TECHNICAL EXPLANATION OF DIVISION C OF H.R. 3221, 

THE “HOUSING ASSISTANCE TAX ACT OF 2008” 

AS SCHEDULED FOR CONSIDERATION BY 

THE HOUSE OF REPRESENTATIVES ON JULY 23, 2008 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

July 23, 2008 

JCX-63-08
i 

CONTENTS 

Page

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

I. EXPLANATION OF THE BILL.............................................................................................. 2 

TITLE I – BENEFITS FOR MULTI-FAMILY LOW-INCOME HOUSING ............................... 2 

A. Low-Income Housing Credit .............................................................................................. 3 

1. Temporary increase in the low-income housing credit volume limits 

(sec. 3001 of the bill and sec. 42 of the Code).............................................................. 3 

2. Determination of credit rate (sec. 3002 of the bill and sec. 42 of the Code) ................ 4 

3. Modifications to definition of eligible basis (sec. 3003 of the bill and sec. 42 

of the Code)................................................................................................................... 5 

4. Other simplification and reform of low-income housing tax incentives 

(sec. 3004 of the bill and sec. 42 of the Code)............................................................ 11 

5. Treatment of Basic Housing Allowances for purposes of income eligibility rules 

(sec. 3005 of the bill and sec. 42 of the Code)............................................................ 16 

6. Refunding treatment for certain multi-family housing bonds (sec. 3007 of the bill 

and sec. 146 of the Code)............................................................................................ 17 

7. Coordination of certain rules applicable to the low-income housing credit and 

qualified residential rental project exempt facility bonds (sec. 3008 of the bill 

and sec. 142 of the Code)............................................................................................ 18 

8. Hold harmless for reductions in area median gross income (sec. 3009 of the bill 

and sec. 42 of the Code).............................................................................................. 21 

9. Exception from the annual recertification requirement for projects which are 

entirely low-income use (sec. 3010 of the bill and sec. 142 of the Code).................. 23 

B. Single Family Housing ..................................................................................................... 25

1. First-time homebuyer credit (sec. 3011 of the bill and sec. 36 of the Code).............. 25 

2. Additional standard deduction for state and local real property taxes 

(sec. 3012 of the bill and sec. 63 of the Code)............................................................ 26 

C. General Provisions............................................................................................................ 28 

1. Modifications to qualified private activity bond rules for housing 

(sec. 3021 of the bill and secs. 142, 143, and 146 of the Code) ................................. 28 

2. Alternative minimum tax treatment of interest on certain bonds, the low-income 

housing credit, and the rehabilitation credit (sec. 3022 of the bill and secs. 38, 

56 and 57 of the Code)................................................................................................ 29 

3. Bonds guaranteed by Federal Home Loan Banks eligible for treatment as 

tax-exempt bonds (sec. 3023 of the bill and sec. 149 of the Code) ............................ 31 

4. Modification of rules pertaining to FIRPTA nonforeign affidavits 

(sec. 3024 of the bill and sec. 1445 of the Code)........................................................ 32 
ii 

5. Modify rehabilitation credit tax-exempt use safe harbor and definition of 

disqualified lease (sec. 3025 of the House bill and sec. 47 of the Code).................... 34 

6. Special rules for mortgage revenue bonds in Presidentially declared disaster 

areas (sec. 3026 of the bill and sec. 143 of the Code) ................................................ 35 

7. Transfer of funds appropriated to carry out 2008 recovery rebates to individuals 

(sec. 3027 of the bill) .................................................................................................. 36 

TITLE II – REFORMS RELATED TO REAL ESTATE INVESTMENT TRUSTS 

(“REITs”) (secs. 3031-3071 of the bill and secs. 856 and 857 of the Code)................................ 37 

TITLE III – REVENUE PROVISIONS ....................................................................................... 51 

A. General Provisions............................................................................................................ 51 

1. Election to accelerate AMT and research credits in lieu of bonus depreciation 

(sec. 3081 of the bill and sec. 168(k) of the Code)..................................................... 51 

2. Certain GO Zones incentives...................................................................................... 53 

(a) Election to amend returns for hurricane-related casualty losses (sec. 3082(a) 

of the bill).............................................................................................................. 53 

(b) Waiver of deadline on construction of GO Zone property eligible for bonus 

depreciation (sec. 3082(b) of the bill)................................................................... 55 

(c) Inclusion of certain counties in GO Zone for purposes of tax-exempt bond 

financing (sec. 3082(c) of the bill and sec. 1400N(a) of the Code)...................... 58 

B. Revenue Offsets................................................................................................................ 60 

1. Require information reporting on payment card and third party payment 

transactions (sec. 3091 of the bill and new sec. 6050(W) of the Code) ..................... 60 

2. Exclusion of gain on sale of a principal residence not to apply to nonqualified 

use (sec. 3092 of the bill and sec. 121 of the Code) ................................................... 62 

3. Delay implementation of worldwide interest allocation (sec. 3093 of the bill 

and sec. 864(f) of the Code)........................................................................................ 64 

4. Modifications to corporate estimated tax payments (sec. 3094 of the bill) ................ 68 
1 

INTRODUCTION 

This document,1

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

technical explanation of Division C of H.R. 3221, the “Housing Assistance Tax Act of 2008,” as 

scheduled for consideration by the House of Representatives on July 23, 2008. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Technical Explanation 

of Division C of H.R. 3221, the “Housing Assistance Tax Act of 2008,” as Scheduled for Consideration 

by the House of Representatives on July 23, 2008 (JCX-63-08), July 23, 2008. This publication can be 

found on the internet at www.jct.gov. 
2 

I. EXPLANATION OF THE BILL 

TITLE I – BENEFITS FOR MULTI-FAMILY LOW-INCOME HOUSING 

Overview

Low-income housing credit

The low-income housing credit may be claimed over a 10-year period for the cost of 

building rental housing occupied by tenants having incomes below specified levels. The amount 

of the credit for any taxable year in the credit period is the applicable percentage of the qualified 

basis of each qualified low-income building. The qualified basis of any qualified low-income 

building for any taxable year equals the applicable fraction of the eligible basis of the building. 

The credit percentage for newly constructed or substantially rehabilitated housing that is 

not Federally subsidized is adjusted monthly by the Internal Revenue Service so that the 10 

annual installments of the credit have a present value of 70 percent of the total qualified basis. 

The credit percentage for newly constructed or substantially rehabilitated housing that is 

Federally subsidized and for existing housing that is substantially rehabilitated is calculated to 

have a present value of 30 percent of qualified basis. These are referred to as the 70-percent 

credit and 30-percent credit, respectively. 

Tax-exempt bonds for housing 

Private activity bonds are bonds that nominally are issued by State or local governments, 

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

which is derived from funds of such private person. The exclusion from income for interest paid 

on State and local bonds does not apply to private activity bonds, unless the bonds are issued for 

certain permitted purposes (“qualified private activity bonds”). The definition of a qualified 

private activity bond includes, but is not limited to, qualified mortgage bonds, qualified veterans’ 

mortgage bonds, and bonds for qualified residential rental projects. 

Residential rental property may be financed with qualified private activity bonds if the 

financed project is a “qualified residential rental project.” A project is a qualified residential 

rental project if 20 percent or more of the residential units in such project are occupied by 

individuals whose income is 50 percent or less of area median gross income (the “20-50 test”). 

Alternatively, a project is a qualified residential rental project if 40 percent or more of the 

residential units in such project are occupied by individuals whose income is 60 percent or less 

of area median gross income (the “40-60 test”). The issuer must elect to apply either the 20-50 

test or the 40-60 test. Operators of qualified residential rental projects must annually certify that 

such project meets the requirements for qualification, including meeting the 20-50 test or the 40-

60 test. 
3 

A. Low-Income Housing Credit 

1. Temporary increase in the low-income housing credit volume limits (sec. 3001 of the bill 

and sec. 42 of the Code) 

Present Law

In general

The low-income housing credit may be claimed over a 10-year period by owners of 

certain residential rental property for the cost of rental housing occupied by tenants having 

incomes below specified levels (sec. 42). The amount of the credit for any taxable year in the 

credit period is the applicable percentage of the qualified basis of each qualified low-income 

building. The qualified basis of any qualified low-income building for any taxable year equals 

the applicable fraction of the eligible basis of the building. 

