DESCRIPTION OF SELECTED FEDERAL TAX 

PROVISIONS THAT IMPACT LAND USE,

CONSERVATION, AND PRESERVATION

Scheduled for a Hearing

Before the

SUBCOMMITTEE ON OVERSIGHT

of the

HOUSE COMMITTEE ON WAYS AND MEANS

On September 30, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 28, 1999

JCX-68-99
CONTENTS

Page

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

I. DESCRIPTION OF PRESENT-LAW TAX PROVISIONS ............... 2

A. Cost Recovery for Land .......................................... 2

B. Income Tax Treatment of Dispositions of Land ...................... 4

C. Tax Credit for Rehabilitation Expenditures .......................... 5

D. Environmental Remediation Expenditures ........................... 7

E. Use of Tax-Exempt Bonds ....................................... 8

F. Contributions of Qualified Conservation Interests .................... 13

G. Estate Tax Preferences for Farms and Small Businesses ................ 15

H. Foreign Investment in U.S. Real Property ........................... 17

II. DESCRIPTION OF INTRODUCED BILLS ........................... 21

A. H.R. 1630, the “Brownfields Cleanup Act” .......................... 21

B. H.R. 1863, the “Community Forestry and Agriculture Conservation Act of

1999" ......................................................... 22

C. H.R. 2263 ..................................................... 23

1. Charitable contribution deduction for qualified conservation

contributions ............................................... 23

2. Exclusion from gross estate for qualified conservation easement ..... 24

D. H.R. 2380, the “Energy Efficient Technology Tax Act” ................ 26

1. Energy credits ............................................... 26

2. Electric and hybrid vehicles credit .............................. 30

3. Tax credit for electricity produced from wind and biomass .......... 31
Page

E. H.R. 2446, the “Better America Bonds Act of 1999" ................... 33

F. H.R. 2497, the “Open Space Preservation Act of 1999" ................ 37

1. Exclusion for gain on sale or exchange of farmland with qualified

covenant ................................................... 37

2. Exclusion from gross estate for farmland subject to qualified

covenant ................................................... 37

G. H.R. 2880, the “Conservation Tax Incentives Act of 1999" ............. 39
 

1

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

Selected Federal Tax Provisions That Impact Land Use, Conservation, and Preservation (JCX68-99), September 28, 1999.

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INTRODUCTION

The Subcommittee on Oversight of the House Committee on Ways and Means has

scheduled a public hearing on September 30, 1999, on issues relating to the impact of Federal tax

law on environmental conservation and preservation. Part I of this document,1 prepared by the

staff of the Joint Committee on Taxation, describes selected provisions of Federal income tax and

estate and gift tax law that may have an effect on the way land is used. Part II of the document

describes certain introduced bills affecting the tax incentives for land use and energy

conservation.
2

 Costs that generally are required to be capitalized include purchase costs and direct

costs of constructing property. In most cases, allocable indirect costs of constructing property

also must be capitalized (sec. 263A(b)(1)). Interest costs generally must be capitalized in the

construction of real property or property with a class life of 20 years or more (sec. 263A(f)).

3

 Class lives have been published by the Secretary of the Treasury in Rev. Proc. 87-56,

1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22, l988-1 C.B. 785.

4

 Sec. 2022 of the Internal Revenue Service Restructuring and Reform Act of 1998.

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I. DESCRIPTION OF PRESENT-LAW TAX PROVISIONS

A. Cost Recovery for Land

In general

A taxpayer generally must capitalize the cost of property used in a trade or business.2 The

capitalized cost of business property that is subject to exhaustion, wear, tear, or obsolescence

may be recovered over time through allowances for depreciation (sec. 167). Depreciation

allowances for tangible property placed in service after 1986 generally are determined under the

Modified Accelerated Cost Recovery System ("MACRS") of section 168, which provides that

depreciation is computed by applying specific recovery periods, placed-in-service conventions,

and depreciation methods to the cost of various types of depreciable property. Intangible

property acquired after July 25, 1991, generally is amortized under section 197, which provides a

15-year recovery period and applies the straight-line method to the cost of applicable property.

Under MACRS, depreciable property is divided into ten classes (3-year property, 5-year

property, 7-year property, 10-year property, 15-year property, 20-year property, 25-year water

utility property, 27.5-year residential rental property, 39-year nonresidential real property, and 50-

year railroad grading or tunnel bores). Personal property generally is included in a property class

based upon its class life. The class life of certain assets is provided by statute. The class life of

other personal property is determined by reference to their class lives.3 The 200-percent declining

balance method of depreciation is used for 3-year, 5-year, 7-year, and 10-year property; the

150-percent declining balance method for 15-year and 20-year property and any property used in

a farming business; and the straight-line method for other property, including most depreciable

real property.

The Secretary of the Treasury (or his delegate) has been directed to conduct a

comprehensive study of the recovery periods under section 168 and to submit the results of such

study, together with recommendations for determining such periods and methods in a more

rational manner, to the Committee on Ways and Means of the House of Representatives and the

Committee on Finance of the Senate by March 31, 2000.4
5

 Treas. reg. sec. 1.167(a)-2.

6

 Treas. reg. sec. 1.167(a)-6(b). See also A. Duda & Sons, Inc. v. United States, 560 F.2d

669 (5th Cir. 1977).

7

 Rev. Proc. 87-56, supra.

8

 Rev. Rul. 65-265, 1965-2 C.B. 52, and Rev. Rul. 68-193, 1968-1 C.B. 79.

9

 Rev. Rul. 55-290, 1955-1 C.B. 320.

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Treatment of land

The cost of land generally may not be depreciated,5 even if the taxpayer's use of the land

may result in its erosion or other type of wear or tear (e.g., in the case of certain farming

practices).6 Any interest in land may not be amortized under section 197 (sec. 197(e)(2)). When

a taxpayer acquires both land and other property in a single transaction (e.g. the purchase of an

apartment building and the underlying land), the acquisition cost must be allocated between the

nondepreciable and depreciable assets.

Some improvements to land (such as sidewalks, roads, landscaping, etc.) may be

depreciated.7 However, certain land improvements may be so "inextricably associated" with the

land as to be nondepreciable. Examples of nondepreciable land improvements include certain

clearing and grading costs associated with land8 and golf course improvements.9 The cost of

demolishing any structure generally must be charged to the land on which the demolished

structure was located (sec. 280B).

The cost of minerals and other natural resources imbedded in land are recoverable through

depletion allowances (sec. 611).
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B. Income Tax Treatment of Dispositions of Land

Capital gains treatment

In general, gain or loss reflected in the value of an asset is recognized for income tax

purposes at the time the taxpayer disposes of the property. On the sale or exchange of capital

assets held more than one year, gain generally is taxed to an individual taxpayer at a maximum

marginal rate of 20 percent. Losses from the sale or exchange of capital assets are deductible

only the extent of the gains from the sale or exchange of such assets, plus, in the case of

individuals, $3000.

Land is a capital asset unless held primarily for sale to customers in the ordinary course of

the taxpayer's trade or business, or is used in the taxpayer's trade or business. In addition, if the

gains from property, including land, used in a taxpayer's trade or business exceeds the losses

from such property, the gains and losses are treated as capital gains.

Deferral of gain or loss

Several provisions allow a taxpayer to defer gain when property, including land, is disposed

of. For example, if land held for investment or business use is exchanged for property of a like

kind (generally defined to include other real estate) gain or loss is deferred (sec. 1031). Likewise

if land is condemned and replaced with other property of a like kind, gain or loss is deferred (sec.

1033).

Principal residence

Under present law, an individual taxpayer may exclude up to $250,000 ($500,000 if married

filing a joint return) of gain realized on the sale or exchange of a principal residence. To be

eligible for the exclusion, the taxpayer must have owned and used the residence as a principal

residence for at least two of the five years prior to the sale or exchange. A taxpayer who fails to

meet these requirements by reason of a change of place of employment, health, or, to the extent

provided under regulations, unforeseen circumstances is able to exclude an amount equal to the

fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of

the two years that the ownership and use requirements are met (sec. 121).
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C. Tax Credit for Rehabilitation Expenditures

In general

An income tax credit is provided for a portion of certain expenditures incurred in the

rehabilitation of certified historic structures and certain other buildings first placed in service

before 1936. The amount of the credit is 20 percent of the qualified rehabilitation expenditures

for a certified historic structure and 10 percent of the qualified rehabilitation expenditures for a

qualified rehabilitated building other than a certified historic structure.

In order for a rehabilitation to qualify for the credit applicable to certified historic structures,

the rehabilitated building must be listed in the National Register of Historic Places, or be located

in a registered historic district and certified by the Secretary of the Interior as being of historic

significance to the district. In addition, the Secretary of the Interior must certify that the

rehabilitation is consistent with the historic character of the building or the historic district in

which the building is located.

In the case of other rehabilitations, a building (or its structural components) is a qualified

rehabilitated building if: (1) the building is substantially rehabilitated; (2) the building was placed

in service before the beginning of the rehabilitation; (3) the rehabilitation meets a 75-percent

retention test; (4) depreciation is allowable with respect to the building; and (5) the building was

first placed in service before 1936.

A building is substantially rehabilitated if the qualified rehabilitation expenditures incurred

during the 24-month period selected by the taxpayer exceed the greater of: (1) the adjusted basis

of the building (and its structural components) as of the beginning of the period (or as of the

holding of the building, if later); or (2) $5,000.

