DESCRIPTION OF THE CHAIRMAN’S MODIFICATION 

TO THE PROVISIONS OF THE 

“ENERGY ADVANCEMENT AND INVESTMENT ACT OF 2007” 

Scheduled for Markup 

By the 

SENATE COMMITTEE ON FINANCE 

on June 19, 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

June 18, 2007 

JCX-33-07
i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

A. Provisions Modifying the Proposal in the Chairman’s Mark .......................................... 2 

1. Modification to item I.A. of the Chairman's Mark relating to the credit for 

the production of electricity from renewable resources and of the credits for 

producing refined coal and Indian coal...................................................................... 2 

2. Modification to item I.B. of the Chairman’s Mark relating to clean renewable 

energy bonds (“CREBs”)........................................................................................... 2 

3. Modification to item I.C. of the Chairman’s Mark relating to clean coal energy 

bonds.......................................................................................................................... 3 

4. Modification to item I.D. of the Chairman’s Mark relating to the extension 

and modification of the energy credit ........................................................................ 3 

5. Modification to item I.E. of the Chairman’s Mark relating to the special 

depreciation allowance for certain power generation equipment used in 

alternative fuel production facilities .......................................................................... 3 

6. Modification to item I.F. of the Chairman’s Mark relating to the extension of 

special rule to implement FERC restructuring policy................................................ 4 

7. Modification to item I.G. of the Chairman’s Mark relating to the credit for 

residential energy efficient property .......................................................................... 4 

8. Modification to item I.H. of the Chairman’s Mark relating to the credit for 

residential wind property ........................................................................................... 4 

9. Modification to item I.I. of the Chairman's Mark relating to the advanced coal 

project investment credit............................................................................................ 4 

10. Modification to item I.J. of the Chairman’s Mark relating to the coal 

gasification investment credit .................................................................................... 5 

11. Modification to item II.A. of the Chairman’s Mark relating to the small 

producer credit for cellulosic alcohol ........................................................................ 5 

12. Modification to item II.B. of the Chairman’s Mark relating to the expansion 

of special depreciation allowance for cellulosic biomass ethanol property............... 5 

13. Modification to item II.E. of the Chairman’s Mark relating to the extension 

of credits for biodiesel ............................................................................................... 5 

14. Modification to item II.F. of the Chairman’s Mark relating to the extension 

and modification of renewable diesel incentives....................................................... 6 

15. Modification to item II.H. of the Chairman's Mark relating to extension and 

modification of alternative fuel excise tax credit....................................................... 6 

16. Modification to item II.J. of the Chairman’s Mark relating to the extension of 

election to expense certain refineries......................................................................... 6 

17. Modification to item III.A. of the Chairman's Mark relating to the credit for 

alternative fuel motor vehicles................................................................................... 6 

18. Modification to item IV.B. of the Chairman’s Mark relating to the credit for 

new energy efficient homes ....................................................................................... 7 

19. Modification to item IV.C. of the Chairman’s Mark relating to the energy 

efficient commercial buildings deduction.................................................................. 7 
ii 

20. Modification to item VI.C. of the Chairman’s Mark relating to the Oil Spill 

Liability Trust Fund tax ............................................................................................. 7 

B. Additional Energy Tax Incentives ................................................................................... 8 

1. Seven-year cost recovery for qualified energy management devices........................ 8 

2. Landowner incentive to encourage electric transmission build-out .......................... 8 

3. Credit for carbon dioxide captured from industrial sources and permanently 

disposed of in geologic formations............................................................................ 9 

4. Seven-year cost recovery for qualified carbon dioxide pipeline property............... 10 

5. Small fossil-free alcohol producer credit................................................................. 11 

6. Heavy vehicle excise tax exemption for idling reduction devices and 

advanced insulation.................................................................................................. 12 

7. Extension and modification of energy efficient appliances credit........................... 13 

8. Study on tax-credit bonds ........................................................................................ 16 

9. Deduction for qualified timber gain and timber REIT provisions........................... 18 

10. Temporary procedures for excise tax refunds on exported coal.............................. 25 

11. Rural Renaissance bonds ......................................................................................... 29 

12. Treatment of publicly traded partnerships with income from carbon dioxide 

and certain fuels ....................................................................................................... 32 

C. Revenue Raising Provisions .......................................................................................... 34 

1. Excise tax on crude oil and gas removed from the outer continental shelf 

in the Gulf of Mexico............................................................................................... 34 

2. Elimination of certain refunds of duty involving oil spill liability tax .................... 35 

3. Tax treatment of certain inverted corporate entities ................................................ 35 

4. Modifications to corporate estimated tax payments ................................................ 40 

D. Technical Corrections .................................................................................................... 42 

1. Energy-related technical corrections........................................................................ 42 
1 

INTRODUCTION 

This document,1

 prepared by the staff of the Joint Committee on Taxation, provides a 

description of the Chairman’s modification to the provisions of the “Energy Advancement and 

Investment Act of 2007,” which is to be marked up by the Senate Committee on Finance on June 

19, 2007. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of the 

Chairman’s Modification to the Provisions of the “Energy Advancement and Investment Act of 2007,” 

(JCX-33-07), June 18, 2007. This document can also be found on the web at www.house/jct. 
2 

A. Provisions Modifying the Proposal in the Chairman’s Mark 

1. Modification to item I.A. of the Chairman's Mark relating to the credit for the 

production of electricity from renewable resources and of the credits for producing refined 

coal and Indian coal 

The Chairman’s modification extends the placed-in-service date period by three years 

(through December 31, 2013) for all qualified facilities other than solar and Indian coal facilities. 

The Chairman's modification extends the credit eligibility period by one year (through December 

31, 2013) for qualified Indian coal facilities. The Chairman's modification permits electricity 

produced after December 31, 2007, at a qualified open-loop biomass facility that (1) is equipped 

with net metering to determine electricity consumption or sale and (2) has such consumption or 

sale verified by an unrelated party, to be eligible for credit notwithstanding the absence of a sale 

to an unrelated third party. The Chairman’s modification freezes at the 2007 level the credit rate 

inflation adjustment for electricity produced and sold after December 31, 2007. 

The Chairman's modification modifies the definition of qualified trash combustion 

facilities to permit facilities that gasify municipal solid waste and then burn such gas as part of 

an electricity generation process to qualify for the electricity production credit. The modification 

to this definition is effective for electricity produced and sold before, on, or after December 31, 

2007. 

The Chairman's modification adds wave, current, tidal, and ocean thermal energy as a 

qualified resource for purposes of the electricity production credit. The credit available for 

electricity produced using this resource is one half of the full electricity production credit. The 

term wave, current, tidal, and ocean thermal energy means electricity produced from: (1) free 

flowing ocean water derived from tidal currents, ocean currents, waves, or estuary currents and 

(2) ocean thermal energy. The Chairman's modification also adds wave, current, tidal, and ocean 

thermal facilities as qualified facilities under the credit. The addition of wave, current, tidal, and 

ocean thermal energy is effective for facilities originally placed in service after the date of 

enactment and before January 1, 2014. 

2. Modification to item I.B. of the Chairman’s Mark relating to clean renewable energy 

bonds (“CREBs”) 

The Chairman’s modification authorizes $900 million of CREBs allocations annually in 

calendar years 2008, 2009, 2010, and 2011. The maximum annual allocation to qualified 

projects of governmental bodies is $563 million. 

The Chairman’s modification provides that the amendments to CREBs generally are 

effective on the date of enactment. The proposal in the Chairman’s Mark to modify the 

amortization requirement for CREBs is effective for bonds issued with respect to allocations of 

the national annual limitations established under the proposal. 
3 

3. Modification to item I.C. of the Chairman’s Mark relating to clean coal energy bonds 

The Chairman’s modification establishes a national limitation for clean coal energy 

bonds of $3 billion. The maximum allocation to qualified projects of governmental bodies is 

$1.875 billion. 

The Chairman’s modification provides that clean coal energy bonds must be issued 

before December 31, 2012. 

4. Modification to item I.D. of the Chairman’s Mark relating to the extension and 

modification of the energy credit 

The Chairman’s modification removes the $500 per half kilowatt of capacity credit cap 

with respect to fuel cells and extends the energy credit for an additional six years, through 

December 31, 2016. The modification clarifies that the effective date of the changes related to 

the energy credit is periods after the date of enactment. 

The Chairman’s modification also makes combined heat and power (“CHP”) property 

eligible for the 10-percent energy credit through December 31, 2016. 

CHP property is property: (1) that uses the same energy source for the simultaneous or 

sequential generation of electrical power, mechanical shaft power, or both, in combination with 

the generation of steam or other forms of useful thermal energy (including heating and cooling 

applications); (2) that has an electrical capacity of not more than 15 megawatts or a mechanical 

energy capacity of no more than 2000 horsepower or an equivalent combination of electrical and 

mechanical energy capacities; (3) that produces at least 20 percent of its total useful energy in the 

form of thermal energy that is not used to produce electrical or mechanical power, and produces 

at least 20 percent of its total useful energy in the form of electrical or mechanical power (or a 

combination thereof); and (4) the energy efficiency percentage of which exceeds 60 percent. 

CHP property does not include property used to transport the energy source to the generating 

facility or to distribute energy produced by the facility. 

Additionally, the Chairman’s modification provides that systems whose fuel source is at 

least 90 percent biomass and that would qualify for the credit but for the failure to meet the 

efficiency standard are eligible for a credit that is reduced in proportion to the degree to which 

the system fails to meet the efficiency standard. For example, a system that would otherwise be 

required to meet the 60-percent efficiency standard, but which only achieves 30-percent 

efficiency, would be permitted a credit equal to one half of the otherwise allowable credit (i.e., a 

5-percent credit). 

5. Modification to item I.E. of the Chairman’s Mark relating to the special depreciation 

allowance for certain power generation equipment used in alternative fuel production 

facilities 

In order to qualify for the special depreciation allowance, the Chairman’s modification 

requires that specified electric transmission property be used in the United States as a generator 

tie to solely transmit electricity from any qualified facility described in section 45(d) (without 

regard to any placed in service date) to the grid. 
4 

The Chairman’s modification removes the exception from adjustment to the allowable 

amount of depreciation for purposes of computing a taxpayer’s alternative minimum taxable 

income with respect to property to which the proposal applies. 

The Chairman’s modification extends the placed in service date requirements from 

January 1, 2011 to January 1, 2014. 

6. Modification to item I.F. of the Chairman’s Mark relating to the extension of special 

rule to implement FERC restructuring policy 

The Chairman’s modification changes the definition of an independent transmission 

company whose facilities are required to be placed under the operational control of a FERCapproved independent transmission provider. Under the modified proposal, the facilities must be 

placed under such control no later than two years after the date of the qualifying electric 

transmission transaction. 

7. Modification to item I.G. of the Chairman’s Mark relating to the credit for residential 

energy efficient property 

The Chairman’s modification extends the credit for residential energy efficient property 

for an additional four years, through December 31, 2014. 

The Chairman’s modification also advances the effective date of the provision to apply to 

expenditures after December 31, 2007. 

8. Modification to item I.H. of the Chairman’s Mark relating to the credit for residential 

wind property 

The Chairman’s modification removes the 100-kilowatt limitation on the size of eligible 

wind property and extends the credit for residential energy efficient property for an additional 

four years, through December 31, 2014. Additionally, the Chairman’s modification adds a rule 

that prevents receipt of the credit if any production tax credit is claimed under section 45 with 

respect to the property. 

9. Modification to item I.I. of the Chairman's Mark relating to the advanced coal project 

investment credit 

The Chairman's modification increases by $937.5 million the amount of credits the 

Secretary may allocate to qualifying integrated gasification combined cycle projects and 

increases by $625 million the amount of credits the Secretary may allocate to other advanced 

coal-based electricity generation projects. The Chairman's modification reduces by five percent 

(to 65 percent) the amount of carbon dioxide that qualifying projects must capture and store. 

The Chairman's modification also increases the credit rate to 30 percent. 
5 

10. Modification to item I.J. of the Chairman’s Mark relating to the coal gasification 

investment credit 

The Chairman's modification increases by $937.5 million the amount of credits the 

Secretary may allocate to qualifying coal gasification projects. The Chairman's modification 

increases by five percent (to 75 percent) the amount of carbon dioxide that qualifying projects 

must capture and store. The Chairman's modification also increases the credit rate to 30 percent. 