Volume limits

A low-income housing credit is allowable only if the owner of a qualified building 

receives a housing credit allocation from the State or local housing credit agency. Generally, the 

aggregate credit authority provided annually to each State for calendar year 2008 is $2.00 per 

resident, with a minimum annual cap of $2,325,000 for certain small population States (Rev. 

Proc. 2007-66). These amounts are indexed for inflation. Projects that also receive financing 

with proceeds of tax-exempt bonds issued subject to the private activity bond volume limit do 

not require an allocation of the low-income housing credit. 

Explanation of Provision

The provision increases from $2.00 per resident to $2.20 per resident the allocation 

authority provided annually to each State for calendar years 2008 and 2009. Also, the provision 

increases the minimum annual cap for certain small population States by ten percent of the 

otherwise available amounts in 2008 and 2009, respectively. In 2010, the volume limits will 

return to the prescribed levels had this provision not been enacted. 

Effective Date

The provision is effective for low-income credit allocations made for calendar years after 

2007. 
4 

2. Determination of credit rate (sec. 3002 of the bill and sec. 42 of the Code) 

(a) Modifications to the applicable percentage

Present Law

In general

The low-income housing credit may be claimed over a 10-year credit period after each 

low-income building is placed-in-service. The amount of the credit for any taxable year in the 

credit period is the applicable percentage of the qualified basis of each qualified low-income 

building. 

Present value credit 

The calculation of the applicable percentage is designed to produce a credit equal to: (1) 

70 percent of the present value of the building’s qualified basis in the case of newly constructed 

or substantially rehabilitated housing that is not Federally subsidized (the “70-percent credit”); or 

(2) 30 percent of the present value of the building’s qualified basis in the case of newly 

constructed or substantially rehabilitated housing that is Federally subsidized and existing 

housing that is substantially rehabilitated (the “30-percent credit”). Where existing housing is 

substantially rehabilitated, the existing housing is eligible for the 30-percent credit and the 

qualified rehabilitation expenses (if not Federally subsidized) are eligible for the 70-percent 

credit. 

Calculation of the applicable percentage

The credit percentage for a low-income building is set for the earlier of: (1) the month the 

building is placed in service; or (2) at the election of the taxpayer, (a) the month the taxpayer and 

the housing credit agency enter into a binding agreement with respect to such building for a 

credit allocation, or (b) in the case of a tax-exempt bond-financed project for which no credit 

allocation is required, the month in which the tax-exempt bonds are issued. 

These credit percentages (used for the 70-percent credit and 30-percent credit) are 

adjusted monthly by the IRS on a discounted after-tax basis (assuming a 28-percent tax rate) 

based on the average of the Applicable Federal Rates for mid-term and long-term obligations for 

the month the building is placed in service. The discounting formula assumes that each credit is 

received on the last day of each year and that the present value is computed on the last day of the 

first year. In a project consisting of two or more buildings placed in service in different months, 

a separate credit percentage may apply to each building. 

Explanation of Provision

The provision provides a temporary applicable percentage of 9 percent for newly 

constructed non-Federally subsidized buildings placed in service after the date of enactment and 

before December 31, 2013. 
5 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

(b) Modification to the definition of a Federally subsidized building

Present Law

If any portion of the eligible basis of a building is Federally subsidized, then the building 

is ineligible for the 70-percent credit. A Federal subsidy is defined as: (1) any obligation the 

interest of which is tax exempt from tax under section 103; (2) a direct or indirect Federal loan if 

the interest rate is less than the applicable Federal rate; or (3) assistance provided under the 

HOME Investments Partnership Act or the Native American Housing Assistance and Self 

Determination Act of 1996 if certain requirements are not met. 

Explanation of Provision

The provision limits the definition of a Federal subsidy for these purposes to any 

obligation the interest on which is exempt from tax under section 103. Therefore, additional 

buildings may become eligible for the 70-percent credit. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

3. Modifications to definition of eligible basis (sec. 3003 of the bill and sec. 42 of the Code) 

(a) Modification to the enhanced credit for buildings in high-cost areas

Present Law

Generally, buildings located in two types of high-cost areas (i.e., qualified census tracts 

and difficult development areas) are eligible for an enhanced credit. Under the enhanced credit, 

the 70-percent and 30-percent credits are increased to a 91-percent and 39-percent credit, 

respectively. The mechanism for this increase is through an increase from 100 to 130 percent of 

the otherwise applicable eligible basis of a new building or the rehabilitation expenditures of an 

existing building. A further requirement for the enhanced credit is that the portions of each 

metropolitan statistical area or nonmetropolitan statistical area designated as difficult to develop 

areas cannot exceed an aggregate area having 20 percent of the population of such statistical 

area. 

Explanation of Provision

The provision adds a third type of high-cost area eligible for an enhanced credit. The 

third type is defined as any building designated by the State housing credit agency as requiring 

the enhanced credit in order for such building to be financially feasible. This new type of highcost area is not subject to the present-law limitation limiting high cost areas to 20 percent of the 

population of each metropolitan statistical area or nonmetropolitan statistical area. 
6 

It is expected that the State allocating agencies shall set standards for determining which 

areas shall be designated difficult development areas and which projects shall be allocated 

additional credits in such areas in the State allocating agency's allocation plan. It is also 

expected that the State allocating agency shall publicly express its reasons for such area 

designations and the basis for allocating additional credits to a project. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

(b) Modification to the substantial rehabilitation requirement

Present Law

Rehabilitation expenditures2 paid or incurred by a taxpayer with respect to a low-income 

building are treated as a separate building and may be eligible for the 70-percent credit if they 

satisfy the otherwise applicable credit rules.3 To qualify for the credit, the rehabilitation 

expenditures must equal the greater of an amount that is (1) at least 10 percent of the adjusted 

basis of the building being rehabbed; or (2) at least $3,000 per low-income unit in the building 

being rehabbed. 

At the election of the taxpayer, a special rule applies allowing the 30-percent credit to 

both existing buildings and rehabilitation expenditures if the second prong (i.e., at least $3,000 of 

rehabilitation expenditures per low-income unit) of the rehabilitation expenditures test is 

satisfied. This special rule applies only in the case where the taxpayer acquired the building and 

immediately prior to that acquisition the building was owned by or on behalf of a government 

unit. 

Explanation of Provision 

The provision increases the minimum expenditure requirements. Under the provision, 

the rehabilitation expenditures must equal the greater of an amount that is (1) at least 20 percent 

of the adjusted basis of the building being rehabbed; or (2) at least $6,000 per low-income unit in 

the building being rehabbed. The provision also indexes the $6,000 amount for inflation. The 

other present-law rules apply.4 

 2

 Rehabilitation expenditures are amounts chargeable to a capital account and incurred for 

property (or additions or improvements to property) of a character subject to the allowance for 

depreciation in connection with the rehabilitation of a building. Such term does not include the cost of 

acquiring the building (or any interest therein). Other rules apply. 

3

 The credit period for an existing building does not begin before the credit period for the 

rehabilitation expenditures. 

4

 A present-law rule reduces the $3,000 amount to $2,000 for any building substantially assisted, 

financed, or operated under Housing and Urban Development (“HUD”) section 8, section 221(d)(3), or 

section 236 programs, or under the USDA Rural Development section 515 program where an assignment 
7 

The provision retains the taxpayer election allowing the 30-percent credit to both existing 

building and the rehabilitation expenditures if the second prong (i.e., at least $6,000 of 

rehabilitation expenditures per low-income unit) of the rehabilitation expenditures test is 

satisfied. 

Effective Date

The provision is effective for buildings which receive credit allocations after the date of 

enactment and substantially tax-exempt bond financed buildings (which satisfy the requirements 

of section 42(h)(4) and therefore do not require a credit allocation) which receive a tax-exempt 

bond allocation after the date of enactment. 

