2.4 2.5 2.7 2.9 3.1 3.2 8

8. 'l"l.lX rqX>zl ing for liiCsculement tl"fUIS3CliQns ........................ gcneBUy tyba 12/31117 131 PJ lSI lSI (5] (SJ lSI (SJ 0.1 0.1 (

9. Clnritication or tax basLo; of life 1RSlU'31ll'C contracts ............. g.:ncrally lcia M/2S/09-••••••••• - •• • • •••••••••••••• - •• £sUma/e lrrchldt:d, llt:Jn II.J.8. 

lO. ExccpliOJI 10 ll'flJ)SfCI' ror \'ilhi.lab1c COilSick-ro't1JOII rules .......... .. 12131117 • • .. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • £sfimote ltlclm/t(/ m llem II.J.8. 

K. J>ann<..Tshfps 

I. l"3X gain (l'li lhe sale of:. intetest on look·thnt 

bn:sis.. . ............ ........ ............ .......................... ........ ........ 12/31/17 (5] 0.2 0.3 0.4 o.s o.s 0 .5 0.5 0.6 1

2. Expand tbc: delinition of buih·in loss f(K' 

purposes or partncrs-hip loss lransfcrs ............................ IOJ'Iill 12/ll/17 (51 (5 1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0

3. Chltit;tble contributions and fotc:ign t:txts into 

account in dctcnnining limitat.ion on allowanc< of 

partner'!> share of JOss.. ....... .......... ...................................... 1yba 12131117 (S( 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 O

l ... Organi7..at•ons 

I. ExciM: lOX based on invcstrlli.'flt inconlC or pnvnte 

colleges nnd UOI\'CtSitics ..... ............ ........ , .......................... lyba 12/J 1117 0.2 0.2 o.z 0.2 0.3 0.3 0.3 0.3 0.3 O.l 1

2. Name- and logo uJlrclated busiDCSllo 

taxabl.: inc01nc .............................. .... .... . . . .................. lyba 12131117 0.2 0.2 o.z 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0

3. Unrelated business taxable S<.-pamtcly computed generally 

for c:11ch 1-rndc or bU.SIIlCSS activity ..... ................................. lybal2f.llll7 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 1

4, tnx·txcmpl. for profe»ional sports lc:agues ..... lyb•12f.llfl7 [SJ Ill (lJ [S] (lJ Ill Ill (ll Ill Jl] I

s. Modilie<1tion of1.nxcs on excess bell.Cfit tmnS<lctiom 

(intt'ml<..-dlate .................................................... 1)1>a12131117 • • • • ·- • • ·- • • • • • • • • • • • • • • • • • • • ·- • • • Negllgible Rf:\•tnut Effect· • • 

6. ExceptiOn. to prh'1tc foundation excess business holdings 

ruks for philanthropic bu:sim-ss holdings ... lybo12f.lll17 (5J [5J lSI [SJ (5 1 (51 [SJ (5J (51 [lj (

7. Charitable deduct ton noc allowed (Qf amou.ms tn 

exch:mge for college athletic event se:1ting rights. ............... c-mi tyba 12/.ll/ 17 0.2 0.2 o.z 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0

8. Rcpcnl substam,:uion cxcq,tiorl fot charitable 

cootribution.-. n-ported by don(."C org;mization . .............. c:Jni tyba 12131116 • • • .. • • • • • • • • • • • • • .. • • • • • • .. • • ···· · · ·Negligible Rt:'t't'JIIIc Ej]i--c:t · • • • • • • • • • • • • • • .. • • • • • • • • 

M, Re(ircmtnt 

I. Confomlityof contribution linuts tbr pybn& 

plans ...................................................................................... IYI>.' 121.1 1/17 0.1 01 0.1 0.2 02 0.2 0.2 0.2 02 0.2 0

2. R<..1>1:al of special rule pcnnitting roc.hamctc."tization 

of IRA cootrib,nioos ............................................................. lyb312f.lll17 lSI (SJ lSI lSI (SJ 0.1 0.1 0.1 0.1 0.1 0
l,t•o,·ision f: ff('('fh'(' 1018 2019 lOlO lOll 1022 20lJ 1024 2015 l02G 1027 1018-

3. or scnice awards ror public saf .. ;y 

voluntc..:rs (221 ................. ................... ......................... tyba 1213 1/17 P I P I 131 PI PI 131 -0.1 -0.1 -0.1 -0.1 -

4. E.xu,,dcd rdlovn period for cenain plnn lo.:m ofl'scts .. tyba 12131117 • ·-• • · • • · -- • · • • • · - • · ·-·-• • · ·- • ·- • · Nt·gliglble Re,•enue · · - • · • • • · • • • ·- • · • • • ·- • ·-

N Other I>Jovuions 

I. Modify true tremtnem o( Alaska NattV<: COI'J)(Jf'tllions and 

l'Ohl$ ................................................................. 1231 131 131 131 131 131 131 131 (JJ PI 131 

l . MC)(ljfie::uior' of low tnCOt1lC h()U$ing senet'3lly 

pl'ograrn ............................................... , ... , . . . ..... 12131117 ·--• • ·-- • • • • ·---·- • • • ·-·- • ·-······Negligible l:."'ffect • • • • • • • • • • • • ·-• • • • ·-• • • • 

.3. Exp;tmioo -of btntfitiarie:s of an clcetin& 

btasine" modify ch.-rilablc contribution IIIIlS f•oqb & 

deduction for elec:ting small business lrusts ............... l)i>o t213 tll 7 r, P I P 1 PI P1 P1 PJ P1 PI P1 !31 -

4. Cruf\ modcrmzation and tax reform generally 

12/J 1/19) ............................................................ ..... IIIIlS -1.6 -I.S -1.1 ·- ... . .. -· .•. -· . .. -4

S. r:xC'Inpc alllOUillS for :urcr.an management M."'"\'i«S 

from the excise tmposL"d on transponatwn by air ... ap:t OOE P I (JJ PI 131 131 131 PI PI PI PI 

6. CteRtc qual ified oppor1unity ..................... ,. ... UOE -1.2 -1.7 -1.6 -1.7 ·I.G ·1.5 -I.S -1.6 8.1 2.7 -7

7. Lkny dcduc:uon fot subject to a 

ag.t .. "t'mem peid in COOI\eeuon with sexual h:ttllS...'\.Inct\t .......... 3PQIII OOI; (51 (51 (51 151 (51 (51 (51 (5) !51 (51 

8 . UniiQnn l tc:l.lllle!U Qf in eOJu ingeney fe-e 

C:lSC$, ..... .,,., ............. , .• , ... , ........ ., .......... ,., ... , ............ , ... , •• , ..... • • t3CJ>Oii ()'""'DOE (51 0.1 0.1 0.1 0.1 (51 (51 (51 (51 (51 0

9. Expand provi'SJOII f'('IO ting tO nOn·<leduetibilit)' 

of fines an<.J ............................................................ DOE 151 (51 151 151 !51 (51 (51 (51 !51 (51 0

10. Repeal of dcduc:-tion for tooal lobbying \:'l:fX..,SCS. ........... apoiola DOE 151 (5) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 O

I I. Rcc-harncterizatton of certain gains on propt'Tty held for 

fewer than 3 years tn lhe case of panner.sJup pcofits 

intcri.'SI held tn c:oonecttOil w1th perfom1ance of mvcstmc.'1'11 

oybo 12131117 0.2 0.2 0.1 0.1 0.1 0.1 0.1 01 0.1 01 0

Tot111 or Uusi.nc.ss TMS Rl·fortn ................................................................. -35.6 -?3.8 - 11 1.4 -?5.0 .Sl.6 -59.4 -48.8 -4l.l -4 1

m. l ntrrntttiOfJIII TIII.\' R('ronn 

A. Estu.blisluncnt of Pu.rti<;ip;ttion for 

Ta.xalion of Foreign Income 

I. 0..-duchon for dividends rt-"CCU't"d by domc:st1c 

corporations from certain foc-eign oorporntion.<>. ... )241 ·11.6 ·26.3 ·18.2 -20.1 ·20.5 · 20.4 ·21.7 ·22.7 ·23.3 -24.6 -102

2. Special rules rclattng to or transft.TS i.nvoh·mg dri 1ybn & 

cenaul forc:1gn corporations: ... ................... ..................... ,.,. 12131117 02 02 0.5 08 1.2 1.4 1.6 1.5 1.7 22 2

3. rmumetu (If deferTed fOtetgn u1conl(: upo11 tmnsmon 

tO eXt.'IHJ)IIOII .. ·m of ta:<ahOtl and 

m:uwbtory 1nelusion at r:ue (5·J)C'fcau ntte 

lOt illiquid assetS, IO.pertetn r:atc (()( liquid a$$ttS) .......... 1251 4l .2 21.l l .9 6.l 7l 16.0 29.9 41.6 IS.8 -S.I 8

8 . Relzm-d tO Passive and Mobile hk.'()lne 

I. Cum.·nt indusion of s,lob:LI int;mgiblc low•taxc:d 

ifl(;omc. \\ i th dec.l\lclion. by United States ..... (241 19.6 24.6 9.7 9.4 9.0 8.6 S.9 8.9 15.1 2 1.3 7
2018 201? 2020 2021 2022 2023 2024 2025 2026 2027 201S-

2. D<:du<; tion for fOfcign·dCI'i\'¢d int3l'l$iblc income dCJ'i\·«< 

from trade or busint.'SS within the United Stnt<."S ... lyOn 1213 1/17 -1.3 3.7 6.8 6.4 0.3 -11.4 -15.8 -19.9 -17.8 -15.3 15

3. Special rules fOr transfers ofint:mgiblt prOJ>¢rl)' from 

oontmllcd foreign oorponuions to United States 

sb.archoltkss. ... [261 -3.? -7.3 ·8.9 -12.1 ·8.3 ..(1.9 1.7 1.8 1.9 1.9 -40

C. Other Modific:uions <>fSubpo'U11: ProvisiOilS 

I. Elimination of inclusion of foreign base company 

oil rcllllcd inc<>•nc:: .................................................................. [241 -0.1 -0.3 -0.3 ..(1.3 -0.4 -o.4 -0.4 -o.5 ·0.5 -tl.6 ·1

2. Inflation adju.<>tnll."'lt of de minimis exception for 

f01'tig:n OOse <;Oillp3ny inc01nc ............................................... [241 [3) 131 131 131 [3) 131 13] [3) 131 131 ·0

3. Repeal of inclusion based on withdmwal ofpre\iousty 

excluded subpart F income from (Jmdilicd invc.stm,mt. . ..... [241 [3) 131 [3) (3) [31 [3) 131 [3) 131 (3) [

4. Modilication of stock aunbution mlcs for dch.-rnmli•lS 

btatu.s a.s a c.:ont.rollod foreign corporation ... 1251 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • b·umatc /ncluc/('d in Item //I.A. I. 

s. Modification or dcfiniti()ll of United Stille$ s.hal"tholdcr ....... [241 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0

6. Eliminution of rcquir('mentlhat eorpor.ation must be 

f()t 30 before subJ)<ltt f indusioi\S ,·,ppty ...... [241 [5] 0.1 15] [5) 15] [51 151 [5) 15] [51 0

7. l.ook-lhm nalc for controlled forcign corporations 

petrnancrn .................................................................... [271 ·- ... ·0.8 -1.2 · 1.3 -1.4 ·1.5 · 1.7 ·1.8 ·2.0 ·3

8. Corporations eligible for deduction for dividends from 

controllod foreign COf1>0r.ttions <:xempt from subpm1 F to 

in\'cstmcnts in United Stntc:s propc11y .................... 1241 -0.1 ·0.2 ·0.2 ..(1.2 -0.2 -o.2 ·0.2 ..(1.2 ·0.2 -o.2 -1

D. Prt."\'\.Tition of Base Erosion 

I. Ocsual of deduction for inte-rest expense of Uniux1 States 

sh.nrcho1dcrs whic-h are members of worldwide aniliatcd 

groups with excess domestic indcbtcdum ........................... ryb.' 12131/17 0.5 0.8 0.7 0.8 0.7 0.9 1.0 0.9 1.2 1.3 3

2. Limitation on ineome shifting through intangible 

pr0p4.'t1y ll'ni\SfCJ-s .................................................. ........... To 1)'1>312131117 0.1 0.1 0.1 0.1 0.1 0.1 (1.1 0.2 0.2 0.2 0

3. Certain rcl:lt4.-d party amounts paid or :tccntcd in 

hybrid tr.ansactions or with hybrid entities ..... ...................... lyba 12/31/17 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Uumrm: btcl,ldt:d In Item //I.A. I. 

4. icnnination of:SJ)I-"Cial ruiC$ for domestic intcmational 

sales corpomtic.m ... lyba 12/3 1/18 ... 0.3 0.5 0.6 0.6 0.6 0.6 0.7 0.7 0.7 2

S. lb-fcign C01"p0rtlliQil.S ll01 eligible for 

reduced rate on dividends . ........................ ........................... dpo 12131117 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0

E. Modili¢<ltions Related 10 F<>reigu T.-.x Credit System 

I. Rcpc31 of section 902 indirec-t foreign UL'< crc.-dits: 

dctcnniu.ation (If sccti0«1 960 credi1 on current ye\r 

basi$ . ................................. ............... (241 .• • • • •• • • • • • • • .• • • • • • • .• • ··· .-.• Estimate Included iult£'m //I.A./. 

2. &'l)an:tte f<>r<:ign tax crcdillimitation bas:kt4 for 

foreign br::uteh irtc(lnlt ........................................................... ryb.' 1213 Ii i 7 · • • • • • • · • • · • · • · ·-• · • · • · ·-······· Estimate fl,cluded in Item /II.B. I. • • • • • • • • • • • • • • • • • • • • • 

). At."Celeration of dc.'>C-tion to allocate intc.'fc:>t etc .. on a 

\VOtld,,>ide OOsis .................................................................... tyb.' 12131/17 -0.3 -o.6 -0.7 -0.4 ... . .. . .. ... . .. . .. ·2
419 

;; ;; ~ - - !& I 

~ ~ ~ 

~ § ~ § 

~ l ~ ~ 
FootMH•s rqrJCX-5!)...17: 

II J The fOf" the beginning ()f the '25%. :32'%. 35%,1utd 38.5,. ,ate .. :u)d the sta•l<brd _ deduction :uuo-uu 2013 :t')' d.e base )'C.'lr Oth-er indexed IWlt:kmdt.."t'$ an.: adJUSh.-d (()r tnOa11on 

from Lheir 2017 vnlucs usmg the chained Cl'l·V as dte inflation lllC':ISUrc todctc.mine 101 S \'alucs. 

(2) I::.Stlmate includes the follow1ng ouday ctTeccs: 1Q.lli 1Q!2 1Q11 l2'n 1Qll 1Qll 1Qlfi 2027 

J0%. 12°4 ,22%,24%, 32%,3S%,and38.S% •axbrackcL.;. .................................. .•• 1.0 1.1 1.2 1.2 1.2 1.2 1.2 1.3 (281 4

Modifystruldarddoducoion. ..................................... ................... ••• 9.4 9.7 10.2 10.4 10.5 10.6 10 7 10.9 1281 39

Rept..'3l pcn.onal exemptions .................................................... ............................. ·10.8 ·IS.9 ·16.3 ·16.6 · 16.9 ·11.2 -17.4 -1 7.7 ·S.3 ••• ·76

Ahenlali\'C: inOnti<:n lnteOtSurc: ............. ......................................... ...... ••• .(tJ -0.6 · 1.3 ·1 .6 ·2 I · 2.S ·3.1 ·3.6 ·4,1 · 3

Modificalion()fch.tldt:.xcred•t.......................................... .............................. .... ·-· 18.0 18.4 18.3 18.3 20.3 20.2 20.2 20.2 ·· · 73

Requite v:tJid S«i3l Security nw1.t>er of child 10 C14lim tefundabl<: ponio•l 

of child credi1 (ochc1·wise $SOO <Jcpcndctu Ct"edtl) .................................. . 