11. Modification to item II.A. of the Chairman’s Mark relating to the small producer credit 

for cellulosic alcohol 

Under the modification to the Chairman's mark regarding the small producer credit for 

cellulosic alcohol, the credit terminates on the later of December 31, 2012 or December 31st of 

the calendar year in which the Secretary, in consultation with the Environmental Protection 

Agency, certifies that one billion gallons of cellulosic alcohol has been produced or imported 

into the United States. The modification also changes the credit amount to an amount equal to 

$1.11 less the credit amount for alcohol fuel and the credit amount for small ethanol producers as 

of the date the cellulosic alcohol fuel is produced. However, a small cellulosic alcohol fuel 

producer is not precluded from also claiming the alcohol or alcohol fuel mixture credit, or the 

small ethanol producer credit, if the requirements for those credits also are met. For example, in 

the case of a gallon of ethanol, a small producer may be able to claim 50 cents as a cellulosic 

alcohol producer, plus 51 cents under the alcohol fuel mixture credit, and an additional 10 cents 

as a small ethanol producer. 

Like the small ethanol producer credit and small agri-biodiesel credit, as modified by 

item VI.H of the Chairman's mark, the small cellulosic alcohol producer credit also is limited to 

domestic production. However, the small cellulosic alcohol producer credit is subject to the 

general restrictions of item VI.H of the Chairman's mark, i.e., only domestically produced 

cellulosic alcohol sold for use, or used, in the United States qualifies for the credit. 

12. Modification to item II.B. of the Chairman’s Mark relating to the expansion of special 

depreciation allowance for cellulosic biomass ethanol property 

The Chairman’s modification changes the definition of qualified property to any alcohol 

produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or 

recurring basis. 

13. Modification to item II.E. of the Chairman’s Mark relating to the extension of credits 

for biodiesel 

Section 40A(d)(2) defines agri-biodiesel as meaning biodiesel derived solely from virgin 

oils, “including” esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, 

cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, and mustard seeds, and 
6 

from animal fats. The language “including” indicates that this list is not exclusive.2

 Camelina is 

a plant from which oil can be extracted. 

The Chairman’s modification adds camelina to the illustrative and nonexclusive list of 

sources of virgin oils for agri-biodiesel. 

14. Modification to item II.F. of the Chairman’s Mark relating to the extension and 

modification of renewable diesel incentives 

Under the modification, co-produced renewable diesel is entitled to a credit of one dollar 

per gallon for the first 60 million gallons per facility. No credit is allowable for gallons in excess 

of 60 million gallons produced at a facility. 

15. Modification to item II.H. of the Chairman's Mark relating to extension and 

modification of alternative fuel excise tax credit 

The modification extends the alternative fuel excise tax incentives (e.g. the alternative 

fuel excise tax credit, alternative fuel mixture credit, and related payment provisions) through 

December 31, 2012 for non-hydrogen fuels. The modification also provides that alternative fuel 

that is not in a mixture may be used, or sold for use, as a fuel in aviation for purposes of the 

credit. 

16. Modification to item II.J. of the Chairman’s Mark relating to the extension of election 

to expense certain refineries 

The Chairman’s modification changes the placed-in-service date requirement to January 

1, 2014 and the binding construction contract date requirement and self-constructed property 

commencement date to January 1, 2010. 

The Chairman’s modification also permits the production capacity requirement to be met 

if a portion of a qualified refinery enables the existing qualified refinery to increase total volume 

output (determined without regard to asphalt or lube oil) by five percent or more on an average 

daily basis. 

The Chairman’s modification also expands the primary purpose test in the definition of 

qualified refinery to include processing directly from shale or tar sands. The production capacity 

test for processing qualified fuels is also expanded to include the processing of shale or tar sands. 

17. Modification to item III.A. of the Chairman's Mark relating to the credit for alternative 

fuel motor vehicles 

The Chairman’s modification modifies the limitation on the number of qualified plug-in 

vehicles eligible for credit. Under the Chairman’s modification, no plug-in vehicle credit is 

permitted for any new qualified plug-in vehicle in any calendar year following the calendar year 

 2

 Treasury Notice 2005-62. 
7 

which includes the first date on which the total number of such new vehicles sold for use in the 

United States after December 31, 2007, is at least 250,000. 

The Chairman’s modification adds a plug-in vehicle conversion credit to the credit for 

alternative fuel motor vehicles. The conversion credit is a 10-percent credit up to $2,500 per 

vehicle converted into a qualified plug-in vehicle. In the case of a plug-in vehicle conversion in 

which the plug-in battery is leased to the taxpayer, the credit is available to the vehicle lessor. 

The conversion credit is available for property placed in service after December 31, 2007, but 

does not apply to conversions made after December 31, 2009. 

18. Modification to item IV.B. of the Chairman’s Mark relating to the credit for new 

energy efficient homes 

The Chairman’s modification extends the proposal in the Chairman’s Mark for an 

additional year, through December 31, 2011. 

19. Modification to item IV.C. of the Chairman’s Mark relating to the energy efficient 

commercial buildings deduction 

The Chairman’s modification extends the proposal in the Chairman’s Mark for an 

additional three years, through December 31, 2013. The modification clarifies that the proposal 

applies to property placed in service after the date of enactment. 

20. Modification to item VI.C. of the Chairman’s Mark relating to the Oil Spill Liability 

Trust Fund tax 

The Chairman’s modification provides that beginning in the first quarter that is more than 

60 days after the date of enactment, the oil spill tax will be increased from five cents to 10 cents 

per barrel. 
8 

B. Additional Energy Tax Incentives 

1. Seven-year cost recovery for qualified energy management devices 

Present Law

A taxpayer generally must capitalize the cost of property used in a trade or business and 

recover such cost over time through annual deductions for depreciation or amortization. 

Tangible property generally is depreciated under the modified accelerated cost recovery system 

(“MACRS”), which determines depreciation by applying specific recovery periods, placed-inservice conventions, and depreciation methods to the cost of various types of depreciable 

property.3 The class lives of assets placed in service after 1986 are generally set forth in 

Revenue Procedure 87-56.4

 Assets included in class 49.14, describing assets used in the 

transmission and distribution of electricity for sale and related land improvements, are assigned a 

class life of 30 years and a recovery period of 20 years. 

Description of Proposal

The proposal provides a seven-year recovery period for any qualified energy 

management device. For purposes of the proposal, a qualified energy management device means 

any energy management device which is placed in service before January 1, 2011, by a taxpayer 

who is a supplier of electric energy or a provider of electric energy services. An energy 

management device is any two-way communications network and associated equipment, 

including equipment installed on the premises of a consumer, which is used by the taxpayer to 

measure and record electricity usage data on a time-differentiated basis of at least 60 minutes, 

and to provide such data on demand to both consumers and the taxpayer. 

Effective Date

The proposal is effective for property placed in service after the date of enactment. 

2. Landowner incentive to encourage electric transmission build-out 

Present Law

Gross income includes all income from whatever source derived unless a specific 

exclusion applies.5

 3

 Sec. 168. 

4

 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 

5

 Sec. 61. 
9 

Description of Proposal

The proposal provides an exclusion from gross income for any qualified electric 

transmission easement payment. For purposes of the proposal, a qualified electric transmission 

easement payment is any payment by an electric utility or electric transmission entity pursuant to 

an easement or other agreement granted by the payee for the right to locate on the payee’s 

property transmission lines and equipment used to transmit electricity at 230 or more kilovolts 

primarily from qualified facilities described in section 45(d) (without regard to any placed in 

service date). 

Effective Date

The proposal is effective for payments received after the date of enactment. 

3. Credit for carbon dioxide captured from industrial sources and permanently disposed of 

in geologic formations 

Present Law

Taxpayers engaged in petroleum extraction activities may generally deduct qualified 

tertiary injectant expenses used while applying a tertiary recovery method, including carbon 

dioxide augmented waterflooding and immiscible carbon dioxide displacement.6

 In addition, 

taxpayers may claim a credit equal to 15 percent of their qualified enhanced oil recovery 

(“EOR”) costs, which include tertiary injectant expenses associated with an EOR project.7 The 

EOR credit is ratably reduced over a $6 phase-out range when the reference price for domestic 

crude oil exceeds $28 per barrel (adjusted for inflation after 1991). At the current reference 

price, the EOR credit is fully phased out. 

Description of Proposal

The proposal allows a credit of $20 (adjusted for inflation) per ton of qualified carbon 

dioxide captured by the taxpayer at a qualified facility and permanently sequestered in geological 

storage. The proposal also allows a credit of $10 (adjusted for inflation) for qualified carbon 

dioxide captured by the taxpayer at a qualified facility and used as a tertiary injectant in an EOR 

project. 

Qualified carbon dioxide is defined under the proposal as carbon dioxide captured from 

an industrial source that would otherwise be released into the atmosphere as an industrial 

emission of greenhouse gas and is measured at the source of capture and verified at the point or 

points of disposal or injection. Qualified carbon dioxide includes the initial deposit of captured 

carbon dioxide used as a tertiary injectant but does not include carbon dioxide that is recaptured, 

recycled, and re-injected as part of an EOR process. A qualified facility is a facility owned by 

 6

 Sec. 193. 

7

 Sec. 43. 
10 

the taxpayer at which carbon capture equipment is placed in service and which captures at least 

500,000 metric tons of carbon dioxide during the taxable year. 

The credit is part of the general business credit and is available to the taxpayer that 

captures, treats, compresses, and physically performs or contractually ensures the injection and 

permanent disposal of the carbon dioxide in geologic formations, except to the extent otherwise 

provided in regulations. The proposal applies only to qualified carbon dioxide capture occurring 

in the United States8

 or one of its possessions.9 The credit terminates at the end of the calendar 

year in which the Secretary, in consultation with the Environmental Protection Agency, certifies 

that 75,000,000 metric tons of qualified carbon dioxide have been captured and disposed of or 

used as a tertiary injectant. 

Effective Date

The proposal is effective for carbon dioxide captured after the date of enactment. 

4. Seven-year cost recovery for qualified carbon dioxide pipeline property 

Present Law

A taxpayer is allowed to recover, through annual depreciation deductions, the cost of 

certain property used in a trade or business or for the production of income. The amount of the 

depreciation deduction allowed with respect to tangible property for a taxable year is determined 

under the modified accelerated cost recovery system (“MACRS”).10 The class lives of assets 

placed in service after 1986 are generally set forth in Revenue Procedure 87-56.11 Assets 

included in class 46.0, describing assets used in the private, commercial, and contract carrying of 

petroleum, gas and other products by means of pipes and conveyors, are assigned a class life of 

22 years and a recovery period of 15 years. 

Description of Proposal

The proposal provides a seven-year recovery period for qualified carbon dioxide pipeline 

property placed in service before January 1, 2014. For purposes of the proposal, the term 

qualified carbon dioxide pipeline means property, the original use of which commences with the 

taxpayer and the original purposes of which is to transport qualified carbon dioxide, used in the 

United States solely to transmit qualified carbon dioxide from the point of capture to the point of 

disposal in secure geological storage or the point at which such qualified carbon dioxide is used 

as a tertiary injectant in a qualified enhanced oil or natural gas recovery project. 

 8

 Sec. 638(1). 

9

 Sec. 638(2). 

10 Sec. 168. 

11 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 
11 

Qualified carbon dioxide is defined under the proposal as carbon dioxide captured from 

an industrial source that would otherwise be released into the atmosphere as an industrial 

emission of greenhouse gas and is measured at the source of capture and verified at the point or 

points of disposal or injection. Qualified carbon dioxide includes the initial deposit of captured 

carbon dioxide used as a tertiary injectant but does not include carbon dioxide that is recaptured, 

recycled, and re-injected as part of an EOR process. 

Effective Date

The proposal is effective for property placed in service after the date of enactment. 

5. Small fossil-free alcohol producer credit 

Present Law

The alcohol fuels credit is the sum of three credits: the alcohol mixture credit, the alcohol 

credit, and the small ethanol producer credit. Generally, the alcohol fuels credit expires after 

December 31, 2010.12

Taxpayers are eligible for an income tax credit of 51 cents per gallon of ethanol (60 

cents in the case of alcohol other than ethanol) used in the production of a qualified mixture (the 

“alcohol mixture credit”). A “qualified mixture” means a mixture of alcohol and gasoline, (or of 

alcohol and a special fuel) sold by the taxpayer as fuel, or used as fuel by the taxpayer producing 

such mixture. The term “alcohol” includes methanol and ethanol but does not include 

(1) alcohol produced from petroleum, natural gas, or coal (including peat), or (2) alcohol with a 

proof of less than 150. 