(c) Community service facility eligibility for the credit

Present Law

In general, the qualified basis of a low-income building is limited to that portion of the 

building dedicated to qualified low-income use (either living space or certain common areas). 

However certain “community service facilities” used by non-tenants of the low-income building 

may be included in the qualified basis of the low-income building if certain requirements are 

satisfied. For this purpose, a community service facility: (1) means any facility to serve 

primarily individuals whose income is 60 percent or less of area median income; and (2) may not 

exceed 10 percent of the eligible basis of the qualified low-income housing credit project of 

which it is a part. 

Explanation of Provision 

The provision expands the size of the community service facility with respect to which 

the low-income housing credit may be claimed. Under the provision the size of the community 

service facility may not exceed the sum of: (1) 25 percent of so much of the eligible basis of the 

qualified low-income housing credit project of which it is a part as does not exceed $15,000,000; 

and (2) 10 percent of any excess over $15,000,000 of the eligible basis of the qualified lowincome housing credit project of which it is a part. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

 

of the mortgage secured by the property in the project to HUD or the USDA Rural Development 

otherwise would occur or when a claim against a Federal mortgage insurance fund would occur. A 

conforming change is made by the provision so that that the $2,000 amount will be increased to twothirds of the $6,000 amount as indexed. 
8 

(d) Clarification of the treatment of Federal grants

Present Law

The compliance period for any low-income credit building is the period of fifteen taxable 

years beginning with the taxable year in which the building is placed in service, or at the election 

of the taxpayer the succeeding taxable year. If during any year of the compliance period, a grant 

is made with respect to any building or the operation thereof and any portion of the grant is 

funded with Federal funds, the eligible basis of the building must be reduced by the portion of 

the grant that is Federally-funded. This basis reduction must be made for the taxable year in 

which the grant is made and all succeeding taxable years. 

Explanation of Provision

The provision clarifies the basis reduction rule to apply to Federally-funded grants 

received before the compliance period. It also provides that no basis reduction is required for 

Federally-funded grants to enable the property to be rented to low-income tenants received 

during the compliance period if those grants do not otherwise increase the taxpayer’s eligible 

basis in the building. 

 The provision also directs the modification of section 1.42-16(b) of the Treasury 

regulations to provide that none of the following shall be considered a grant made with respect to 

a building or its operation for purposes of section 42(d)(5)(A) of the Internal Revenue Code of 

1986: (1) rental assistance under section 521 of the Housing Act of 1949 (42 U.S.C. 1490a); (2) 

assistance under section 538(f)(5) of the Housing Act of 1949 (42 U.S.C. 1490p-2(f)(5)); (3) 

interest reduction payments under section 236 of the National Housing Act (12 U.S.C. 1715z-1); 

(4) rental assistance under section 202 of the Housing Act of 1959 (12 U.S.C. 1701q); (5) rental 

assistance under section 811 of the Cranston-Gonzalez National Affordable Housing Act (42 

U.S.C. 8013); (6) modernization, operating, and rental assistance pursuant to section 202 of the 

Native American Housing Assistance and Self-Determination Act of 1996 (25 U.S.C. 4132); (7) 

assistance under title IV of the Stewart B. McKinney Homeless Assistance Act (42 U.S.C. 11361 

et seq.); (8) tenant-based rental assistance under section 212 of the Cranston-Gonzalez National 

Affordable Housing Act (42 U.S.C. 12742); (9) assistance under the AIDS Housing Opportunity 

Act (42 U.S.C. 12901 et seq.); (10) per diem payments under section 2012 of title 38, United 

States Code; (11) rent supplements under section 101 of the Housing and Urban Development 

Act of 1965 (12 U.S.C. 1701s); (12) assistance under section 542 of the Housing Act of 1949 (42 

U.S.C. 1490r); and (13) any other ongoing payment used to enable the property to be rented to 

low-income tenants. Further, no basis reduction is required for loans (regardless of interest rate) 

made to owners of qualified low-income housing projects from the proceeds of Federally-funded 

grants. Nothing contained in this direction to modify the regulations is intended to create any 

inference with respect to the consideration of any program specified under subsection (a) of a 

grant made with respect to a building or its operation for purposes of section 42(d)(5)(A) of the 

Internal Revenue Code of 1986 as in effect on the day before such date of enactment. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 
9 

(e) Modification to the definition of related persons

Present Law

With certain exceptions,5 the eligible basis of an existing building is zero for low-income 

housing credit purposes unless: (1) the building was acquired by purchase; (2) there has been a 

period of at least 10 years between the acquisition by purchase and the later of the date the 

building was last placed in service or the date of the most recent nonqualified substantial 

improvement of the building (e.g., improvements equaling at least 25 percent of the adjusted 

basis of the building before such improvements); and (3) the building was not previously placedin-service by the taxpayer or a related person (sec. 42(d)(2)(B)). In order for a building to be 

acquired by purchase, it may not be acquired from a related party. 

The definition of related persons for purposes of these rules is the same as the definition 

used in sections 267(b) and 707(b)(1) (relating to the disallowance of losses) with one 

modification.6 Under the modification, in determining whether two persons are related, “10 

percent” is substituted for “50 percent” in determining the threshold level of ownership in certain 

partnerships and corporations. For example, under the low-income credit provision, two 

partnerships are related if the same persons own more than ten percent of the capital interests or 

profits interest in each partnership. 

Explanation of Provision

The provision repeals the ten-percent attribution rule used to determine whether parties 

are related for purposes of determining whether an existing building qualifies for the low-income 

housing credit. Under the provision, two persons are related for this purpose if they bear a 

relationship to each other specified in sections 267(b) or 707(b)(1). 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

 5

 The Internal Revenue Service may waive the 10-year requirement for any building substantially 

assisted, financed, or operated under Housing and Urban Development (“HUD”) section 8, section 

221(d)(3), or section 236 programs, or under the Farmers’ Home Administration section 515 program 

where an assignment of the mortgage secured by the property in the project to HUD or the Farmers’ 

Home Administration otherwise would occur or when a claim against a Federal mortgage insurance fund 

would occur. 

6

 In addition, certain businesses under common control are related persons for purposes of these 

rules. 
10 

(f) Exception to 10-year period rule related to prior placement in service of certain 

buildings

Present Law

In general the low income housing credit is not allowed with respect to existing buildings 

unless there was a period of at least ten years between the date of it's acquisition by the taxpayer 

and the later of the date the building was last placed-in-service or the date of the most recent 

nonqualified substantial improvement of the buildings (the "ten-year" rule"). 

 Under one exception from this general rule, the Secretary of the Treasury (after 

consultation with the appropriate Federal official) may waive the ten-year rule with respect to 

any Federally-assisted building if such waiver is necessary: (1) to avert an assignment of the 

mortgage secured by property in the project (of which the building is a part) to the Department of 

Housing and Urban Development or the Farmers Home Administration, or (2) to avert a claim 

against a Federal mortgage insurance fund (or such department or Administration) with respect 

to a mortgage which is so secured. For these purposes a Federally-assisted building is any 

building which is substantially assisted, financed, or operated under: (1) section 8 of the United 

States Housing Act of 1937; (2) section 221(d)(3) or 236 of the National Housing Act; or (3) 

section 515 of the Housing Act of 1949, as such Acts are in effect on the date of the enactment of 

the Tax Reform Act of 1986. 

Also, a waiver may be granted with respect to certain Federally-assisted building if; (1) 

the mortgage on such building is eligible for prepayment under subtitle B of the Emergency Low 

Income Housing Preservation Act of 1987 or under section 502(c) of the Housing Act of 1949 at 

any time within one year after the date of the application for such waiver; (2) the appropriate 

Federal official certifies to the Secretary of the Treasury that it is reasonable to expect that, if the 

waiver is not granted, such building will cease complying with its low-income occupancy 

requirements; and (3) the eligibility to prepay such mortgage without the approval of the 

appropriate Federal official is waived by all persons who are so eligible and such waiver is 

binding on all successors of such persons. For purposes of this rule a Federally-assisted building 

is a building which is substantially assisted, financed, or operated under: (1) section 221(d)(3) or 

236 of the National Housing Act; or (2) section 515 of the Housing Act of 1949, as such Acts 

are in effect on the date of the enactment of the Tax Reform Act of 1986). An appropriate 

Federal official means, for these purposes, the Secretary of Housing and Urban Development (in 

certain instances) and the Secretary of Agriculture (in certain instances). 