Repeal ofi1emi7.cd dcduc11ons tOt taxes not patdor in atradeot 

tntcrcst on home cqutty d .. -bt, non-di.$astcr tos.scs and 

cLTtatn nlis.cc:llancou.s ....................................................... . 

Rcpt'31 of allcmativc minimum lax on ccwporotiocb ... Reduce amount of the ACA mdwidual :.ban-d respoosibility paytm·tu to t.cro .. . 

Clarifi<:ation of I·Rs \\ ........................................................ .. 

Pl IC$$ 1hltn sso nulliou. 

(4) Estun:uc it.clu<ks th<: 

Tocal f:ff'cc1 (SECA intefael•<nl) ... 

On-budget cn'c..-ccs. ...... . Off-budget ct'fcc•s. .. . 

IS} Gam of less thnn SSO nullion. 

10.8 

[281 

.I.J 

-0.2 

·1.0 

( 6) Estimate inclu<k-s the following budg\'1 effects: 

Tocal Revenue EITt.'ltt.... .............. ................ ........ .............. .............. ................... 0.4 

-3.2 

·OS 

3.8 

-6.2 

1281 

1!!12 

-1 .8 

·1.4 

lli2 

0.6 

On-budget •. , ..... , ...................................................... ....... .................. • 0.3 OA Off·budsctelfects.................................................................................................. 0.1 0.1 

(7) l;.s-lu)'I.'Ue nlC'ludC$ poliey th:n tctiln's txclusio•lunder SCCitOu 217(8) (tchucd 10 tncrnbcrs ()ftheArmod f-orces). 

·3.0 ·0.4 

-0.4 

·12.9 

1281 

m2 

·1.6 

-0.3 

· 1.2 

W2 

0.6 

o.s 

0. 1 

(8J pfO\'td<.'(( by dtc Joitn Com_nuttcc 0" Tax.•uion stan· i" eollaboratn'ln with the Cong.res!>ional Budget Ofli«. 

·2.9 

.04 

-0.3 

·28.2 

(2.81 

W! 

.I.J 

-0.3 

·1.0 

Wl 

0.6 o.s 0.1 

·2.? 

.0.4 

-

·35.2 

1281 

lQll 

.09 

.0.7 

1lli 

06 

0.5 0.1 

·2.9 ·0.4 

·38.4 

[281 

m.l 

1.1 

0.3 

1.4 

Wl 

0.6 

o.s 

0.1 

·2.9 ·0.4 

-· 

40.1 

1281 

2.7 

0.6 

2.2 

2lli 

0.6 o.s 0.1 

·2.8 

.0.4 

-· 

43.1 

1281 

1m 

1.9 

0.4 

1.5 

1ill 

0.7 

o.s 

0.1 

·2.8 ·0.4 

·45.2 

1281 

lQl.§ 

0.4 0.1 0.3 0.2 0.1 

-O.S 

4 1.8 

1281 

:l2ll 

W1 

·1 2

-1

13

·82

12

lliJi

-6

·1

·5

lliH

22

0

(9] E ...-tsmate includes the followtng budge1 effec-ts: 2018 lQ!2 1Qll 12U 1Qll 1Qll m2 1Q11 ?018-2

'focal Rcwnuc:- Hni:lCt ................................. .................. ...... ............ -· 6.S 10.2 28.8 37.S 41 2 44, I 46.8 SO. I S3.2 &.1

On-budg.:ocffe<:os .................... ...... ................... ••• 6.5 9.4 26.9 35.2 38.8 41.4 43.9 47.2 504 78OJT-budgco<O'c<:b........ ......................... ....... ....................... ........................ ••• 0.1 0.8 1.9 2 3 2.4 2.7 2 9 2.9 2.8 5

(I OJ Emx:tivc with feSJ)I."C1 10: (I) lc\'lCS mack aftct 1hc dtl1e of a11d (2) lc\'ics made ()n ot before the <btc of cnaClnlCill ptO\'idi.XI that the mne-mo.-uh 1>eriod has riOt <:;l(J)ircd a$ of the date or enac

(II J EO'er:;tivc foe agn .. entt.."'ed into on or aHer the dutc tluH1.S 60 <b)'li: ttftc.T OO.te or eu:Ktn)l!'nt 

(12) t() the "MISSiSSii)J)i Ri\.;r Delt.a 11<1()(1 arc.-.• dclinod us the area Wtlh re'J>ctl t<• which fl nlAjot diSibtCI' h.as. been declared by the l>fcsid('lll umkr M."Ctioo 401 of Robtn T. Staffo•'d 

l)asastcr Relief a1ld Emergency Act b<:.li>rc Match 31, 2016. by rea!1.(Jft of ,s-c\'cre ll()()(ling QCcurring in Tc)C3i.. :·uul dutsng March of2016, (l.f' $.cJ)Ien\lxr 3. 201

by rc-a:.on or $<:\'Cfe lloodmg occumng in l.Olli.•uana dttrins August of201(i. 

113) lO'ccttvc for mf<llniUtiOil pro\i<kd before., on, or after tJtc dntc: of cnnc:tmr:ru Wlth respect to which a finnl de1cmunnuon has not bt."Cn made berorc such date. 
r.·oOinOI<'s fo1· .JCX-S9-17 conciuucd: 

[ 14) ·n1c cxp:m.sion oft he tbn:shold allowing the usc of the c3sh method. the of an exemption from the rcquircnu.mt to usc invc.,-ntories, and the cxp:ut.Sion of the exception from the unifonn cnpitn1iz

rules are effective for tn.'=able years beginning ofter 0<.-cc:mbcr 3l, 2017. The expansion ofchc exct.--ption from tJ1c use the JX..'l'CC1Hage of completion mcduxl. is cffocti\'c for eontrucu ente

into after December 31. 2017. in taxable ending after such date. 111e threshold applicable to C3Ch provision is indexed for in.fhuion for tax::.blc years beginning aftc..'f December 31. 2018. 

r IS] Estimate CQntnins intcmction with the section 179 expansion in U.C.I . 

ll6) Estim:·uc includt."S the I'OIIowing. provisions: ft.)l" nonresidential real nx:h1cc the applicable rCCO\'Cty p<..--riod to 25 years f1·om 39 y<.-:1r:.; for rt.";Sidcntial rcntol properry. reduce the. rccovc.

period to 25 years ffom 27.5 years: for qualified improvernent propeny. reduce the applicable tccow:1y pctiod to 10 years ftom lS years. 

( 17] Estimoto includ<'S the followin$ budg<t dlccts: :1lrui 2!!ll 

TO<tll Rel'cnue Cff«:L... .............. .......... ..... ............... ............ .............. .......... ..... 1.6 2.0 2.1 2.1 2.2 2.3 2.4 2.5 2.8 2.9 

On·budg<t effects ............................................................................................. 1.3 1.6 1.7 1.8 1.8 1.9 2.0 2.1 2.4 2.4 OIT·budg<t cfli.-ots.................................................................................................. 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 

lliUA 

10

8.

1

(IS] Estimotc includ<-. the R>llowing budget effects: :lQJ! lQ.!.2 mQ 1Qll :lQll l.Q.!!:

TO<al Rei'Cnue Effect.................... .............. ........................... ............................. 1.3 1.5 1.7 1.7 1.8 1.8 1.8 1.9 1.9 2.0 7

On·budg<t effects.................................................................................................. 1.0 1.2 1.3 1.3 1.4 1.4 1.5 1.5 1.5 1.6 Off-budget dTccts.. ..................... ........... ............ .............. .......... .............. 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 

6.

1

L 19] Gt..·nerallyeffecti\"e lbt amountS paid ot inc::urred after Dect..•mbet 31 . 2017, with a transition l'lllc ptoviding that for buildmgs owned 01" lc.ased ot all tunes after December 31, 2017. the 24·month 

period for making qualified rehabihl:nion expenditures begins no latt..'f than ISO days after the date of enactment. and the repeal ls effective for such expenditures p<1id or incurred <1ftcr the 

end of the tuxnble ycur in whid1 such 24-month period ends. 

[20) Trunsition rule for any rcmunetntlOil undc,,· a wnnen bindi11g c.OJHtaCI which \\'t\S in effect on Novcn'lber 2, 2017, a.nd which wos not modified lhereaftcr in 0.1\y material ropect. 

r21] Effecli\'C for options exercised Of restricted stock UJlits settled a ncr December 31. 2017. The r>enahy for fuilure to provide 0 notice is cffeclivc for fhilurcs a Ocr December 31. 2017. 

(22] Estimote include'S the following budg<t ciTccts: llij1 mJ. 

TO<nl Rel'cnue Effect........ ............ ................ ............. ............... ............ .............. (3] [3] [3] (3] [3] (3] ·0.1 ·0.1 -0.1 -0.1 

On·budg<t effects..... ......................................................... .............. .............. [3] (3] f3] (3] (3] (3] [3] [31 ·0.1 ·0.1 OIT·budg<t clTccts.................................................................................................. (3] (3] (3] (3] (3] [3] (3] (3] (3] ·0.1 

l23] Gcnerolly, taxnblc years beginning after December 31, 2016. The deduction for 10 a Sculcmcnt Trust i.:. cffc."Ctivc for ll\Xoblc yc.11r:, for which the Native Coq:>Omtion's refund 

st<ltutc of limilations period hns not expired, with :a one-year w:1ivcr of the rcftmd statute oflimitntions period in the event that tlle p<.'fiod expires before the end of the· one·yc..v period 

beginning on the date of L'tlO.ctmL'"1ll. 

-0

(3

(3

r24] Efft."Ciivc for laxnbfc of foreign C()rponuions beginning afler DcCX'mbcr 3 1. 2017. and to taxable years of Unitc.xl Slates :,harcholdcr$ with or within which such taxublc ycaf'$ of fQrcign corpOration

[25) Effcc1ivc for 1hc last taxable year of foreign corporntion.:; beginning before Janunry 1. 2018. and aU subsc.oqucnt taxable years of foreign corporations and fOr the taxable years of a Unitc."(l States shareho

with or within which suc,h tnx:tble yc3rs end. 

l26) Ellc.'Ciivc for distributions made in tn.xable years of fon:ign corpomtion.s beginning after Dc."Ccmbcr 3 1. 2017. and for taxable years of United St3tCS shareholders wilh or wilhin which o;uch taxnblc year

foreign COJ])(1111lions end. 

r27) EfTc."Cii\'C for laxnl>lc years of foreign rorporatioos beginning afll..'f December 31. 2019. and to taxable years of United States sharcholdc.TS with or wilhin which such taxnble years of foreign corporation

r28)1ncreusc in outJays of less thll.n sso million. 

r29] R.;:pc.aJ provisions arc for Hlxnblc years bc..-g.inning after December 31. 2025. aud reporting r<.'qllirc.mcnts and (>CIUihics nrc e0i;.'Ctivc for taxable beginning after O<X:cmb ... T 3 l' 2024. 

(30] Negligible rcv<1mc ciTe<!. 
422 

III. VOTES OF THE COMMITTEE 

Motion to report the bill 

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 "Tax Cuts and Jobs Act," as 

modified by the Chairman's modifications to the mark and amended by the Committee, was 

ordered favorably reported by rollcall vote of 14 ayes and 12 nays on November 16, 2017. 
423 

IV. REG ULATORY IMPACT AND OTHER MATTERS 

0. Regulatory Impact 

Pursuant to paragraph II (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 our the provisions of the bill as amended. 

Impact on individuals and businesses, personal privacy and paperwork 

The provisions of the bill are not expected to impose additional administrative 

requiremems or regulatory burdens on individuals or businesses. 

TI1e provisions of the bill do uot impact personal privacy. 

E. Unfunded Mandates Statement 

This inforn1ation is provided in accordance with section 423 of the Unfunded Mandates 

Refonn Act of 1995 (Pub. L. No. I 04-4). 

The Committee has determined that the tax provisions of the reported bill do not contain 

Federal private sector mandates or Federal intergovernmental mandates on State, local, or triba l 

governments within the meaning of Public Law I 04-4, the Unfunded Mandates Reform Act of 

1995. 

F. Tax Complexity Analysis 

Section 4022(b) of the Internal Revenue Service Refonn aud Restrncturiug Act of 1998 

requires the staff oft he Joint Committee on Taxation (in consultation with the Internal Revenue 

Service and tl1e Treasury Department) 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 legisla tion includes a 

provision that directly or indirectly amends the Code and has widespread applicability to 

individuals or small businesses. The staff of the Joint Committee on Taxation bas detennined 

that the following provisions are of widespread applicability to individuals or small businesses. 

I. Temporary modification ofr.ax rates, tax brackets, standard deduction and repeal of 

personal exemptions(secs. 11001, 11002, 11021 and 1104 1 ofthe bill) 

Summary description of the provisions 

The bill temporarily changes the structure of the individua l income tax by modifying the 

rate structure such that the tax bracke ts are I 0-percent, 12-percent, 22-percent, 24-percent, 32-

percent, 35-percent and 38.5-percent. The bill temporarily increases the size of the standard 

deduction (for 20 18 tbe standard deduction is $24,000 for joint fi lers, S 18,000 for heads of 

household and $12,000 for other filers), and temporarily eliminates personal exemptions. These 

provisions sunset for taxable years beginniug after December 3 1, 2025. 
424 

Number of affected taxpayers 

It is estimated that the provision will affect approximately 120 million tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional records due to these 

provisions. It should not result in an increase in disputes with the IRS, nor will regulatory 

guidance be necessary to implement this provision. 

The IRS will need to adjust its wage withholding tables to reflect the repeal of personal 

exemptions. Because revised wage withholding will occur within the first month of 2018, this 

would require employers to switch to new withholding tables somewhat quickly, which can be 

expected to result in a one-time additional burden for employers (or potential additional costs for 

employers that rely on a bookkeeping or payroll service). 

The IRS will need to modify its forms and publications. The temporary nature of the 

provision will necessitate that the IRS do this again once the temporary provisions expire. 

Some taxpayers who currently itemize deductions may respond to the provision by 

claiming the increased standard deduction in lieu of itemizing. According to estimates by the 

staff of the Joint Committee on Taxation, approximately 94-percent of taxpayers will claim the 

standard deduction under tbe bill, up from approximately 70-percent under present law. These 

taxpayers will no longer have to file Schedule A to Form 1040, a significant number of which 

will no longer need to engage in the record keeping inherent in itemizing below-the-line 

deductions. Moreover, by claiming the standard deduction, such taxpayers may qualify to use 

simpler versions of the Form 1040 (i.e., Form 1040EZ or Form 1040A) that are not available to 

individuals wbo itemize their deductions. These forms simplify the return preparation process by 

eliminating from the Form 1040 those items that do not apply to particular taxpayers. 

This reduction in complexity and record keeping also may result in a decline in the 

number of individuals using a tax preparation service, or tax preparation software, or a decline in 

the cost of such service or software. The provision also should reduce the number of disputes 

between taxpayers and the IRS regarding the substantiation of itemized deductions. 

2. Temporary deduction for qualified business income (sec. 11011 of the bill) 

Summary description of the provisions 

For taxable years beginning after December 31, 2017, and before January 1, 2026, an 

individual taxpayer generally may deduct 17.4 percent of qualified business income from a 

partnership, S corporation, or sole proprietorship, as well as 17.4 percent of aggregate qualified 

REIT dividends and qualified cooperative dividends. A limitation based on W -2 wages paid is 

phased in above a threshold amount of taxable income computed without regard to this 

deduction. A disallowance of the deduction with respect to specified service trades or businesses 

is also phased in above the threshold amount of taxable income computed without regard to this 

deduction. 
425 

The deduction does not apply to specified service businesses, except in the case of a 

taxpayer whose taxable income does not exceed the threshold amount of $250,000 (200 percent 

of that amount, or $500,000, in the case of a joint return). The threshold amount is indexed for 

inflation. The exclusion from the definition of a qualified business for specified service trades or 

businesses is fully phased in for a taxpayer with taxable income in excess of the threshold 

amount plus $50,000 ($1 00,000 in the case of a joint return). 