Taxpayers may reduce their income taxes by 51 cents for each gallon of ethanol, which is 

not in a mixture with gasoline or other special fuel, that they sell at the retail level as vehicle fuel 

or use themselves as a fuel in their trade or business (“the alcohol credit”). For alcohol other 

than ethanol, the rate is 60 cents per gallon.13 

In the case of ethanol, the Code provides an additional 10-cents-per-gallon credit for up 

to 15 million gallons per year for small producers. Small producer is defined generally as a 

producer whose production capacity does not exceed 60 million gallons per year. The ethanol 

must (1) be sold by such producer to another person (a) for use by such other person in the 

production of a qualified alcohol fuel mixture in such person’s trade or business (other than 

casual off-farm production), (b) for use by such other person as a fuel in a trade or business, or, 

(c) who sells such ethanol at retail to another person and places such ethanol in the fuel tank of 

 12 The alcohol fuels credit is unavailable when, for any period before January 1, 2011, the tax 

rates for gasoline and diesel fuels drop to 4.3 cents per gallon. 

13 In the case of any alcohol (other than ethanol) with a proof that is at least 150 but less than 

190, the credit is 45 cents per gallon (the “low-proof blender amount”). For ethanol with a proof that is at 

least 150 but less than 190, the low-proof blender amount is 37.78 cents. 
12 

such other person; or (2) used by the producer for any purpose described in (a), (b), or (c). A 

cooperative may pass through the small ethanol producer credit to its patrons. 

The alcohol fuels credit is includible in income and is treated as a general business credit, 

subject to the ordering rules and carryforward/carryback rules that apply to business credits 

generally. The credit is allowable against the alternative minimum tax. 

Description of Proposal

The modification adds a new component to the alcohol fuels credit, the small fossil-free 

alcohol producer credit. The credit provides an additional 25-cents-per-gallon credit for up to 60 

million gallons of alcohol produced at a fossil-free facility during the calendar year for small 

producers. Small producer is defined generally as a producer whose fossil free alcohol 

production capacity does not exceed 60 million gallons per year. A fossil-free facility is one at 

which 90 percent of the fuel used in the production of alcohol at such facility is from biomass as 

defined in sec. 45K(c)(3). 

 The alcohol must (1) be sold by such producer to another person (a) for use by such 

other person in the production of a qualified alcohol fuel mixture in such person’s trade or 

business (other than casual off-farm production), (b) for use by such other person as a fuel in a 

trade or business, or, (c) who sells such ethanol at retail to another person and places such 

ethanol in the fuel tank of such other person; or (2) used by the producer for any purpose 

described in (1)(a), (b), or (c). Only domestically produced alcohol, sold for use or used in the 

United States qualifies for the credit. A cooperative may pass through the small producer credit 

to its patrons. 

The credit terminates after December 31, 2012. 

Effective Date

The proposal is effective after December 31, 2007. 

6. Heavy vehicle excise tax exemption for idling reduction devices and advanced insulation 

Present Law

A 12-percent excise tax (the “heavy vehicle excise tax”) is imposed on the first retail sale 

of automobile truck chassis and bodies, truck trailer and semitrailer chassis and bodies, and 

tractors of the kind chiefly used for highway transportation in combination with a trailer or 

semitrailer.14 The heavy vehicle excise tax does not apply to automobile truck chassis and 

bodies suitable for use with a vehicle which has a gross vehicle weight of 33,000 pounds or less. 

The tax also does not apply to truck trailer and semitrailer chassis and bodies suitable for use 

with a trailer or semitrailer which has a gross vehicle weight of 26,000 pounds or less, or to 

 14 Sec. 4051. 
13 

tractors having a gross vehicle weight of 19,500 pounds or less if such tractor in combination 

with a trailer or semitrailer has a gross combined weight of 33,000 pounds or less. 

If the owner, lessee, or operator of a taxable article installs any part or accessory within 

six months after the date such vehicle was first placed in service, a 12 percent tax applies on the 

price of such part or accessory and its installation. 

Description of Proposal

The proposal provides an exemption from the heavy vehicle excise tax for the cost of 

qualifying idling reduction devices. A qualifying idling reduction device means any device that 

(1) is installed on automobile truck chassis and bodies, truck trailer or semitrailer chassis and 

bodies, or tractors, which are subject to the heavy vehicle excise tax, (2) is designed to provide 

such vehicle those services (such as heat, air conditioning, or electricity) that would otherwise 

require the operation of the main drive engine while the vehicle is temporarily parked or remains 

stationary using either (i) an all electric unit, such as a battery powered unit or from gridsupplied electricity, or (ii) a dual fuel unit powered by diesel or other fuels, and capable of 

providing such services from grid-supplied electricity or on-truck batteries alone, and (3) is 

certified by the Secretary of Energy, in consultation with the Environmental Protection Agency 

and the Secretary of Transportation, to reduce long-duration idling of such vehicle at a motor 

vehicle rest stop or other location where such vehicles are temporarily parked or remain 

stationary. Long duration idling means the operation of a main drive engine for a period greater 

than 15 consecutive minutes, when the main drive engine is not engaged in gear. Such term does 

not apply to routine stoppages associated with traffic movement or congestion. 

The proposal also provides an exemption for the installation of “advanced insulation” in a 

commercial refrigerated truck or trailer that is subject to the heavy vehicle excise tax. Advanced 

insulation means insulation that has an R value of not less than R35 per inch. 

Both exemptions apply regardless of whether the device or insulation is factory installed 

or later added as an accessory. 

Effective Date

The proposal is effective for retail sales or installations made after December 31, 2007. 

7. Extension and modification of energy efficient appliances credit 

Present Law

The provision provides a credit for the eligible production of certain energy-efficient 

dishwashers, clothes washers and refrigerators. 

The credit for dishwashers applies to dishwashers produced in 2006 and 2007 that meet 

the Energy Star standards for 2007. The credit amount equals $3 multiplied by 100 times the 

“energy savings percentage,” but may not exceed $100 per dishwasher. The energy saving 

percentage is defined as the change in the energy factor (EF) required by the Energy Star 

program between 2007 and 2005 divide by the EF requirement for 2007. The EF required in 
14 

2005 for the Energy Star program was 0.58 and it was 0.65 in 2007, for a change of 0.07. The 

energy saving percentage is thus 0.07 / 0.65, which when multiplied by 100 times $3 equals 

$32.31 per refrigerator. 

The credit for clothes washers equals $100 for clothes washers manufactured in 2006-

2007 that meet the requirements of the Energy Star program which are in effect for clothes 

washers in 2007. 

The credit for refrigerators is based on energy savings and year of manufacture. The 

energy savings are determined relative to the energy conservation standards promulgated by the 

Department of Energy that took effect on July 1, 2001. Refrigerators that achieve a 15 to 20 

percent energy saving and that are manufactured in 2006 receive a $75 credit. Refrigerators that 

achieve a 20 to 25 percent energy saving receive a (i) $125 credit if manufactured in 2006-2007. 

Refrigerators that achieve at least a 25 percent energy saving receive a (i) $175 credit if 

manufactured in 2006-2007. 

Appliances eligible for the credit include only those produced in the United States and 

that exceed the average amount of U.S. production from the 3 prior calendar years for each 

category of appliance. In the case of refrigerators, eligible production is U.S. production that 

exceeds 110 percent of the average amount of U.S. production from the 3 prior calendar years. 

A dishwasher is any a residential dishwasher subject to the energy conservation standards 

established by the Department of Energy. A refrigerator must be an automatic defrost 

refrigerator-freezer with an internal volume of at least 16.5 cubic feet to qualify for the credit. A 

clothes washer is any residential clothes washer, including a residential style coin operated 

washer, that satisfies the relevant efficiency standard. 

The taxpayer may not claim credits in excess of $75 million for all taxable years, and 

may not claim credits in excess of $20 million with respect to clothes washers eligible for the 

$50 credit and refrigerators eligible for the $75 credit. A taxpayer may elect to increase the $20 

million limitation described above to $25 million provided that the aggregate amount of credits 

with respect to such appliances, plus refrigerators eligible for the $100 and $125 credits, is 

limited to $50 million for all taxable years. 

Additionally, the credit allowed in a taxable year for all appliances may not exceed two 

percent of the average annual gross receipts of the taxpayer for the three taxable years preceding 

the taxable year in which the credit is determined. 

The credit is part of the general business credit. 

Description of Proposal

The proposal extends and modifies the energy efficient appliances credit. 

The proposal provides modified credits for eligible production as follows: 
15 

Dishwashers

1. $75 in the case of a dishwasher which is manufactured in calendar year 2008, 2009, or 

2010 and which uses no more than 307 kilowatt hours per year and 5.0 gallons per 

cycle (5.5 gallons per cycle for dishwashers designed for greater than 12 place 

settings). 

Clothes washers

2. $125 in the case of a residential top-loading clothes washer manufactured in calendar 

year 2008 or 2009 which meets or exceeds a 1.8 modified energy factor and does not 

exceed a 7.5 water consumption factor, 

3. $150 in the case of a residential or commercial clothes washer manufactured in 

calendar year 2008, 2009 or 2010 which meets or exceeds 2.0 modified energy factor 

and does not exceed a 6.0 water consumption factor, and 

4. $250 in the case of a residential or commercial clothes washer manufactured in 

calendar year 2008, 2009, or 2010 which meets or exceeds 2.2 modified energy factor 

and does not exceed a 4.5 water consumption factor. 

Refrigerators

1. $75 in the case of a refrigerator which is manufactured in calendar year 2008 or 2009, 

and consumes at least 23 percent but no more than 24.9 percent less kilowatt hours per 

year than the 2001 energy conservation standards, 

2. $100 in the case of a refrigerator which is manufactured in calendar year 2008, 2009 

or 2010, and consumes at least 25 percent but not more than 29.9 percent less kilowatt 

hours per year than the 2001 energy conservation standards, and 

3. $200 in the case of a refrigerator manufactured in calendar year 2008, 2009 or 2010 

and which consumes at least 30 percent less energy than the 2001 energy conservation 

standards. 

Appliances eligible for the credit include only those that exceed the average amount of 

production from the 2 prior calendar years for each category of appliance, rather than the present 

law 3 prior calendar years. Additionally, the special rule with respect to refrigerators that 

requires production in excess of 110 percent of prior production is eliminated. 

The aggregate credit amount allowed with respect to a taxpayer for all taxable years 

beginning after December 31, 2007 may not exceed $75 million.

The term “modified energy factor” means the modified energy factor established by the 

Department of Energy for compliance with the Federal energy conservation standard. 

The term “gallons per cycle” means, with respect to a dishwasher, the amount of water, 

expressed in gallons, required to complete a normal cycle of a dishwasher. 
16 

The term “water consumption factor” means, with respect to a clothes washer, the 

quotient of the total weighted per-cycle water consumption divided by the cubic foot (or liter) 

capacity of the clothes washer. 

Effective Date

The proposal applies to appliances produced after December 31, 2007. 

8. Study on tax-credit bonds 

Present law

Tax-exempt bonds

Interest on State and local governmental bonds generally is excluded from gross income 

for Federal income tax purposes if the proceeds of the bonds are used to finance direct activities 

of these governmental units or if the bonds are repaid with revenues of the governmental units. 

Activities that can be financed with these tax-exempt bonds include the financing of electric 

power facilities (i.e., generation, transmission, distribution, and retailing). 

Interest on State or local government bonds to finance activities of private persons 

(“private activity bonds”) is taxable unless a specific exception is contained in the Code (or in 

non-Code provision of a revenue Act). The term “private person” generally includes the Federal 

Government and all other individuals and entities other than States or local governments. The 

Code includes exceptions permitting States or local governments to act as conduits providing 

tax-exempt financing for certain private activities. In most cases, the aggregate volume of these 

tax-exempt private activity bonds is restricted by annual aggregate volume limits imposed on 

bonds issued by issuers within each State. For calendar year 2007, the State volume cap, which 

is indexed for inflation, equals $85 per resident of the State, or $256.24 million, if greater. 

The tax exemption for State and local bonds also does not apply to any arbitrage bond.15 

An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are 

reasonably expected to be used (or intentionally are used) to acquire higher yielding investments 

or to replace funds that are used to acquire higher yielding investments.16 In general, arbitrage 

profits may be earned only during specified periods (e.g., defined “temporary periods”) before 

funds are needed for the purpose of the borrowing or on specified types of investments (e.g., 

“reasonably required reserve or replacement funds”). Subject to limited exceptions, investment 

profits that are earned during these periods or on such investments must be rebated to the Federal 

Government. 

 15 Secs. 103(a) and (b)(2). 

16 Sec. 148. 
17 

Tax-credit bonds

As an alternative to traditional tax-exempt bonds, the Code permits three types of taxcredit bonds. States and local governments have the authority to issue qualified zone academy 

bonds (“QZABS”), clean renewable energy bonds (“CREBS”), and “Gulf tax credit bonds.”17 In 

lieu of tax-exempt interest, these bonds entitle eligible holders to a tax credit. 