Qualified rehabilitation expenditures generally include any amounts properly chargeable to

capital account in connection with the rehabilitation of a building, but do not include the cost of:

(1) acquiring the building or any interest in the building; (2) facilities related to a building (e.g., a

parking lot); (3) enlarging an existing building; or (4) rehabilitations allocable to a portion of a

building that is (or is reasonably expected to be) tax-exempt use property.

The 75-percent retention test requires the retention, in place, of (1) at least 75 percent of the

building's existing external walls (including at least 50 percent as external walls) and (2) at least 75

percent of the building's internal structural framework. In general, a building's internal structural

framework includes all load-bearing internal walls and any other structural supports, including the

columns, girders, beams, trusses, spandrels, and all other items that are essential to the stability of

the building.
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Other rules

The rehabilitation credit is part of the investment credit which, in turn, is part of the general

business credit. The general business credit may offset the first $25,000 of a taxpayer's regular

tax liability, plus 75 percent of the taxpayer's regular tax liability in excess of $25,000. The

general business credit is not allowed to offset a taxpayer's minimum tax liability.

Taxpayers claiming the credit must reduce their adjusted basis in the building by the

amount of the credit. Capitalized rehabilitation expenditures must be depreciated using a

straight-line method.

The credit is subject to recapture if the rehabilitated building is disposed of or otherwise

ceases to be a qualified property within five years after the property is placed in service.
10 Section 198 was enacted as part of the Taxpayer Relief Act of 1997.

11

 Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), holding that equipment

depreciation allocable to the taxpayer’s construction of capital facilities must be capitalized under

section 263(a)(1).

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D. Environmental Remediation Expenditures

Taxpayers can elect to treat certain environmental remediation expenditures that would

otherwise be chargeable to capital account as deductible in the year paid or incurred (sec. 198).10

The deduction applies for both regular and alternative minimum tax purposes. The expenditure

must be incurred in connection with the abatement or control of hazardous substances at a

qualified contaminated site.

In general, any expenditure for the acquisition of depreciable property used in connection

with the abatement or control of hazardous substances at a qualified contaminated site does not

constitute a qualified environmental remediation expenditure. However, depreciation deductions

allowable for such property, which would otherwise be allocated to the site under the principles

set forth in Commissioner v. Idaho Power Co.11 and section 263A, are treated as qualified

environmental remediation expenditures.

A “qualified contaminated site” generally is any property that (1) is held for use in a trade

or business, for the production of income, or as inventory; (2) is certified by the appropriate State

environmental agency to be located within a targeted area; and (3) contains (or potentially

contains) a hazardous substance (so-called “brownfields”). Targeted areas are defined as: (1)

empowerment zones and enterprise communities as designated under present law; (2) sites

announced before February, 1997, as being subject to one of the 76 Environmental Protection

Agency (“EPA”) Brownfields Pilots; (3) any population census tract with a poverty rate of 20

percent or more; and (4) certain industrial and commercial areas that are adjacent to census tracts

with a poverty rate of 20 percent or more. However, sites that are identified on the national

priorities list under the Comprehensive Environmental Response, Compensation, and Liability

Act of 1980 cannot qualify as targeted areas.

In the case of property to which a qualified environmental remediation expenditure

otherwise would have been capitalized, any deduction allowed under section 198 is treated as a

depreciation deduction and the property is treated as section 1245 property. Thus, deductions for

qualified environmental remediation expenditures are subject to recapture as ordinary income

upon sale or other disposition of the property.

Eligible expenditures are those paid or incurred before January 1, 2001.
12 Interest on these "State and local government bonds" may, in certain cases, be

includible in calculating the individual and corporate alternative minimum taxes. Additionally,

State and local government bond interest is included in determining whether a portion of Social

Security benefits is taxable under the regular individual income tax.

13 Activities that are conducted by private businesses under certain shorter-term

management contracts are treated as carried out by a governmental unit. On the other hand,

activities conducted by private businesses pursuant to longer-term management contracts or

contracts providing for profit-based payments generally are treated as private business, as

opposed to governmental, activities.

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E. Use of Tax-Exempt Bonds

In general

The Code exempts interest on certain debt obligations of States (including territories and

possessions of the United States) from the regular individual and corporate income taxes (sec.

103). Interest on debt of local governments generally receives identical treatment to that provided

for States.12 The State and local government bond interest exemption applies to two principal

types of bonds. First, interest is tax-exempt on bonds issued to finance public activities

conducted by13 or paid for by States and local governments themselves ("governmental bonds"). 

Examples of activities financed with governmental bonds are schools, courthouses, roads, public

mass transit systems, governmentally owned and operated water, sewer, and electric facilities,

and State and local park and recreational facilities.

The second major category of State and local government bonds on which interest is taxexempt consists of bonds issued by these governmental units acting as a conduit to provide

financing for private persons ("private activity bonds"). Unlike governmental bonds, tax-exempt

private activity bonds generally may only be issued for purposes specified in the Code. The

specified purposes include several activities related to private land use and real estate

development.

Private activity bonds

Qualified 501(c)(3) bonds

Tax-exempt organizations that are described in Code section 501(c)(3) are permitted to

finance the activities forming the basis for tax-exemption of their income with the proceeds of

State or local government tax-exempt bonds (“qualified 501(c)(3) bonds”). Land and related

property used in the exempt activities of the organizations is eligible for tax-exempt financing. 

Property which is not used in furtherance of an exempt purpose (i.e., is used in an “unrelated

business activity”) may not financed with the proceeds of tax-exempt bonds. Management
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contract rules similar to those applicable to actual State or local governmental activities apply in

determining whether property used in activities carried out by taxable private businesses on

behalf of section 501(c)(3) organizations may be financed with qualified 501(c)(3) bonds.

Exempt-facility bonds

Exempt-facility bonds are private activity bonds issued to finance certain privately operated

transportation facilities (airports, ports, mass commuting facilities, and high-speed intercity rail

facilities); municipal service facilities (water, sewage, solid waste, local furnishing of electricity or

gas, environmental enhancement of hydroelectric dams, and local district heating and cooling

facilities); hazardous waste disposal facilities; and multifamily rental housing. 

Bonds for each of these private activities are subject to extensive Federal targeting criteria. 

For example, developers of housing receiving tax-exempt financing must agree that either (1) 20

percent of the rental housing units will be occupied by tenants having incomes of 50 percent or

less of the area median income where the project is located, or (2) 40 percent of the rental

housing units will be occupied by tenants having incomes of 60 percent of less of the area median

income where the project is located. This low-income tenant occupancy requirement must be

continuously satisfied for a minimum period of 15 years after the State and local government

bonds are issued. The Code includes extensive rules to ensure that developers comply with this

requirement.

Qualified redevelopment bonds

Qualified redevelopment bonds are State and local government bonds issued for the

redevelopment of private property in governmentally designated "blighted areas." In addition to

any private revenues pledged to repayment of these bonds, the bonds must be backed by a

pledge of governmental tax revenues. The term "blighted area" is defined as an area designated

by a local government pursuant to a State statute as having excessive vacant or abandoned land

and structures, substandard structures, or real property tax delinquencies. Designation of

blighted areas is subject to limits on minimum size per area, and aggregate designations may not

exceed areas comprising 20 percent of the assessed value of real property in the government's

jurisdiction.

Qualified redevelopment bonds may be used for acquisition of property; clearing,

rehabilitation, and redevelopment activities; and expenses of relocating area residents. This taxexempt financing may not be used for new construction or enlargement of existing buildings. 

Facilities such as golf courses, suntan parlors, racetracks, casinos and other gambling facilities,

and liquor stores may not be financed with loans financed with these bonds.
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Empowerment zone and enterprise community business bonds

State and local government bonds may be issued to finance capital expenditures of certain

businesses that are located in Federal empowerment zones and enterprise communities and that

are eligible for other tax incentives provided to empowerment zone businesses. The following

types of business are not eligible for this tax-exempt financing: golf courses, country clubs,

massage parlors, hot tub facilities, suntan parlors, gambling facilities (including race tracks), and

off-site alcoholic beverage stores.

In the case of empowerment zones designated under the original legislation providing tax

benefits for such areas and enterprise communities, the amount of these bonds is limited to $3

million per business in any one zone. Businesses receiving this tax-exempt financing further are

subject to a $20 million aggregate limit on such bonds for property in all zones. Issuance of these

bonds is subject to the aggregate State private activity bond volume limits, described below.

In the case of the additional empowerment zones designated under the 1997 expansion of

the program, the amount of bonds issued is subject to aggregate per-empowerment-zone limits

rather than the per-business and general State volume limits. These per-empowerment zone

limits are $60 million for rural zones; $130 million for urban zones in areas with populations of

less than 100,000, and $230 million for urban zones in areas having a population of at least

100,000.

Businesses receiving this tax-exempt financing must continuously qualify as a "zone business"

during a prescribed “test period” after the bonds are issued.

Qualified small-issue bonds

Qualified small-issue bonds are tax-exempt State and local government bonds used to

finance private business manufacturing facilities or the acquisition of land and equipment by

certain farmers. In both instances, these bonds are subject to limits on the amount of financing

that may be provided, both for an single borrowing and in the aggregate. In general, no more

than $1 million of small-issue bond financing may be outstanding at any time for property of a

business (including related parties) located in the same municipality or county. This $1 million

limit may be increased to $10 million if all other capital expenditures of the business in the same

municipality or county over a six-year period are counted toward the limit. Outstanding

aggregate borrowing under this program is limited to $40 million per borrower (including related

parties) regardless of where the property is located.