For each qualified trade or business, the taxpayer is allowed a deductible amount equal to 

the lesser of 17.4 percent of the qualified business income with respect to such trade or business 

or 50 percent of the W-2 wages with respect to such business (the "wage limit"). However, if the 

taxpayer's taxable income is below the threshold amount, the deductible amount for each 

qualified trade or business is equal to 17.4 percent of the qualified business income with respect 

to each respective trade or business. 

Qualified business income for a taxable year generally means the net amount of domestic 

qualified items of income, gain, deduction, and loss with respect to the taxpayer's qualified 

businesses. Qualified business income does not include any amount paid by an S corporation 

that is treated as reasonable compensation of the taxpayer. Similarly, qualified business income 

does not include any guaranteed payment for services rendered with respect to the trade or 

business, and to the extent provided in re~,;ulations, does not include any amount allocated or 

distributed by a partnership to a partner who is acting other than in his or her capacity as a 

partner for services. Qualified business income or loss does not include certain investmentrelated income, gain, deductions, or loss. 

Number of affected taxpayers 

It is estimated that the provision will affect over ten percent of small business tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional records due to the 

provision. It should not result in an increase in disputes with the IRS, nor will regulatory 

guidance be necessary to implement this provision. It may, however, increase the number of 

questions that taxpayers ask the IRS, such as how to calculate qualified business income and how 

to apply the phaseins of the W -2 wage limit and of the exclusion of service business income in 

the case of taxpayers with taxable income exceeding the threshold amount of$250,000 (200 

percent of that amount, or $500,000, in the case of a joint return). This increased volume of 

questions could have an adverse impact on other elements of IRS' operation, such as the levels 

of taxpayer service. The provision should not increase the tax preparation costs for most 

individuals. 

The IRS will need to add to the individual income tax forms package a new worksheet so 

that taxpayers can calculate their qualified business income, as well as the phaseins. This 

worksheet will require a series of calculations. 

3. Temporary increase in child tax credit (sec. 11022 of the bill) 

Summary description of the provisions 
426 

The bill temporarily increases the value of the child tax credit to $2,000, providing that 

no more than $1,000 per child shall be refundable. This $1,000 limitation is indexed and rounded 

up, such that in 2018 it is $1,100. In order to qualify for the refundable child tax credit, a Social 

Security number must be provided for the qualifying child for whom such credit is claimed. The 

bill temporarily increases the age eligibility of a qualifying child by one year, providing that 

children under age 18 may qualify for the credit These provisions sunset for taxable years 

beginning after December 31, 2025. 

Number of affected taxpayers 

It is estimated that the provision will affect approximately 90 million tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional records due to these 

provisions. It should not result in an increase in disputes with the IRS, nor will regulatory 

guidance be necessary to implement this provision. The provision may, however, increase the 

number of questions that taxpayers ask the IRS, such as whether they may claim the new family 

credit for certain members of their household, or whether and to what extent the combined tax 

credit is refundable. 

The IRS will need to modify its forms and publications to reflect this change. The 

temporary nature of the provision will necessitate that the IRS do this again once the temporary 

provision expires. 

4. Temporary suspension of the deduction for State and local income taxes (sec. 11042 

of the bill) 

Summary description of the provisions 

The bill provides for a suspension of the itemized deduction for State and local taxes, as 

described below. 

For the taxable years to which the suspension applies, in the case of an individual, State, 

local and foreign property taxes and State and local sales taxes are allowed as a deduction only 

when paid or accrued in carrying on a trade or business or an activity described in section 212 

(relating to expenses for the production ofincome). 1247 Thus, the bill allows only those 

deductions for State, local and foreign property taxes, and sales taxes that are presently 

deductible in computing income on an individual's Schedule C, Schedule E, or Schedule F on 

such individual's tax return. For instance, in the case of property taxes, an individual may 

deduct such items only if these taxes were imposed on business assets (such as residential rental 

property). 

The bill does not modify the deductibility of GST tax imposed on certain income distributions. 
427 

For the taxable years to which the suspension applies, in the case of an individual, State 

and local income, war profits, and excess profits taxes are not allowable as a deduction. 

The suspension ends for taxable years beginning after December 31, 2025. 

Number of affected taxpayers 

It is estimated that the provision will affect approximately 44 million tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional records due to this 

provision. Because the deduction for State and local taxes has been longstanding in the Code, its 

repeal may require regulatory guidance, so as to provide guidance for taxpayers regarding which 

taxes remain properly deductible on an individual's Schedule C, Schedule E or Schedule F. This 

may also result in an increase in disputes with the IRS. 

The IRS will need to modify its forms and publications to reflect this change. The 

temporary nature of the provision will necessitate that the IRS do this again once the temporary 

provisiOn expires. 

5. Modifications of rules for expensing depreciable business assets (sec. 13101 of the 

bill) 

The bill increases the maximum amount a taxpayer may expense under section 179 to 

$1,000,000, and increases the phase-out threshold amount to $2,500,000. The $1,000,000 and 

$2,500,000 amounts, as well as the $25,000 sport utility vehicle limitation, are indexed for 

inflation for taxable years beginning after 2018. 

The bill expands the definition of section 179 property to include certain depreciable 

tangible personal property used predominantly to furnish lodging or in connection with 

furnishing lodging. 

The bill also expands the definition of qualified real property eligible for section 179 

expensing to include any of the following improvements to nonresidential real property placed in 

service after the date such property was first placed in service: roofs; heating, ventilation, and 

air-conditioning property; fire protection and alarm systems; and security systems. 

The bill applies to property placed in service in taxable years beginning after December 

31,2017. 

Number of affected taxpayers 

It is estimated that the provision will affect over ten percent of small business tax returns. 

Discussion 
428 

While taxpayers purchasing section 179 property will still be required to complete and 

file Form 4562, Depreciation and Amortization (Including Information on Listed Property), 

significantly less detail is required to be included on such form. Accordingly, the compliance 

burden of many taxpayers will be reduced. 

6. Temporary 100-percent expensing for certain business assets (sec. 13201 of the bill) 

The bill extends and modifies the additional first-year depreciation deduction through 

2022 (through 2023 for longer production period property and certain aircraft). The 50-percent 

allowance is increased to 100 percent for property placed in service after September 27, 2017, 

and before January I, 2023 (January 1, 2024, for longer production period property and certain 

aircraft), as well as for specified plants planted or grafted after September 27, 2017, and before 

January l, 2023. Thus, the provision repeals the phase-down of the additional first-year 

depreciation deduction for property placed in service after December 31, 2017, and for specified 

plants planted or grafted after such date. 

As a confonning amendment to the repeal of corporate AMT, the election to accelerate 

AMT credits in lieu of bonus depreciation is repealed. 

The bill maintains the section 280F increase amount of $8,000 for passenger automobiles 

placed in service after December 31, 2017. 

The bill extends the special rule under the percentage-of-completion method for the 

allocation of bonus depreciation to a long-term contract for property placed in service before 

January 1, 2023 (January 1, 2024, in the case of longer production period property). 

The bill expands the definition of qualified property eligible for the additional first-year 

depreciation allowance to include qualified film, television and live theatrical productions (as 

defined in section 18l(d) and (e)) for which a deduction otherwise would have been allowable 

under section 181 without regard to the dollar limitation or tennination of such section, effective 

for productions placed in service after September 27, 2017, and before January I, 2023. For 

purposes of this provision, a production is considered placed in service at the time of initial 

release, broadcast, or live staged performance (i.e., at tbe time of the first commercial exhibition, 

broadcast, or live staged performance of a production to an audience). 

The bill excludes from the definition of qualified property any property which is 

primarily used in the trade or business of the furnishing or sale of (1) electrical energy, water, or 

sewage disposal services, (2) gas or steam through a local distribution system, or 

(3) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case 

may be, have been established or approved by a State or political subdivision thereof, by any 

agency or instrumentality of the United States, by a public service or public utility commission 

or other similar body of any State or political subdivision thereof, or by the governing or 

ratemaking body of an electric cooperative. 

Number of affected taxpayers 

It is estimated that the provision will affect over ten percent of small business tax returns. 
429 

Discussion 

The reporting requirements are unchanged by this provision. Capital assets purchased 

during the tax year will still need to be reported on Form 4562, Depreciation and Amortization 

(Including Information on Listed Property); however, the current year tax deduction associated 

with such assets will increase. 
430 

CBO COST AND BUDGETARY CONSIDERATIONS

The following estimate of the costs of this measure has been provided by the Congressional Budget Office: 

SUMMARY

The Reconciliation Recommendations of the Senate Committee 

on Finance, the Tax Cuts and Jobs Act, would amend numerous 

provisions of U.S. tax law. Among other changes, the bill would reduce most income tax rates for individuals and modify the tax 

brackets for those taxpayers; increase the standard deduction and 

the child tax credit; and repeal deductions for personal exemptions, 

certain itemized deductions, and the alternative minimum tax 

(AMT). Those changes would take effect on January 1, 2018, and 

would be scheduled to expire after December 31, 2025. The bill also 

would permanently repeal the penalties associated with the requirement that most people obtain health insurance coverage (also 

known as the individual mandate). 

The legislation would permanently modify business taxation as 

well. Among other provisions, beginning in 2019, it would replace 

the structure of corporate income tax rates, which has a top rate 

of 35 percent under current law, with a single 20 percent rate. The 

legislation also would substantially alter the current system under 

which the worldwide income of U.S. corporations is subject to taxation. 

The staff of the Joint Committee on Taxation (JCT) estimates 

that enacting the legislation would reduce revenues by about 

$1,633 billion and decrease outlays by $219 billion over the 2018– 

2027 period, leading to an increase in the deficit of $1,414 billion 

over the next 10 years. A portion of the changes in revenues would 

be from Social Security payroll taxes, which are off-budget. Excluding the estimated $27 billion increase in off-budget revenues over 

the next 10 years, JCT estimates that the legislation would increase on-budget deficits by about $1,441 billion over the period 

from 2018 to 2027. Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues. 

JCT estimates that enacting the legislation would not increase on-budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2028. 

Because of the magnitude of its estimated budgetary effects, the 

Tax Cuts and Jobs Act is considered major legislation as defined 

in section 4107 of H. Con. Res. 71, the Concurrent Resolution on 
431 

1See Joint Committee on Taxation, Estimated Revenue Effects of the ‘‘Tax Cuts and Jobs Act,’’ 

as Ordered Reported by the Committee on Finance on November 16, 2017, JCX–59–17 (November 

17, 2017), https://go.usa.gov/xnKQv. 

the Budget for Fiscal Year 2018. It therefore triggers the requirement that the cost estimate, to the greatest extent practicable, include the budgetary impact of the bill’s macroeconomic effects. The 

staff of the Joint Committee on Taxation is currently analyzing 

changes in economic output, employment, capital stock, and other 

macroeconomic variables resulting from the bill for purposes of determining these budgetary effects. However, JCT indicates that it 

is not practicable for a macroeconomic analysis to incorporate the 

full effects of all of the provisions in the bill, including interactions 

between these provisions, within the very short time available between completion of the bill and the filing of the committee report. 

CBO and JCT have determined that the tax provisions of the legislation contain no intergovernmental or private-sector mandates 

as defined in the Unfunded Mandates Reform Act (UMRA). 

ESTIMATED COST TO THE FEDERAL GOVERNMENT

The estimated budgetary effects of the Tax Cuts and Jobs Act are 

shown in the table below. 

BASIS OF ESTIMATE

Revenues and Direct Spending 

The Congressional Budget Act of 1974, as amended, stipulates 

that JCT’s estimates of revenues will be the official estimates for 

all tax legislation considered by the Congress. Therefore, CBO incorporates JCT’s estimates into its cost estimates of the effects of 

legislation. JCT provided virtually all estimates for the provisions 

of the bill, but JCT and CBO collaborated on the estimate of the 

provision that would eliminate the penalties associated with the requirement that most people obtain health insurance coverage.1 The 

date of enactment of the bill is generally assumed to be December 

1, 2017. 

JCT estimates that, together, the provisions contained in the legislation would decrease Federal revenues, on net, by about $38 billion in 2018, by $972 billion over the period from 2018 to 2022, and 

by $1,633 billion over the period from 2018 to 2027. Net outlays 

would be nearly unchanged in 2018, and would decrease by $46 billion from 2018 to 2022, and by $219 billion over the period from 

2018 to 2027. On net, deficits would increase by $38 billion in 2018, 

by $926 billion from 2018 to 2022, and by $1,414 billion from 2018 

to 2027. A portion of those effects reflect changes to revenues from 

Social Security taxes, which are off-budget. JCT estimates that 

over the 2018–2027 period, the bill would increase on-budget deficits by $1,441 billion and reduce off-budget deficits by $27 billion. 
432 

Tax Changes for Individuals.—The bill would make numerous 

changes to tax law pertaining to individuals. 

JCT estimates that the individual tax provisions would, on net, 

reduce revenues by $1,119 billion from 2018 to 2027. Those provisions also would decrease outlays by an estimated $233 billion over 

the 2018–2027 period. Some provisions would increase off-budget 

revenues by $20 billion over the period from 2018 to 2027, JCT estimates. On-budget revenues would decrease by an estimated 

$1,139 billion. 

Revenue-Reducing Provisions.—Provisions that are estimated to 

reduce revenues over the 2018–2027 period include the following, 

which would take effect on January 1, 2018 and expire on December 31, 2025: 

—Modify the seven tax brackets in place under current law to 

create brackets with rates of 10 percent, 12 percent, 22 percent, 24 

percent, 32 percent, 35 percent, and 38.5 percent; 

—Increase the standard deduction; 

—Repeal the individual AMT; 
433 

—Allow a 17.4 percent deduction, subject to certain limits, for 

qualified business income that individuals receive from passthrough entities, namely partnerships, S corporations, and sole proprietorships; 

—Increase the child tax credit to $2,000, and, among other related changes, provide a new $500 credit for certain other dependents; and 

—Double the exemption allowed under estate and gift taxes. 

According to JCT’s estimates, the largest revenue reductions 

would result from the provision that would modify income tax rates 

and brackets: Revenues would fall by $1,165 billion and outlays for 

refundable tax credits would increase by $9 billion over the 2018– 

2027 period. The increase in the standard deduction would reduce 

revenues by $654 billion and increase outlays for refundable tax 

credits by $83 billion over the same period, JCT estimates. Repealing the individual AMT would reduce revenues by $769 billion from 

2018 to 2027. 

JCT also estimates that the bill’s provisions that provide a deduction for qualifying income from pass-through entities would reduce revenues by $362 billion over the 2018–2027 period and that 

modifications to the child tax credit would, over the same period, 

reduce revenues by $431 billion and increase outlays for refundable 

tax credits by $154 billion. JCT estimates that additional revenue 

reductions, totaling $83 billion from 2018 to 2027, would result 

from the modifications to estate and gift taxes. 

Revenue-Increasing Provisions.—Provisions that are estimated to 

increase revenues over the 2018–2027 period would: 

—Repeal deductions for personal exemptions through 2025; 

—Repeal certain itemized deductions, including those for State 

and local taxes and interest on home equity indebtedness, also 

through 2025; 

—Disallow immediate use of certain losses by active owners of 

pass-through entities; and 

—Permanently index tax parameters to the chained consumer 

price index instead of the traditional consumer price index. 

The largest revenue increases would result from the provision to 

repeal deductions for personal exemptions, which JCT estimates 

would increase revenues by $1,086 billion and reduce outlays for 

refundable credits by $134 billion over the 2018–2027 period. JCT 

estimates that the repeal of certain itemized deductions also would 

increase revenues by $974 billion and reduce outlays for refundable 

credits by $3 billion from 2018 to 2027. 

Substantial but smaller increases in revenues would result from 

two other provisions. First, disallowing certain losses by passthrough entities would increase revenues by an estimated $137 billion over the 2018–2027 period. Second, the change in the inflation 

measure used to index tax parameters would increase revenues by 

$115 billion and reduce outlays for refundable credits by $19 billion 

over the 2018–2027 period, according to JCT’s estimates. 