Unlike tax-exempt bonds, tax-credit bonds are not interest-bearing obligations. Rather, 

the taxpayer holding a tax-credit bond on a credit allowance date is entitled to a tax credit. The 

amount of the credit is determined by multiplying the bond’s credit rate by the face amount on 

the holder’s bond. The credit rate on the bonds is determined by the Secretary and is to be a rate 

that permits issuance of tax-credit bonds without discount and interest cost to the holders of such 

bonds. The credit on such bonds accrues quarterly and is includible in gross income (as if it 

were an interest payment on the bond), and can be claimed against regular income tax liability 

and alternative minimum tax liability. 

Description of Proposal

The proposal directs the Secretary to undertake a study of the use of tax-credit bonds as a 

means of subsidizing the borrowing costs of the beneficiaries of such financing. In particular, 

the study should examine the efficacy of the existing tax-credit bond programs. The study also 

should provide a general examination of the Federal subsidy provided by tax-credit bonds 

relative to the subsidy provided by tax-exempt bonds, the study should examine the extent to 

which projects eligible for tax-credit bonds also receive other Federal tax benefits under present 

law. 

The study also should examine any market or administrative issues associated with 

present-law tax-credit bonds, including, but not limited to: the effect of Treasury setting the 

credit rate; Treasury selection of projects eligible for financing; the potential for arbitrage 

earnings and the extent to which this may affect the level of subsidy; the lack of uniform rules 

for tax-credit bonds; and the direct issuance of tax-credit bonds by private parties. 

Finally, the study should discuss the changes to present-law that would be necessary to 

provide a tax-credit bond that delivers a subsidy comparable to that provided by tax-exempt 

bonds and reduces the market and administrative issues associated with present-law tax-credit 

bonds. 

The Secretary is to submit a report on the results of the study to the Senate Committee on 

Finance and House Committee on Ways and Means by the end of the second calendar year after 

the date of enactment of this proposal. 

Effective Date

The proposal is effective on the date of enactment. 

 17 Secs. 1397E, 54, and 1400N(l), respectively. 
18 

9. Deduction for qualified timber gain and timber REIT provisions 

Present Law

Treatment of certain timber gain 

Under present law section 631(a), if a taxpayer cuts standing timber, the taxpayer may 

elect to treat the cutting as a sale or exchange eligible for capital gain treatment. The fair market 

value of the timber on the first day of the taxable year in which the timber is cut is then used for 

purposes of determining the gain attributable to such cutting and the cost of the cut timber for 

purposes of the taxpayer’s income from later sales of the timber or timber products. Under 

section 631(b), if a taxpayer disposes of timber with a retained economic interest or makes an 

outright sale of timber, the gain is eligible for capital gain treatment. Capital gain treatment 

under either section 631(a) or section 631(b) requires that the taxpayer have owned the timber or 

held the contract right for a period of more than one year. 

Under present law, for taxable years beginning before January 1, 2011, the maximum rate 

of tax on long-term capital gain (“adjusted net capital gain”) of an individual, estate, or trust is 

15 percent.18 Any adjusted net capital gain that otherwise would be taxed at a 10- or 15-percent 

rate is taxed at a 5-percent rate (zero for taxable years beginning after 2007). These rates apply 

for purposes of both the regular tax and the alternative minimum tax.19 

For taxable years beginning before January 1, 2011, the maximum rate of tax on ordinary 

income of an individual, estate, or trust is 35 percent.20 The maximum rate of tax on long-term 

capital gain (“net capital gain”) of a corporation is 35 percent, the same as the maximum rate on 

ordinary income of a corporation. 

 18 For taxable years beginning after December 31, 2010, the maximum rate of tax on the adjusted 

net capital gain of an individual is 20 percent. Any adjusted net capital gain that otherwise would be 

taxed at a 10- or 15-percent rate is taxed at a 10-percent rate. In addition, any gain from the sale or 

exchange of property held more than five years that would otherwise have been taxed at the 10-percent 

rate is taxed at an 8-percent rate. Any gain from the sale or exchange of property held more than five 

years and the holding period for which began after December 31, 2000, which would otherwise have been 

taxed at a 20-percent rate is taxed at an 18-percent rate. 

19 Because the entire amount of the capital gain is included in alternative minimum taxable 

income (“AMTI”), for taxpayers subject to the alternative minimum tax with AMTI in excess of $112,500 

($150,000 in the case of a joint return), the gain may cause a reduction in the minimum tax exemption 

amount and thus effectively tax the gain at rates of 21.5 or 22 percent. Also, the gain may cause the 

phase-out of certain benefits in computing the regular tax. 

20 For taxable years beginning after December 31, 2010, the maximum rate of tax on ordinary 

income of an individual, estate, or trust is 39.6 percent. 
19 

Real estate investment trusts

In general

Under present law, a real estate investment trust (“REIT”) is a U.S. entity that derives 

most of its income from passive real estate-related investments and that elects to be taxed as a 

REIT rather than as a regular “C” corporation that would be subject to all the rules of subchapter 

C of the Code. A C corporation may not deduct its dividends paid to shareholders. By contrast, 

if an electing entity meets the requirements for REIT status, the portion of its income that is 

distributed to its investors each year as dividends out of its earnings and profits is deductible by 

the REIT and includible in income by its investors. In this manner, the distributed income of the 

REIT is not taxed at the entity level. The distributed income is taxed only at the investor level. 

A REIT that has net capital gain can declare a dividend that shareholders are entitled to treat as 

long-term capital gain. 

REITs must satisfy a number of tests on an annual basis that relate to the entity's 

organizational structure, the source of its income, the nature of its assets, and its required 

distribution of income. 

Distribution requirements and long-term capital gain 

A REIT generally must distribute 90 percent of its income (other than long-term capital 

gain) to its shareholders each year. Any undistributed income is subject to tax at regular 

corporate rates. However, net capital gain of the REIT is not required to be distributed. For 

undistributed long-term capital gain, the REIT can pay corporate-level tax at regular corporate 

rates on the retained amounts, while the shareholders also include such amounts in their income 

and receive a credit or refund for the tax paid by the REIT. In effect, long-term capital gain of a 

REIT (including but not limited to timber gain) can be taxed as long-term capital gain of the 

REIT shareholders, whether or not the gain is distributed to them. The shareholders receive an 

upward basis adjustment in their REIT stock in the case of undistributed gain to reflect the 

amount of retained gain that was taxed to them. If a REIT shareholder has obtained such an 

upward basis adjustment for a REIT interest and disposes of the interest before having held the 

interest for at least 6 months, then any loss on disposition of the interest is treated as a long-term 

capital loss. 

A REIT is also subject to a four-percent excise tax to the extent it does not distribute 

specified percentages of its income within any calendar year. The required distributed 

percentage is 85 percent in the case of the REIT ordinary income, and 95 percent in the case of 

the REIT capital gain net income (as defined).21 The amount of the excess of the required 

distribution over the actual distribution is subject to the four-percent tax. 

 21 Sec. 4981. 
20 

Income requirements

A REIT generally is restricted to earning certain types of passive income. Among other 

requirements, at least 75 percent of a REIT’s gross income in a taxable year must consist of 

certain types of real estate related income, including rents from real property, interest on 

mortgages secured by real property or interests in real property, and income from the sale or 

exchange of real property (including interests in real property) that is not stock in trade, 

inventory, or property held for primarily for sale to customers in the ordinary course of 

business.22 Interests in real property are specifically defined to exclude mineral, oil, or gas 

royalty interests.23 In addition, 95 percent of a REIT’s gross income for the taxable year must 

consist of income that is either qualified for the 75-percent test or that is income from specified 

other generally passive income (such as dividends, capital gains, and interest income). A REIT 

will not qualify as a REIT, and will be taxable as a regular C corporation, for any taxable year if 

it does not meet these income tests. 

Some REITs have been formed to hold land on which trees are grown. Upon maturity of 

the trees, the standing trees are sold by the REIT. The Internal Revenue Service has issued 

private letter rulings in particular instances stating that the income from the sale of the trees that 

is treated as capital gain under section 631(b) can qualify as REIT real property income because 

the uncut timber and the timberland on which the timber grew is considered real property and the 

sale of uncut trees can qualify as capital gain derived from the sale of real property. The Internal 

Revenue Service has also indicated in private letter rulings that income from the cutting of 

timber can qualify as real estate income for REIT qualification purposes if the income would 

have qualified under section 631(b) but for the fact that the one-year holding period under that 

section was not met.24 

Asset requirements

Seventy-five percent of REIT assets, determined as of the close of each quarter of the 

REIT taxable year, must be real-estate assets (as defined), including interests in real property. 

Interests in real property are specifically defined to exclude mineral, oil, or gas royalty 

interests.25 

A REIT generally cannot own more than 10 percent of the vote or value of the securities 

of a single entity; and no more than five percent of the fair market value of REIT assets can be 

 22 Secs. 856(c) and sec. 1221(a). Income from sales that are not prohibited transactions solely by 

virtue of section 857(b)(6) is also qualified REIT income. 

23 Sec. 856(c)(5)(C). 

24 See, e.g., PLR 200052021; see also PLR 199945055; PLR 199927021;, PLR 8838016. A 

private letter ruling may be relied upon only by the taxpayer to which the ruling is issued. However, such 

rulings provide an indication of administrative practice. 

25 Sec. 856(c)(5)(C). 
21 

securities of any one issuer. However, there is an exception for ownership of securities of a 

taxable REIT subsidiary (“TRS”) that is taxed as a corporation, provided that TRS securities do 

not represent more than 20 percent of the value of REIT assets. 26 A TRS can generally engage 

in any kind of business activity, with certain limitations and exceptions relating to lodging 

facilities and health care facilities. 

Prohibited transactions tax

A REIT is subject to a 100-percent excise tax on gain from any sale that is a “prohibited 

transaction,” defined as a sale of property that is stock in trade, inventory, or property held 

primarily for sale to customers in the ordinary course of trade or business.27 This determination 

is based on facts and circumstances. However, a safe-harbor provides that no excise tax is 

imposed if certain requirements are met. 

In the case of timber property, the safe harbor is met, regardless of the number of sales 

that occur during the taxable year, if (i) the REIT has held the property for not less than four 

years in connection with the trade or business of producing timber; (ii) the aggregate adjusted 

bases of the property sold (other than foreclosure property) during the taxable year does not 

exceed 10 percent of the aggregate bases of all the assets of the REIT as of the beginning of the 

taxable year, and certain other requirements are satisfied. These include requirements that limit 

the amount of expenditures the REIT can make during the four-year period prior to the sale that 

are includible in the adjusted basis of the property,28 a requirement that marketing must be done 

by an independent contractor, and a requirement that the sales price cannot be based on the 

income or profits of any person.29 

Non-timber property has a similar but separate safe harbor from the prohibited 

transactions tax, with rules similar to the rules for timber property, including a four-year holding 

 26 REITs are also subject to a tax equal to 100 percent of redetermined rents, redetermined 

deductions, and excess interest. These are defined generally as the amounts of specified REIT 

transactions with a TRS of the REIT that differ from an arm’s length amount. 

27 Secs. 857(b)(6) and 1221(a)(1). There is an exception for certain foreclosure property. The 

definition of a prohibited transaction for this purpose is the same as the definition of a transaction the gain 

on which for any taxpayer (not limited to a REIT) would otherwise be ordinary income, rather than 

capital gain, because it is “stock in trade of the taxpayer or other property which would properly be 

included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by 

the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” Sec. 

1221(a)(1). 

28 Aggregate expenditures (other than timberland acquisition expenditures) during such period 

made by the REIT or a partner of the REIT, which are includible in basis, may not exceed 30 percent of 

the net selling price in the case of expenditures that are directly related to operation of the property for the 

production of timber or the preservation of the property for use as timberland, and may not exceed five 

percent of the net selling price in the case of expenditures that are not directly related to those purposes. 

29 Sec. 857(b)(6)(D). 
22 

period requirement and a limit on the percentage of the aggregate adjusted basis of property that 

can be sold in one taxable year.30 

Description of Proposal

Elective deduction for 60 percent of qualified timber gain

The proposal allows a taxpayer to elect to deduct an amount equal to 60 percent of the 

taxpayer’s qualified timber gain (or, if less, the net capital gain) for the taxable year. In the case 

of an individual, the deduction reduces adjusted gross income. Qualified timber gain means the 

net gain described in section 631(a) and (b) for the taxable year. 

The deduction is allowed in computing the regular tax and the alternative minimum tax 

(including the adjusted current earnings of a corporation). 

If a taxpayer elects the deduction, the 40 percent of the gain subject to tax is taxed at 

ordinary income tax rates.31

In the case of a pass-thru entity other than a REIT, the election may be made separately 

by each taxpayer subject to tax on the gain. The Treasury Department may prescribe rules 

appropriate to apply this proposal to gain taken into account by a pass-thru entity. 