Finally, a waiver may be granted with respect to any building acquired from an insured 

depository institution in default (as defined in section 3 of the Federal Deposit Insurance Act) or 

from a receiver or conservator of such an institution 

Explanation of Provision

The provision replaces the first two exceptions to the ten-year rule under present law with 

one new exception. The new exception waives the ten-year rule in the case of any Federally- or 

State-assisted building. For these purposes, the definition of Federally-assisted building is 

expanded to include any building which is substantially assisted, financed, or operated under 
11 

section 8 of the United States Housing Act of 1937, section 221(d)(3), 221(d)(4) or 236 of the 

National Housing Act, section 515 of the Housing Act of 1949, or any other housing program 

administered by the Depart of Housing and Urban Development or the Rural Housing Service of 

the Department of Agriculture. The term State-assisted building means any building which is 

substantially assisted, financed, or operated under any State law similar in purposes to those of 

the Federal laws used in the definition of a Federally-assisted building. The present-law 

exception related to certain depository institutions in default is retained. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

4. Other simplification and reform of low-income housing tax incentives (sec. 3004 of the 

bill and sec. 42 of the Code) 

(a) Repeal prohibition of the credit for buildings receiving HUD moderate rehabilitation 

assistance

Present Law

Generally, the low-income housing credit is available to otherwise qualifying buildings 

which also receive direct assistance under HUD Section 8 programs. No credit is allowed to any 

building with respect to which moderate rehabilitation assistance is provided at any time during 

the compliance period, under section 8(e)(2) of the United States Housing Act of 1937 (other 

than assistance under the Stewart B. McKinney Homeless Assistance Act). 

Explanation of Provision

The provision eliminates the present-law prohibition against providing the low-income 

housing credit to buildings receiving moderate rehabilitation assistance under section 8(e)(2) of 

the United States Housing Act of 1937. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

(b) Carryover allocation rule

Present Law

In general, the allocation of the low-income housing credit must be made not later than 

the close of the calendar year in which the building is placed in service. One exception to this 

rule is a carryover allocation. In a carryover allocation, an allocation may be made to a building 

that has not yet been placed in service, provided that: (1) more than 10 percent of the taxpayer’s 

reasonably expected basis in the project (as of the close of the second calendar year following the 

calendar year of the allocation) is incurred as of the later of six months after the allocation is 

made or the end of the calendar year in which the allocation is made; and (2) the building is 
12 

placed in service not later than the close of the second calendar year following the calendar year 

of the allocation. 

Explanation of Provision

The provision modifies the first prong of the carryover allocation rule. Under this 

modification such an allocation will satisfy the first prong provided that more than 10 percent of 

the taxpayer’s reasonably expected basis in the project (as of the close of the second calendar 

year following the calendar year of the allocation) is incurred as of 12 months after the allocation 

is made. The second prong of the carryover allocation rules is unchanged. 

Effective Date

The provision is effective for buildings placed in service after the date of enactment. 

(c) Repeal of bond posting requirement

Present Law

The compliance period for any building is the period beginning on the first day of the 

first taxable year of the credit period of such building and ending 15 years from such date. 

The penalty for any building subject to the 15-year compliance period failing to remain 

part of a qualified low-income project (due, for example, to noncompliance with the minimum 

set aside requirement, or the gross rent requirement, or other requirements with respect to the 

units comprising the set aside) is recapture of the accelerated portion of the credit, with interest, 

for all prior years. 

Generally, any change in ownership by a taxpayer of a building subject to the compliance 

period is also a recapture event. An exception is provided if the seller satisfies certain bond 

posting requirements (in an amount and manner prescribed by Treasury), and if it can reasonably 

be expected that such building will continue to be operated as a qualified low-income building 

for the remainder of the compliance period. 

Explanation of Provision

The provision eliminates the bond posting requirement. In its place the provision extends 

the otherwise applicable statute of limitation until three years after the Secretary of the Treasury 

is notified of noncompliance with the low-income housing credit rules. 

Also, at the election of the taxpayer, the provision applies with respect to dispositions of 

interests in a building on or before the date of enactment if it is reasonably expected that such 

building will continue to be a qualified low-income building for the remaining compliance 

period. 
13 

Effective Date

The provision applies with respect to dispositions of interests in buildings after the date 

of enactment. 

(d) Additions of energy efficiency and historic nature criteria to housing credit agency 

allocation plan criteria

Present Law

Each State must develop a plan for allocating credits, and such plan must include certain 

allocation criteria including: (1) project location; (2) housing needs characteristics; (3) project 

characteristics (including whether the project uses existing housing as part of a community 

revitalization plan; (4) sponsor characteristics; (5) tenant populations with special needs; 

(6) tenant populations of individuals with children; and (7) projects intended for eventual tenant 

ownership. 

The State allocation plan must also give preference to housing projects: (1) that serve the 

lowest-income tenants; (2) that are obligated to serve qualified tenants for the longest periods; 

and (3) that are located in qualified census tracts and the development of which contributes to a 

concerted community revitalization plan. For this purpose, a qualified census tract is defined as 

a census tract: (1) designated by the Secretary of HUD; and (2) for the most recent year for 

which census data is available for such tract, either 50 percent or more of the households have a 

income that is less than 60 percent of the area median income for that year or which has a 

poverty rate of at least 25 percent. 

Present law also requires that housing credit agencies perform a comprehensive market 

study of the housing needs of the low-income individuals in the area to be served by the project 

and a written explanation, available to the general public, for any allocation not made in 

accordance with the established priorities and selection criteria of the housing credit agency. It 

also requires that the housing credit agency conduct site visits to monitor for compliance with 

habitability standards. 

Explanation of Provision

The provision adds two additional criteria which States must use in its allocation of 

credits among potential low-income housing projects. The additional criteria are: (1) the energy 

efficiency of the project; (2) the historic nature of the project (e.g., encouraging rehabilitation of 

certified historic structures (sec. 47(c)(3))). 

Effective Date

The provision is effective for allocations made after December 31, 2008. 
14 

(e) Treatment of individuals who previously received foster care assistance

Present Law

In general, student housing does not qualify for the low-income housing credit. Two 

exceptions are provided from this general rule.7

 There two exceptions are units occupied by an 

individual: (1) who is a student and receiving assistance under title IV of the Social Security Act 

(Temporary Assistance for Needy Families); or (2) enrolled in a job training program receiving 

assistance under the Job Training Partnership Act or under other similar Federal, State, or local 

laws. 

Explanation of Provision

The provision adds a third exception to the general rule that student housing is not 

eligible for the low-income housing credit. This new exception applies in the case of a student 

who was previously under the care and placement responsibility of a foster care program (under 

part B or E of title IV of the Social Security Act). 

Effective Date

The provision is effective for determinations made after the date of enactment. 

(f) Measurement of area median gross income for certain projects located in certain 

nonmetropolitan areas

Present Law

In order to be eligible for the low-income housing credit, a qualified low-income building 

must be part of a qualified low-income housing project. In general, a qualified low-income 

housing project is defined as a project which satisfies one of two tests at the election of the 

taxpayer. The first test is met if 20 percent or more of the residential units in the project are both 

rent-restricted and occupied by individuals whose income is 50 percent or less of area median 

gross income (the “20-50 test”). The second test is met if 40 percent or more of the residential 

units in such project are both rent-restricted and occupied by individuals whose income is 60 

percent or less of area median gross income (the “40-60 test”). 