Mortgage revenue bonds

Present law authorizes issuance of two types of tax-exempt bonds for owner-occupied

housing: qualified mortgage bonds and qualified veterans' mortgage bonds. Qualified mortgage

bonds are bonds issued to provide below-market financing to first-time homebuyers having 
14 The States are Alaska, California, Oregon, Texas, and Wisconsin.

15 A portion of the private business use financed with certain larger (i.e., over $150

million) governmental bond issues also is subject to these volume limitations.

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incomes below prescribed maximums and who purchase homes having purchase prices below

prescribed maximums. Only principal residences may be financed with the proceeds of these

bonds. If homebuyers sell the bond-financed homes within nine years after the loan is made, a

portion of the subsidy provided by the tax-exempt interest rate is recaptured by the Federal

Government. In addition to housing purchases, qualified mortgage bonds may be used to

finance limited amounts of home improvement and rehabilitation loans.

Only five States are permitted to issue qualified veterans' mortgage bonds.14 Unlike

qualified mortgage bonds, qualified veterans' mortgage bond-financed loans are not restricted to

first-time home buyers satisfying income criteria, there is no limit on purchase price of homes

that are financed, and there is no recapture of the Federal tax subsidy if property is sold early. 

Since 1984, issuance of these bonds is being gradually phased out. The phase-out is

accomplished by (1) limiting issuance to States that had issued the bonds before 1985, (2)

limiting each State's annual issuance to an amount not exceeding its historical issuance of the

bonds, and (3) limiting eligibility for bond-financed loans to veterans who served on active duty

before 1977 and who apply for a loan within 30 years after leaving active military service (January

31, 1985, if later).

General restrictions on State and local government bond financing for private

activities

Like many Federal direct spending programs, issuance of State and local government

private activity bonds is subject to general restrictions on amount and use. The following

discussion illustrates some of the major restrictions.

State volume limitations.--Issuance of most tax-exempt private activity bonds is subject to

annual per-State volume limitations. Each State (including local governments within the State) is

allowed to issue an annual amount of these bonds not exceeding the greater of $50 per resident of

the State or $150 million.15 These volume limits are scheduled to increase to $75 per resident of

the State or $225 million beginning in calendar year 2007. This increase is phased-in

proportionately beginning in calendar year 2003. States may elect to carryover their unused

private activity bond volume authority for designated activities for a period of up to three years. 

Bond authority that is not used within the carryforward period lapses.

The State volume limits do not apply to State and local government bonds for section

501(c)(3) organizations, for airports and ports, for governmentally owned (but privately operated)

solid waste disposal facilities, for environmental enhancements of hydro-electric generating
16 Bonds for privately owned high-speed intercity rail facilities must receive a State

volume limit allocation equal to 25 percent of the bond amount.

17 As noted above, qualified veterans' mortgage bonds are subject to separate volume

limits based on historical State issuance as part of the 1984-enacted phase-out of that program.

18 New empowerment zone bonds are subject to separate aggregate limits based on the

type of zone: $60 million for a rural zone; $130 million for urban zones in areas with populations

of less than 100,000, and $230 million for urban zones in areas having a population of at least

100,000.

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facilities, for governmentally owned (but privately operated) high-speed intercity rail facilities,16

for qualified veterans' mortgage loans,17 and to bonds to finance property in “newly designated”

empowerment zones.18

Other restrictions on private activity bonds.--Among the other Federal restrictions

applicable to private activity, but not to governmental, State and local government bonds are the

following:

(1) A requirement that public notice be given and a hearing held before issuance of the

bonds;

(2) A restriction on the costs of issuance (e.g., bond attorney and underwriter fees) that

may be financed with bond proceeds to an amount not exceeding two percent of the

bond issue;

(3) A minimum rehabilitation requirement for existing property that is acquired with State

and local government bond proceeds;

(4) A limit on the amount of land that may be financed with any single bond issue;

(5) A limit on the maximum maturity of the bonds, determined by reference to the

economic life of the property being financed; and

(6) Loss of interest deductions for private borrowers receiving bond proceeds if the bondfinanced property ceases to be used in a qualifying use.
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F. Contributions of Qualified Conservation Interests

Charitable contributions generally

Subject to certain limitations, a deduction is permitted for contributions of property to (1)

charitable organizations, (2) the United States, or (3) a State or local government. The amount of

deduction generally equals the fair market value of the contributed property on the date of the

contribution. Charitable deductions are provided for income, estate, and gift tax purposes (secs.

170, 2055, and 2522, respectively).

Gifts of certain types of property interests are subject to special restrictions, either as to the

amount deductible or as to the types of property interests for which a deduction is permitted. For

example, a contribution of less than the donor's entire interest in property generally does not give

rise to a charitable deduction (for income, estate, or gift tax purposes) unless the gift takes the

form of an interest in a unitrust, annuity trust, or a pooled income fund. In addition, exceptions

to the partial interest rule are provided for gifts of remainder interests in farms or personal

residences, gifts of undivided portions of the donor's entire interest in the property, and for gifts

of qualified conservation interests.

Qualified conservation contributions

Qualified conservation contributions are contributions of real property interests for any of

the following conservation purposes:

(1) The preservation of land areas for outdoor recreation by, or for the education of, the

general public;

(2) The protection of a relatively natural habitat of fish, wildlife, or plants, or similar

ecosystem;

(3) The preservation of open space (including farmland and forest land) where such

preservation will yield a significant public benefit and is either: (a) for the scenic

enjoyment of the general public, or (b) pursuant to a clearly delineated Federal, State,

or local governmental conservation policy; or

(4) The preservation of an historically important land area or a certified historic structure

(sec. 170(h)).

Deductible conservation interests may take any of three forms. First, the value of a

remainder interest is deductible. Second, the value of a restriction (e.g., an easement) granted in

perpetuity on the use of the property is deductible. Finally, the contribution of the donee's entire

interest in a property is deductible, except that the donor may retain his or her interest in

subsurface oil, gas, or other minerals and the right of access to such minerals.
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Exclusion for land subject to permanent conservation easement

An executor may elect to exclude, for Federal estate tax purposes, 40 percent of the value

of any land subject to a qualified conservation easement, up to a maximum exclusion of

$200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and $500,000 in 2002 and thereafter. 

(Code sec. 2031(c).) If the value of the conservation easement is less than 30 percent of the value

of the land without the easement (reduced by the value of any retained development rights), then

the exclusion percentage is reduced by 2 percentage points for each percentage point (or fraction

thereof) by which the value of the qualified conservation easement is less than 30 percent of the

value of the land.

A qualified conservation easement is one that meets the following requirements: (1) the

land is located within 25 miles of a metropolitan area (as defined by the Office of Management

and Budget) or a national park or wilderness area, or within 10 miles of an Urban National Forest

(as designated by the Forest Service of the U.S. Department of Agriculture); (2) the land has been

owned by the decedent or a member of the decedent’s family at all times during the three-year

period ending on the date of the decedent’s death; and (3) a qualified conservation contribution

(within the meaning of sec. 170(h)) of a qualified real property interest (as generally defined in

sec. 170(h)(2)(C)) was granted by the decedent or a member of his or her family. For purposes

of the provision, preservation of a historically important land area or a certified historic structure

does not qualify as a conservation purpose.

In order to qualify for the exclusion, a qualifying easement must have been granted by the

decedent, a member of the decedent’s family, the executor of the decedent’s estate, or the trustee

of a trust holding the land, no later than the date of the election. To the extent that the value of

such land is excluded from the taxable estate, the basis of such land acquired at death is a

carryover basis (i.e., the basis is not stepped-up to its fair market value at death). Property

financed with acquisition indebtedness is eligible for this provision only to the extent of the net

equity in the property. The exclusion from estate taxes does not extend to the value of any

development rights retained by the decedent or donor.
 

19 For purposes of the 50-percent and 25-percent tests, the value of property is determined

without regard to its current use value.

 

20 The term "qualified heir" means a member of the decedent's family, including his spouse,

lineal descendants, parents, aunts, and uncles of the decedent and their descendants.

 

21 In the case of qualifying real property where the material participation requirement is

satisfied, the real property which qualifies for current use valuation includes the farmhouse or

other residential buildings and related improvements located on qualifying real property if such

buildings are occupied on a regular basis by the owner or lessee of the real property (or by

employees of the owner or lessee) for the purpose of operating or maintaining the real property

or the business conducted on the property. Qualified real property also includes roads, buildings,

and other structures and improvements functionally related to the qualified use.

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G. Estate Tax Preferences for Farms and Small Businesses

Special use valuation

A Federal estate tax is imposed on the value of property passing at death. Generally, the

value of property is its fair market value, i.e., the price at which the property would change hands

between a willing buyer and a willing seller, neither being under any compulsion to buy or sell

and both having reasonable knowledge of relevant facts.

If certain requirements are met, present law allows family farms and real property used in a

closely held business to be included in a decedent's gross estate at their current use value, rather

than full fair market value, provided that the gross estate is not reduced more than $750,000 (sec.

2032A).