In the case of a REIT, the election to take the 60-percent deduction is made by the REIT. 

If a REIT makes the election, then the qualified timber gain is excluded from the computation of 

capital gain or loss of the REIT for purposes of applying the tax rates, and can no longer be 

designated as a long-term capital gain dividend to shareholders. The gain is treated as ordinary 

income for purposes of applying the REIT income distribution requirements for qualification as a 

REIT, but for this purpose 60 percent of the amount of the gain is deductible by the REIT in 

computing its income. REIT earnings and profits also exclude the portion of the timber gain that 

is deductible. Thus, 40 percent of the gain is subject to the REIT distribution requirements; and 

40 percent of the gain increases REIT earnings and profits. Thus, when the 40 percent is 

distributed it is treated as an ordinary REIT dividend distribution to shareholders. Because this 

dividend is from a REIT and is not derived from an entity that was taxed as a C corporation, it is 

not qualified for the current 15-percent qualified dividend rates and will be taxed at the ordinary 

income rates of the shareholders.32

Under the proposal, REIT shareholders obtain an upward basis adjustment in their REIT 

interests that is equal to the 60 percent of the timber gain that is deductible by the electing REIT. 

Because the 60 percent of timber gain that was deductible by the REIT does not increase REIT 

 30 Sec. 857(b)(6)(C). 

31 Under the proposal, because only 40 percent of the gain is included in adjusted gross income 

and AMTI, only that amount of gain would result in the phase-out of tax benefits. 

32 Sec. 857(c)(2). 
23 

earnings and profits, a distribution of such 60 percent to the shareholders generally would not be 

treated as a dividend (in the absence of other retained earnings) but as a return of basis under the 

general rules of section 301(c). Because the shareholders’ basis has been increased by this 60 

percent, this distribution would not exceed the shareholders' basis and thus would be nontaxable 

return of basis, rather than capital gain in excess of basis. However, under the proposal, if a 

REIT shareholder has obtained such an upward basis adjustment for a REIT interest and disposes 

of the interest before having held the interest for at least six months, then any loss on disposition 

of the interest is disallowed to the extent of such upward basis adjustment. 

For purposes of the section 4981 excise tax on amounts not distributed within a calendar 

year, qualified timber gain continues to be treated as a capital gain item, but 60 percent of that 

gain is deducted. 

Additional REIT proposals

Timber gain qualified REIT income without regard to one-year holding period

The proposal includes timber gain under section 631(a) as a category of qualified real 

estate income of a REIT if the cutting is provided by a taxable REIT subsidiary, and also 

includes gain recognized under section 631(b). For purposes of such qualified income treatment 

under those proposals, there is no requirement of a one-year holding period. Thus, for example, 

a REIT can acquire timber property, and harvest the timber on the property within one year of 

the acquisition, with the resulting income being qualified real estate income for REIT 

qualification purposes, even though such income is not eligible for long term capital gain 

treatment under section 631(a) or section 631(b). The proposal provides, however, that for all 

purposes of the Code, such income shall not be considered to be gain described in section 

1221(a)(1), that is, it shall not be treated as income from the sale of stock in trade, inventory, or 

property held by the REIT primarily for sale to customers in the ordinary course of its trade or 

business. 

For purposes of determining REIT income, if the cutting is done by a taxable REIT 

subsidiary, the cut timber is deemed sold on the first day of the taxable year to the taxable REIT 

subsidiary (with subsequent gain, if any, attributable to the taxable REIT subsidiary). 

REIT prohibited transaction safe harbor for timber property

For sales to a qualified organization exclusively for conservation purposes, (as those 

terms are defined in section 170(h)(3) and 170(h)(1)(C), respectively), the proposal reduces to 

two years the present-law four-year holding period requirement under the section 857(b)(6) (D) 

safe harbor from “prohibited transaction” treatment for certain timber property sales. Also, in the 

case of such sales, the safe-harbor limitations on how much may be added, within the four-year 

period prior to the date of sale, to the aggregate adjusted basis of the property, are changed to 

refer to the two-year period prior to the date of sale. 

The proposal also removes the safe-harbor requirement that marketing of the property 

must be done by an independent contractor and permits a TRS of the REIT to perform the 

marketing. 
24 

The proposal states that any gain that is eligible for the timber property safe harbor is 

considered for all purposes of the Code not to be described in section 1221(a)(1), that is, it shall 

not be treated as income from the sale of stock in trade, inventory, or property held by the REIT 

primarily for sale to customers in the ordinary course of its trade or business. 

Special rules for timber REITs

The proposal contains several proposals applicable only to a “timber REIT,” defined as a 

REIT in which more than 50 percent of the value of its total assets consists of real property held 

in connection with the trade or business of producing timber. 

First, mineral royalty income from real property owned by a timber REIT and held, or 

once held, in connection with the trade or business of producing timber by such REIT, is 

included as qualifying real estate income for purposes of the REIT income tests. 

Second, a timber REIT is permitted to hold TRS securities with a value up to 25 percent, 

(rather than 20 percent) of the value of the total assets of the REIT. 

Effective Date

The proposals allowing the 60-percent deduction for qualified timber gain, and providing 

for the application of the deduction in the case of a REIT, apply to taxable years that end after 

the date of enactment and that begin before the end of the one-year period following the date of 

enactment. These provisions apply only to qualified timber gain from dispositions after the date 

of enactment and before the date that is one year after the date of enactment. 

The proposals treating certain timber gains as qualifying REIT income and changing the 

rules relating to the safe-harbor provisions apply to dispositions after the date of enactment and 

before the date that is one year after the date of enactment. The provision treating mineral royalty 

income of a timber REIT as qualifying income applies to income earned after the date of 

enactment and before the date that is one year after the date of enactment. The provision 

increasing the permitted amount of TRS securities for a timber REIT applies to quarters closing 

after the date of enactment and before date that is one year after the date of enactment. 
25 

10. Temporary procedures for excise tax refunds on exported coal 

Present Law

In general

Excise tax is imposed on coal, except lignite, produced from mines located in the United 

States.33 The producer of the coal is liable for paying the tax to the IRS. Producers generally 

recover the tax from their purchasers. 

The Export Clause of the U.S. Constitution provides that “no Tax or Duty shall be laid on 

Articles exported from any State.”34 Courts have determined that the Export Clause applies to 

excise tax on exported coal, and therefore such taxes are subject to a claim for refund.35 The 

courts have further determined that there are two procedural means to judicially obtain such 

refunds, under the Code or the Tucker Act. 

Claims under the Code

Unless a claimant proceeds under the Tucker Act, claims by coal producers and exporters 

for refunds or credits of excise taxes on exported coal are governed by the general Code rules for 

refunds of tax on exported items. A claimant must satisfy the following requirements of the 

Code and case law: 

1. A claim for refund must be filed within three years from the time the return was 

filed, or within two years from the time the tax was paid, whichever period 

expires later;36

2. The person must establish that the goods were in the stream of export when the 

excise tax was imposed;37

3. The claimant must establish that it has borne the tax. More specifically, the 

claimant must establish that the tax was neither included in the price of the article 

nor collected from the purchaser (or if so, that the claimant has repaid the amount 

 33 Sec. 4121(a). Throughout the relevant period, the rate of tax on coal from underground mines 

has been $1.10 per ton and the rate of tax on coal from surface mines has been $0.55 per ton. These rates 

are subject to a limitation of 4.4 percent of the producer’s sale price. Sec. 4121(b). 

34 U.S. Const., art. I, sec. 9, cl. 5. 

35 See Ranger Fuel Corp. v. United States, 33 F. Supp. 2d 466 (E.D. Va. 1998). 

36 Sec. 6511(a). 

37 See Ranger Fuel Corp. v. United States, 33 F. Supp. 2d 466 (E.D. Va. 1998). See also United 

States v. International Business Machines Corp., 517 U.S. 843 (1996); Joy Oil, Ltd. v. State Tax 

Commission, 337 U.S. 286 (1949). 
26 

of tax to the ultimate purchaser), that the claimant has repaid or agreed to repay 

the tax to the ultimate vendor or has obtained the written consent of such ultimate 

vendor to the allowance of the claim, or that the claimant has filed the written 

consent of the ultimate purchaser to the allowance of the claim;38

4. In the case of an exporter or shipper of an article exported to a foreign country or 

shipped to a possession, the amount of tax may be refunded to the exporter or 

shipper if the person who paid the tax waives its claim to such amount;39 and 

5. A civil action for refund must not be begun before the expiration of six months 

from the date of filing the claim (unless the claim has been disallowed during that 

time), nor after the expiration of two years from the date of mailing the notice of 

claim disallowance.40

In 2000, the Internal Revenue Service (“IRS”) issued Notice 2000-28,41 which 

summarizes the IRS position regarding claims for credits or refunds of excise taxes on exported 

coal and sets forth procedural rules relating to such claims. Under Notice 2000-28, a coal 

producer or exporter must provide the following information as part of its claim: 

1. A statement by the person that paid the tax to the government that provides the quarter 

and the year for which the tax was reported on Form 720, the line number on such 

Form, the amount of tax paid on the coal, and the date of payment; 

2. In the case of an exporter, a statement by the person that paid the tax to the 

government that such person has waived the right to claim a refund; 

3. A statement that the claimant has evidence that the coal was in the stream of export 

when sold by the producer; 

4. In the case of an exporter, proof of exportation; 

5. In the case of a coal producer, a statement that the coal actually was exported; and 

6. A statement that the claimant: 

a. has neither included the tax in the price of the coal nor collected the amount of 

the tax from its buyer, 

b. has repaid the amount of the tax to the ultimate purchaser of the coal, or 

 38 Sec. 6416(a)(1). 

39 Sec. 6416(c). 

40 Sec. 6532(a). 

41 Notice 2000-28, 2001-1 C.B. 1116. 
27 

c. has obtained the written consent of the ultimate purchaser of the coal to the 

allowance of the claim. 

If the IRS disallows the claim, the claimant may proceed in a Federal district court or the 

Court of Federal Claims under 28 U.S.C. sec. 1346(a)(1), which affords the Federal district 

courts concurrent jurisdiction with the Court of Federal Claims over “[a]ny civil action against 

the United States for the recovery of any internal revenue tax alleged to have been erroneously or 

illegally assessed or collected ... or any sum alleged to have been excessive or in any manner 

wrongfully collected under the internal-revenue laws.” 

Claims under the Tucker Act

Instead of proceeding under the Code, a person may claim a refund in the Court of 

Federal Claims under the Export Clause and the Tucker Act, which confers jurisdiction upon 

such court “to render judgment upon any claim against the United States founded either upon the 

Constitution, or any Act of Congress or any regulation of an executive department ....”42 A 

claim for such a refund under the Tucker Act is not bound by the Code requirements described 

above (it is bound by the case law requirement that the claimant must establish that the goods 

were in the stream of export when the excise tax was imposed) and is entitled to the benefit of a 

six-year statute of limitations.43 The Court of Appeals for the Federal Circuit held that such 

claims accrue prejudgment interest, reversing the Court of Federal Claims on that issue.44 In 

addition, the claimant in such a proceeding is subject to general rules of judicial standing, which 

may bar certain exporters from prevailing in such a proceeding.45

Description of Proposal

The proposal creates a new procedure under which certain coal producers and exporters 

may claim a refund of excise taxes imposed on coal exported from the United States. Coal 

producers or exporters that exported coal during the period beginning on or after October 1, 1990 

and ending on or before the date of enactment of the proposal, with respect to which a return was 

filed on or after October 1, 1990, and on or before the date of enactment, and that file a claim for 

refund not later than the close of the 30-day period beginning on the day of enactment, may 

obtain a refund from the Secretary of the Treasury of excise taxes paid on such exported coal and 

any interest accrued from the date of overpayment. Interest on such claims is computed under 

 42 28 U.S.C. sec. 1491(a). 

43 Venture Coal Sales Co. v. U.S., 93 AFTR 2d 2004-2495 (Fed. Cir. 2004); Cyprus Amax Coal 

Co. v. U.S., 205 F.3d 1369 (Fed. Cir. 2000). 

44 Clintwood Elkhorn Mining Company, v. U.S., 473 F.3d 1373 (Fed. Cir. 2007), rev’g sub. nom. 

Andelex Resources, Inc. v. U.S., No. 00-cv-249 (Fed. Cl. July 21, 2004). 

45 See, e.g., Emerald Int’l Corp. v. U.S., 90 AFTR 2d 2002-7710 (Ct. Fed. Cl. 2002) (exporter 

lacked standing because tax was imposed upon the producer, which had no obligation to pass on the tax to 

exporter). 
28 

the Code.46 The Secretary is required to determine whether to approve the claim within 180 days 

after such claim is filed, and to pay such claim not later than 180 days after making such 

determination. 