In the case of property placed in service during 2006, 2007, and 2008 in a 

nonmetropolitan area within the Gulf Opportunity Zone, the income targeting rules of the lowincome housing credit are applied by replacing the area median gross income standard with a 

national nonmetropolitan median gross income standard. These new income targeting rules 

apply to all such buildings in the Gulf Opportunity Zone regardless of whether the building 

receives its credit allocation under the otherwise applicable low-income housing credit cap or the 

additional credit cap (described above). The income targeting rules are not changed for 

buildings in metropolitan areas in the Gulf Opportunity Zone. 

 7

 See also the discussion of the full-time student rule in item I.A.7., below. 
15 

Explanation of Provision

The measurement of area median gross income applied for residential rental property 

located in certain rural areas is modified in the case of projects subject to the low-income 

housing credit volume limits. In the case of such properties located in rural areas (as defined in 

section 520 of the Housing Act of 1949), the income targeting rules of the low-income housing 

credit are applied by reference to the greater of the otherwise applicable area median gross 

income standard, or the national nonmetropolitan median gross income. This new income 

targeting rule applies to all such buildings if the building receives a low-income housing credit 

allocation under the otherwise applicable low-income housing credit volume limit. It does not 

apply in the case of buildings which do not require a low-income housing credit allocation 

because they are substantially bond-financed. The area median gross income rules are not 

changed for buildings in metropolitan areas. 

Effective Date

The provision is effective for determinations after the date of enactment. 

(g) Clarification of general public use rule

Present Law

 In order to be eligible for the low-income housing credit, the residential units in a 

qualified low-income housing project must be available for use by the general public. A project 

is available for general public use if: (1) the project complies with housing non-discrimination 

policies including those set forth in the Fair Housing Act (42. U.S.C. 3601), and (2) the project 

does not restrict occupancy based on membership in a social organization or employment by 

specific employers.8

 In addition, any residential unit that is part of a hospital, nursing home, 

sanitarium, lifecare facility, trailer park, or intermediate care facility for the mentally or 

physically handicapped is not available for use by the general public. 

Explanation of Provision

The provision clarifies that a project which otherwise meets the general public use 

requirements above shall not fail to meet the general public use requirement solely because of 

occupancy restrictions or preferences that favor tenants: (1) with special needs; or (2) who are 

members of specified group under a Federal program or State program or policy that supports 

housing for such a specified group; or (3) who are involved in artistic and literary activities. 

Effective Date

The provision applies to buildings placed in service before, on, or after the date of 

enactment. 

 8

 See Treas. Reg. 1.42-9. 
16 

(h) GAO study

Present Law

There are no current GAO studies planned of the low-income credit. 

Explanation of Provision

The Comptroller General of the United States is directed to analyze the changes to the 

low-income credit made by this Act. The report shall be submitted to Congress not later than 

December 31, 2012. 

Effective Date

The provision is effective on the date of enactment. 

5. Treatment of Basic Housing Allowances for purposes of income eligibility rules 

(sec. 3005 of the bill and sec. 42 of the Code) 

Present Law

In order to be eligible for the low-income housing credit, a qualified low-income building 

must be part of a qualified low-income housing project. In general, a qualified low-income 

housing project is defined as a project that satisfies one of two tests at the election of the 

taxpayer. The first test is met if 20 percent or more of the residential units in the project are both 

rent-restricted, and occupied by individuals whose income is 50 percent or less of area median 

gross income (the “20-50 test”). The second test is met if 40 percent or more of the residential 

units in such project are both rent-restricted, and occupied by individuals whose income is 60 

percent or less of area median gross income (the “40-60 test”). These income figures are 

adjusted for family size. 

The military provides the basic housing allowance. The recipients of the military basic 

housing allowance must include these amounts for purposes of low-income credit eligibility. 

Explanation of Provision

In general

Under the provision the basic housing allowance (i.e., payments under 37 U.S.C. 

sec. 403) is not included in income for the low-income credit income eligibility rule. The 

provision is limited in application to qualified buildings. A qualified building is defined as any 

building located: 

1. any county which contains a qualified military installation to which the number of 

members of the Armed Forces assigned to units based out of such qualified military 

installation has increased by 20 percent or more as of June 1, 2008 over the personnel 

level on December 31, 2005; and 
17 

2. any counties adjacent to county described in (1), above. 

For these purposes, a qualified military installation is any military installation or facility 

with at least 1000 members of the Armed Forces assigned to it. 

Applicability

The provision applies to income determinations: (1) made after the date of enactment and 

before January 1, 2012 in the case of qualified buildings which received credit allocations on or 

before the date of enactment or qualified buildings placed in service on or before the date of 

enactment to the extent a credit allocation was not required with respect to such building by 

reason of 42(h)(4) (i.e. such qualified building was at least 50% tax bond financed with bonds 

subject to the private activity bonds volume cap) but only with respect to bonds issued before 

such date of enactment; and (2) made after the date of enactment in the case of qualified 

buildings which received credit allocations after the date of enactment and before January 1, 

2012 or qualified buildings placed in service after the date of enactment and before January 1, 

2012, to the extent a credit allocation was not required with respect to such qualified building by 

reason of 42(h)(4) (i.e. such qualified building was at least 50% tax bond financed with bonds 

subject to the private activity bond volume cap) but only with respect to bonds issued after such 

date of enactment and before January 1, 2012. 

Effective Date

The proposal is effective for income determinations after the date of enactment. 

6. Refunding treatment for certain multi-family housing bonds (sec. 3007 of the bill and 

sec. 146 of the Code) 

Present Law

In general

Private activity bonds are bonds that nominally are issued by State or local governments, 

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

which is derived from funds of such private person. The exclusion from income for interest paid 

on State and local bonds does not apply to private activity bonds, unless the bonds are issued for 

certain permitted purposes (“qualified private activity bonds”). The definition of a qualified 

private activity bond includes, but is not limited to, qualified mortgage bonds, qualified veterans’ 

mortgage bonds, and bonds for qualified residential rental projects. 

Qualified residential rental projects

Residential rental property may be financed with qualified private activity bonds if the 

financed project is a “qualified residential rental project.” A project is a qualified residential 

rental project if 20 percent or more of the residential units in such project are occupied by 

individuals whose income is 50 percent or less of area median gross income (the “20-50 test”). 

Alternatively, a project is a qualified residential rental project if 40 percent or more of the 

residential units in such project are occupied by individuals whose income is 60 percent or less 
18 

of area median gross income (the “40-60 test”). The issuer must elect to apply either the 20-50 

test or the 40-60 test. Operators of qualified residential rental projects must annually certify that 

such project meets the requirements for qualification, including meeting the 20-50 test or the 40-

60 test. 

As with most qualified private activity bonds, bonds for qualified residential rental 

projects are subject to annual State volume limitations (the “State volume cap”). For calendar 

year 2008, the State volume cap, which is indexed for inflation, equals $85 per resident of the 

State, or $262.09 million, if greater. 

Bonds issued to finance qualified residential rental projects are subject to a term to 

maturity rule which limits the period of time such bonds may remain outstanding. Generally, 

this rule provides that the average maturity of a qualified private activity bond cannot exceed 120 

percent of the economic life of the property being financed.9

Explanation of Provision

Under the provision, if within six months after receipt of a repayment of a conduit loan 

used to finance a qualified residential rental project, such repayment is used to finance a second 

qualified residential rental project, any bond issued to refinance the first issue of bonds (i.e., the 

bond financing the original conduit loan) shall be treated as a refunding issue. A loan to a person 

other than the governmental entity from the proceeds of a bond issue to carry out the defined 

qualified purpose of the issue is a conduit loan. Thus, under the provision, the refinancing bond 

is treated as a refunding notwithstanding a change in obligors under the first and second conduit 

loans. The provision only applies to the first refunding of the refunded bond and only if such 

refunding bond is issued within four years of the date of issue of the refunded bond. In addition, 

the final maturity date for the refunding bonds cannot be later than 34 years after the date of 

issuance of the refunded bond. 

Effective Date

The provision applies to repayments of loans received after the date of enactment. 