Repealing the Individual Mandate.—The bill’s most significant 

effects on outlays would occur as a result of the elimination, beginning in 2019, of the penalties associated with the individual mandate. CBO and JCT estimate the following effects of that provision: 
434 

2See Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An 

Updated Estimate (November 2017), www.cbo.gov/publication/53300. 

—Federal budget deficits would be reduced by about $318 billion 

between 2018 and 2027, consisting of estimated reductions in outlays of $298 billion and increases in revenues of $21 billion over 

the period; 

—The number of people with health insurance would decrease by 

4 million in 2019 and 13 million in 2027; 

—Nongroup insurance markets would continue to be stable in almost all areas of the country throughout the coming decade; and 

—Average premiums in the nongroup market would increase by 

about 10 percent in most years of the decade (with no changes in 

the ages of people purchasing insurance accounted for) relative to 

CBO’s baseline projections. In other words, premiums in both 2019 

and 2027 would be about 10 percent higher than is projected in the 

baseline. 

Those effects would occur mainly because healthier people would 

be less likely to obtain insurance and because, especially in the 

nongroup market, the resulting increases in premiums would cause 

more people to not purchase insurance. In this estimate for the Tax 

Cuts and Jobs Act, the estimated reduction in the deficit is different from a CBO and JCT estimate published on November 8, 

2017.2 The differences occur because the provision of this legislation eliminates the penalties associated with the mandate but not 

the mandate itself and because of interactions with other provisions of the bill. 

Business-Related Tax Changes.—The bill would make many permanent changes to business taxes. The provisions with the largest 

effects on revenues, as estimated by JCT, are those that would: 

—Replace, starting in 2019, the current graduated structure of 

corporate income tax rates, which has a top rate of 35 percent 

under current law, with a single 20 percent rate; 

—Limit the deduction for net interest expenses to the sum of 

business interest income and 30 percent of an adjusted measure of 

taxable income; and 

—Limit the deduction for past net operating losses to a portion 

of current taxable income, and generally repeal the 2-year period 

over which losses may be carried back to previous tax years. 

JCT estimates that those tax provisions would, on net, reduce 

revenues by $669 billion from 2018 to 2027. In addition, those provisions would increase outlays for refundable tax credits by an estimated $14 billion over the 2018–2027 period. 

JCT estimates that the modifications to the rate structure, including reducing the top corporate tax rate from the 35 percent 

that is assessed on most taxable income to a 20 percent rate that 

would apply to all amounts of taxable income, would reduce revenues by $1,329 billion over the 2018–2027 period. JCT also estimates that limiting the deductions for interest expenses would increase revenues by $308 billion and that limiting the use of net operating losses would raise revenues by $158 billion over the same 

period. 

Other changes to business taxes would increase revenues, on net, 

according to JCT. The largest of those estimated increases over the 
435 

2018–2027 period would come from repealing the deduction for income attributable to domestic production activities ($81 billion over 

the period) and from requiring that certain research or experimental expenditures be amortized over a period of 5 years or 

longer, starting in 2026 ($62 billion over the period). 

The outlay effects from the business provisions would result from 

repealing the corporate alternative minimum tax. That change 

would reduce receipts by $26 billion and increase outlays by $14 

billion over the period from 2018 to 2027, according to JCT’s estimates. 

International Tax Changes.—The bill would substantially modify 

the current system of taxation of worldwide income of U.S. corporations, generally including foreign earnings in taxable income when 

paid to businesses as dividends by their foreign subsidiaries and 

with an allowance for tax credits for certain foreign taxes that businesses pay. Under the Tax Cuts and Jobs Act, the tax system 

would provide an exemption for dividends paid by a foreign corporation to its U.S. parent, and no foreign tax credits would be allowed for taxes paid on the amount of such dividends. Other 

changes also would be implemented. The international tax provisions with the largest estimated effects on revenues are those that 

would: 

—Provide a deduction for the foreign-source portion of dividends 

received by domestic corporations from certain foreign corporations; 

—Require that certain untaxed foreign income of U.S. corporations be deemed to be immediately paid to those corporations as 

dividends and included in taxable income, subject to taxation at a 

rate of 10 percent (or 5 percent for certain illiquid assets), and with 

an option to spread the resulting tax payments over an 8-year period with 60 percent paid in the final 3 years; 

—Impose on U.S. corporations a minimum tax of 10 percent (12.5 

percent starting in 2026) on a tax base that excludes certain otherwise tax-deductible payments to foreign affiliates; and 

—Require that U.S. corporations immediately include in taxable 

income certain amounts earned from low-taxed investments by foreign subsidiaries. 

JCT estimates that the provisions related to international taxation would, on net, increase revenues by $155 billion from 2018 

to 2027. It also estimates that the deduction for dividends received 

from foreign corporations would reduce revenues by $216 billion 

over that period. JCT estimates that three other provisions would 

have large budgetary effects that would increase revenues from 

2018 to 2027. Those provisions would require a deemed repatriation of untaxed foreign income ($185 billion), impose a new minimum tax ($138 billion), and require the immediate inclusion in 

taxable income of certain amounts earned by foreign subsidiaries 

($135 billion). 

Revenue-Dependent Repeals.—The bill would make parts of six 

business and international taxation provisions dependent on future 

revenue collections. The parts that would be affected generally 

begin in 2026, and would increase revenues in 2026 and 2027. 

Those amounts are incorporated into the overall revenue effects 

shown in the estimate of this legislation. The provisions include 

those that would require that certain research or experimental ex-
436 

penditures be amortized, that would limit the deduction for net operating losses, and that would impose a minimum tax on a tax base 

that excludes certain otherwise tax-deductible payments to foreign 

affiliates. 

Under the legislation, the parts of those provisions beginning in 

2026 would not take effect if an overall revenue target was 

reached. Specifically, if on-budget revenues for the period from 

2018 to 2026 exceeded $28.387 trillion, then those revenue-raising 

provisions would be repealed starting in 2026. Under CBO’s latest 

baseline revenue projections, adjusted to include the revenue effects of the bill (without incorporating any macroeconomic feedback), the on-budget revenue target would not be reached and 

therefore the revenue-raising modifications would occur. JCT has 

estimated that the revenue-dependent repeals would have a negligible effect on revenues. Given variations in inflation, economic 

output, and many other economic developments that affect revenues, including the response of overall economic activity to this legislation, there is some probability that the target would be reached 

and that the modifications to those provisions, and the resulting 

revenues, would not occur. 

PAY-AS-YOU-GO CONSIDERATIONS

The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting direct 

spending or revenues. The net changes in outlays and revenues 

that are subject to those pay-as-you-go procedures are shown in the 

following table. Only on-budget changes to outlays or revenues are 

subject to pay-as-you-go procedures. 

ALLOCATION OF BUDGETARY EFFECTS ACROSS INCOME GROUPS

Section 4107 of H. Con. Res. 71 requires that CBO and JCT’s estimates of budgetary effects for major legislation include, to the ex-
437 

3See Joint Committee on Taxation, Distributional Effects of the ‘‘Tax Cuts and Jobs Act,’’ as 

Ordered Reported by the Committee on Finance on November 16, 2017, JCX–60–17 (November 

24, 2017), https://www.jct.gov/publications.html?func=startdown&id=5044. 4For the estimates and associated methodology, see Congressional Budget Office, letter to 

Honorable Ron Wyden on the distributional effects of changes in spending under the Tax Cuts 

and Jobs Act as of November 15, 2017 (November 17, 2017), www.cbo.gov/publication/53333. 

tent practicable, the legislation’s distributional effects across income categories. 

JCT has published a distributional analysis of the Tax Cuts and 

Jobs Act that includes the effects of the bill on revenues and on the 

portion of refundable tax credits recorded as outlays.3 That analysis included effects on outlays for premium tax credits stemming 

from eliminating the penalty associated with the requirement that 

most people obtain health insurance coverage. However, other 

spending related to eliminating that penalty was not included, specifically changes in spending for Medicaid, cost-sharing reduction 

payments, the Basic Health Program, and Medicare. 

CBO has separately allocated across income groups the budgetary effects of those other changes for an earlier version of the legislation, under consideration by the Senate Finance Committee; 

those estimates also apply to the bill as ordered reported.4 In making those estimates, CBO did not attempt to estimate the value 

that people place on such spending, which may be different from 

the actual cost to the government of providing the benefits. CBO 

also did not attempt to make any distributional allocations for people who would choose to obtain unsubsidized health insurance in 

the nongroup market and who face higher premiums there compared with what would occur otherwise. 

The combined distributional effect of the provisions estimated by 

JCT and CBO, thus representing the total distributional effect of 

the bill, was calculated by subtracting the estimated change in 

Federal spending from the change in Federal revenues allocated to 

each income group. The resulting changes in the Federal deficit allocated to each income group are reflected in the following table. 
438 

Overall, the combined effect of the change in net Federal revenues and spending is to decrease deficits (primarily stemming from 

reductions in spending) allocated to lower-income tax filing units 

and to increase deficits (primarily stemming from reductions in 

taxes) allocated to higher-income tax filing units. Those effects do 

not incorporate any estimates of the budgetary effects of any macroeconomic changes that would stem from the proposal. 

INCREASE IN LONG-TERM ON-BUDGET DEFICITS

JCT estimates that enacting the legislation would not increase 

on-budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2028. 

MANDATES

CBO and JCT have determined that the legislation contains no 

intergovernmental or private-sector mandates as defined by 

UMRA. 

Estimate prepared by: Staff of the Joint Committee on Taxation 

and Cecilia Pastrone of the Congressional Budget Office. 

Estimate approved by: John McClelland Assistant Director for 

Tax Analysis and Theresa Gullo Assistant Director for Budget 

Analysis. 
439 

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November 21, 2017 

The Honorable Michael B. Enzi, Chainnan 

Altention: Kimberly Proctor, Clerk 

Committee on the Budget 

624 Dirksen Senate Office Building 

United States Senate 

Washington, D.C. 205 10-6100 

Rc: Transmittal •. Recommendations of the Committee on Energy and Natural Resources 

Dear Chainnan Enzi: 

This letter and its attachments respond to the inslrucrion to the Comminee on Energy and Natural 

Resources (the Committee) contained in section 2001 of H. Con. Res. 71, the Concurrent 

Resolution on the Budget for Fiscal Year2018, to report changes in laws within its jurisdiction 

to reduce the deficit by not less than $1 ,000,000,000 for the period of fiscal years 2018 through 

2027. 

The Committee's submission includes, in addition to this letter of transmittal, the following: {I} 

the text of reconciliation legislation reported favorably by the Committee at its business meeting 

on November IS, 2017; (2) a report of the Committee on the reconciliation legislation together 

with minority views; and (3) a cost estimate of the legislative text prepared by the Congressional 

Budget Office. 1 

I appreciate the opportunity to transmit these materials meeting the instruction to the Committee 

contained in the Budget Resolution. Please let me know if you have any questions concerning 

this submission. Thank you for your consideration. 

y, 

~ Ltsa Murkowski ~~.~~·~------ Chainnan 

1 See Senate Reconciliation Guidelines to Committees (October 20 17), Comminee on the Budget, United Stntes 

SeM1e :u nn "\-4 
440 

TITLE II—COMMITTEE ON ENERGY AND NATURAL RESOURCES

CONTENTS

Page 

I. Amendment ................................................................................................................... 440 

II. Purpose ......................................................................................................................... 440 

III. Background and Need .................................................................................................. 441 

IV. Legislative History ....................................................................................................... 445 

V. Committee Recommendation and Tabulation of Votes ............................................. 445 

VI. Committee Amendment ............................................................................................... 446 

VII. Section-by-Section Analysis ......................................................................................... 446 

VIII. Regulatory Impact Evaluation .................................................................................... 447 

IX. Congressionally Directed Spending ............................................................................ 448 

X. Executive Communications ......................................................................................... 448 

XI. Dissenting Views of Senators Cantwell, Wyden, Sanders, Stabenow, Franken, 

Heinrich, Hirono, Duckworth, and Cortez Masto .................................................. 449 

XII. Changes in Existing Law ............................................................................................ 452 

I. AMENDMENT

The amendment [stated in terms of the page and line numbers 

of the introduced bill] is as follows: 

On page 4, after line 20, add the following: 

SEC.——. LIMITATIONS ON AMOUNT OF DISTRIBUTED QUALIFIED OUTER CONTINENTAL 

SHELF REVENUES. 

Section 105(f)(1) of the Gulf of Mexico Energy Security Act of 2006 (43 U.S.C. 

1331 note; Public Law 109–434) is amended by striking ‘‘exceed $500,000,000 for 

each of fiscal years 2016 through 2055.’’ And inserting the following: ‘‘exceed— 

‘‘(A) $500,000,000 for each of fiscal years 2016 through 2019; 

‘‘(B) $650,000,000 for each of fiscal years 2020 through 2021; and 

‘‘(C) $500,000,000 for each of fiscal years 2022 through 2055.’’. 

SEC.——. STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE. 

(a) DRAWDOWN AND SALE.— 

(1) IN GENERAL.—Notwithstanding section 161 of the Energy Policy and 

Conservation Act (42 U.S.C. 6241), except as provided in subsections (b) and (c), 

the Secretary of Energy shall draw down and sell from the Strategic Petroleum 

Reserve 5,000,000 barrels of crude oil during the period of fiscal years 2026 

through 2027. 

(2) DEPOSIT OF AMOUNTS RECEIVED FROM SALE.—Amounts received from a 

sale under paragraph (1) shall be deposited in the general fund of the Treasury 

during the fiscal year in which the sale occurs. 

(b) EMERGENCY PROTECTION.—The Secretary of Energy shall not draw down 

and sell crude oil under subsection (a) in a quantity that would limit the authority 

to sell petroleum products under subsection (h) of section 161 of the Energy Policy 

and Conservation Act (42 U.S.C. 6241) in the full quantity authorized by that section. 

(c) LIMITATION.—The Secretary of Energy shall not drawdown or conduct sales 

of crude oil under subsection (a) after the date on which a total of $325,000,000 has 

been deposited in the general fund of the Treasury from sales authorized under that 

subsection. 

II. PURPOSE

The purpose of Title II is to direct the Secretary of the Interior 

to establish and administer a competitive oil and gas program in 

the non-wilderness portion of the Arctic National Wildlife Refuge 

(ANWR), known as the ‘‘1002 Area’’ or Coastal Plain, and for other 

purposes. 
441 

1Withdrawals by Executive Order 3797–A, Feb. 23, 1923, as reported in the Department of 

the Interior’s ‘‘Arctic National Wildlife Refuge Revised Comprehensive Conservation Plan,’’ Apr. 

3, 2015; pg. 4–1, www.fws.gov/home/arctic-ccp. 2PLO 82, issued, Jan. 22, 1943. 

3PLO 2214, signed Dec. 6, 1960, and PLO 2215, signed the same day, revoked PLO 82; DOI 

‘‘Arctic National Wildlife Refuge Revised Comprehensive Conservation Plan, Apr. 3, 2015, pg. 

4–1. 4 Ibid. 

III. BACKGROUND AND NEED

H. Con. Res. 71, the Concurrent Resolution on the Budget for 

Fiscal Year 2018, directs the Senate Energy and Natural Resources 

Committee to report legislation within its jurisdiction to the Senate 

Budget Committee to reduce the deficit by not less than $1 billion 

for the 10-year period of fiscal year 2018 through fiscal year 2027. 

In accordance with that instruction, the Committee is reporting 

reconciliation legislation to establish and administer a competitive 

oil and gas program for the leasing, development, production, and 

transportation of oil and gas in and from the Coastal Plain of 

ANWR; to increase revenue sharing for Alabama, Louisiana, Mississippi, and Texas, all of which produce energy from the Gulf of 

Mexico; and to sell 5 million barrels of oil from the Strategic Petroleum Reserve (SPR). The Congressional Budget Office (CBO) estimates that this legislation will generate net Federal receipts of 

$1.107 billion over the specified time period. 