An estate may qualify for current use valuation if: (1) the decedent was a citizen or resident

of the United States at his death; (2) the value of the farm or closely held business assets in the

decedent's estate, including both real and personal property (but reduced by debts attributable to

the real and personal property) is at least 50 percent of the decedent's gross estate (reduced by

mortgages and other secured debts); (3) at least 25 percent of the adjusted value of the gross

estate is qualified farm or closely held business real property;19 (4) the real property qualifying for

current use valuation must pass to a qualified heir;20 (5) such real property must have been owned

by the decedent or a member of his family and used or held for use as a farm or closely held

business ("a qualified use") for five of the last eight years prior to the decedent's death; and (6)

there must have been material participation in the operation of the farm or closely held business

by the decedent or a member of his family in five years out of the eight years immediately

preceding the decedent's death (sec. 2032A (a) and (b)).21

If, within 10 years after the death of the decedent (but before the death of the qualified
-16-

heir), the property is disposed of to nonfamily members or ceases to be used for farming or other

closely held business purposes, all or a portion of the Federal estate tax benefits obtained from

the reduced valuation will be recaptured by means of a special "additional estate tax" imposed on

the qualified heir.

Deferred payment of estate tax

The estate tax is imposed on transfers at death, and the tax generally is due nine months

after the date of the decedent’s death. The Commissioner may extend the time for payment of

the estate tax for up to 12 months. (Sec. 6161(a)(1).) There is, however, an additional rule which

provides that the Commissioner has discretion to grant an extension to pay estate tax upon a

showing of “reasonable cause” for a period not exceeding 10 years (sec. 6161(a)(2)).

Moreover, an executor generally may elect to pay the Federal estate tax attributable to an

interest in a closely held business in installments over as many as 14 years (sec. 6166). To qualify

for the election, the business must be an active trade or business and the value of the decedent's

interest in the closely held business must exceed 35 percent of the decedent's adjusted gross

estate. If this election is made, the estate pays only interest during the first five years, then up to

ten annual installments of both principal and interest. Interest generally is imposed at a rate equal

to 45 percent of the rate applicable to underpayments of tax under section 6621 (i.e., the Federal

short term rate plus three percentage points). In addition, a special 2-percent interest rate applies

to the amount of deferred estate tax attributable to the first $1,000,000 (adjusted for inflation) in

value of the closely-held business (i.e., the amount of estate tax on the first $1,000,000 less the

amount of any allowable unified credit). (Sec. 6601(j).)
-17-

H. Foreign Investment in U.S. Real Property

In general

Nonresident alien individuals and foreign corporations (referred to herein collectively as

"foreign persons") are subject to U.S. tax at a flat rate of 30 percent (or a lower rate pursuant to an

applicable tax treaty) on certain types of passive income (but generally not capital gains) derived

from U.S. sources. Foreign persons are subject to U.S. tax at the regular graduated rates

applicable to U.S. persons on income derived from a U.S. trade or business.

Special U.S. tax rules apply to gains of foreign persons attributable to dispositions of

interests in U.S. real property. The rules governing the imposition and collection of tax on such

dispositions are contained in a series of provisions that were enacted in 1980 and that are

collectively referred to as the Foreign Investment in Real Property Tax Act ("FIRPTA'') (secs.

897, 1445, 6039C, and 6652(f)). Prior to the enactment of the FIRPTA provisions, foreign

persons could invest in U.S. real property without being subject to U.S. tax upon the eventual

disposition of such property.

Imposition of tax

Section 897(a) provides that gain or loss of a foreign person from the disposition of a U.S.

real property interest is taken into account for U.S. tax purposes as if such gain or loss were

effectively connected with a trade or business within the United States during the taxable year. 

Accordingly, foreign persons generally are subject to U.S. tax on any gain from a disposition of a

U.S. real property interest at the same rates that apply to similar income received by U.S. persons.

In the case of nonresident alien individuals, the alternative minimum tax applies to the

lesser of the individual's alternative minimum taxable income or the individual's net real property

gains (sec. 897(a)(2)(A)). Losses of nonresident alien individuals are taken into account under

the FIRPTA provisions only to the extent that such losses would be taken into account under

Code section 165(c), which limits loss deductions to business losses, losses on transactions

entered into for profit, and certain casualty or theft losses (sec. 897(b)).

In the case of foreign corporations, the gain from a disposition of a U.S. real property

interest may also be subject to the branch profits tax at a 30-percent rate (or a lower treaty rate). 

If a foreign corporation that holds a U.S. real property interest is entitled to nondiscriminatory

treatment with respect to such interest under an applicable treaty, the foreign corporation may

elect to be treated as a U.S. corporation for purposes of the FIRPTA provisions (sec. 897(i)). This

election may be made only if all shareholders of the corporation consent to the election and

specifically agree that any gain upon the disposition of the interest that would be taken into

account under the FIRPTA provisions will be taxable even if such taxation would be contrary to

a treaty. This election to be treated as a domestic corporation is the exclusive remedy for any

person claiming treaty protection against discriminatory treatment as a result of the FIRPTA
-18-

provisions.

Definition of U.S. real property interest

Under the FIRPTA provisions, U.S. tax is imposed on gains from the disposition of an

interest in real property (including an interest in a mine, well, or other natural deposit) located in

the United States or the U.S. Virgin Islands. The term "interest in real property'' includes, with

respect to both land and improvements thereon, fee ownership and co-ownership, leaseholds,

options to acquire, and options to acquire leaseholds (sec. 897(c)(6)(A)). Moreover, the term

includes partial interests in real property, such as life estates, remainders, and reversions. In

addition, the term includes any direct or indirect right to share in the appreciation in the value of,

or in the gross or net proceeds or profits generated by, U.S. real property.

Also included in the definition of a U.S. real property interest is any interest (other than an

interest solely as a creditor) in any domestic corporation, unless the taxpayer establishes that the

corporation was not a U.S. real property holding corporation ("USRPHC") at any time during the

five-year period ending on the date of the disposition of the interest (sec. 897(c)(1)(A)(ii)). This

general rule does not apply to investments in a publicly-traded USRPHC. Under a special rule,

USRPHC stock of a class that is regularly traded on an established securities market is treated as

a U.S. real property interest only in the case of a foreign person that, at some time during the

five-year period described above, held more than 5 percent of that class of stock (sec. 897(c)(3)). 

Rules similar to this special rule apply to treat an interest in a publicly-traded partnership as a U.S.

real property interest.

A corporation is a USRPHC if the fair market value of such corporation's U.S. real property

interests equals or exceeds 50 percent of the sum of the fair market values of (i) its U.S. real

property interests, (ii) its interests in foreign real property, plus (iii) any other of its assets which

are used or held for use in a trade or business (sec. 897(c)(2)). For purposes of this asset test, a

corporation that is a partner in a partnership or a beneficiary of an estate or trust generally takes

into account its proportionate share of all assets of such partnership, estate or trust (sec.

897(c)(4)(B)). Look-through rules also apply to a controlling interest (50 percent or more of the

fair market value of all classes of stock) held by a corporation in another corporation, whether

foreign or domestic (sec. 897(c)(5)).

Special rules applicable to certain transactions

Gain recognized by a foreign person on the disposition of an interest in a partnership, trust,

or estate generally is subject to tax under the FIRPTA provisions to the extent that the gain is

attributable to any appreciation in the value of any U.S. real property interests of the entity (sec.

897(g)).
-19-

As a general rule, nonrecognition provisions apply under the FIRPTA provisions only in the

case of an exchange of a U.S. real property interest for an interest the sale of which would be

taxable under the Code (sec. 897(e)). This rule is designed to prevent a foreign person from

escaping U.S. tax by exchanging a taxable asset for a nontaxable asset in an exchange which

would otherwise qualify for nonrecognition treatment under the Code. Specific rules apply to

require gain recognition in certain cases. In this regard, foreign corporations are required in

certain circumstances to recognize gain upon the distribution (including a distribution in

liquidation or redemption) to their shareholders of appreciated U.S. real property interests (sec.

897(d)(1)). Moreover, gain generally is recognized by a foreign person under the FIRPTA

provisions on the transfer of a U.S. real property interest to a foreign corporation if the transfer is

made as paid-in surplus or as a contribution to capital.

Withholding on dispositions by foreign persons of U.S. real property interests

The Code generally imposes a withholding obligation when a U.S. real property interest is

acquired from a foreign person (sec. 1445). The withholding obligation generally is imposed on

the transferee; however, in certain limited circumstances, an agent of the transferor or transferee

is required to withhold. Any tax imposed on a foreign person under the FIRPTA provisions in

excess of the amount withheld remains the liability of the foreign person.

The amount required to be withheld on the sale by a foreign person of a U.S. real property

interest generally is 10 percent of the amount realized on the transaction (i.e., the gross sales

price) (sec. 1445(a)). However, a certificate for reduced withholding may be issued by the IRS

such that the amount required to be withheld will not exceed the transferor's maximum tax

liability (sec. 1445(c)(1)).

There are several exemptions from the obligation to withhold on a disposition of a U.S. real

property interest. First, withholding by the transferee generally is not required if the transferor

furnishes to the transferee an affidavit stating, under penalty of perjury, that the transferor is not a

foreign person and providing the transferor's taxpayer identification number (sec. 1445(b)(2)). 