7. Coordination of certain rules applicable to the low-income housing credit and qualified 

residential rental project exempt facility bonds (sec. 3008 of the bill and sec. 142 of the 

Code) 

(a) Next available unit rule

Present Law

In order to be eligible for the low-income housing credit, each of the residential units 

with respect to which the credit is claimed must be: (1) occupied by low-income tenants; and (2) 

rent-restricted. If the incomes of any such tenants rise above certain levels, then the credit with 

 9

 Sec. 147(b). 
19 

respect to that unit is denied unless the next available unit in the low-income building (of a size 

comparable or smaller than such unit) is rented to a new tenant who satisfies the income and 

rent-restriction requirements (the “next-available-unit rule”).10

Subject to certain requirements, tax-exempt bonds may be issued to finance qualified 

residential rental projects. The tax-exempt bond rules for qualified residential projects have 

similar tenant income limitations as the low-income credit, but apply the next available unit rule 

on a project basis rather than a building-by-building basis.11 Therefore, to avoid noncompliance 

when the income of a tenant rises above certain levels, the next available unit (of a size 

comparable or smaller than such unit) in the entire project (rather than just the same building) 

must be rented to a new tenant who satisfies the income and rent-restriction requirements. 

Explanation of Provision

In the case of a low-income building which is tax-exempt bond financed and eligible for 

the low-income housing credit, the provision provides that both the bond and credit restrictions 

will be satisfied if the next available unit in the building is rented to a new tenant who satisfies 

the income and rent-restriction requirements. It therefore conforms the tax-exempt bond rule to 

the low-income housing credit rule. 

Effective Date

The provision applies to determinations of the status of qualified residential rental 

projects for periods beginning after the date of enactment with respect to bonds issued before, 

on, or after such date. 

(b) Students 

Present Law

In general

The low-income housing credit is not available for any residential unit unless it is 

available for use by the general public. For these purposes, a residential unit generally is 

available for use by the general public if the unit is rented in a manner consistent with housing 

policy governing nondiscrimination as evidenced by the rules and regulations of the Department 

of Housing and Urban Development (“HUD”). Notwithstanding compliance with the HUD rules 

and regulations, a residential rental unit is not available for use by the general public if such unit 

is: (1) provided only for a member of a social organization; or (2) provided by an employer for 

its employees. Other rules may apply. 

 10 Sec. 42(g)(2)(D)(ii). 

11 Sec. 142(d)(3)(B). 
20 

Rules for full-time students

For purposes of the low-income housing credit, no credit is allowed with respect to a 

otherwise eligible unit occupied entirely by full-time students: (1) unless those students are 

comprised entirely of single parents and their children; or (2) are married and file a joint return. . 

Further, the single parents may not be dependents of another individual and the children may not 

be dependents of another individual other than of their parents. For purposes of the tax-exempt 

bond rules, a slightly different full-time student rule applies. The tax-exempt bond rule provides 

that a residential unit will not satisfy the income tests if all the occupants are students (as defined 

in section 152(f)(2)) and are not entitled to file a joint tax return. 

Explanation of Provision

The provision conforms the tax-exempt bond rule with respect to students to the lowincome housing credit rule. 

Effective Date

The full-time student provision applies to determinations of the status of qualified 

residential rental projects for periods beginning after the date of enactment with respect to bonds 

issued before, on, or after such date. 

(c) Single-room occupancy units

Present Law

Unlike the requirements for projects financed with tax-exempt bonds, certain single-room 

occupancy housing used on a nontransient basis may qualify for the low-income credit, even 

though such housing may provide eating, cooking, and sanitation facilities on a shared basis. An 

example of housing that may qualify for the credit is a residential hotel used on a nontransient 

basis that is available to all members of the public. 

Among other requirements, qualified residential rental projects financed with tax-exempt 

bonds generally cannot be used on a transient basis. Treasury regulations clarify that a 

residential unit will not be treated as used on a transient basis if the unit contains complete 

facilities for living, including living, sleeping, eating, cooking, and sanitation.12

Explanation of Provision

The provision conforms the tax-exempt bond rule to the low-income housing credit rule. 

 12 Treas. Reg. sec. 1.103-8(b)(10)(ii). 
21 

Effective Date

The provision applies to determinations of the status of qualified residential rental 

projects for periods beginning after the date of enactment with respect to bonds issued before, 

on, or after such date. 

8. Hold harmless for reductions in area median gross income (sec. 3009 of the bill and 

sec. 42 of the Code) 

Present Law

Tax rules

Tax-exempt bonds

Residential rental property may be financed with exempt facility bonds if the financed 

project is a “qualified residential rental project.” A project is a qualified residential rental project 

if 20 percent or more of the residential units in such project are occupied by individuals whose 

income is 50 percent or less of area median gross income (the “20-50 test”). Alternatively, a 

project is a qualified residential rental project if 40 percent or more of the residential units in 

such project are occupied by individuals whose income is 60 percent or less of area median gross 

income (the “40-60 test”). The issuer must elect to apply either the 20-50 test or the 40-60 test 

(sec. 142). 

Low-income housing tax credit

In order to be eligible for the low-income housing credit, a qualified low-income building 

must be part of a qualified low-income housing project. In general, a qualified low-income 

housing project is defined as a project that satisfies one of two tests at the election of the 

taxpayer (sec. 42(g)). The first test is met if 20 percent or more of the residential units in the 

project are both rent-restricted, and occupied by individuals whose income is 50 percent or less 

of area median gross income (the “20-50 test”). The second test is met if 40 percent or more of 

the residential units in such project are both rent-restricted, and occupied by individuals whose 

income is 60 percent or less of area median gross income (the “40-60 test”). These income 

figures are adjusted for family size. 

Determination of income and area median gross income

The income of individuals and area median gross income are determined by the Secretary 

of the Treasury in a manner consistent with determinations of lower-income families and area 

median gross income under section 8 of the Housing Act of 1937 (sec. 142(d)). These 

determinations under section 8 are made by HUD. These determinations also include 

adjustments for family size. 

Therefore such determinations (individual and area median gross income) are applicable 

for purposes of tax-exempt bonds and the low-income housing credit. 
22 

HUD hold harmless policy

Generally HUD releases its calculation of area median gross income for a calendar year 

early in that year. Historically HUD has used the most recent decennial census data and updated 

it with other data on income, employment and earnings. 

Recently HUD modified its methodology to include additional data in its calculation of 

area median gross income. In some instances this change in methodology resulted in 

significantly lower numbers for area median gross income in some areas. In response to this 

result, HUD provided that such areas are not treated as having a lower area median gross income 

for purposes of HUD housing programs. 

Explanation of Provision

In general

The provision makes two modifications to the determination of area median gross income 

for purposes of tax-exempt bonds and the low-income housing credit. 

Determination of income and area median gross income

 The provision provides that any determination of area median gross income with respect 

to a project may not be less than the determination of area median gross income with respect to 

that project for the preceding calendar year. This modification applies to all projects and is not 

limited to projects benefiting from the HUD hold harmless policy. 

HUD hold harmless policy 

In the case of a HUD hold harmless impacted project, the determination of area median 

gross income for the project is the greater of (i) the amount determined without regard to the 

special rule for HUD hold harmless impacted projects or (ii) the sum of the area median gross 

income determined under the HUD hold harmless policy with respect to the project for 2008 plus 

any increase in area median gross income after 2008. 

Effective Date

The provision applies to determinations of area median gross income for calendar years 

after 2008. 
23 

9. Exception from the annual recertification requirement for projects which are entirely 

low-income use (sec. 3010 of the bill and sec. 142 of the Code) 

Present Law

Tax rules

In general

Tax-exempt bonds

Residential rental property may be financed with exempt facility bonds if the financed 

project is a “qualified residential rental project.” A project is a qualified residential rental project 

if 20 percent or more of the residential units in such project are occupied by individuals whose 

income is 50 percent or less of area median gross income (the “20-50 test”). Alternatively, a 

project is a qualified residential rental project if 40 percent or more of the residential units in 

such project are occupied by individuals whose income is 60 percent or less of area median gross 

income (the “40-60 test”). The issuer must elect to apply either the 20-50 test or the 40-60 test 

(sec. 142). 