COMPETITIVE OIL AND GAS PROGRAM IN THE 1002 AREA

History of ANWR 

The issue of development of the roughly 135 miles of the Arctic 

Coastal Plain between Alaska’s border with Canada and the Canning River traces back to at least 1923, when 23.7 million acres 

were ‘‘withdrawn’’ from some public land and mineral laws to establish the National Petroleum Reserve No. 4 (now the National 

Petroleum Reserve-Alaska, or NPR–A).1

In 1943, the Federal Government modified that land withdrawal 

and during World War II issued a new public land order (PLO) 

that withdrew more than 500 miles of Arctic coastline and coastal 

plain, about 49 million acres of land in total, from entrance for ‘‘use 

in connection with the prosecution of the war.’’ 2

Soon after Alaska attained Statehood in 1959, the Eisenhower 

administration, through Interior Secretary Fred Seaton, formally 

designated 8.83 million acres of the coastal plain and uplands as 

the Arctic National Wildlife Range on December 6, 1960.3 The designation permitted oil and gas development to occur as the Range 

designation withdrew the acreage from mining, but not from mineral leasing laws.4 The twin PLOs that lifted the 1943 land order 

reduced the size of the withdrawals substantially and effectively allowed the new State of Alaska to select roughly 4 million acres 

near Prudhoe Bay for State ownership. In December 1968, the Nation’s largest single oil discovery was made at Prudhoe Bay—a field 

that is still in production today. 

Alaska Native Claims Settlement Act and Alaska Land Use Issues 

With the discovery of oil in northern Alaska, Congress turned its 

attention to resolving a host of land issues in the State that might 
442 

5Public Law 92–203. 

6 Id. Section 17(d)(2)(A) of ANSCA further provided that ‘‘such withdrawals shall not affect 

the authority of the State and the Regional and Village Corporations to make selections and 

obtain patents within the areas withdrawn pursuant to section 11.’’ 7Department of the Interior, ‘‘Andrus Commends Alaska Governor Hammond; Exercises 

204e,’’ Nov. 16, 1978, https://www.fws.gov/news/Historic/NewsReleases/1978/19781116b.pdf. 8Letter from Secretary Berglund to President Carter, Nov. 28, 1978, https:// 

www.jimmycarterlibrary.gov/digitalllibrary/sso/148878/99/SSOl148878l099l04.pdf 9Presidential Proclamations 4611–4627. Dec. 1, 1978. 

10Department of the Interior, ‘‘Andrus Extends Withdrawals on 40 Million Acres of Federal 

Lands In Alaska to 20 Years; Cites Senate Inaction,’’ Feb. 12, 1980, https://www.fws.gov/news/ 

Historic/NewsReleases/1980/19800212a.pdf. 11On Feb. 29, 1980, about 9 months before final passage of ANILCA, the Arctic National 

Wildlife Range was renamed as the William O. Douglas Arctic Wildlife Range by Presidential 

Proclamation 4729 to honor the former Supreme Court Justice. The designation was repealed 

by ANILCA. 

have affected efforts to move the oil to market, including the issue 

of aboriginal land claims. In 1971, Congress approved the Alaska 

Native Claims Settlement Act (ANCSA; Public Law 92–203), which 

provided Alaska Natives $962.5 million and a total of 44 million 

acres of land in return for settlement of all aboriginal land claims.5

ANCSA also authorized the Secretary of the Interior to withdraw 

‘‘up to, but not to exceed, 80 million acres of unreserved public 

lands, including previously classified lands, which the Secretary 

deems are suitable for addition to or creation as units of the National Park, Forest, Wildlife Refuge, and Wild and Scenic River 

Systems,’’ 6 and required Congress to make a land use decision 

within 7 years. 

Throughout the 1970s, Congress attempted to develop a public 

land use agreement for Alaska. After compromise legislation failed 

in 1978, Secretary of the Interior Cecil Andrus used section 204(e) 

the Federal Land Policy and Management Act of 1976 (Public Law 

94–579) to withdraw roughly 110 million acres of Alaska from development for a 3-year period.7 Later that month, Secretary of Agriculture Robert Bergland withdrew an additional 11 million acres 

from mining for 2 years under section 204(b) of the same Act.8 On 

December 1, 1978, President Carter designated 56 million acres as 

national monuments under the 1906 Antiquities Act (54 U.S.C. 

320301–320303).9 Finally, in February 1980, Secretary Andrus extended the withdrawal on 40 million acres for another 20 years.10

The Antiquities Act withdrawals and associated PLOs stopped 

the State of Alaska and Alaska Native Corporations from making 

land selections under the Alaska Statehood Act and under ANCSA. 

The withdrawals encouraged Representative Mo Udall of Arizona 

to reintroduce legislation calling for 127 million acres of conservation system units in Alaska. Negotiations in the 96th Congress resulted in a compromise Alaska lands bill,11 the Alaska National Interest Lands Conservation Act (ANILCA; Public Law 96–487), 

signed by President Carter on December 2, 1980. 

Alaska National Interest Lands Conservation Act 

ANILCA is the largest land withdrawal ever undertaken in the 

United States. Through it, more than 104 million acres were withdrawn or conserved in the form of 13 new or expanded parks, 16 

wildlife refuges, 26 wild and scenic rivers, the two largest national 

forests in the Nation, and two national monuments. More than half 

of those acres (57 million acres, an area of land nearly the size of 

Oregon) were designated as Federal Wilderness. ANILCA single- 
443 

12 Congressional Research Service, ‘‘Federal Land Ownership: Overview and Data,’’ C. Hardy 

Vincent, Mar. 2, 2017, (R42346). 13 ‘‘Acreages . . . are derived from many sources and may not agree with previously published 

values,’’ according to a disclaimer (pg. S–9) in the Executive Summary for the 2015 Arctic National Wildlife Refuge Revised Comprehensive Conservation Plan (Jan. 2015). 14This is usually referred to as about 8 million acres because in 1980 GIS technology was 

not as precise. 15Public Law 96–497; 16 U.S.C. 3143. 16Department of the Interior, Arctic National Wildlife Refuge, Alaska, Coastal Plain Assessment, Apr. 1987, https://pubs.usgs.gov/fedgov/70039559/report.pdf. 

handedly doubled the size of the National Park System and significantly expanded the National Wildlife Refuge System, as well.12

The Coastal Plain of the Arctic National Wildlife Refuge 

Section 303(2) of ANILCA expanded the Arctic National Wildlife 

Range to the south and west by 9.2 million acres of public domain 

lands and renamed the 19.64 million acres the Arctic National 

Wildlife Refuge.13 ANILCA also designated 7.16 million acres of 

the refuge, including the foothills and 45 miles of the eastern-most 

coastline bordering Canada, as wilderness under the Wilderness 

Act of 1964.14 The remainder of the land in ANWR, including all 

of the 1.57 million acre Coastal Plain, or the so-called ‘‘1002 Area,’’ 

was not included in the wilderness designation. Section 1002 of 

ANILCA specifically set aside the 1002 Area for further study and 

exploration of its oil and gas potential. Pursuant to section 1003 of 

the Act, oil and gas production was prohibited and no ‘‘leasing or 

other development leading to production of oil and gas’’ could take 

place until authorized by Congress.15

Section 1002 of ANILCA further directed the Secretary of the Interior to study the Coastal Plain’s biological and geological resources and provide recommendations for future management decisions by Congress. The Department produced the report in 1987 

after 5 years of biological baseline studies and geological studies; 

two seasons of seismic exploration activities; public hearings; and 

the receipt of 11,000 public comments. The report contained five 

management alternatives, ranging from opening all of the 1002 

Area to designating it as wilderness. The Secretary recommended 

that Congress pass legislation to open the entire 1002 Area to responsible oil and gas development, stating that, ‘‘[the] coastal plain 

is rated by geologists as the most promising onshore oil and gas exploration area in the United States.’’ 16

Projected Resources in the 1002 Area 

Estimates of the 1002 Area’s resource potential stem from a variety of historical data. There are three known oil seeps inside the 

Coastal Plain. Additional data comes from evaluations of the geology after the discovery of oil at nearby Prudhoe Bay; from seismic 

testing conducted in the winter of 1984–1985 as part of the Interior 

Department’s study of the area (as directed by section 1002 of 

ANILCA); and from proprietary data from an exploratory test well 

drilled on Alaska Native-owned lands southeast of the Village of 

Kaktovik in 1985–1986. 

According to the U.S. Geologic Survey’s (USGS) most recent reevaluation of the 1002 Area’s potential, there is a 95 percent probability that the area contains 5.72 billion barrels of oil, a mean (50 
444 

17Department of the Interior, USGS, 1999 Open File Report 98–34. 18 Alyeska Pipeline Company, Throughput, available online at http://www.alyeska-pipe.com/ 

TAPS/PipelineOperations/Throughput 19 California Energy Commission, ‘‘Oil Supply Sources to California Refineries,’’ available online at http://www.energy.ca.gov/almanac/petroleumldata/statistics/crudeloillreceipts.html 20 Energy Information Administration, Annual Energy Outlook 2017, Appendix Table A11, 

‘‘Petroleum and other liquids supply and disposition,’’ available online at https://www.eia.gov/ 

outlooks/aeo/pdf/appa.pdf. 21 CNBC, ‘‘Oil hits 2 year high and the path of ‘least resistance is higher,’ ’’ Nov. 6, 2017, available online at https://www.cnbc.com/2017/11/06/oil-hits-two-year-high-and-the-path-of-leastresistance-is-higher.html. 22 International Energy Agency, ‘‘World Energy Outlook 2017,’’ available online at https:// 

www.iea.org/weo2017/. 

percent) chance that it contains 10.36 billion barrels, and a 5 percent chance that it contains 15.95 billion barrels of oil.17

Importance of Production in the 1002 Area 

Responsible development of up to 2,000 Federal acres of the 1002 

Area is projected to yield significant long-term benefits for the 

United States. 

Deficit Reduction.—While bonus bids from lease sales are projected to raise more than $1 billion for the Federal Treasury between fiscal year 2018 and fiscal year 2027, the largest share of 

revenues will accrue outside the 10-year window as leases enter 

commercial production. Federal taxes are likely to raise even greater revenues, further reducing Federal deficits. 

Energy Security.—Production from the 1002 Area will help restore throughput to the Trans-Alaska Pipeline System, which is 

currently operating at just one-quarter of its capacity.18 This is expected to provide a needed supply of domestic oil to West Coast refineries in Washington and California, which have become significantly more dependent on foreign suppliers in recent years.19 Despite some suggestions that U.S. oil exports have obviated the need 

for new production, the Federal Energy Information Administration 

projects the United States will remain a significant net importer 

through at least 2050, with net import levels beginning to rise 

again after 2030.20

Global Stability.—Production from the 1002 Area will likely add 

a measure of stability to oil markets, which are at considerable risk 

of tightening. Global oil prices reached a 2-year high the week before the committee’s business meeting,21 with artificial supply restrictions or supply disruptions possible or underway in a range of 

major exporting nations. In its new World Energy Outlook 2017, 

the International Energy Agency notes that, ‘‘[o]nce U.S. tight oil 

plateaus in the late 2020s and non-OPEC production as a whole 

falls back, the market becomes increasingly reliant on the Middle 

East to balance the market. There is a continued large-scale need 

for investment to develop a total of 670 billion barrels of new resources to 2040, mostly to make up for declines at existing fields 

rather than to meet the increase in demand.’’ 22

Job Creation.—Responsible development in the 1002 Area will 

also create thousands of jobs throughout the United States, while 

indirectly supporting the creation of many thousands more. This is 

particularly important in Alaska, which had the highest unemploy-
445 

23 Bureau of Labor Statistics, State-by-State Unemployment Levels, Nov. 2017, available online at https://www.bls.gov/news.release/laus.t01.htm 

ment rate of any State at 7.2 percent in October 2017, as compared 

to the national average of 4.1 percent.23

IV. LEGISLATIVE HISTORY

The Senate passed H. Con. Res. 71, the Concurrent Resolution 

on the Budget for fiscal year 8, on October 19, 2017, by a vote of 

51–49. The Senate amendment to H. Con. Res. 71 was agreed to 

in the House of Representatives on October 26, 2017, by a vote of 

216–212. 

Pursuant to H. Con. Res. 71, the Senate Committee on Energy 

and Natural Resources was directed to achieve $1 billion in outlay 

reductions in the period of fiscal year through fiscal year 2027. On 

November 2, 2017, the Committee held a hearing ‘‘to receive testimony on the potential for oil and gas exploration and development 

in the non-wilderness portion of the Arctic National Wildlife Refuge, known as the ‘1002 Area’ or Coastal Plain, to raise sufficient 

revenue pursuant to the Senate reconciliation instructions included 

in H. Con. Res 71.’’ 

The Committee adopted amendment 16, sponsored by Senators 

Cassidy, Strange, and King, at its business meeting on November 

15, 2017, on a roll call vote of 13–10. 

At the business meeting on November 15, 2017, the Committee 

ordered reconciliation legislation, Title II, favorably reported as 

amended, in accordance with its reconciliation instruction, by a 

vote of 13–10. 

V. COMMITTEE RECOMMENDATION AND TABULATION OF VOTES

The Senate Committee on Energy and Natural Resources, in 

open business session on November 15, 2017, by majority vote of 

a quorum present, recommends that the Senate pass Title II, if 

amended as described herein. 

The roll call vote on reporting the measure was 13 yeas and 10 

nays, as follows: 

Name & State Yea Nay Answer 

Present Name & State Yea Nay Answer Present 

MURKOWSKI (AK) (Chairman) X CANTWELL (WA) (Ranking) X 

BARRASSO (WY) X WYDEN (OR) * X 

RISCH (ID) X SANDERS (VT) X 

LEE (UT) X STABENOW (MI) X 

FLAKE (AZ) X FRANKEN (MN) * X 

DAINES (MT) X MANCHIN (WV) X 

GARDNER (CO) X HEINRICH (NM) X 

ALEXANDER (TN) X HIRONO (HI) * X 

HOEVEN (ND) X KING (ME) X 
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Name & State Yea Nay Answer 

Present Name & State Yea Nay Answer Present 

CASSIDY (LA) X DUCKWORTH (IL) * X 

PORTMAN (OH) X CORTEZ MASTO (NV) X 

STRANGE (AL) X 

* Indicates vote by proxy. 

VI. COMMITTEE AMENDMENT

During the Committee’s consideration of this legislation, one 

amendment was adopted. 

The first section of the amendment increases the annual limitation on offshore revenue sharing under section 105(f)(1) of the Gulf 

of Mexico Energy Security Act of 2006 (GOMESA, Public Law 109– 

432) for the Gulf producing States of Alabama, Louisiana, Mississippi, and Texas, from $500 million annually for fiscal year 2016 

through fiscal year 2055, to $500 million annually for fiscal year 

2016 through fiscal year 2019, $650 million annually for fiscal year 

2020 through fiscal year 2021, and $500 million annually for fiscal 

year 2022 through fiscal year 2055. 

The second section of the amendment directs the Secretary of 

Energy to draw down and sell 5 million barrels of crude oil from 

the SPR during fiscal year 2026 and fiscal year 2027. The Secretary is prohibited from taking action that would limit the authority to sell petroleum products pursuant to the national energy security provision in section 161(h) the Energy Policy and Conservation 

Act (42 U.S.C. 6241). The Secretary is further directed to stop the 

drawdown or sale of crude oil after the date on which a total of 

$325 million has been deposited in the general fund of the Federal 

Treasury. 

VII. SECTION-BY-SECTION ANALYSIS

Section 20001(a) sets forth definitions for use in this section. 

Subsection (a)(1) defines the term ‘‘Coastal Plain’’ by referencing 

a map prepared by the USGS entitled ‘‘ANWR Map—Plate 1’’ and 

‘‘ANWR Map—Plate 2’’ and dated October 24, 2017. This map is attached to this Report in Appendix A. 

Subsection (a)(2) defines the term ‘‘Secretary’’ as the Secretary of 

the Interior, acting through the Bureau of Land Management. 

Subsection (b)(1) repeals section 1003 of the ANILCA (16 U.S.C. 

3143). 