Second, withholding is not required on the disposition of an interest in a domestic corporation if

the corporation furnishes an affidavit to the transferee stating, under penalty of perjury, that the

corporation is not a USRPHC and has not been a USRPHC during the five-year period ending on

the date of disposition (sec. 1445(b)(3)). Third, withholding may be reduced or eliminated if the

transferee receives a qualifying statement issued by the IRS that the transferor is exempt from tax

or either the transferor or the transferee has provided adequate security or has made other

arrangements for payment of the tax (sec. 1445(b)(4)). Fourth, withholding is not required if the

transferee intends to use the transferred real property as a residence, and the amount realized by

the transferor on the disposition of the property is $300,000 or less (sec. 1445(b)(5)). Fifth,

withholding is not required on a disposition of stock of a class that is regularly traded on an

established securities market (sec. 1445(b)(6)).
-20-

Special withholding rules apply in the case of certain dispositions of U.S. real property

interests by partnerships, trusts, and estates; certain distributions by foreign or domestic

corporations, partnerships, trusts and estates; and certain dispositions of interests in partnerships,

trusts, and estates.

Reporting requirements and penalties for noncompliance

Section 6039C of the Code authorizes the IRS to require reporting by foreign persons

holding direct investments in U.S. real property interests, and imposes penalties for failure to file

any required reports. However, to date no such requirements have been imposed.
22 Section 198 was enacted as part of the Taxpayer Relief Act of 1997.

-21-

II. DESCRIPTION OF INTRODUCED BILLS

A. H.R. 1630, the “Brownfields Cleanup Act”

(Mr. Coyne and others)

Present Law

As described in I.D., above, under present law, taxpayers can elect to treat certain

environmental remediation expenditures that would otherwise be chargeable to capital account as

deductible in the year paid or incurred (sec. 198).22 The deduction applies for both regular and

alternative minimum tax purposes. The expenditure must be incurred in connection with the

abatement or control of hazardous substances at a qualified contaminated site. Eligible

expenditures (“qualified Brownfields expenses”) are those paid or incurred before January 1,

2001.

Description of the Bill

The bill permanently extends the deduction for qualified brownfields expenses.

Effective Date

The bill would be effective on the date of enactment.
23 A private, for-profit business would not be treated as affiliated with the tax-exempt

organization provided that the for-profit business controlled no more than 20 percent of the

governing body of the section 501(c)(3) organization.

-22-

B. H.R. 1863, the “Community Forestry and Agriculture Conservation Act of 1999"

(Ms. Dunn and others)

Present Law

As described in I.E., above, property used in carrying out the exempt activities of

organizations described in Code section 501(c)(3) may be financed with tax-exempt bonds

(“qualified 501(c)(3) bonds”).

Description of the Bill

 H.R. 1863 would modify the rules applicable to tax-exempt financing for certain section

501(c)(3) organizations to allow (1) longer-term bonds and (2) more liberal private management

contract rules for property financed with qualified 501(c)(3) bonds. The liberalized tax-exempt

financing rules would apply to bonds used to finance the acquisition of land and renewable

resources (typically timber) located on the land if the land was subject to an easement granted in

perpetuity to a section 501(c)(3) organization which met the requirements of Code section 170

(relating to certain easements for conservation purposes).

Under the bill, the maximum maturity date of qualified 501(c)(3) bonds used to finance

property subject to these qualified easements would be 120 percent of the economic life that was

“commensurate with the economic and ecological feasibility of the financing of such land or

renewable resource” rather than 36 years. Further, the economic life of timber located on the

land when it was acquired would be deemed to be the same as the life of the land. This last

provision would eliminate the present-law requirement that the maturity of bonds allocable to the

value of standing timber be determined relative to the age of the timber being acquired, and that

bonds allocable to the timber be redeemed when the timber is severed or sold.

The bill also would permit section 501(c)(3) organizations to enter into longer-term

contracts for the management or the standing timber or other renewable resource and “up front”

contracts for the sale or severance of such timber or resource with unaffiliated23 private, for-profit

businesses than are permitted under the general tax-exempt bond private business use rules. 

These contracts could not result in activities constituting an unrelated trade or business use under

the general Code limits on exempt activities of section 501(c)(3) organizations.

Effective Date

The provisions of the bill would apply to bonds issued after the date of enactment.
24 The 30-percent contribution base limit applicable to gifts of qualified conservation

contributions (and other gifts of capital gain property to public charities) is effectively a sublimit

of a separate 50-percent contribution base limit that applies to contributions of cash by

individuals to public charities, private operating foundations, and certain private non-operating

foundations. The 30-percent and 50-percent limits are not cumulative; thus, cash gifts made in

the current year or carried forward to the current year may reduce a donor’s ability to deduct a

contribution of capital gain property up to the 30-percent limit.

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C. H.R. 2263 (Mrs. Johnson and others)

1. Charitable contribution deduction for qualified conservation contributions

Present Law

As described in I.F., above, an income tax deduction is permitted for a contribution of a

qualified real property interest to “qualified organizations” exclusively for conservation purposes.

“Qualified organizations” for purposes of such qualified conservation contributions include

governmental units, certain public charities that qualify as publicly supported organizations, and

certain organizations that support public charities (sec. 170(h)(3)). A gift of a qualified

conservation contribution to a qualified organization generally may be deducted by the donor up

to 30 percent of the donor’s “contribution base,” which is typically the donor’s adjusted gross

income for a taxable year computed without a net operating loss carryback deduction. Any

amount in excess of the 30-percent limit may be carried forward and deducted until exhausted in

the five years following the year of the contribution, subject in each year to a maximum

deduction of 30 percent of the donor’s contribution base for that year.24

Description of the Bill

Section 1 of H.R. 2263 would modify the rules governing charitable contribution

deductions for income tax purposes of donations of qualified conservation contributions and

capital gain real property for conservation purposes. Specifically, section 1 of the bill would

provide that any contribution of a qualified conservation contribution, as defined in I.G. above, is

deductible up to 50 percent of the donor’s contribution base. In addition, section 1 of the bill

would provide that any other contribution of real property is subject to the 50-percent

contribution base limit as long as the contribution (1) qualifies as capital gain property, (2)

constitutes the donor’s entire interest in such property, and (3) is made to a qualified organization

(as defined above), which is organized for a conservation purpose and which provides the donor

with a letter acknowledging that the property is intended to be used for conservation purposes. 

Section 1 of the bill also would eliminate the 5-year limitation on carryforwards of excess

qualified conservation contributions and contributions of capital gain real property for

conservation purposes.
25 The bill would not eliminate the requirements that the land have been owned by the

decedent or a member of the decedent’s family at all times during the three-year period ending

on the date of the decedent’s death and that a qualifying easement have been granted by the

decedent, a member of the decedent’s family, the executor of the decedent’s estate, or the trustee

of a trust holding the land, no later than the date of the election.

-24-

Effective Date

The bill would be effective for contributions made in taxable years beginning after the date

of enactment.

2. Exclusion from gross estate for qualified conservation easement

Present Law

As described in I.F., above, an executor may elect to exclude from the gross estate 40

percent of the value of any land subject to a qualified conservation easement.

Description of the Bill

H.R. 2263 would repeal the restrictions on where land subject to the easement must be

located in order to be considered “land subject to a qualified conservation easement” under

section 2031(c)(8)(A). Under the bill, land which is located in the United States or any

possession of the United States would be considered “land subject to a qualified conservation

easement.”25

The bill also would repeal the maximum exclusion limitations. Thus, the executor would be

permitted to elect to exclude from the taxable estate 40 percent of the value of any land subject to

a qualified conservation easement (reduced by the amount of any estate tax charitable deduction

with respect to such land). If the value of the easement is less than 30 percent of the value of the

land without the easement, then the exclusion percentage would continue to be reduced by two

percentage points for each percentage point by which the value of the conservation easement is

less than 30 percent of the value of the land. There would be no limit to the amount of qualified

conservation easement which could be excluded.

Moreover, the bill would provide that the date for determining the value of the land and the

conservation easement would be the value as of the date of the contribution.

Under the bill, certain commercial recreational uses would be permitted (i.e., deemed to be

de minimis commercial activity). Rights retained in the conservation easement to lease the land

for hunting and fishing shall be deemed to be de minimis use (so long as such leases are not

inconsistent with the conservation purpose of the easement). Furthermore, easements qualifying
-25-

under present law will be deemed to allow no more than de minimis commercial use unless by

their terms they expressly provide for commercial recreational activity in excess of that otherwise

allowed. In addition, if the executor of an estate and every individual with an interest in the land

execute an agreement to amend or extinguish any right under the easement of commercial

activity in the land to ensure that such land is used for no more than de minimis commercial

activity, then such agreement will be treated as in effect as of the date of the election made with

the estate tax return.

Finally, the bill would provide that the sale of a qualified real property interest would not

fail to be treated as a qualified conservation easement if such interest would meet the

requirements were it donated to the purchaser.

Effective Date

The provisions of the bill would be effective as if enacted in section 508 of the Taxpayer

Relief Act of 1997 (i.e., with respect to estates of decedents dying and easements granted after

December 31, 1997).
-26-

D. H.R. 2380, the “Energy Efficient Technology Tax Act”

(Mr. Matsui and others)

1. Energy credits

Present Law

No income tax credit is currently provided for investment in energy-efficient building

equipment.