Low-income housing tax credits

In order to be eligible for the low-income housing credit, a qualified low-income building 

must be part of a qualified low-income housing project. In general, a qualified low-income 

housing project is defined as a project that satisfies one of two tests at the election of the 

taxpayer (sec. 42(g)). The first test is met if 20 percent or more of the residential units in the 

project are both rent-restricted, and occupied by individuals whose income is 50 percent or less 

of area median gross income (the “20-50 test”). The second test is met if 40 percent or more of 

the residential units in such project are both rent-restricted, and occupied by individuals whose 

income is 60 percent or less of area median gross income (the “40-60 test”). These income 

figures are adjusted for family size. 

Determination of income and area median gross income

The income of individuals and area median gross income are determined by the Secretary 

of the Treasury in a manner consistent with determinations of lower-income families and area 

median gross income under section 8 of the Housing Act of 1937 (sec. 142(d)). These 

determinations also include adjustments for family size. 

Certification 

The Code provides that the operator of any qualified residential rental project must 

submit to the Secretary of the Treasury (at such time and in such manner as the Secretary 

prescribes) an annual certification that the project continues to satisfy the requirements of a 

qualified residential rental project. Any failure to comply with the annual certification to the 

Secretary of the Treasury will subject the operator to penalties but will not affect the tax-exempt 

status of the underlying bonds (sec. 142(d)(7)). 
24 

Similar rules apply for the low-income housing credit regarding tenant incomes (sec. 

42(g)(4)). IRS Revenue Procedure 1994-64 allows a taxpayer to request a waiver of this 

certification under certain circumstances with the consent of the State agency responsible for 

monitoring the low-income credit project. 

Treatment of tenants whose incomes rise above the income limits

Generally a low-income unit will continue to be treated as such even when the tenant’s 

income rises above the income limits provided that the next available unit (of a size comparable 

to or smaller than such unit) in the project is occupied by a new resident who satisfies the income 

limits. 

HUD rules

A family’s eligibility for various types of HUD housing assistance is based on its income 

and family composition. The HUD Handbook 4350.3 contains the certification and annual 

recertification rules to be followed by project operators. Under the HUD program requirements 

tenants have the responsibility to provide timely information to the project operators. Operators 

have the responsibility to review and verify the tenant information and to make changes to 

assistance payment and tenant rent to satisfy program requirements. 

Explanation of Provision

The provision waives the annual recertification requirements under the low-income credit 

(sec. 42) and tax-exempt bonds (sec. 142) for any project as long as no residential unit in the 

project is occupied by tenants who fail to satisfy the otherwise applicable income limits. The 

provision does not modify the HUD rules; therefore some projects must continue annual 

certification notwithstanding this provision. 

Effective Date

The provision is effective for years ending after the date of enactment. 
25 

B. Single Family Housing 

1. First-time homebuyer credit (sec. 3011 of the bill and sec. 36 of the Code) 

Present Law

Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for 

owner-occupied residences. The subsidy provided for qualified mortgage bonds allows issuers 

to finance mortgages for homebuyers at reduced interest rates. The Code imposes several 

limitations on qualified mortgage bonds, including a “first-time homebuyer” requirement. The 

first-time homebuyer requirement provides that qualified mortgage bonds generally cannot be 

used to finance a mortgage for a homebuyer who had an ownership interest in a principal 

residence in the three years preceding the execution of the mortgage. In addition, bond proceeds 

generally only can be used for new mortgages, i.e., proceeds cannot be used to acquire or 

refinance existing mortgages. 

In addition, prior to 2008, first-time homebuyers of a principal residence in the District of 

Columbia were eligible for a nonrefundable tax credit of up to $5,000 of the amount of the 

purchase price. The $5,000 maximum credit applies both to individuals and married couples 

filing a joint return. A married individual filing separately can claim a maximum credit of 

$2,500. The instructions to IRS Form 8859 (District of Columbia First-Time Homebuyer Credit) 

state that if “two or more unmarried individuals buy a main home, they can allocate the credit 

among the individual owners in any manner they choose.” The credit phases out for individual 

taxpayers with modified adjusted gross income between $70,000 and $90,000 ($110,000-

$130,000 for joint filers). For purposes of eligibility, “first-time homebuyer” means any 

individual if such individual did not have a present ownership interest in a principal residence in 

the District of Columbia in the one-year period ending on the date of the purchase of the 

residence to which the credit applies. The credit expired for residences purchased after 

December 31, 2007.13

Explanation of Provision

Under the proposal, a taxpayer who is a first-time homebuyer is allowed a refundable tax 

credit equal to the lesser of $7,500 ($3,750 for a married individual filing separately) or 10 

percent of the purchase price of a principal residence. The credit is allowed for the tax year in 

which the taxpayer purchases the home. 

The credit phases out for individual taxpayers with modified adjusted gross income 

between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. 

 13 Sec. 1400C. The credit was enacted as part of the Taxpayer Relief Act of 1997 and was 

originally scheduled to expire on December 31, 2000. It has been extended several times, the last 

extension through December 31, 2007. 
26 

A taxpayer is considered a first-time homebuyer if such individual had no ownership 

interest in a principal residence in the United States during the 3-year period prior to the 

purchase of the home to which the credit applies. 

No credit is allowed if the D.C. homebuyer credit is allowable for the taxable year the 

residence is purchased or a prior taxable year. A taxpayer is not permitted to claim the credit if 

the taxpayer’s financing is from tax-exempt mortgage revenue bonds, if the taxpayer is a 

nonresident alien, or if the taxpayer disposes of the residence (or it ceases to be a principal 

residence) before the close of a taxable year for which a credit otherwise would be allowable. 

The credit is recaptured ratably over fifteen years with no interest charge beginning in the 

second taxable year after the taxable year in which the home is purchased. For example, if the 

taxpayer purchases a home in 2008, the credit is allowed on the 2008 tax return, and repayments 

commence with the 2010 tax return. If the taxpayer sells the home (or the home ceases to be 

used as the principal residence of the taxpayer or the taxpayer's spouse) prior to complete 

repayment of the credit, any remaining credit repayment amount is due on the tax return for the 

year in which the home is sold (or ceases to be used as the principal residence). However, the 

credit repayment amount may not exceed the amount of gain from the sale of the residence to an 

unrelated person. For this purpose, gain is determined by reducing the basis of the residence by 

the amount of the credit to the extent not previously recaptured. No amount is recaptured after 

the death of a taxpayer. In the case of an involuntary conversion of the home, recapture is not 

accelerated if a new principal residence is acquired within a two year period. In the case of a 

transfer of the residence to a spouse or to a former spouse incident to divorce, the transferee 

spouse (and not the transferor spouse) will be responsible for any future recapture. 

An election is provided to treat a home purchased in the eligible period in 2009 as if 

purchased on December 31, 2008 for purposes of claiming the credit on the 2008 tax return and 

for establishing the beginning of the recapture period. Taxpayers may amend their returns for 

this purpose. 

Effective Date

The provision is effective for qualifying home purchases on or after April 9, 2008 and 

before July 1, 2009 (without regard to whether or not there was a binding contract to purchase 

prior to April 9, 2008). 

2. Additional standard deduction for state and local real property taxes (sec. 3012 of the 

bill and sec. 63 of the Code) 

Present Law

An individual taxpayer’s taxable income is computed by reducing adjusted gross income 

either by a standard deduction or, if the taxpayer elects, by the taxpayer’s itemized deductions. 