Subsection (b)(2)(A) directs the Secretary to establish and administer a competitive oil and gas program for the leasing, development, production, and transportation of oil and gas in and from the 

Coastal Plain. 

Subsection (b)(2)(B) amends section 303(2)(B) of ANILCA by adding ‘‘to provide for an oil and gas program on the Coastal Plain’’ 

as an additional purpose for ANWR. 

Subsection (b)(3) directs the Secretary to manage the oil and gas 

program in accordance with the Naval Petroleum Reserves Production Act of 1976 (42 U.S.C. 6501 et seq.) and associated regulations. 
447 

Subsection (b)(4) sets the royalty rate for leases issued pursuant 

to this section at 16.67 percent. 

Subsection (b)(5) specifies that of the amount of adjusted bonus, 

rental, and royalty receipts derived from Federal oil and gas leasing and operations in the Coastal Plain, 50 percent shall be paid 

to the State of Alaska and the remaining 50 percent shall be deposited into the Federal Treasury as miscellaneous receipts. 

Subsection (c)(1)(A) directs the Secretary to conduct not fewer 

than two area-wide lease sales within 10 years after the Act’s enactment. 

Subsection (c)(1)(B) directs the Secretary to make available not 

fewer than 400,000 acres of land in each lease sale and to include 

the areas with the highest hydrocarbon potential. This subsection 

further directs the Secretary to conduct the first lease sale within 

4 years of enactment of this Act, and the second lease sale within 

7 years of enactment. 

Subsection (c)(2) directs the Secretary to issue any rights-of-way 

or easements across the Coastal Plain necessary for the exploration, development, production, or transportation associated with 

the oil and gas program. 

Subsection (c)(3) directs the Secretary to authorize up to 2,000 

surface acres of Federal land on the Coastal Plain to be covered by 

production and support facilities. Such facilities include airstrips 

and any area covered by gravel berms or piers for support of pipelines. 

Section 20002 amends section 105(f)(1) of GOMESA to increase 

the revenue sharing limits on the disbursement of qualified revenues to Gulf producing States from $500 million to $650 million in 

fiscal year 2020 and fiscal year 2021. The current limitation of 

$500 million per year would remain from fiscal year 2016 through 

fiscal year 2019 and from fiscal year 2022 through fiscal year 2055. 

Section 20003(a) requires the Secretary of Energy to sell 5 million barrels of crude oil from the SPR from fiscal year 2026 through 

fiscal year 2027 and to deposit the revenue into the general fund 

of the Federal Treasury. 

Subsection (b) provides emergency protection by prohibiting the 

Secretary from taking action that would limit the authority to sell 

petroleum products pursuant to the national energy security provision in section 161(h) the Energy Policy and Conservation Act (42 

U.S.C. 6241). 

Subsection (c) directs the Secretary to stop the drawdown or sale 

of crude oil after the date on which a total of $325 million has been 

deposited in the general fund of the Federal Treasury. 

VIII. REGULATORY IMPACT EVALUATION

In compliance with paragraph 11(b) of Rule XXVI of the Standing Rules of the Senate, the Committee makes the following evaluation of the regulatory impact which would be incurred in carrying out this legislation. 

The bill is not a regulatory measure in the sense of imposing 

Government-established standards or significant economic responsibilities on private individuals and businesses. 

No personal information would be collected in administering the 

program. Therefore, there would be no impact on personal privacy. 
448 

Little, if any, additional paperwork would result from the enactment of this measure, as ordered reported. 

IX. CONGRESSIONALLY DIRECTED SPENDING

This measure, as ordered reported, does not contain any congressionally directed spending items, limited tax benefits, or limited 

tariff benefits as defined in Rule XLIV of the Standing Rules of the 

Senate. 

X. EXECUTIVE COMMUNICATIONS

The testimony provided by the Department of the Interior on November 2, 2017, which addresses development in the 1002 Area, 

follows: 

STATEMENT OF GREG SHEEHAN, PRINCIPAL DEPUTY DIRECTOR, U.S. FISH AND WILDLIFE SERVICE, BEFORE THE SENATE ENERGY AND NATURAL RESOURCES COMMITTEE, ON OIL AND GAS EXPLORATION AND DEVELOPMENT IN THE ARCTIC COASTAL PLAIN

Chairman Murkowski, Ranking Member Cantwell and Members of the Committee, thank you for the opportunity to appear before you today to testify on behalf 

of the Department of Interior (Department) regarding resource development in the 

1002 area of the coastal plain of Alaska’s North Slope. I am Greg Sheehan, Principal 

Deputy Director of the U.S. Fish and Wildlife Service. 

THE ARCTIC NATIONAL WILDLIFE REFUGE

The original 8.9 million acre Arctic National Wildlife Range was established on 

December 6, 1960 to protect the wildlife, wilderness, and recreational values of the 

range. It was later expanded through the Alaska National Interest Lands Conservation Act (ANILCA) on December 2, 1980 to 19.3 million acres and renamed the Arctic National Wildlife Refuge. ANILCA also designated 8 million acres of the original 

Range as Wilderness, requiring this area to be managed in accordance with the Wilderness Act, and added new Refuge purposes. These purposes include conservation 

of fish and wildlife populations; fulfillment of international treaty obligations of the 

United States with respect to fish and wildlife and their habitats; providing the opportunity for continued subsistence uses by rural residents; and ensuring water 

quality and quantity within the refuge. 

THE 1002 AREA

In section 1002 of ANILCA, Congress and President Carter deferred a decision regarding future management of the 1.5-million-acre coastal plain—now referred to as 

the 1002 area—in recognition of the area’s natural resource potential. Section 1002 

of ANILCA provides for the comprehensive and continuing inventory and assessment of the fish and wildlife resources of the coastal plain of the Arctic Refuge; an 

analysis of the impacts of oil and gas exploration, development, and production, and 

authorization of exploratory activity within the coastal plain in a manner that 

avoids significant adverse effects on the fish and wildlife and other resources. 

Due to its unique purpose and potential, Congress did not include the 1002 area 

in the refuge’s designated wilderness when ANILCA was enacted in 1980. Since 

then, no Congress has designated the 1002 area as wilderness. 

The 1002 area is currently managed as a Minimal Management Area in the National Wildlife Refuge System. As such, Service activities are directed at maintaining the existing conditions of areas that have high fish and wildlife values or other 

resource values. Opportunities for public use and access are available for subsistence purposes and for a variety of recreational activities, including hunting, fishing, 

trapping, backpacking, and camping. Traditional motorized access via aircraft and 

motorboats is allowed. The Service focuses its efforts in the 1002 area primarily on 

conducting studies and survey/inventory programs. Section 1003 stipulates that production of oil and gas from the Arctic Refuge is prohibited and no leasing or other 

development leading to production of oil and gas shall be undertaken until authorized by an Act of Congress. 

In an assessment completed and sent to Congress in 1987, the Secretary recommended that Congress consider leasing the 1002 area for oil and gas. In 1988, 
449 

the Arctic Refuge’s initial Comprehensive Conservation Plan (CCP) recognized the 

coastal plain as a critical calving area for the Porcupine caribou herd, which is an 

important subsistence resource for Alaska Native people. In 2009, the U.S. Geological Survey determined in its most recent economic analysis the area had a mean 

estimate of 10.35 billion barrels of recoverable oil, with 80 to 90 percent of that volume being economically recoverable at $42 per barrel. 

Since the 1987 assessment was completed, the Service has continued to inventory, 

monitor, and assess the fish and wildlife resources within the 1002 area so that current data is available to inform future activity. 

Last spring, Secretary Zinke visited the North Slope with Chairman Murkowski 

and a bipartisan Senate delegation. After seeing it first hand, he signed a secretarial order in Anchorage that requires the USGS to update its resource assessments for the 1002 area. The plan includes consideration of new geological and geophysical data, as well as potential for reprocessing existing geological and geophysical data. The secretarial order does not reduce, eliminate, or modify any environmental or regulatory requirements for energy development. This evaluation is 

consistent with the intent of ANILCA and will improve the Department’s understanding of the 1002 area. 

ADMINISTRATION SUPPORT

The administration’s fiscal year 2018 budget proposes oil and gas leasing in the 

1002 area. If production is authorized by Congress, the administration believes this 

will bolster our Nation’s energy independence and national security, provide economic opportunity for Alaskans and provide much-needed revenue to both the State 

of Alaska and Federal Government. With passage of the budget reconciliation provisions in H. Con. Res. 71, and its revenue-raising instructions to your Committee, 

the Department stands ready to assist Congress as it considers legislation, consistent with ANILCA, to authorize the potential development of the resources contained in this area. 

Chairman Murkowski, I appreciate the opportunity to testify on behalf of the Department on this issue and look forward to answering any questions you might 

have. Thank you. 

XI. DISSENTING VIEWS OF SENATORS CANTWELL, WYDEN, SANDERS, 

STABENOW, FRANKEN, HEINRICH, HIRONO, DUCKWORTH, AND CORTEZ MASTO

Section 2001(b) of the Concurrent Resolution on the Budget for 

Fiscal Year 2001, H. Con. Res. 71, instructs the Committee on Energy and Natural Resources to report changes in laws within its jurisdiction to reduce the deficit by not less than $1 billion for the 

period of fiscal years 2018 through 2027. The majority has chosen 

to meet this instruction by turning the Arctic National Wildlife Refuge into an oil field. We strongly oppose this action. 

The Arctic National Wildlife Refuge is considered ‘‘the Last Great 

Wilderness.’’ It exemplifies the idea of wilderness. It preserves arctic and subarctic ecosystems in their natural and unaltered state. 

It provides critical habitat for threatened polar bears, and it serves 

as the calving ground for caribou and the breeding ground for more 

than 200 species of migratory birds. It was first protected by the 

Eisenhower administration in 1960 to preserve the area’s ‘‘unique 

wildlife, wilderness, and recreational values.’’ It was established as 

a national wildlife refuge by Congress in 1980 ‘‘to conserve fish and 

wildlife populations and habitats in their natural diversity. . . .’’ 

Congress acted in 1980 to preserve the lands ‘‘for the benefit, 

use, education and inspiration of present and future generations.’’ 

It declared the protection of these lands to be in ‘‘the national interest’’ because of the ‘‘unrivaled . . . natural landscapes,’’ the ‘‘inestimable value’’ of the area’s wildlife to the Nation, and the opportunities its unaltered ecosystems provide for scientific research. We 

should not now permit this priceless patrimony to be auctioned off 
450 

to oil companies in order to fund tax cuts for the wealthiest among 

us. 

To begin with, we do not need to sacrifice the Arctic Refuge to 

balance the budget. According to the Congressional Budget Office, 

the proposal will reduce the deficit by, at most, less than $1.1 billion. At the same time, the Concurrent Resolution on the Budget 

has instructed the Finance Committee to increase the deficit by up 

to $15 trillion in order to provide tax cuts to the wealthy. Auctioning off the Nation’s premier wildlife refuge to the oil companies 

to plunder will only reduce the deficit created by tax cuts for the 

wealthy by less than 0.067 percent. 

Nor does the Nation need the oil. Oil imports and oil prices have 

fallen. Domestic oil production is at historic highs. The Trump administration has declared that we have a ‘‘domestic surplus of oil.’’ 

We now export significant amounts of the oil we produce in this 

country. Much of the oil produced in the Refuge will likely be exported. We are selling off much of the Strategic Petroleum Reserve, 

which once provided an emergency reserve of oil to see us through 

supply disruptions. Indeed, at the same time the majority approved 

auctioning off the Arctic Refuge to the oil companies, it adopted an 

amendment to sell off another 5 million barrels of the Strategic Petroleum Reserve. 

The majority bases this ill-advised legislation on a fabric of false 

premises. First, it asserts that the oil and gas leasing program it 

authorizes would not significantly affect the 19.6 million-acre Refuge because it would only permit leasing on a 1.5 million-acre area 

of the coastal plain. But the coastal plain is the ‘‘biological heart’’ 

of the Refuge. It has been designated as critical habitat for threatened polar bears. It is where the Porcupine Caribou Herd calves 

and most of the migratory birds nest and breed. 

Second, the majority contends that Congress intended the coastal 

plain to be leased for oil and gas development when it established 

the Refuge. It did not. The Congress that established the Refuge 

expressly prohibited oil and gas production, leasing, or any other 

development leading to oil and gas production on the coastal plain 

without further statutory authorization. It withdrew the coastal 

plain from the operation of the mineral leasing laws. Although it 

did authorize temporary, limited exploratory activities on the coastal plain, it did so only in the context of an environmental assessment of the coastal plain’s fish and wildlife resources and the impacts of any oil and gas development on those fish and wildlife resources. It did not promise that oil and gas development would ever 

be permitted on the coastal plain. 

Third, the majority argues that the oil and gas development that 

its proposal authorizes would occupy no more than 2,000 acres of 

the 1.5 million-acre coastal plain. But it counts only the area ‘‘covered by production and support facilities’’ toward the 2,000-acre 

limit. It excludes from its calculation the many miles of roads, 

causeways, and pipelines (other than the support piers) that will 

be needed to connect the production and support facilities, and 

which will destroy fish and wildlife habitat and disrupt migration 

patterns. Nor does it count that vast areas that may be affected by 

seismic testing and other exploration activities. 
451 

Moreover, the majority neglects to mention that if Congress authorizes any leasing or other development leading to production on 

the coastal plain, the Arctic Slope Regional Corporation, will be entitled to lease all 100,000 acres in the northeast corner of the Refuge pursuant to a 1983 contractual agreement with the Department of the Interior. 

Finally, the majority asserts that its proposed oil and gas development program will be compatible with fish and wildlife protection and that the legislation will not waive any environmental laws 

or regulations. While it is true that the proposal does not expressly 

waive any environmental laws, it fundamentally alters the purpose 

of the Refuge and dramatically diminishes the legal protections 

currently afforded to the Refuge. By mandating the oil and gas program, the legislation will have the effect of waiving many of the 

protections of these environmental laws. 

Under current law, oil and gas development is prohibited in a national wildlife refuge unless the Secretary of the Interior determines it is ‘‘compatible’’ with the purpose for which the refuge was 

established. The Arctic National Wildlife Refuge was established 

‘‘to conserve fish and wildlife populations and habitats.’’ Oil and 

gas development is not compatible with conserving fish and wildlife 

populations and habitats. That is why prior legislative proposals to 

authorize oil and gas development in the Refuge have ‘‘deemed’’ it 

to be ‘‘compatible.’’ Rather than deeming oil and gas development 

to be compatible with wildlife conservation, the majority simply 

makes oil and gas development a purpose of the Refuge. 

The proposal then gives responsibility for managing the oil and 

gas program to the Bureau of Land Management and directs the 

Bureau to manage the program in accordance with the National 

Petroleum Reserve Production Act. Under current regulations, no 

oil and gas development can occur within a national wildlife refuge 

except ‘‘with the concurrence of the Fish and Wildlife Service as to 

the time, place and nature of such operations in order to give complete protection to wildlife populations and wildlife habitat on the 

areas leased. . . .’’ The Fish and Wildlife Service cannot concur 

unless it determines that the operations, ‘‘based on sound professional judgment, will not materially interfere with or detract from’’ 

the wildlife protection purposes of the refuge. 

The majority’s proposal fundamentally alters that environmental 

protection standard. By directing the Bureau of Land Management 

to conduct an oil and gas development program in the Arctic Refuge in accordance the National Petroleum Reserve Production Act, 

the proposal makes oil and gas development, rather than wildlife 

protection, its principal purpose. The Production Act affords wildlife protection only to the extent consistent with the requirements 

. . . for the exploration’’ for oil and gas, and it only requires the 

Department of the Interior to ‘‘mitigate,’’ not avoid or prevent, ‘‘reasonably foreseeable and significantly adverse effects’’ on fish and 

wildlife and their habitats. 

By mandating that the Bureau of Land Management to establish 

an oil and gas leasing program and to conduct at least two lease 

sales, offering at least 400,000 acres in each lease sale, the proposal will statutorily require the Bureau to grant leases in the Ref-
452 

uge regardless of the harmful environmental impacts the program 

will inevitably have on fish and wildlife and their habitats. 