A 10-percent energy credit is allowed for the cost of new property that is equipment (1) that

uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process

heat, or (2) used to produce, distribute, or use energy derived from a geothermal deposit, but

only, in the case of electricity generated by geothermal power, up to the electric transmission

stage, and which meet performance and quality standards prescribed by the Treasury

Department. Public utility property does not qualify for the credit (sec. 48(a)).

A taxpayer may exclude from income the value of any subsidy provided by a public utility

for the purchase or installation of an energy conservation measure. An energy conservation

measure means any installation or modification primarily designed to reduce consumption of

electricity or natural gas or to improve the management of energy demand with respect to a

dwelling unit (sec. 136).

Description of the Bill

The bill would provide tax credits for businesses for solar and geothermal energy property,

photovoltaic property, “20-percent” energy-efficient building property, “10-percent” energyefficient building property, and combined heat and power system property. For individuals, the

bill would provide personal tax credits for solar water heating property, photovoltaic property,

“20-percent” energy-efficient building property, “10-percent” energy-efficient building property,

and certain energy-efficient new homes.

Solar and geothermal energy property

The bill would provide a business tax credit of 10 percent of the purchase price of solar

energy property (other than elected solar hot water property and photovoltaic property) and

geothermal property. The 10-percent energy credit would be allowed for the cost of new property

that is equipment (1) that uses solar energy to generate electricity, to heat or cool a structure, or to

provide solar process heat, or (2) used to produce, distribute, or use energy derived from a

geothermal deposit, but only, in the case of electricity generated by geothermal power, up to the

electric transmission stage, and which meet performance and quality standards prescribed by the
-27-

Secretary of the Treasury. Public utility property would not qualify for the credit (sec. 48(a)). 

There would be no maximum credit, though the general limitations on business credits would

apply.

A business could elect to treat certain solar energy property as “elected solar hot water

property.” The election would be available for solar energy property that is used to heat or cool a

structure, or to provide hot water for use in the structure. Elected solar hot water property would

be eligible for a 15-percent credit up to a maximum credit of $1,000 for each item of property

elected.

For individuals, the bill would provide a 15-percent credit for property installed in

connection with a structure that uses solar energy for the purpose of providing hot water for use

within such structure. The maximum credit would be $1,000 for each item of property.

Effective date.--The business credit for solar energy property (other than elected solar hot

water property and photovoltaic property) and geothermal property would apply to property

placed in service on or after January 1, 2000. The business credit for elected solar hot water

property would apply to property placed in service on or after January 1, 2000 and before

January 1, 2005. The personal credit for solar water heating property would apply to property

placed in service on or after January 1, 2000, and before January 1, 2007.

Photovoltaic property

A credit of 15 percent of the purchase price (up to a maximum of $2000 per unit) of

photovoltaic property. Photovoltaic property would be defined as solar energy property that

used a solar photovoltaic process to generate electricity.

Effective date.--The business credit for photovoltaic property would apply to property

placed in service on or after January 1, 2000, and before January 1, 2005. The personal credit for

photovoltaic property would apply to property placed in service on or after January 1, 2000, and

before January 1, 2007.

Combined heat and power (”CHP”) systems

The bill would establish an 8-percent investment credit for businesses for qualified CHP

systems with an electrical capacity in excess of 50 kilowatts or with a capacity to produce

mechanical power in excess of 67 horsepower (or an equivalent combination of electrical and

mechanical energy capacities). CHP property would be defined as property comprising a system

that uses the same energy source for the simultaneous or sequential generation of (1) electricity

or mechanical shaft power (or both) and (2) steam or other forms of useful thermal energy

(including heating and cooling applications). A qualified CHP system would be required to

produce at least 20 percent of its total useful energy in the form of thermal energy and at least 20

percent of its total useful energy in the form of electrical or mechanical power (or a combination
-28-

thereof) and would also be required to satisfy an energy-efficiency standard. For CHP systems

with an electrical capacity in excess of 50 megawatts (or a mechanical energy capacity in excess

of 67,000 horsepower), the total energy efficiency of the system would have to exceed 70

percent. For smaller systems, the total energy efficiency would have to exceed 60 percent. For

this purpose, total energy efficiency would be calculated as the sum of the useful electrical,

thermal, and mechanical power produced by the system at normal operating rates, measured on a

Btu basis, divided by the lower heating value of the primary fuel source for the system supplied.

The credit would be allowed with respect to qualified CHP property only if its eligibility was

verified under regulations prescribed by the Treasury Department.

Investments in qualified CHP assets that would otherwise be assigned cost recovery periods

of less than 15 years would be eligible for the credit, provided that the taxpayer elected to treat

such property as having a 22-year class life. Thus, regular tax depreciation allowances would be

calculated using a 15-year recovery period and the 150-percent declining balance method.

Effective date.--The credit would apply to investments in CHP equipment placed in service

after December 31, 1999, but before January 1, 2003.

10-percent energy-efficient building property

A credit of 10 percent of the purchase price (up to a maximum of $250 per unit) would be

allowed for the purchase of the following building equipment:

C Electric heat pumps (equipment using electrically powered vapor compression cycles

to extract heat from air in one space and deliver it to air in another space) with a

heating efficiency of at least 7.5 HSPF (Heating Seasonal Performance Factor) and a

cooling efficiency of at least 13.5 SEER (Seasonal Energy Efficiency Rating);

C Central air conditioners with an efficiency of at least 13.5 SEER; and

C Advanced natural gas water heaters (equipment using a variety of mechanisms to

increase steady-state efficiency and reduce standby and vent losses) with an Energy

Factor of at least 0.65 in the standard Department of Energy (DOE) test procedure.

The credit would be nonrefundable and subject to the dollar caps as specified. For

businesses, the credit would be subject to the limitations on the general business credit and

would reduce the basis of the equipment.

Effective date.--The 10-percent credit would be available for final purchases from unrelated

third parties after December 31, 1999, and before January 1, 2002.
-29-

20-percent energy-efficient building property

A credit of 20 percent of the purchase price would be allowed for the purchase of the

following building equipment:

C Fuel cells (equipment using an electrochemical process to generate electricity and

heat) with an electricity-only generation efficiency of at least 35 percent and a

minimum generating capacity of 5 kilowatts. The maximum credit would be $500 per

kilowatt of capacity.

C Electric heat pump hot water heaters (equipment using electrically powered vapor

compression cycles to extract heat from air and deliver it to a hot water storage tank)

with an Energy Factor of at least 1.7 in the standard DOE test procedure. The

maximum credit would be $500 per unit.

C Electric heat pumps with a heating efficiency of at least 9 HSPF and a cooling

efficiency of at least 15 SEER. The maximum credit would be $500 per unit.

C Central air conditioners with an efficiency of at least 15 SEER. The maximum credit

would be $500 per unit.

C Advanced natural gas water heaters with an Energy Factor of at least 0.80 in the

standard DOE test procedure. The maximum credit would be $500 per unit.

C Natural gas heat pumps (equipment using either a gas-absorption cycle or a gas-driven

engine to power the vapor compression cycle to extract heat from one source and

deliver it to another) with a coefficient of performance for heating of at least 1.25 and

for cooling of at least 0.70. The maximum credit would be $1,000 per unit.

The credit would be nonrefundable and subject to the dollar caps as specified. For

businesses, it would be subject to the limitations on the general business credit and would reduce

the basis of the equipment.

Effective date.--The 20-percent credit would be available for final purchases from unrelated

third parties after December 31, 1999, and before January 1, 2004.

Energy-efficient new homes

A nonrefundable personal tax credit of up to $2,000 would be available to purchasers of

new homes that meet energy-efficiency standards for heating, cooling and hot water that

significantly exceed those of the International Energy Conservation Code (the “IECC”). A

taxpayer could claim the credit only if the new home was the taxpayer's principal residence, was

located in the United States, and reduced energy use by prescribed amounts as compared to the
-30-

IECC for single family residences. The tax credit would be $1,000 for new homes at least 30

percent more energy efficient than the IECC standard; $1,500 for new homes at least 40 percent

more energy efficient than the IECC standard; and $2,000 for new homes at least 50 percent

more energy efficient than the IECC standard.

Effective date.--The credit would be available for new homes purchased after December 31,

1999.

2. Electric and hybrid vehicles credit

Present Law

A 10-percent tax credit is provided for the cost of a qualified electric vehicle, up to a

maximum credit of $4,000 (sec. 30). A qualified electric vehicle is a motor vehicle that is

powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or

other portable sources of electrical current, the original use of which commences with the

taxpayer, and that is acquired for the use by the taxpayer and not for resale. The full amount of

the credit is available for purchases prior to 2002. The credit phases out between 2002 and 2005.

Certain costs of qualified clean-fuel vehicle property may be expensed and deducted when

such property is placed in service (sec. 179A). Qualified clean-fuel vehicle property includes

motor vehicles that use certain clean-burning fuels (natural gas, liquefied natural gas, liquefied

petroleum gas, hydrogen, electricity and any other fuel at least 85 percent of which methanol,

ethanol, any other alcohol or ether. The maximum amount of the deduction is $50,000 for a truck

or van with a gross vehicle weight over 26,000 pounds or a bus with seating capacities of at least

20 adults; $5,000 in the case of a truck or van with a gross vehicle weight between 10,000 and

26,000 pounds; and $2,000 in the case of any other motor vehicle. Qualified electric vehicles do

not qualify for the clean-fuel vehicle deduction. The deduction phases out in calendar years 2002

through 2004.