In order to qualify for a refund under the proposal, a coal producer must establish that it, 

or a party related to such coal producer, exported coal produced by such coal producer to a 

foreign country or shipped coal produced by such coal producer to a U.S. possession, the export 

or shipment of which was other than through an exporter that filed a valid and timely claim for 

refund under the proposal. An exporter must establish that it exported coal to a foreign country, 

shipped coal to a U.S. possession, or caused such coal to be so exported or shipped. Refunds to 

producers are to be made in an amount equal to the tax paid on exported coal. Exporters are to 

receive a payment equal to $0.825 per ton of exported coal. 

Special rules apply if a court has rendered a judgment. If a coal producer or a party 

related to a coal producer has received, from a court of competent jurisdiction in the United 

States, a judgment in favor of such coal producer (or party related to such coal producer) that 

relates to the constitutionality of Federal excise tax paid on exported coal, then such coal 

producer is deemed to have established the export of coal to a foreign country or shipment of 

coal to a possession of the United States. The amount of any payment due to a coal producer 

under the proposal is reduced by any amount awarded under such court judgment. In the event 

such judgment is later overturned, the coal producer must pay to the Secretary the amount of any 

payment received under the proposal unless the coal producer establishes the export of the coal 

to a foreign country or shipment of coal to a possession of the United States. Subject to the rules 

below, a coal exporter may file a claim notwithstanding that a coal producer or a party related to 

a coal producer has received a court judgment relating to the same coal. 

Under the proposal, the term “coal producer” means the person that owns the coal 

immediately after the coal is severed from the ground, without regard to the existence of any 

contractual arrangement for the sale or other disposition of the coal or the payment of any 

royalties between the producer and third parties. The term also includes any person who extracts 

coal from coal waste refuse piles or from the silt waste product which results from the wet 

washing or similar processing of coal. The term “exporter” means a person, other than a coal 

producer, that does not have an agreement with a producer or seller of such coal to sell or export 

such coal to a third party on behalf of such producer or seller, and that is indicated as the 

exporter of record in the shipper’s export declaration or other documentation, or actually 

exported such coal to a foreign country, shipped such coal to a U.S. possession, or caused such 

coal to be so exported or shipped. The term “a party related to such coal producer” means a 

person that is related to such coal producer through any degree of common management, stock 

ownership, or voting control, is related, within the meaning of section 144(a)(3), to such coal 

producer, or has a contract, fee arrangement, or any other agreement with such coal producer to 

sell such coal to a third party on behalf of such coal producer. 

 46 See sec. 6621. 
29 

The proposal does not apply with respect to excise tax on exported coal if a credit or 

refund of such tax has been allowed or made, or if a “settlement with the Federal Government” 

has been made with and accepted by the coal producer, a party related to such coal producer, or 

the exporter of such coal, as of the date that the claim is filed under the proposal. The term 

“settlement with the Federal Government” does not include a settlement or stipulation entered 

into as of the date of enactment, if such settlement or stipulation contemplates a judgment with 

respect to which any party has filed an appeal or has reserved the right to file an appeal. In 

addition, the proposal does not apply to the extent that a credit or refund of tax on exported coal 

has been paid to any person, regardless of whether such credit or refund occurs prior to, or after, 

the date of enactment. 

The proposal does not confer standing upon an exporter or a coal producer to commence, 

or intervene in, any judicial or administrative proceeding concerning a claim for refund by a coal 

producer or exporter, respectively, of any Federal or State tax, fee, or royalty. 

Effective Date

The proposal applies to claims on coal exported on or after October 1, 1990, through the 

date of enactment, with respect to amounts of tax for which a return was filed on or after October 

1, 1990, and on or before the date of enactment, and for which a claim for refund is filed not later 

than the close of the 30-day period beginning on the date of enactment. 

11. Rural Renaissance bonds 

Present law

Tax-exempt bonds

Interest on State and local governmental bonds generally is excluded from gross income 

for Federal income tax purposes if the proceeds of the bonds are used to finance direct activities 

of these governmental units or if the bonds are repaid with revenues of the governmental units. 

Activities that can be financed with these tax-exempt bonds include the financing of electric 

power facilities (i.e., generation, transmission, distribution, and retailing). 

Interest on State or local government bonds to finance activities of private persons 

(“private activity bonds”) is taxable unless a specific exception is contained in the Code (or in 

non-Code provision of a revenue Act). The term “private person” generally includes the Federal 

Government and all other individuals and entities other than States or local governments. The 

Code includes exceptions permitting States or local governments to act as conduits providing 

tax-exempt financing for certain private activities. In most cases, the aggregate volume of these 

tax-exempt private activity bonds is restricted by annual aggregate volume limits imposed on 

bonds issued by issuers within each State. For calendar year 2007, the State volume cap, which 

is indexed for inflation, equals $85 per resident of the State, or $256.24 million, if greater. 
30 

The tax exemption for State and local bonds also does not apply to any arbitrage bond.47 

An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are 

reasonably expected to be used (or intentionally are used) to acquire higher yielding investments 

or to replace funds that are used to acquire higher yielding investments.48 In general, arbitrage 

profits may be earned only during specified periods (e.g., defined “temporary periods”) before 

funds are needed for the purpose of the borrowing or on specified types of investments (e.g., 

“reasonably required reserve or replacement funds”). Subject to limited exceptions, investment 

profits that are earned during these periods or on such investments must be rebated to the Federal 

Government. 

An issuer must file with the IRS certain information about the bonds issued by them in 

order for that bond issue to be tax-exempt.49 Generally, this information return is required to be 

filed no later the 15th day of the second month after the close of the calendar quarter in which the 

bonds were issued. 

Clean renewable energy bonds

As an alternative to tax-exempt bonds, States and local governments may issue clean 

renewable energy bonds (“CREBs”). CREBs are defined as any bond issued by a qualified 

issuer if, in addition to the requirements discussed below, 95 percent or more of the proceeds of 

such bonds are used to finance capital expenditures incurred by qualified borrowers for qualified 

projects. “Qualified projects” are facilities that qualify for the tax credit under section 45 (other 

than Indian coal production facilities), without regard to the placed-in-service date requirements 

of that section.50 The term “qualified issuers” includes (1) governmental bodies (including 

Indian tribal governments); (2) mutual or cooperative electric companies (described in section 

501(c)(12) or section 1381(a)(2)(C), or a not-for-profit electric utility which has received a loan 

or guarantee under the Rural Electrification Act); and (3) clean renewable energy bond lenders. 

The term “qualified borrower” includes a governmental body (including an Indian tribal 

government) and a mutual or cooperative electric company. A clean renewable energy bond 

lender means a cooperative which is owned by, or has outstanding loans to, 100 or more 

cooperative electric companies and is in existence on February 1, 2002. 

Unlike tax-exempt bonds, CREBs are not interest-bearing obligations. Rather, the 

taxpayer holding CREBs on a credit allowance date is entitled to a tax credit. The amount of the 

credit is determined by multiplying the bond’s credit rate by the face amount on the holder’s 

bond. The credit rate on the bonds is determined by the Secretary and is to be a rate that permits 

 47 Secs. 103(a) and (b)(2). 

48 Sec. 148. 

49 Sec. 149(e). 

50 In addition, Notice 2006-7 provides that qualified projects include any facility owned by a 

qualified borrower that is functionally related and subordinate to any facility described in sections 

45(d)(1) through (d)(9) and owned by such qualified borrower. 
31 

issuance of CREBs without discount and interest cost to the qualified issuer. The credit accrues 

quarterly and is includible in gross income (as if it were an interest payment on the bond), and 

can be claimed against regular income tax liability and alternative minimum tax liability. 

CREBs are subject to a maximum maturity limitation. The maximum maturity is the 

term which the Secretary estimates will result in the present value of the obligation to repay the 

principal on a CREBs being equal to 50 percent of the face amount of such bond. The discount 

rate used to determine the present value amount is the average annual interest rate of tax-exempt 

obligations having a term of 10 years or more which are issued during the month the CREBs are 

issued. In addition, the Code requires level amortization of CREBs during the period such bonds 

are outstanding. 

CREBs also are subject to the arbitrage requirements of section 148 that apply to 

traditional tax-exempt bonds. Principles under section 148 and the regulations thereunder apply 

for purposes of determining the yield restriction and arbitrage rebate requirements applicable to 

CREBs. 

In addition to the above requirements, at least 95 percent of the proceeds of CREBs must 

be spent on qualified projects within the five-year period that begins on the date of issuance. To 

the extent less than 95 percent of the proceeds are used to finance qualified projects during the 

five-year spending period, bonds will continue to qualify as CREBs if unspent proceeds are used 

within 90 days from the end of such five-year period to redeem bonds. The five-year spending 

period may be extended by the Secretary upon the qualified issuer’s request demonstrating that 

the failure to satisfy the five-year requirement is due to reasonable cause and the projects will 

continue to proceed with due diligence. 

Issuers of CREBs are required to report issuance to the IRS in a manner similar to the 

information returns required for tax-exempt bonds. There is a national CREB limitation of $1.2 

billion. The maximum amount of CREBs that may be allocated to qualified projects of 

governmental bodies is $750 million. CREBs must be issued before January 1, 2009. 

Description of Proposal

The proposal provides a tax credit to holders of a new category of tax-credit bonds, 

“Rural Renaissance Bonds.” A Rural Renaissance Bond means any bond if: (1) the bond is 

issued by a qualified issuer pursuant to an allocation of the national limitation on such bonds; (2) 

95 percent or more of the proceeds of the bond are to be used for capital expenditures incurred 

by qualified borrowers for one or more qualified projects; (3) the qualified issuer designates the 

bond as a Rural Renaissance Bond and such bond is issued in registered form; (4) the bond meets 

the five-year spending requirement (described below); and (5) the bond is not Federally 

guaranteed (i.e., no portion of the bond is guaranteed in whole or in part by the United States). 

Under the proposal, the term “qualified issuer” means: (1) a rural renaissance bond 

lender; (2) a cooperative electric company; and (3) a governmental body. A “rural renaissance 

bond lender” means a cooperative which is owned by, or has outstanding loans to, 100 or more 

cooperative electric companies and is in existence on February 1, 2002, including any affiliated 

lender which is controlled by such lender. The term “cooperative electric company” means a 
32 

mutual or cooperative electric company (described in section 501(c)(12) or section 

1381(a)(2)(C), or a not-for-profit electric utility which has received a loan or guarantee under the 

Rural Electrification Act. The term “governmental body” means a State, territory, possession of 

the United States, the District of Columbia, Indian tribal government, and any political 

subdivision thereof. Under the proposal, a “qualified borrower” means a cooperative electric 

company or a governmental body. 

The term “qualified projects” means: (1) a utilities program described in section 

381E(d)(2) of the Consolidated Farm and Rural Development Act; (2) a distance learning or 

telemedicine program authorized pursuant to chapter 1 of subtitle D of title XXIII of the Food, 

Agriculture, Conservation, and Trade Act of 1990; (3) the rural electric programs authorized 

pursuant to the Rural Electrification Act of 1936; (4) the rural telephone programs authorized 

pursuant to the Rural Electrification Act of 1936; (5) the broadband access programs authorized 

pursuant to title VI of the Rural Electrification Act of 1936; and (6) the rural community facility 

programs as described in section 381E(d)(1) of the Consolidated Farm and Rural Development 

Act. 

Under the proposal, at least 95 percent or more of the proceeds of Rural Renaissance 

Bonds must be spent on qualified projects within the five-year period that begins on the date of 

issuance of such bonds. To the extent less than 95 percent of the proceeds are spent as required 

during the five-year spending period, bonds will continue to qualify as Rural Renaissance Bonds 

only if unspent proceeds are used within 90 days from the end of such five-year period to redeem 

outstanding bonds. The five-year spending period may be extended by the Secretary upon the 

qualified issuer’s request demonstrating that the failure to satisfy the five-year requirement is due 

to reasonable cause and the projects will continue to proceed with due diligence. In addition, the 

proposal requires level amortization of Rural Renaissance Bonds during the period such bonds 

are outstanding. 

The proposal establishes a national limitation of $400,000,000 on the amount of bonds 

that may be designated as Rural Renaissance Bonds. The Secretary, in consultation with the 

Secretary of Agriculture, shall make allocations of the national limitation to at least 20 qualified 

projects, or such lesser number of qualified projects based on the number of applications filed 12 

months after applications for allocations have been solicited by the Secretary. In addition, no 

more than 15 percent of the national limitation may be allocated to qualified projects located in 

any one State. Under the proposal, Rural Renaissance Bonds may not be issued after December 

31, 2008. 