Simply put, the proposal, if enacted, will turn the Nation’s premier national wildlife refuge into another national petroleum reserve, in which oil and gas development will have priority over the 

protection of the Refuge’s wildlife. Doing so will violate our trust 

responsibility, as stewards of our public lands, to preserve and protect this priceless piece of our national heritage for the benefit of 

present and future generations. 

We strongly dissent. 

MARIA CANTWELL, 

RON WYDEN, 

BERNARD SANDERS, 

DEBBIE STABENOW, 

AL FRANKEN, 

MARTIN HEINRICH, 

MAZIE K. HIRONO, 

TAMMY DUCKWORTH, 

CATHERINE CORTEZ MASTO, 

U.S. Senators. 

XII. CHANGES IN EXISTING LAW

In compliance with paragraph 12 of Rule XXVI of the Standing 

Rules of the Senate, changes to existing law made by the legislation, as ordered reported to the Committee on the Budget, are 

shown as follows (existing law proposed to be omitted is enclosed 

in black brackets, new matter is printed in italic, existing law in 

which no change is proposed is shown in roman): 

ALASKA NATIONAL INTEREST LANDS CONSERVATION 

ACT 

PUBLIC LAW 96–487, AS AMENDED

* * * * * * * 

SEC. 303. ADDITIONS TO EXISTING REFUGES. * * * 

(2) ARCTIC NATIONAL WILDLIFE REFUGE. * * * 

(B) The purposes for which the Arctic National Wildlife Refuge is established and shall be managed include— 

(i) to conserve fish and wildlife populations and habitats 

in their natural diversity including, but not limited to, the 

Porcupine caribou herd (including participation in coordinated ecological studies and management of this herd and 

the Western Arctic caribou herd), polar bears, grizzly 

bears, muskox, Dall sheep, wolves, wolverines, snow geese, 

peregrine falcons and other migratory birds and Arctic 

char and grayling; 

(ii) to fulfill the international treaty obligations of the 

United States with respect to fish and wildlife and their 

habitats; 
453 

(iii) to provide, in a manner consistent with the purposes 

set forth in subparagraphs (i) and (ii), the opportunity for 

continued subsistence uses by local residents; øand¿ 

(iv) to ensure, to the maximum extent practicable and in 

a manner consistent with the purposes set forth in paragraph (i), water quality and necessary water quantity 

within the refugeø.¿; and 

(v) to provide for an oil and gas program on the Coastal 

Plain. 

* * * * * * * 

øSEC. 1003. PROHIBITION ON DEVELOPMENT. Production of oil and 

gas from the Arctic National Wildlife Refuge is prohibited and no 

leasing or other development leading to production of oil and gas 

from the range shall be undertaken until authorized by an Act of 

Congress.¿ 

* * * * * * * 

GULF OF MEXICO ENERGY SECURITY ACT 

PUBLIC LAW 109–432, AS AMENDED

* * * * * * * 

SEC. 105. DISPOSITION OF QUALIFIED OUTER CONTINENTAL SHELF 

REVENUES FROM 181 AREA, 191 SOUTH AREA, AND 2002– 

2007 PLANNING AREAS OF GULF OF MEXICO. * * * 

(f) LIMITATIONS ON AMOUNT OF DISTRIBUTED QUALIFIED OUTER

CONTINENTAL SHELF REVENUES.— (1) IN GENERAL.—Subject to paragraph (2), the total 

amount of qualified outer Continental Shelf revenues made 

available under subsection (a)(2) shall not øexceed 

$500,000,000 for each of fiscal years 2016 through 2055.¿ exceed— 

(A) $500,000,000 for each of fiscal years 2016 through 

2019; 

(B) $650,000,000 for each of fiscal years 2020 through 

2021; and 

(C) $500,000,000 for each of fiscal years 2022 through 

2055. 

* * * * * * * 
454 

APPENDIX A—ANWR MAP PLATE 1 AND ANWR MAP PLATE 2 

I I HI 
455 
456 

0 CONGRESSIONAL BUDGET OFFICE 

U.S. Congress 

Washington, DC 20515 

Honorable Lisa Murkowsk:i 

Chairman 

Committee on Energy 

and Natural Resources 

United States Senate 

Washington, DC 20510 

Dear Madam Chairman: 

November 21, 2017 

Keith Hall, Director 

The Congressional Budget Office bas prepared the enclosed cost estimate 

for Reconciliation Recommendations of the Senate Committee on Energy 

and Natural Resources. 

If you wish further deta ils on this estimate, we will be pleased to provide 

them. The CBO staff contact is Jeff LaFave, who can be reached at 

226-2860. 

Enclosure 

cc: Honorable Maria Cantwell 

Ranking Member 

Keith Hall 

www.cbo.gov 
457 

CBO COST AND BUDGETARY CONSIDERATIONS

The following estimate of the costs of this measure has been provided by the Congressional Budget Office: 

SUMMARY

The legislation would direct the Secretary of the Interior (DOI) 

to implement an oil and gas leasing program for the coastal plain 

of the Arctic National Wildlife Refuge (ANWR). It also would authorize DOI to spend $300 million from proceeds from oil and gas 

leasing on the Outer Continental Shelf (OCS) over the 2018–2027 

period. Finally, the legislation would direct the Department of Energy (DOE) to sell a portion of the petroleum stored in the Strategic Petroleum Reserve (SPR). On the basis of information provided by DOI, DOE, and individuals working in the oil and gas industry, CBO estimates that implementing the legislation would increase net offsetting receipts, which are treated as reductions in direct spending, by about $1.1 billion over the 2018–2027 period. 

Because enacting the legislation would affect direct spending 

pay-as-you-go procedures apply. Enacting the legislation would not 

affect revenues. 

CBO estimates that enacting legislation would not increase net 

direct spending or on-budget deficits in any of the four consecutive 

10-year periods beginning in 2028. 

The legislation contains no intergovernmental or private-sector 

mandates as defined in the Unfunded Mandates Reform Act 

(UMRA). 

ESTIMATED COST TO THE FEDERAL GOVERNMENT

The estimated budgetary impact of the legislation is shown in 

the following table. The costs of this legislation fall within budget 

functions 270 (energy), 300 (natural resources and environment), 

800 (general government), and 950 (undistributed offsetting receipts). 
458 

BASIS OF ESTIMATE

For this estimate, CBO assumes that the legislation will be enacted near the end of 2017 and that the appropriated funds necessary to implement the legislation would be available. 

Description of the Legislation 

The legislation would direct the Secretary of the Interior to implement an oil and gas leasing program for lands located within 

the coastal plain of ANWR, which includes about 1.5 million acres 

of Federal land on the northeast coast of Alaska. Under current 

law, activities related to oil and gas leasing in ANWR are prohibited. 

The legislation would require the Secretary to hold two lease 

sales over a 7-year period following enactment and to offer at least 

400,000 acres of land in ANWR for lease at each sale. Any lease 

sales in ANWR would be carried out in accordance with procedures 

used to conduct oil and gas leasing within the National Petroleum 

Reserve in Alaska. For each lease awarded, lessees would pay the 

Federal Government bonus bids to acquire the leases, annual rent 

to retain the leases, and royalties based on the value of any oil or 

gas production from the leases. The legislation would establish a 

16.67 percent royalty on oil and gas produced in ANWR. (Under 

current law, the Federal Government charges royalties of 12.5 percent for oil and gas produced onshore and 18.75 percent for oil and 

gas produced in the Outer Continental Shelf.) Under the legislation, Alaska would receive one-half of the gross proceeds generated 

from this leasing program. 

The legislation would authorize DOI to spend $300 million over 

the 2018–2027 period without further appropriation from receipts 

from oil and gas leases on the Outer Continental Shelf. In addition, 

the legislation would direct the Department of Energy to sell 5 mil-
459 

lion barrels of oil from the Strategic Petroleum Reserve over the 

2026–2027 period, subject to certain conditions. 

Direct Spending 

CBO estimates that implementing the legislation would increase 

net offsetting receipts, and thus reduce direct spending, by about 

$1.1 billion over the 2018–2027 period. 

Oil and Gas Leasing in ANWR.—CBO estimates that gross proceeds from bonus bids paid for the right to develop leases in ANWR 

would total $2.2 billion over the 2018–2027 period. That estimate 

is based on historical information about oil and gas leasing in the 

United States and on information from DOI, the Energy Information Administration (EIA), and individuals working in the oil and 

gas industry about factors that affect the amounts that companies 

are willing to pay to acquire oil and gas leases. In addition, CBO 

relied on estimates prepared by the U.S. Geological Survey of the 

amount of oil that might be produced from the coastal plain of 

ANWR. As specified in the legislation, one-half of all receipts from 

leases in ANWR would be paid to Alaska, leaving net Federal receipts totaling $1.1 billion over the 2018–2027 period. 

Estimates of bonus bids for leases in ANWR are uncertain. Potential bidders might make assumptions that are different from 

CBO’s, including assumptions about long-term oil prices, production costs, the amount of oil and gas resources in ANWR, and alternative investment opportunities. In particular, oil companies have 

other domestic and overseas investment options that they would 

evaluate and compare with potential investments in ANWR. The 

potential profitability for a wide range of such global investment 

options would probably be a significant factor in prospective bidders’ ultimate choices of how much to bid for ANWR leases. The 

number of factors that affect companies’ investment decisions result in a wide range of estimates for bonus bids. CBO’s estimate 

reflects our best estimate of the midpoint of that range. 

In addition to receipts from bonus bids, CBO estimates that the 

Federal Government would collect net receipts from rental payments totaling about $2 million over the 2022–2027 period. (Lease 

holders make an annual rental payment until production begins.) 

CBO also estimates that the Federal Government would receive 

royalty payments on oil produced from ANWR leases; however, 

based on information from EIA regarding the typical amount of 

time necessary to drill exploratory wells, complete production 

plans, and build the necessary infrastructure to produce and transport any oil produced in ANWR, CBO expects that no significant 

royalty payments would be made until after 2027. 

Spending of OCS Receipts.—Section 20002 would authorize DOI 

to spend an additional $300 million over the 2018–2027 period 

without further appropriation from receipts collected from certain 

OCS leases. Under current law, DOI is directed to pay a portion 

of the receipts from leases issued after 2006 in the Central and 

Western Gulf of Mexico to four States—Alabama, Louisiana, Mississippi, and Texas—and to the Land and Water Conservation 

Fund. Current law caps those payments at $500 million a year 

through 2055. This legislation would raise that cap to $650 million 

in 2020 and 2021. CBO estimates that enacting that change would 
460 

increase spending by $150 million in each of the fiscal years 2021 

and 2022, reflecting the 1-year lag between the time receipts are 

collected and spent. 

SPR Drawdown..—Section 20003 would direct DOE to sell 5 million barrels of oil from the SPR over the 2026–2027 period, subject 

to certain conditions. Under the legislation, the proceeds from such 

sales would be deposited in the general fund of the Treasury by the 

end of each fiscal year and could not be spent for other purposes. 

The legislation would limit the cash proceeds resulting from those 

sales by prohibiting DOE from offering oil for sale under this section after it has deposited $325 million in the Treasury. 

CBO estimates that enacting this section would increase offsetting receipts by $315 million over the 2018–2027 period. That estimate is based on the projection of oil prices in CBO’s June 2017 

baseline forecast, adjusted for the technical characteristics of the 

oil being sold from the SPR, and reflects the net effect of the legislation’s limit on total proceeds from the sales. 

Spending Subject to Appropriation 

CBO estimates that implementing the legislation would cost $10 

million over the 2018–2022 period for environmental reviews and 

administrative costs associated with the leasing program, subject to 

the availability of appropriated funds. Based on information provided by the Government Accountability Office, we estimate that 

completing the environmental reviews required under the National 

Environmental Policy Act would cost $2 million. In addition, CBO 

estimates that other implementation costs would total between $1 

million and $2 million per year over that period. 

PAY-AS-YOU-GO CONSIDERATIONS

The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting direct 

spending or revenues. The net changes in outlays that are subject 

to those pay-as-you-go procedures are shown in the following table. 

MANDATES

The legislation contains no intergovernmental or private-sector 

mandates as defined in UMRA, and would benefit the State of 

Alaska by increasing the generation of royalties from oil and gas 

production on public lands in ANWR. Portions of the royalties 

would be shared with the State under formulas specified by the 

legislation and under Federal laws governing oil and gas produc-
461 

tion. Over the 2018–2027 period, CBO estimates that Alaska would 

receive a total of about $1.1 billion in royalties. 

INCREASE IN LONG-TERM DIRECT SPENDING AND DEFICITS

CBO estimates that enacting the legislation would not increase 

net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028. 

PREVIOUS ESTIMATE

On November 8, 2017, CBO transmitted a cost estimate for a legislative proposal related to the Arctic National Wildlife Refuge, as 

posted on the Web site of the Senate Committee on Energy and 

Natural Resources on November 2, 2017. CBO’s estimates of the 

budgetary effects for the provisions related to oil and gas leasing 

in ANWR are the same for each piece of legislation. 

Estimate prepared by: Jeff LaFave (Federal Costs) and Zachary 

Bynum (Mandates). 

Estimate approved by: H. Samuel Papenfuss, Deputy Assistant 

Director for Budget Analysis. 
462 

C. ROLLCALL VOTE IN THE BUDGET COMMITTEE 

Rollcall vote on the Enzi motion to report the reconciliation 

measure to the Senate was 12 yeas and 11 nays, as follows: 

Name & State Yea Nay Answer 

Present Name & State Yea Nay Answer Present 

ENZI (WY) (Chairman) X SANDERS (VT) (Ranking) X 

GRASSLEY (IA) X MURRAY (WA) X 

CRAPO (ID) X WYDEN (OR) X 

GRAHAM (SC) X STABENOW (MI) X 

TOOMEY (PA) X WHITEHOUSE (RI) X 

JOHNSON (WI) X WARNER (VA) X 

CORKER (TN) X MERKLEY (OR) X 

PERDUE (GA) X KAINE (VA) X 

GARDNER (CO) X KING (ME) X 

KENNEDY (LA) X VAN HOLLEN (MD) X 

BOOZMAN (AR) X HARRIS (CA) X 

STRANGE (AL) X 
463 

D. ADDITIONAL VIEWS 

RANKING MEMBER BERNARD SANDERS 

BUDGET COMMITTEE STATEMENT ON TAX PLAN 

(As Prepared for Delivery) 

Mr. Chairman: This is one of the most important pieces of 

legislation to come before this committee in recent years and I am very 

disappointed that you have only allocated I 5 minutes for debate. That 

means there are 11 Republicans and 10 Democrats who are on this 

committee who will not be able to speak before the vote is cast. That's 

wrong and it's wrong that the Budget Committee has not held a single 

hearing on this tax bi ll - not one. But frankly I do understand why this 

committee and the Finance committee have been so reluctant to allow 

the American people to know exactly what is in this legislation. 

And that is that this is a disastrous and unfair piece of legislation 

which gives huge tax breaks for the very rich; raises taxes on mi llions of 

middle class families; leaves 13 million more Americans without health 

insurance while raising premiums 10 percent a year; raises the deficit by 

$1.4 trillion; lays the groundwork for massive cuts to Social Security, 

Medicare, Medicaid, and education; and makes it easier for large 

corporations to offshore American jobs. Other than that, Mr. Chairman, 

it's a pretty good bill. 

Now, 1 understand that Donald Trump and the Republican 

leadership have been tell ing the American people that this bill is a 
464 

middle class tax cut, that the wealthy won't get a tax cut, and that this 

bill will not increase the deficit. 

Unfortunately, Mr. Chairman, nothing could be further from the 

truth. 