No credit is currently provided for hybrid vehicles.

Description of the Bill

The bill would extend the present credit for qualified electric vehicles and provide

temporary tax credits for two types of fuel-efficient hybrid vehicles.

Electric vehicles

The phase down of the credit for electric vehicles would be eliminated and the credit would

be extended through December 31, 2006. Thus, the maximum $4,000 credit would be available

for purchases before 2007.
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Effective date.--The tax credit for electric vehicles would be effective for vehicles placed in

service after the date of enactment of the bill.

Qualified hybrid vehicles

The bill would provide tax credits for qualified hybrid vehicles that draw propulsion energy

from both a consumable fuel and a rechargeable energy storage system. The credit amount

would depend on the percentage of the vehicle’s maximum available power that is provided by

the rechargeable energy storage system. The credit would be equal to $500 for a percentage

greater than or equal to 5 but less than 10; $1,000 for a percentage greater than or equal to 10 but

less than 20; $1,500 for a percentage greater than or equal to 20 but less than 30; and $2,000 for a

percentage greater than or equal to 30.

An additional credit would be available if the qualifying hybrid vehicle used a regenerative

braking system that would recover the applicable percentage of the energy in a typical 60-0

braking event. The additional credit would be equal to $250 for a percentage greater than or

equal to 20 but less than 40; $500 for a percentage greater than or equal to 40 but less than 60;

and $1,000 for a percentage greater than or equal to 60.

A qualifying vehicle would have to meet all emission requirements applicable to

gasoline-powered automobiles. These credits would be available for all qualifying light vehicles

including cars, minivans, sport utility vehicles, and light trucks. Taxpayers who claim one of these

credits would not be able to claim the qualified electric vehicle credit or the deduction for

clean-fuel vehicle property for the same vehicle.

Effective date.--The credit for qualified hybrid vehicles would be effective for such vehicles

placed in service on or after January 1, 2003, and before January 1, 2007.

3. Tax credit for electricity produced from wind and biomass

Present Law

An income tax credit is allowed for the production of electricity from either qualified wind

energy or qualified “closed-loop” biomass facilities (sec. 45). The credit is equal to 1.7 cents (1.5

cents plus adjustments for inflation since 1992) per kilowatt hour of electricity produced from

these qualified sources during the 10-year period after the facility is placed in service.

The credit applies to electricity produced by a qualified wind energy facility placed in

service after December 31, 1993, and before July 1, 1999, and to electricity produced by a

qualified closed-loop biomass facility placed in service after December 31, 1992, and before July

1, 1999. Closed-loop biomass is the use of plant matter, if the plants are grown for the sole

purpose of being used to generate electricity. The term does not include waste materials

(including, but not limited to, scrap wood, manure, and municipal or agricultural waste) or
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standing timber used to produce electricity. In order to claim the credit, a taxpayer must own the

facility and sell the electricity produced by the facility to an unrelated party.

The credit for electricity produced from wind or closed-loop biomass is a component of the

general business credit (sec. 38(b)(1)). This credit, when combined with all other components of

the general business credit, generally may not exceed for any taxable year the excess of the

taxpayer's net income tax over the greater of (1) 25 percent of net regular tax liability above

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after

December 31, 1997, an unused general business credit generally may be carried back one taxable

year and carried forward 20 taxable years.

Description of the Bill

The bill would reinstate the wind and closed-loop biomass credit, for facilities placed in

service before July 1, 2004, and would expand the biomass fuels for facilities eligible for the

electricity credit to include non-closed-loop (e.g., a waste product other than unsegregated

municipal waste) biomass. In the case of non-closed-loop biomass, the credit would be available

only for production from facilities placed in service after June 30, 1999. In addition, the presentlaw rule that requires that an eligible biomass facility exclusively use a biomass fuel would be

modified to allow the credit (at a reduced 1-cent-per-kilowatt rate) for electricity produced from

biomass facilities that also use coal as a fuel.

Effective date.--The bill would be effective on the date of enactment, for facilities placed in

service before July 1, 2004.
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E. H.R. 2446, the “Better America Bonds Act of 1999"

(Mr. Matsui and others)

Present Law

Tax-exempt bonds

As described in I.E., above, interest on debt incurred by States or local governments is

excluded from income if the proceeds of the borrowing are used to carry out governmental

functions of those entities or the debt is repaid with governmental funds (“governmental bonds”). 

These bonds may include bonds used to finance the acquisition of land (or interests in land) and

buildings. Interest on bonds that nominally are issued by States or local governments, but the

proceeds of which are used (directly or indirectly) by a private person and payment of which is

derived from funds of such a private person ("private activity bonds") is taxable unless the

purpose of the borrowing is approved specifically in the Code or in another provision of a

revenue Act. These specified purposes include, but are not limited to, privately owned and/or

operated: (1) sewage facilities; (2) solid waste disposal facilities; and (3) water systems. Issuance

of most private activity bonds is subject to annual state volume limits, currently the greater of $50

per resident, or $150 million if greater.

Tax credits for interest on bonds

A nonrefundable tax credit in an amount equal to a credit rate (set monthly by the Treasury

Department) multiplied by the face amount of certain qualified zone academy bonds is allowed

to certain financial institutions (i.e., banks, insurance companies, and corporations actively

engaged in the business of lending money). The credit rate applies to all bonds issued in a

month. A taxpayer holding a qualified zone academy bond on the credit allowance date (i.e., the

annual anniversary of the bond’s issuance) is entitled to a credit. The credit is includible in gross

income (as if it were an interest payment on the bond), and may be claimed against regular

income tax liability and alternative minimum tax liability. A qualified zone academy bonds is

defined as any bond issued by a State or local government, provided that (1) at least 95 percent of

the proceeds are used for the purpose of renovating, providing equipment to, developing course

materials for use at, or training teachers and other school personnel in a “qualified zone

academy” and (2) private entities have promised to contribute to the qualified zone academy

certain equipment, technical assistance or training, employee services, or other property or

services with a value equal to at least 10 percent of the bond proceeds.

Expensing of certain environmental remediation expenses

Taxpayers can elect to treat certain environmental remediation expenditures that would

otherwise be chargeable to capital account as deductible in the year paid or incurred (sec. 198).

The deduction applies for both regular and alternative minimum tax purposes. The expenditure

must be incurred in connection with the abatement or control of hazardous substances at a
26The structure of H.R. 2446 would be similar to the structure in the Administration’s

fiscal year 2000 budget proposals for Better America bonds, qualified school modernization

bonds and qualified zone academy bonds.

27To this end, the credit rate would be set equal to a measure of the yield on outstanding

corporate bonds, as specified in Treasury regulations, for the business day prior to the date of

issue. It is anticipated that the credit rate would be set with reference to a corporate AA bond rate

which could be published daily by the Federal Reserve Board or otherwise determined under 

Treasury regulations.

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qualified contaminated site. A qualified contaminated site generally is any property that: (1) is

held for use in a trade or business, for the production of income, or as inventory; (2) is certified

by the appropriate State environmental agency to be located within certain targeted areas; and (3)

contains (or potentially contains) a hazardous substance (so-called “brownfields”). In the case of

property to which a qualified environmental remediation expenditure otherwise would have been

capitalized, any qualified environmental remediation expenditure deductions are subject to

recapture as ordinary income upon sale or other disposition of the property (sec. 1245). The

provision applies only to eligible expenditures paid or incurred in taxable years ending after

August 5, 1997, and before January 1, 2001.

Description of the Bill

In general

The bill would provide a tax credit to holders of a new category of bonds, Better America

Bonds (“BABs”),26issued by a State government (including the District of Columbia, any

possession of the United States, or any Indian tribal government within the meaning of section

7871) or local government (including a combination of local governments) for certain qualified

purposes. Like holders of present-law qualified zone academy bonds, the holders of BABs

would be allowed an annual Federal income tax credit against regular income tax liability and

alternative minimum tax liability. The credit would be in lieu of interest payments. Because the

proposed credits would compensate the holder for lending money, such credits would be treated

as payments of interest for Federal income tax purposes and, accordingly, would be included in

the holder’s gross income. As with present-law qualified zone academy bonds, the “credit rate”

for BABs would be set by the Secretary of the Treasury so that, on average, such bonds would be

issued without interest, discount, or premium.27 The taxpayer holding a BAB on a credit

allowance date (i.e., March 15, June 15, September 15, and December 15th) would be entitled to

the credit. The amount of the credit on each credit allowance date would equal one quarter of the

amount determined by multiplying that BAB’s credit rate (set by the Treasury Department when

the BAB was issued) by the face amount of the holder’s BABs. In the case of issuance or

redemption of BABs between credit allowance dates, the amount of credit would be determined

ratably.
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Authority to issue BABs

The Administrator of the Environmental Protection Agency (“EPA”) would be given

authority to allocate $1.9 billion dollars of BAB authority to eligible issuers (i.e., States and local

governments, including Tribal governments, U.S. Possessions and the District of Columbia)

annually for five years beginning in the year 2000. Any amounts unallocated for a year could be

allocated in the following year. Any amounts allocated to a State or local government in any year

could be used for bond issuance in that year or the following year.

The EPA would be directed to publish guidelines, before January 1, 2000, establishing the

criteria to be used in an annual competition for authority to issue the BABs. State and local

governments would apply for an allocation of authority to issue the BABs and the EPA would

review these applications and allocate authority to issue BABs. Whenever possible, the EPA

would make allocations on a per capita basis.