Effective Date

The proposal is effective for bonds issued after the date of enactment. 

12. Treatment of publicly traded partnerships with income from carbon dioxide and 

certain fuels 

Present Law

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

Federal tax purposes (sec. 7704(a)). For this purpose, a publicly traded partnership means any 
33 

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

interests in the partnership are readily tradable on a secondary market (or the substantial 

equivalent thereof). 

An exception from corporate treatment is provided for certain publicly traded 

partnerships, 90 percent or more of whose gross income is qualifying income (sec. 7704(c)(2)). 

Qualifying income includes income and gains from the exploration, development, mining 

or production, processing, refining, transportation (including pipelines transporting gas, oil, or 

products thereof), or the marketing of any mineral or natural resource (including fertilizer, 

geothermal energy, and timber). Qualifying income also includes interest, dividends, and gains 

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

for the production of income that is qualifying income. Qualifying income also includes rents 

from real property, gains from the sale or other disposition of real property. It also includes 

income and gains from commodities (not described in section 1221(a)(1)) or futures, options, or 

forward contracts with respect to such commodities (including foreign currency transactions of a 

commodity pool) in the case of partnership, a principal activity of which is the buying and 

selling of such commodities, futures, options or forward contracts. 

Description of Proposal

The proposal provides that qualifying income of a publicly traded partnership includes 

income and gains from the exploration, development, mining or production, processing, refining, 

transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of 

industrial source carbon dioxide. 

The proposal provides that qualifying income of a publicly traded partnership includes 

income and gains from transportation or storage of any fuel described in section 6426(b), (c), or 

(d). This fuel includes alcohol fuel mixtures, biodiesel mixtures, liquefied petroleum gas, P 

Series Fuels (as defined by the Secretary of Energy under 42 U.S.C. 13211(2)), compressed or 

liquefied natural gas, liquefied hydrogen, any liquid fuel derived from coal (including peat) 

through the Fischer-Tropsch process, and liquid hydrocarbons derived from biomass (as defined 

in section 45K(c)(3)). 

Effective Date

The proposal is effective on the date of enactment, for taxable years ending after that 

date. 
34 

C. Revenue Raising Provisions 

1. Excise tax on crude oil and gas removed from the outer continental shelf in the Gulf of 

Mexico 

Present Law

Under present law, there is no Federal severance tax on oil and gas produced on the outer 

Continental Shelf (OCS). The United States leases Federal lands containing oil and gas deposits 

from offshore or submerged lands under the Outer Continental Shelf Lands Act of 1953, as 

amended.51 Offshore oil and gas lessees generally must pay the United States a royalty of not 

less than 12.5 percent, which is sometimes paid in kind.52 The royalty rate for most newlyissued OCS leases was recently raised by administrative action to 16 2/3 percent. 

In general, excise taxes are not deductible as taxes under section 164 of the Code; 

however, such taxes may be deductible as ordinary and necessary business expenses. 

Description of Proposal

The proposal establishes an excise tax equal to 13 percent of the removal price of any 

crude oil or natural gas produced from Federal submerged lands on the outer continental shelf in 

the Gulf of Mexico pursuant to a lease entered into with the United States that authorizes the 

production (“taxable crude oil or natural gas”) during the taxable period. The tax is to be paid by 

the producer of the taxable crude oil or natural gas. For this purpose, crude oil includes 

condensates and natural gasoline. Under the proposal, each calendar year is a taxable period. 

The Secretary is to provide for the filing, and time for filing of the return of tax imposed under 

the proposal. 

The removal price is defined as the amount for which the barrel of taxable crude oil (or 

dollars per thousand cubic feet in the case of natural gas) is sold by the taxpayer. In the case of 

sales between related parties, and crude oil or natural gas removed from the property before it is 

sold, the removal price is the constructive sales price. If the manufacture or conversion of crude 

oil into refined products begins before such oil is removed from the property, such oil is treated 

as removed on the day such manufacture or conversion begins, and the removal price is the 

constructive sales price. In determining the removal price of oil or natural gas from a property in 

the case of any transaction, the Secretary may adjust the removal price to reflect clearly the fair 

market value of oil or natural gas removed. 

The proposal allows as a credit against the excise tax imposed by the proposal an amount 

equal to the aggregate amount of royalties paid under Federal law with respect to the production 

of taxable crude oil or natural gas produced from Federal submerged lands on the outer 

 51 43 U.S.C. secs. 1335 and 1137. 

52 43 U.S.C. secs. 1335, 1337 and 1353(a)(1). 
35 

continental shelf in the Gulf of Mexico. In no event may the aggregate amount of the credit 

exceed the aggregate amount of tax imposed by the proposal in any calendar year. 

The Secretary is authorized to prescribe such regulations and guidance as is necessary for 

the withholding and quarterly deposit of the tax imposed by the proposal, as well as other 

guidance as is necessary to carry out the proposal. 

The proposal provides that the amount of the excise tax imposed, net of the credit for 

royalty payments, is deductible as a tax under section 164 of the Code. 

Effective Date

The proposal is effective for crude oil and natural gas removed after date of enactment. 

2. Elimination of certain refunds of duty involving oil spill liability tax53

Present Law

Present law permits a drawback claimant to obtain a refund equal to the money deposited 

into a Federal trust fund such as the fund established to reimburse the cost of cleanup of the oil 

spills. 

Description of Proposal

This proposal prevents the amount of fees and taxes that are deposited into special 

purpose Federal Trust Funds from being refunded through the general fund of the Treasury. 

Effective Date

The proposal is effective for any good exported on or after the fifteenth day after 

enactment. 

3. Tax treatment of certain inverted corporate entities 

Present Law

Determination of corporate residence

The U.S. tax treatment of a multinational corporate group depends significantly on 

whether the parent corporation of the group is domestic or foreign. For purposes of U.S. tax law, 

a corporation is treated as domestic if it is incorporated under the law of the United States or of 

any State. Other corporations (i.e., those incorporated under the laws of foreign countries or 

U.S. possessions) generally are treated as foreign. 

U.S. taxation of domestic corporations

 53 Description prepared by the staff of the Senate Committee on Finance. 
36 

The United States employs a “worldwide” tax system under which domestic corporations 

generally are taxed on all income, whether derived in the United States or abroad. In order to 

mitigate the double taxation that may arise from taxing the foreign-source income of a domestic 

corporation, a foreign tax credit for income taxes paid to foreign countries is provided to reduce 

or eliminate the U.S. tax owed on such income, subject to certain limitations. 

Income earned by a domestic parent corporation from foreign operations conducted by 

foreign corporate subsidiaries generally is subject to U.S. tax when the income is distributed as a 

dividend to the domestic corporation. Until such repatriation, the U.S. tax on such income 

generally is deferred, and U.S. tax is imposed on such income when repatriated. However, 

certain anti-deferral regimes may cause the domestic parent corporation to be taxed on a current 

basis in the United States with respect to certain categories of passive or highly mobile income 

earned by its foreign subsidiaries, regardless of whether the income has been distributed as a 

dividend to the domestic parent corporation. The main anti-deferral regimes in this context are 

the controlled foreign corporation rules of subpart F (secs. 951-964) and the passive foreign 

investment company rules (secs. 1291-1298). A foreign tax credit is generally available to 

offset, in whole or in part, the U.S. tax owed on this foreign-source income, whether such 

income is repatriated as an actual dividend or included under one of the anti-deferral regimes. 

U.S. taxation of foreign corporations

The United States taxes foreign corporations only on income that has a sufficient nexus to 

the United States. Thus, a foreign corporation is generally subject to U.S. tax only on income 

that is “effectively connected” with the conduct of a trade or business in the United States. Such 

“effectively connected income” generally is taxed in the same manner and at the same rates as 

the income of a U.S. corporation. An applicable tax treaty may limit the imposition of U.S. tax 

on business operations of a foreign corporation to cases in which the business is conducted 

through a “permanent establishment” in the United States. 

In addition, foreign corporations generally are subject to a gross-basis U.S. tax at a flat 

30-percent rate on the receipt of interest, dividends, rents, royalties, and certain similar types of 

income derived from U.S. sources, subject to certain exceptions. The tax generally is collected 

by means of withholding by the person making the payment. This tax may be reduced or 

eliminated under an applicable tax treaty. 

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

2004

Prior to the American Jobs Creation Act of 2004 (“AJCA”), a U.S. corporation could 

reincorporate in a foreign jurisdiction and thereby replace the U.S. parent corporation of a 

multinational corporate group with a foreign parent corporation. These transactions were 

commonly referred to as inversion transactions. Inversion transactions could take many different 

forms, including stock inversions, asset inversions, and various combinations of and variations 

on the two. Most of the known transactions were stock inversions. In one example of a stock 

inversion, a U.S. corporation forms a foreign corporation, which in turn forms a domestic merger 

subsidiary. The domestic merger subsidiary then merges into the U.S. corporation, with the U.S. 

corporation surviving, now as a subsidiary of the new foreign corporation. The U.S. 
37 

corporation’s shareholders receive shares of the foreign corporation and are treated as having 

exchanged their U.S. corporation shares for the foreign corporation shares. An asset inversion 

could be used to reach a similar result, but through a direct merger of the top-tier U.S. 

corporation into a new foreign corporation, among other possible forms. An inversion 

transaction could be accompanied or followed by further restructuring of the corporate group. 

For example, in the case of a stock inversion, in order to remove income from foreign operations 

from the U.S. taxing jurisdiction, the U.S. corporation could transfer some or all of its foreign 

subsidiaries directly to the new foreign parent corporation or other related foreign corporations. 

In addition to removing foreign operations from U.S. taxing jurisdiction, the corporate 

group could seek to derive further advantage from the inverted structure by reducing U.S. tax on 

U.S.-source income through various earnings stripping or other transactions. For example, the 

corporate group could engage in earnings stripping through payment by a U.S. corporation of 

deductible amounts such as interest, royalties, rents, or management service fees to the new 

foreign parent or other foreign affiliates. In this respect, the post-inversion structure could 

enable the group to employ the same tax-reduction strategies that are available to other 

multinational corporate groups with foreign parents and U.S. subsidiaries, subject to the same 

limitations (e.g., sections 163(j) and 482). 

Inversion transactions could give rise to immediate U.S. tax consequences at the 

shareholder and/or the corporate level, depending on the type of inversion. In stock inversions, 

the U.S. shareholders generally recognized gain (but not loss) under section 367(a), based on the 

difference between the fair market value of the foreign corporation shares received and the 

adjusted basis of the domestic corporation stock exchanged. To the extent that a corporation’s 

share value had declined, and/or it had many foreign or tax-exempt shareholders, the impact of 

this section 367(a) “toll charge” was reduced. The transfer of foreign subsidiaries or other assets 

to the foreign parent corporation also could give rise to U.S. tax consequences at the corporate 

level (e.g., gain recognition and earnings and profits inclusions under sections 1001, 311(b), 304, 

367, 1248, or other provisions). The tax on any income recognized as a result of these 

restructurings could be reduced or eliminated through the use of net operating losses, foreign tax 

credits, and other tax attributes. 

In asset inversions, the U.S. corporation generally recognized gain (but not loss) under 

section 367(a) as though it had sold all of its assets, but the shareholders generally did not 

recognize gain or loss, assuming the transaction met the requirements of a reorganization under 

section 368. 

U.S. tax treatment of inversion transactions under AJCA

In general

AJCA added new section 7874 to the Code, which defines two different types of 

corporate inversion transactions and establishes a different set of consequences for each type. 

Certain partnership transactions also are covered. 
38 

Transactions involving at least 80 percent identity of stock ownership

The first type of inversion is a transaction in which, pursuant to a plan54 or a series of 

related transactions: (1) a U.S. corporation becomes a subsidiary of a foreign-incorporated entity 

or otherwise transfers substantially all of its properties to such an entity in a transaction 

completed after March 4, 2003; (2) the former shareholders of the U.S. corporation hold (by 

reason of holding stock in the U.S. corporation) 80 percent or more (by vote or value) of the 

stock of the foreign-incorporated entity after the transaction; and (3) the foreign-incorporated 

entity, considered together with all companies connected to it by a chain of greater than 50 

percent ownership (i.e., the “expanded affiliated group”), does not have substantial business 

activities in the entity’s country of incorporation, compared to the total worldwide business 

activities of the expanded affiliated group. The provision denies the intended tax benefits of this 

type of inversion (“80-percent inversion”) by deeming the top-tier foreign corporation to be a 

domestic corporation for all purposes of the Code.55 

In determining whether a transaction meets the definition of an inversion under the 

provision, stock held by members of the expanded affiliated group that includes the foreign 

incorporated entity is disregarded. For example, if the former top-tier U.S. corporation receives 

stock of the foreign incorporated entity (e.g., so-called “hook” stock), the stock would not be 

considered in determining whether the transaction meets the definition. Similarly, if a U.S. 

parent corporation converts an existing wholly owned U.S. subsidiary into a new wholly owned 

controlled foreign corporation, the stock of the new foreign corporation would be disregarded, 

with the result that the transaction would not meet the definition of an inversion under the 

provision. Stock sold in a public offering related to the transaction also is disregarded for these 

purposes. 