Under the Senate GOP Tax Plan, 62 Percent of the Benefits Go to the Top 1 Percent Disulburlon ofltdero1tOKthonge bytxponded<o.shJn<om~ percetttkNllOll 

61.8% 

40.001 

.!0.0% 

20.0% 

2.9" - 7.2" 

II 5.6" 

- JO.Q"A 7.1" 

II ·1.0% 

lowes! O,viAtile SecOfld Quinth Middk Qulntile fOltrlhQ\irtlle «lth·901h Pttttnt 90tlt 9S.~h Pctctnc: 95th 99-th PcHCeN Top l PeiCtllt 

S<>ur<t: fO"x ~yC~IIltl or~o:,siJ o/the rox cuu ottd Jobs Aa os repofted out of rht FMonce Commirr~ (tobie t17·0Z7J) 
465 

Under this legislation, 87 million middle class households would 

see their taxes go up, while 62 percent of the benefits flow to the top one 

percent. That's not Bernie Sanders talking. That's corning from the 

bipartisan Tax Policy Center. 

87 Million Households Earning Less Than $200,000Would 

See a Tax Increase Under the Senate GOP Tax Plan, But Less 

Than 2 Percent of the Richest Households Wou ld 

Percent of households seeing o tax increase by expended cash income percelltile in 202 7 

60.0% 

SO.O'A. 

40.0'A. 

30.0'A. 

20.0'k 

10.0% 

0.0% 

87mll llon 

households 

2,160 

households 

Percent of households making below Percent of households in the top 0.1 

$200,000 with a tax increase percent with a tax increase 

Source: Tox Polley Center analysis of the Tox Cuts ond Jobs Act os rtporttd out of th~ Ffnonc Commftttt (toble 

flJ.027J ondtl7·0278) 
466 

Further, in order to pay for a permanent tax break for corporations 

- companies that are making record-breaking profits - the middle class 

tax cuts in the Senate bill would expire by the end of2025. 

Adding insult to injury, this legislation provides a huge tax break 

to corporations that are shifting jobs to China and profits to the Cayman 

Islands by exempting offshore profits from U.S. taxation- what is 

known as a "territorial" tax scheme. 

Now, Mr. Chairman, Senator Ron Johnson and I don't agree on 

many things, but I agree with him when he said and I quote: "With a 

territorial system, there will be a real incentive to keep manufacturing 

overseas." 

Mr. Chairman, it is not surprising that the Republican Party would 

be pushing legislation that would provide a massive tax breaks to the 

wealthiest people and largest corporations in America. 

What is surprising is that this legislation would increase the federal 

deficit by more than $1.4 trillion. 

My Republican colleagues love to talk about how we have got to 

reduce the deficit when it comes to Social Security, Medicare and 

Medicaid. But when it comes to tax breaks for billionaires and 

corporations, like their tax plan provides, the sky is the limit. 
467 

Now, Mr. Chairman, last month, Senator Corker made a very 

eloquent statement on this subject. 

This is what he said: "Unless this bill in its final analysis number 

one, produces growth, in other words there's something that's helping 

working people to have better wages through productivity and that kind 

of thing. Unless it reduces deficits - let me say that one more time -

unless it reduces deficits and does not add to deficits with reasonable 

and responsible growth models, and unless we can make it permanent, I 

don't have any interest in it." 

Well, Mr. Chairman, I happen to agree with that statement. 

And every independent expert that has looked at this legislation -

from the Wharton School of Business to the Tax Policy Center to the 

Committee for a Responsible Federal Budget - have concluded that this 

bill will increase the deficit by at least $1.3 trillion over the next decade 

- even after accounting for economic growth. 

Mr. Chairman, mark my words. If the Trump Republican tax plan 

is passed, giving huge tax breaks to the 1 percent and raising the deficit 

by more than $1.3 trillion over a 10 year period, the Republican 

leadership will once again rediscover "the deficit crisis," and move 

aggressively to cut Social Security, Medicare, Medicaid, education, 

nutrition, environmental protection, and every other program designed to 
468 

protect the needs of working families, the elderly, the children, the sick, 

and the poor. 

Mr. Chairman, the overwhelming majority of the American people 

do not want to provide tax breaks for billionaires while cutting Social 

Security, Medicare, and Medicaid. So why are the Republicans bringing 

forth such an absurd tax plan that, in almost every instance, is 

diametrically opposed to what the American people want? 

The answer isn't complicated. Follow the money. 

The front page headline of the Boston Globe on October 14111 says 

it all: "The Koch brothers (and their friends) want President Trump's tax 

cut. Very badly." 

A few days ago, Trump's chief economic adviser Gary Cohn, 

talking about the Republican tax plan, said: "The most excited group out 

there are big CEOs, about our tax plan." 

Mr. Chairman, we need for the working class, not tax relief for the 

billionaire class. I urge a no vote on this legislation. 
469 

SENATOR WYDEN - MINORITY VIEWS 

Commiuce Report ofFY 2018 Budget Reconciliation Legislation 

Senate Commiuee on the Budget 

December I, 2017 

The Republicans are using an arcane budget process known as reconciliation to ram through two of the 

most damaging policies we have seen in recent history. This budget is a vessel for an overhaul of our tax 

laws that may lead to the eventual gutting of fimding for crucial middle class programs like Medicare and 

Social Security, and threatens to destroy some of our most pristine pubjjc lands, both of which are 

legislative malprac-tice at its worst. 

Republicans decided on day one to use this most pattisan of processes in Washington rather than work on 

a bipartisan basis with Democrats, as in pt·evious landmark tax reform negotiations like President 

Reagan's !986 tax reform. Because Republicans have elevated partisanship over bipartisan collaboration 

and regular order, they are now trying to squeeze several trillion dollars of tax handouts and corporate 

goodies into a $1.5 trillion box. And they're forcing this fit by making the middle class pay up and 

destroying one oftl1e last remaining wild places on earth. 

What slatted out as a promise of a signitieant middle class tax cut has become a multi-trillion dollar bait 

and switch) a massive handout to multjnational corporations and a bonanza for tax cheats and powerflll 

political donors. 

Another massive corporate handout and Congressional Republican bait and switch is the inclusion of 

opening up the Arctic National Wildlife Refuge-- one of the last untouched places in North America -

for oil and gas drilling. Republicans claim it will raise Sl billion, but the revenue from similar lease sales 

in tl1e region have not even come close to that amount. In addition, lhe recent scoring on the provision in 

questions says it will not produce that revenue. Lastly, once there is a spill in the Refuge, the wild and 

free aspects of this pristine area will be ruined. Industrial oil and gas operations do not belong in the 

Arctic Refuge. Plain and simple. 

And the! tax provisions in question, plainly and simply. amount to a tax increase, not a tax cut, for millions 

of Americans in the middle class. 

There is a massive gap between the Republican rhe toric surrounding the tax bill and the reality of what's 

on paper. The rhetoric makes this out to be lasting and substantial tax relief for everybody in the middle 

class. But the reality is, it's neither lasting nor substantial. 

Data from the Joint Committee on Taxation analysis confirms that in 2019 this legislation would raise 

taxes on nearly 13 million middle class families earning under $200,000. That's simply unacceptable. 

For the middle class, the hill goes wrong by eliminating the State and Local Tax Deduction. State and 

local taxes arc how communities pay for firefighters and police, schools, roads and bridges. Americans 

get to dcducL those taxes because of a principle that has been enshrined in the tax code since lts very 
470 

beginning- that the government shouldn't reach into thei•· pockets twice to double-tax the same earnings. 

The bill Republicans have offered betrays this fundamental principle of federalism. 

At its core, this plan perpetuates what is most unfair about the tax code on the books today. There are two 

tax systems in America. There's one set of rules for the cop on the heat and tl1e nurse in the E.R. For 

them, the system is strict and compulsory, and says their taxes must come straight out of each and every 

paycheck. Then there's another set ofntles for the powerful, the well-cofUlccted, and multinational 

corporations with armies of tax lawyers and accountants. That system says they can pay what they want, 

when they want. 

The proposal before the committee doesn't do anything to fix that imbalance. In fact, it worsens that 

division and enshrines tbe sources of unfairness that leave so many hard-working Americans feeling 

kicked around every April I 5th. 

This bill is also an economic double standard. While individuals get temporary tax relief, the bill 

permanently cuts the corporate tax rate. And after 2025, all this temporary relief vanishes. The result, 

according to the Joint Committee on Taxation, is that the bill increases taxes on nearly 38 million middle 

class families eaming under $200,000. This point bears repeating. A tax bill that spends $1.4 trillion still 

results in millions of middle class Americans facing higher taxes. Many Americans will be asking 

themsel vcs how is that even possible come April I 5th. What is more, once the tcmporaty individual 

provisions expir ~ American famil ies are not taken hack to 7.ero ·~they continue to lo!-\e he.r:ause 

pennanent provisions like slower inflation indexing continue to affiict their pocket books even after their 

tax cuts have expired. The Joint Committee on Taxation confirmed that higher tax revenues on 

individuals arc proj ected to foot the biiJ for continuing tax cuts to multinational corporations. 

Under this Republican plan, multinational corporations will get ao even bigger reward for doing business 

overseas than they'll get for creating jobs here at home. Imagine how that sounds to the residents of 

forgotten mill towns or in cities where Main Street is boarded up and the factory lightS never come on. 

There arc too many Americans who've lost jobs that paid middle class wages and had to scrape together 

work wherever they can get it just to make ends meet. They arc tired of watching this same pattern play 

oul. And people who 'vc waited decades for a meaningful raise deserve better than to sec Congress reward 

corporations that flee the United States. 

So it shouldn't come as a big surprise that those ideas arc a tough sell. But in another return to the old 

playbook, the administration and Republicans in Congress have cracked out fuzzy trickle-down math to 

justify these corporate tax breaks. They're making big promises about record wage inc•·eases, the 

economy kicking into high gear, and tax cuts paying for themselves. But there's no tmstworthy 

independent analysis or historical record to back up those claims. 

Treasury Secretary Mnuchin even claimed these tax handouts wouldn't just pay for themselves, they'd 

raise an additional $ 1 trillion atop their own cost. How he came to that conclusion remains a mystery. 
471 

In fact, the Joint Committee on Taxation bas confi1med that the Senate Republican bill increases the 

deficit by over $1 trillion - ever afier accounting for economic growth. There's just no way to pretend this 

bill pays for itself-- not even close. 

The Treasury Secretary also scrubbed from the Treasury Department's website a recent analysis that said 

corporate shareholders -- not workers -- are the overwhelming beneficiaries of tax cuts. And if you're 

tired of the political back and forth on this issue, you don't need to listen to lawmakers. You can listen to 

the corporate heads l.hemselves. They're already previewing plans to funnel tl1eir tax handouts into stock 

buybacks and dividend payments --not the new jobs or big wage increases Republicans have been 

promising. 

So the millions of middle class Americans who face a tax hike directly caused by this bill will only be its 

first victims. The hard-working people whose jobs are sent abroad because of this bill will become 

victims later on, too. And then there's the threat of an exploding defieiL 

Members of the Administration and top Republicans in Congress are already saying that entitlement 

reform will come next after taxes. That's code for Medicare, Medicaid, and Social Security cuts. It's an 

old game plan: Run up a big federal deficit, and then insist there's no choice but to force draconian cuts to 

the social safety net. 

The American people have seen this movie before. The first big legislative push after the B·ush tax cuts 

was an attempt to privatize Social Security. Fortunately it was stopped then, but this time it might not be. 

If those cuts to our safety-net programs happen, you can add seniors and many of the most vulnerable 

people hit hard by this bill. 

In closing on taxes, some in the majority are saying they are faced with a choice between this unpopular 

tax bill and looking like they can't govern. But those are not the only options on the table. They weren't 

the only options when Ronald Reagan and a big group of Democrats came together to pass tax reform. 

There is still an opportunity to work on a bipartisan basis -- the way Ronald Reagan did it. II means sitting 

down and spending the necessary time 10 rna.kc sure your bill doesn't increase taxes on the middle class. II 

means Democrats and Republicans talki ng together instead of relying on partisan trickery to speed a 

secretive bill to completion before anybody catches on. 

Twice l've had a chance to talk taxes with Democratic Senators and Administration officials. Both times, 

my Democratic colleagues and I made clear that we agree with Republicans tbat the tax code is a rotten, 

broken mess. 

Democrats do not oppose tax refonn done right. The message we delivered to Republicans was that real, 

bipartisan, Reagan-style tax rcfonn could pass with 70 or 80 votes, perhaps even more. It could make the 

tax code a whole lot more fa ir, put money back in the pockets of middle class families and bring a wave 

of jobs back to the U.S. 

Even before those meetings, Democrats shared with Republicans our principles for reform --a focus on 

the middle class and fiscal responsibility to protect Medicare, Medicaid and Social Security. 
472 

Those are principles the President says he's for. But they're not what Republicans put on paper. 

The Republican tax bill is a rejection of the bipartisan approach. The partisan bill that was pushed through 

the Finance and Budget Committees has been in the public view less than two weeks. This isn't a real 

debate. This is an abandonment of Reagan-style tax reform. 

Republicans are attempting to cover up their con j ob on the middle class by ntshing it through Congress 

before the public is able to fi nd out what's in it. This bill will reshape the American economy in ways 

that, according to the official tax scorekeeper, will leave millions of families worse off. II is going to raise 

taxes on millions in the middle class. And it will give American multinational corporations more relief for 

doing business overseas than they'll get for doing business in the U.S. ! don't believe it's a radical idea to 

say the Senate ought to take the time to consider the consequences before the voting begins. 

There is bipartisan agreement that the tax code is a broken mess. So instead of this partisan process that 

will force middle class families to pay up to finance a corporate handout, it's not too late to do this the 

right way. 
473 

Statement of Senator Chris Van Hollen 

November 28, 2017 

Senat e Republicans are discarding even the semblance of regular order in their mad dash to 

pass a partisan bill that gives huge tax cuts to big corporations, raises taxes on millions of 

middle-class families, makes it harder for Americans to get health insurance, and opens up the 

Arctic wildlife refuge for oil drilling. Instead of reforming the tax code to work better for 

everyone, the Republican tax plan rigs the system even more for millionaires, billionaires, and 

multinational corporations- with everyone else left to pay the bill. 

At its core, this bill is a permanent corporate tax cut paid for with a permanent middle-class tax 

increase. In 2027, families making $7S,OOO or less get a tax increase totaling $27 billion under 

the Senat e t ax bill, according to the Joint Committee on Taxation. M illions of Americans will see 

their taxes go up immediately after this bill is enacted, but even those who get a short-term tax 

cut will have it taken away when the individual tax cuts expire In 2026. To help pay for the 

corporat e tax cut, the bill raises middle-class taxes by using a slower measure of inflation 

known as chained-CPI. This will result in a lower standard deduction and push more income 

into higher tax brackets. 

Foreign investors own 35% of U.S. corporate stock, and they will be major beneficiaries of the 

corporate tax cut in the Republican plan. According to the Institute on Taxation and Economic 

Policy (ITEP), these foreign shareholders get a $31 billion tax cut from the Senate bill in 2019 

alone. This windfall for wealthy foreign shareholders comes straight out of the pockets of 

American families. In 2019, ITEP calculates that more than 15 million Americans will see tax 

increases totaling roughly $27 billion. 

One of the largest tax increases in the bill comes from repealing the deduction for state and 

local taxes. This means double-taxation for the more than 100 million Americans who currently 

use the deduction. Yet again, corporations get preferential treatment under the Republican tax 

plan: Businesses can still deduct many of their state and local taxes under the bill, even though 

middle-class families cannot. 

The cruelest part of the Senate bill is the attack on the Affordable Care Act, which will increase 

premiums and make health insurance less affordable for millions of Americans. Repealing the 

individual mandate will result in a less healthy pool of people purchasing health insurance, 

which is especially concerning for those with pre-existing conditions who need health care the 

most. The Congressional Budget Office reports that this part of the bill will result in 13 million 

fewer Americans having health insurance, and premiums increasing by 10% for those who 

purchase insurance in the individual market. 

1 also strongly oppose language in the legislation that will cause significant harm to one of the 

Crown Jewels of the United Stat es, the Arctic National Wildlife Refuge, by opening the entire 

1.5-million-acre Coast al Plain to oil and gas development ahd effectively turning it into a 

petroleum reserve. This undercuts the existing purposes of the Arctic Refuge to protect fish, 
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