BAB requirements

For an instrument to qualify as a BAB several requirements must be met: (1) the issuer of

the BAB must reasonably expect that, on the date of issue, 95 percent of the proceeds of the

bond (including any investment earnings on such proceeds) will be spent on qualifying purposes

within three years and any property financed with bond proceeds will be used for a qualified

purpose for at least a 15-year period; (2) the issuer must incur a binding obligation with a third

party to spend at least 10 percent of proceeds of the issue within 6 months of the date of issue;

(3) the issuer must reasonable expect that the remaining proceeds of the issue will be spent with

due diligence for qualified purposes; (4) the term of each BAB could not exceed 15 years; (5) the

issuance of each BAB would also be subject to the public approval rules of section 147(f)

generally applicable to tax-exempt bonds (except in the case of certain real property abandoned

by the prior owner); and (6) the payment of the principal on the BAB would be secured by taxes

of general applicability imposed by a general purpose governmental unit (except in the case of

certain real property abandoned by the prior owner).

Issuers of BABs would be required to allow eligible 501(c)(3) organizations to purchase the

credit financed property at any time after the end of its qualified use (e.g., at the end of the 15-

year period beginning on the date of issuance of the BAB) before selling to another party. An

eligible 501(c)(3) organization would have the right, but not the obligation, to purchase the

property at that time before the sale to another party. An eligible 501(c)(3) organization must: (1)

have exempt purposes which include environmental protection; (2) covenant to maintain the

property in qualifying use in perpetuity; and (3) hold an option to purchase the property. The

purchase price to the 501(c)(3) under the option would be the price paid in conjunction with the

expenditure of bond proceeds at the beginning of the 15-year period. This option would be

created when the proceeds of the bond are expended to purchase the property and recorded

pursuant to State law as a restrictive covenant binding upon all successors. The actual option

could be granted at any time during the 15-year period beginning on the date of issuance and
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would lapse after a reasonable time after the bonds mature.

Qualifying purposes for BABs

The bill would limit the purposes for which BABs could be issued by State or local

governments for: (1) acquisition of land for open space, wetland, public parks or green ways to

be owned by the State or local government or 501(c)(3) entity whose exempt purpose includes

environmental preservation; (2) the provision of visitors’ facilities to be owned by the State or

local government or 501(c)(3) entity whose exempt purpose includes environmental preservation;

(3) remediation of land, in order to improve water quality, acquired under (1) above, or of

publicly owned open space, wetlands, or parks, by restoring hydrology or planting of trees or

other vegetation, undertaking reasonable measures to control erosion, restoring wetlands, or

remediating conditions caused by prior disposal of toxic or other waste; (4) acquisition of

easements on privately owned open land that prevent commercial development and any

substantial change in the use or character of the land; or (5) environmental assessment and

remediation of contaminated property owned by State or local governments because it was

abandoned by the prior owner.

Other rules applicable to BABs

No depreciation for tax purposes would be allowed with respect to property financed with

BABs. Also, no expenditures financed with BAB proceeds would be eligible for expensing under

the environmental remediation rules of section 198.

Any taxpayer would be able to hold a BAB and thereby claim the tax credit. Treasury

would provide regulations regarding the treatment of credits that flow through from a mutual

fund to the holder of mutual fund shares. Unused credits would not be carried back, but would

be carried forward. The bill would grant regulatory authority to the Secretary to require

information returns to be provided with respect to holders (including corporations) that are

entitled to credits.

Any property financed with BAB proceeds must be used for a qualifying purpose for at

least a 15-year period after the date of issuance. If the use of a bond-financed facility changes to

a non-qualifying use within that 15-year period, the bonds would cease to be qualifying bonds

and would accrue no further tax credits. Further, the issuer would be required to reimburse the

Treasury for all tax credits which accrued in the year of cessation of qualified use and the two

prior calendar years. If the issuer fails to make a full and timely reimbursement of tax credits, the

Federal government could proceed to collect against current holder(s) of the bond for any

remaining amounts.

Effective date

The provisions of the bill would apply to bonds issued after December 31, 1999.
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F. H.R. 2497, the “Open Space Preservation Act of 1999"

(Mr. Pitts and others)

1. Exclusion for gain on sale or exchange of farmland with qualified covenant

Present Law

Generally, no exclusion from income is provided for gain from the sale or exchange of

farmland.

Description of the Bill

Under the bill, operators of farmland could exclude from gross income any gain from the

sale or exchange of such farmland, if on the date of such sale or exchange there was a qualified

covenant in effect limiting the use of that land to farming. For these purposes, farmland would

be any real property located in the United States which is being used as a farm for farming

purposes (within the meaning of sec. 2031A(e)). A qualified covenant would be an irrevocable

covenant entered into by all persons having a present ownership interest in the land and which is

binding on all future owners of the farmland to which such covenant applies. The exclusion

would not apply unless the operator of the farmland (1) notifies the Secretaries of the Treasury

and Agriculture of the local government in which such covenant is recorded, and (2) submits a

copy of the covenant to the Secretary of the Treasury.

Effective Date

The provisions of the bill would be effective for covenants first recorded after December 31,

1999, and to sales or exchanges after such date.

2. Exclusion from gross estate for farmland subject to qualified covenant

Present Law

The value of the gross estate generally is determined by including the value at the time of

the decedent’s death all property, real or personal, tangible or intangible, wherever situated. To

the extent the decedent had an interest at the time of his or her death, property is included in the

gross estate. (Sec. 2031(a).)
28 The term “adjusted value” refers to the value of farmland reduced by the amount of

claims against or indebtedness in respect of the farmland.

29 “Material participation” would be defined by reference to section 2032A(e)(6).

30 Sec. 2032A(e)(4) provides that the term “farm” includes stock, dairy, poultry, fruit,

furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other

similar structures used primarily for the raising of agricultural or horticultural commodities, and

orchards and woodlands. Under sec. 2032(A)(e)(5), “farming purposes” generally includes

cultivating the soil or raising or harvesting any agricultural or horticultural commodity, handling,

drying, packing, grading, or storing any agricultural or horticultural commodity, or the planting,

cultivating, caring for, or cutting of trees or preparation of trees for market.

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Description of the Bill

H.R. 2497 would add a new section 2033A, which would provide an exclusion from the

gross estate for the adjusted value28 of farmland which, by covenant, is restricted to use as

farmland. The provisions would apply to an estate if (1) the decedent was, at the date of death, a

citizen or resident of the United States, and (2) during the eight-year period ending on the date of

the decedent’s death, there have been periods aggregating five years or more during which (a) the

farmland was owned by the decedent or member of his or her family, and (b) there was material

participation by the decedent or member of his or her family in the operation of the farmland.29

“Farmland” refers to any real property which is located in the United States and which is used as

a farm or for farming purposes within the meaning of section 2032A(e).30 A “qualified covenant”

means a covenant which may not be revoked which, with respect to farmland to which it applies,

is entered into by all persons having ownership in such farmland, and which binds all future

owners of the farmland to which the covenant applies.

The provisions of new section 2033A would not apply unless both the Secretary of the

Treasury and the Secretary of Agriculture are notified of the political subdivision of the State in

which the covenant is recorded and a copy of such covenant is submitted to the Secretary of the

Treasury.

Effective Date

The provisions of the bill would apply to covenants first recorded after December 31, 1999,

with respect to estates of decedents dying after such date.
31 Sec. 61(a)(3).

32 The term “land” or “interest in land or water” includes stock in any corporation if the

fair market value of the corporation’s land or interests in land or water equals 90 percent of the

fair market value of all such corporation’s assets at all times during the three-year period ending

on the date of the sale.

33 Family members include an ancestor or spouse of an individual, a lineal descendant of

such individual, of such individual’s spouse, or of a parent of such individual, or the spouse of

any such lineal descendant.

34 Sec. 170(h)(4).

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G. H.R. 2880, the “Conservation Tax Incentives Act of 1999"

(Mr. Portman and others)

Present Law

Gross income generally includes the gain from the sale or exchange of property.31

Description of the Bill

Under the bill, gross income would not include 50 percent of the gain from the sale of land

or an interest in land or water (determined without regard to any improvements),32 if sold to an

eligible entity if (1) the land or interest in land or water was owned by the taxpayer or a member

of the taxpayer’s family33 during the three-year period ending on the date of the sale, and (2) such

land or interest in land or water is being acquired by an eligible entity which provides the

taxpayer with a written letter of intent at the time of acquisition, which includes the following

statement: “The purchaser’s intent is that this acquisition will serve 1 or more of the conservation

purposes specified in clause (i), (ii), or (iii) of section 170(h)(4)(A).”

“Eligible entities” include an agency of the United States or of any State or local

government or any other organization that meets the “qualified organization” requirements of

section 170(h)(3) and is at all times operated principally for one or more of the conservation

purposes, which include (1) the preservation of land areas for outdoor recreation by, or the

education of, the general public, (2) the protection of a relatively natural habitat of fish, wildlife,

or plants, or similar ecosystem, (3) the preservation of open space where such preservation is for

the scenic enjoyment of the general public or pursuant to a governmental conservation policy, or

(4) the preservation of an historically important land area or certified historic structure.34

Effective Date

The provisions would apply to sales occurring on or after the date of enactment.