Transfers of properties or liabilities as part of a plan a principal purpose of which is to 

avoid the purposes of the provision are disregarded. In addition, the Treasury Secretary is to 

provide regulations to carry out the provision, including regulations to prevent the avoidance of 

the purposes of the provision, including avoidance through the use of related persons, passthrough or other noncorporate entities, or other intermediaries, and through transactions designed 

to qualify or disqualify a person as a related person or a member of an expanded affiliated group. 

Similarly, the Treasury Secretary has the authority to treat certain nonstock instruments as stock, 

and certain stock as not stock, where necessary to carry out the purposes of the provision. 

 54 Acquisitions with respect to a domestic corporation or partnership are deemed to be “pursuant 

to a plan” if they occur within the four-year period beginning on the date that is two years before the 

ownership threshold under the provision is met with respect to such corporation or partnership. 

55 Since the top-tier foreign corporation is treated for all purposes of the Code as domestic, the 

shareholder-level “toll charge” of section 367(a) does not apply to these inversion transactions. 
39 

Transactions involving at least 60 percent but less than 80 percent identity of stock 

ownership

The second type of inversion is a transaction that would meet the definition of an 

inversion transaction described above, except that the 80-percent ownership threshold is not met. 

In such a case, if at least a 60-percent ownership threshold is met, then a second set of rules 

applies to the inversion. Under these rules, the inversion transaction is respected (i.e., the foreign 

corporation is treated as foreign), but any applicable corporate-level “toll charges” for 

establishing the inverted structure are not offset by tax attributes such as net operating losses or 

foreign tax credits. Specifically, any applicable corporate-level income or gain required to be 

recognized under sections 304, 311(b), 367, 1001, 1248, or any other provision with respect to 

the transfer of controlled foreign corporation stock or the transfer or license of other assets by a 

U.S. corporation as part of the inversion transaction or after such transaction to a related foreign 

person is taxable, without offset by any tax attributes (e.g., net operating losses or foreign tax 

credits). This rule does not apply to certain transfers of inventory and similar property. These 

measures generally apply for a 10-year period following the inversion transaction. 

Other rules

Under section 7874, inversion transactions include certain partnership transactions. 

Specifically, the provision applies to transactions in which a foreign-incorporated entity acquires 

substantially all of the properties constituting a trade or business of a domestic partnership, if 

after the acquisition at least 60 percent (or 80 percent, as the case may be) of the stock of the 

entity is held by former partners of the partnership (by reason of holding their partnership 

interests), provided that the other terms of the basic definition are met. For purposes of applying 

this test, all partnerships that are under common control within the meaning of section 482 are 

treated as one partnership, except as provided otherwise in regulations. In addition, the modified 

“toll charge” rules apply at the partner level. 

A transaction otherwise meeting the definition of an inversion transaction is not treated as 

an inversion transaction if, on or before March 4, 2003, the foreign-incorporated entity had 

acquired directly or indirectly more than half of the properties held directly or indirectly by the 

domestic corporation, or more than half of the properties constituting the partnership trade or 

business, as the case may be. 

Description of Proposal

The proposal generally extends the 80-percent inversion regime of section 7874 to 80-

percent inversions completed after March 20, 2002, but on or before March 4, 2003, with certain 

modifications as described below. A transaction otherwise meeting the definition of an 80-

percent inversion under the proposal (i.e., one completed after March 20, 2002, but on or before 

March 4, 2003) is not treated as an 80-percent inversion if, on or before March 20, 2002, the 

foreign-incorporated entity had acquired directly or indirectly more than half the properties held 

directly or indirectly by the domestic corporation, or more than half the properties constituting 

the partnership trade or business, as the case may be. 
40 

Under the proposal, an 80-percent inversion that is completed after March 20, 2002, but 

on or before March 4, 2003, is respected until the end of the last day of the foreign-incorporated 

entity’s taxable year that began in 2006. At the end of that day, the inverted foreign-incorporated 

entity that completed the 80-percent inversion (or, if relevant, any successor entity) is deemed to 

have transferred all of its assets and liabilities to a domestic corporation in a transaction that is 

generally treated as a nontaxable inbound reorganization (“repatriation”). The basis of the assets 

of the foreign-incorporated entity generally remains the same in the hands of the domestic 

corporation, subject to any special adjustments for importing built-in losses (e.g., section 362(e)). 

Shareholders of the domestic corporation inherit the respective bases of their shares of the 

foreign-incorporated entity. 

On the day of the repatriation, the earnings and profits of the inverted foreignincorporated entity transfer over to the domestic corporation. The transfer of such earnings and 

profits is not a deemed dividend and does not result in a tax upon the domestic corporation or its 

shareholders. In addition, any foreign taxes attributable to such earnings and profits are not 

creditable. However, shareholders may be subject to tax on distributions of such earnings and 

profits. 

Beginning on the day after the repatriation, the inverted foreign-incorporated entity is 

treated for all tax purposes as a domestic corporation. Thus, any income earned by the inverted 

foreign-incorporated entity after the date of repatriation is deemed to be earned by a domestic 

corporation, and, therefore, is fully taxable at U.S. corporate income tax rates. As a further 

consequence of the repatriation of the inverted foreign-incorporated entity, foreign subsidiaries 

become controlled foreign corporations, subject to the rules of subpart F. 

It is intended that the Treasury Secretary will prescribe regulations that are necessary or 

appropriate to carry out the proposal, including, but not limited to, regulations to prevent the 

avoidance of the purposes of the proposal. 

Effective Date

The proposal is effective for taxable years beginning after December 31, 2006.

4. Modifications to corporate estimated tax payments 

Present Law

In general, corporations are required to make quarterly estimated tax payments of their 

income tax liability. For a corporation whose taxable year is a calendar year, these estimated tax 

payments must be made by April 15, June 15, September 15, and December 15. 

The Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) provided that in 

the case of a corporation with assets of at least $1 billion, the payments due in July, August, and 

September, 2012, shall be increased to 106.25 percent of the payment otherwise due and the next 

required payment shall be reduced accordingly. 
41 

The Small Business and Work Opportunity Tax Act of 2007 as contained in the U.S. 

Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations 

Act, 2007 increased the 106.25 percent to 114.25. 

Explanation of Provision 

The provision increases the 114.25 percent to 118 percent. 

Effective Date

The provision is effective on the date of enactment. 
42 

D. Technical Corrections 

1. Energy-related technical corrections 

Except as otherwise provided, the amendments made by the technical corrections 

contained in the bill take effect as if included in the original legislation to which each 

amendment relates. 

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

Legacy for Users

Timing of claims for excess alternative fuel (not in a mixture) credit and liquid 

hydrocarbons from biomass (Act sec. 11113)

The Code makes the alternative fuel (not in a mixture) credit refundable. Section 

6427(i)(3) permits claims to be filed on a weekly basis with respect to alcohol, biodiesel, and 

alternative fuel mixtures if certain requirements are met. This rule, however, does not reference 

the alternative fuel credit (for alternative fuel not in a mixture). The amendment clarifies that the 

same rules for filing claims with respect to fuel mixtures applies to the alternative fuel credit. 

The Code provides that alternative fuel includes “liquid hydrocarbons derived from 

biomass.” It was intended that liquid hydrocarbons from biomass include fuels made from 

biomass such as fish oil, which contains some oxygen in addition to hydrogen and carbon. The 

amendment provides that alternative fuel includes “liquid fuel from biomass” and clarifies that 

fuels described in sections 6426(b) or (c), or sections 40 or 40A (alcohol, biodiesel, and 

renewable diesel), do not qualify for the alternative fuel credit or alternative fuel mixture credit. 

Amendments to the Energy Policy Act of 2005

Clarify limitation on the credit of installing alternative fuel refueling property

(Act sec. 1342)

The present-law credit for qualified alternative fuel vehicle refueling property for a 

taxable year is limited to $30,000 per property subject to depreciation, and $1,000 for other 

property (sec. 30C(b)). The provision clarifies that the $30,000 and $1,000 limitations apply to 

all alternative fuel vehicle refueling property placed in service by the taxpayer at a location. The 

provision is consistent with similar deduction limitations imposed under section 179A(b)(2)(A) 

(relating to the deduction for clean-fuel vehicles and certain refueling property). 

In addition, Code section 30C(c)(1) provides that qualified alternative fuel vehicle 

refueling property has the meaning given to the term by section 179A(d). However, section 

179A(d) defines a different term, qualified clean-fuel vehicle refueling property. The provision 

coordinates the reference to this definition. 
43 

Double taxation of rail and inland waterway fuel resulting from the use of dyed fuel 

on which the Leaking Underground Storage Tank Trust Fund tax has already been 

imposed; off-highway business use (Act sec. 1362)

Section 4081(a)(2)(B) imposes tax at the Leaking Underground Storage Tank Trust Fund 

financing tax rate of 0.1 cent per gallon on diesel fuel at the time it is removed from a terminal. 

Section 4082(a) provides that none of the generally applicable exemptions other than the 

exemption for export apply to this removal even if the fuel is dyed. When dyed fuel is used or 

sold for use in a diesel powered highway vehicle or train (sec. 4041), or such fuel is subject to 

the inland waterway tax (sec. 4042), the Code inadvertently imposes the Leaking Underground 

Storage Tank Trust Fund tax a second time. Section 6430 prohibits the refund of taxes imposed 

at the Leaking Underground Storage Tank Trust Fund financing rate, except in the case of fuel 

destined for export. The amendment eliminates the imposition of the 0.1 cent tax a second time 

if the Leaking Underground Storage Tank Trust Fund financing tax rate previously was imposed 

under section 4081. The amendment permits a refund in the amount of the Leaking Underground 

Storage Tank Trust Fund financing rate if such tax was imposed a second time under 4041 or 

4042. The amendment also clarifies that off-highway business use is not exempt from the 

Leaking Underground Storage Tank Trust Fund Financing rate, effective for fuel sold for use or 

used after the date of enactment. 

Exemption from the Leaking Underground Storage Tank Trust Fund financing rate 

for aircraft and vessels engaged in foreign trade (Act. sec. 1362)

Fuel supplied in the United States for use in aircraft engaged in foreign trade is exempt 

from U.S. customs duties and internal revenue taxes, so long as, where the aircraft is registered 

in a foreign State, the State of registry provides substantially reciprocal privileges for U.S.-

registered aircraft. However, the Energy Policy Act of 2005 imposed, without exemption, the 

Leaking Underground Storage Tank Trust Fund financing rate on all taxable fuels, except in the 

case of export. As a result, aviation fuel is no longer exempt from the Leaking Underground 

Storage Tank Trust Fund financing rate. According to the State Department, almost all of the 

United States’ bilateral air services agreements contain provisions exempting from taxation all 

fuel supplied in the territory of one party for use in the aircraft of the other party. The United 

States has interpreted these provisions to prohibit the taxation, in any form, of aviation fuel 

supplied in the United States to the aircraft of airlines of the foreign countries that are parties to 

these air services agreements. The amendment provides that fuel for use in vessels (including 

civil aircraft) employed in foreign trade or trade between the United States and any of its 

possessions is exempt from the Leaking Underground Storage Tank Trust Fund financing rate. 

Amendment to the American Jobs Creation Act

Interaction of rules relating to credit for low sulfur diesel fuel (Act. sec. 339)

Section 45H of the Code allows a credit at the rate of five cents per gallon for low sulfur 

diesel fuel produced at certain small business refineries. The aggregate credit with respect to any 

refinery is limited to 25 percent of the costs of the type deductible under section 179B of the 

Code. Section 179B allows a deduction for 75 percent of certain costs paid or incurred with 

respect to these refineries. The basis of the property is reduced by the amount of any credit 
44 

determined with respect to any expenditure (sec. 45H(d)). Further, no deduction is allowed for 

the expenses otherwise allowable as a deduction in an amount equal to the amount of the credit 

under section 45H (sec. 280C(d)). The interaction of these provisions is unclear, and the basis 

reduction and deduction denial rules may have an unintentionally duplicative effect. Under the 

provision, deductions are denied in an amount equal to the amount of the credit under section 

45H, and the provisions of present law reducing basis and denying a deduction are repealed.