Unless an individual taxpayer elects, no itemized deduction is allowed for the taxable year. The 
27 

deduction for certain taxes, including income taxes, real property taxes, and personal property 

taxes, generally is an itemized deduction.14 

Explanation of Provision

The provision increases an individual taxpayer’s standard deduction for a taxable year 

beginning in 2008 by the lesser of (1) the amount allowable15 to the taxpayer as a deduction for 

State and local taxes described in section 164(a)(1) (relating to real property taxes), or (2) $500 

($1,000 in the case of a married individual filing jointly). The increased standard deduction is 

determined by taking into account real estate taxes for which a deduction is allowable to the 

taxpayer under section 164 and, in the case of a tenant-stockholder in a cooperative housing 

corporation, real estate taxes for which a deduction is allowable to the taxpayer under section 

216. No taxes deductible in computing adjusted gross income are taken into account in 

computing the increased standard deduction. 

Effective Date

The provision applies to taxable years beginning in 2008. 

 14 If the deduction for State and local taxes is attributable to business or rental income, the 

deduction is allowed in computing adjusted gross income and therefore is not an itemized deduction. 

15 In the case of an individual taxpayer who does not elect to itemize deductions, although no 

itemized deductions are allowed to the taxpayer, itemized deductions are nevertheless treated as 

“allowable.” See section 63(e). 
28 

C. General Provisions 

1. Modifications to qualified private activity bond rules for housing (sec. 3021 of the bill 

and secs. 142, 143, and 146 of the Code) 

Present Law

In general

Private activity bonds are bonds that nominally are issued by State or local governments, 

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

which is derived from funds of such private person. The exclusion from income for interest paid 

on State and local bonds does not apply to private activity bonds, unless the bonds are issued for 

certain permitted purposes (“qualified private activity bonds”). The definition of a qualified 

private activity bond includes, but is not limited to, qualified mortgage bonds, qualified veterans’ 

mortgage bonds, and bonds for qualified residential rental projects. 

Qualified private activity bond rules for housing

Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for 

owner-occupied residences. The Code imposes several limitations on qualified mortgage bonds, 

including income limitations for homebuyers, purchase price limitations for the home financed 

with bond proceeds, and a “first-time homebuyer” requirement. The income limitations are 

satisfied if all financing provided by an issue is provided for mortgagors whose family income 

does not exceed 115 percent of the median family income for the metropolitan area or State, 

whichever is greater, in which the financed residences are located. The purchase price 

limitations provide that a residence financed with qualified mortgage bonds may not have a 

purchase price in excess of 90 percent of the average area purchase price for that residence. The 

first-time homebuyer requirement provides that qualified mortgage bonds generally cannot be 

used to finance a mortgage for a homebuyer who had an ownership interest in a principal 

residence in the three years preceding the execution of the mortgage. In addition, bond proceeds 

generally only can be used for new mortgages, i.e., proceeds cannot be used to acquire or 

refinance existing mortgages. Under present law, the proceeds of qualified mortgage bonds 

generally must be used to finance mortgages within 42 months from the date of issuance of the 

bonds. 

Residential rental property may be financed with qualified private activity bonds if the 

financed project is a “qualified residential rental project.” A project is a qualified residential 

rental project if 20 percent or more of the residential units in such project are occupied by 

individuals whose income is 50 percent or less of area median gross income (the “20-50 test”). 

Alternatively, a project is a qualified residential rental project if 40 percent or more of the 

residential units in such project are occupied by individuals whose income is 60 percent or less 

of area median gross income (the “40-60 test”). 

As with most qualified private activity bonds, qualified mortgage bonds and bonds for 

qualified residential rental projects are subject to annual State volume limitations (the “State 

volume cap”). For calendar year 2008, the State volume cap, which is indexed for inflation, 

equals $85 per resident of the State, or $262.09 million, if greater. The interest income from 
29 

qualified mortgage bonds and bonds for qualified residential rental projects is a preference item 

for purposes of calculating the alternative minimum tax (“AMT”). 

Explanation of Provision

Temporary volume cap increase

The provision authorizes an additional $11 billion of volume cap for 2008 for the purpose 

of issuing qualified mortgage bonds or private activity bonds for qualified residential rental 

projects. The additional volume cap is allocated to each State in the same proportion as the total 

State volume is allocated to each of the States. Qualified mortgage bonds issued with respect to 

the additional volume cap may be used to finance either mortgages permitted under present law 

(e.g., new mortgages) or qualified subprime loans as defined under the bill. However, all 

proceeds of qualified mortgage bonds issued with respect to the additional volume cap must be 

used within 12 months of the date of issuance of such bonds. Additional volume cap that 

remains unused at the end of 2008 may be carried forward to 2009 and 2010, but solely for the 

purpose of issuing qualified mortgage bonds or private activity bonds for qualified residential 

rental projects. 

Qualified mortgage bonds for certain refinancings

The provision creates an exception to the new mortgage requirement for qualified 

mortgage bonds by authorizing the use of such bonds to refinance a qualified subprime loan. 

The provision defines a qualified subprime loan as an adjustable rate residential mortgage loan 

originated after December 31, 2001, and before January 1, 2008, that the issuer determines 

would be reasonably likely to cause financial hardship to the borrower if not refinanced. Under 

the provision, proceeds of qualified mortgage bonds used to refinance qualified subprime loans 

must be so used within 12 months from the date of issuance of the bond. In addition, the 

provision also provides that qualified subprime loans cannot be refinanced by bonds issued after 

December 31, 2010. 

Effective Date

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

2. Alternative minimum tax treatment of interest on certain bonds, the low-income housing 

credit, and the rehabilitation credit (sec. 3022 of the bill and secs. 38, 56 and 57 of the 

Code) 

Present Law

In general

Present law imposes an alternative minimum tax (“AMT”) on individuals and 

corporations. AMT is the amount by which the tentative minimum tax exceeds the regular 

income tax. The tentative minimum tax is computed based upon a taxpayer’s alternative 

minimum taxable income (“AMTI”). AMTI is the taxpayer’s taxable income modified to take 

into account certain preferences and adjustments. 
30 

Tax-exempt bonds

One of the preference items is tax-exempt interest on certain tax-exempt bonds issued for 

private activities (sec. 57(a)(5)). Also, in the case of a corporation, an adjustment based on 

current earnings is determined, in part, by taking into account 75 percent of items, including taxexempt interest, that are excluded from taxable income but included in the corporation’s earnings 

and profits (sec. 56(g)(4)(B)). 

Low-income housing and rehabilitation credits

Business tax credits generally may not exceed the excess of the taxpayer’s income tax 

liability over the tentative minimum tax (or, if greater, 25 percent of the regular tax liability in 

excess of $25,000). Thus, business tax credits generally cannot offset the alternative minimum 

tax liability.16

Credits in excess of the limitation may be carried back one year and carried forward for 

up to 20 years. 

Explanation of Provision

Tax-exempt bonds

The bill provides that tax-exempt interest on (i) exempt facility bonds issued as part of an 

issue 95 percent or more of the net proceeds of which are used to provide qualified residential 

rental projects (as defined in section 142(d)), (ii) qualified mortgage bonds (as defined in section 

143(a)), and (iii) qualified veterans’ mortgage bonds (as defined in section 143(b)) is not an item 

of tax preference for purposes of the alternative minimum tax. Also, this interest is not included 

in the corporate adjustment based on current earnings. The provision does not apply to interest 

on any refunding bond unless interest on the refunded bond (or in the case of a series of 

refundings, the original bond) was not an item of tax preference. 

Low-income housing and rehabilitation credits

The bill treats the tentative minimum tax as being zero for purposes of determining the 

tax liability limitation with respect to the low-income housing credit and the rehabilitation credit. 

Thus, the low-income housing tax credit and the rehabilitation credit may offset the 

alternative minimum tax liability. 

 16 A special rule treats the tentative minimum tax as being zero for purposes of determining the 

tax liability limitation with respect to certain energy credits, the work opportunity credit and the credit for 

taxes paid with respect to employee cash tips (sec. 38(c)(4)). Thus, the credits listed in the preceding 

sentence may offset the alternative minimum tax liability. 
31 

Effective Date

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

The provision applies to low-income housing credits determined under section 42 

attributable to buildings placed in service after December 31, 2007 (including any carryback of 

the credits). 

The provision applies to rehabilitation credits determined under section 47 attributable to 

qualified rehabilitation expenses properly taken into account for periods after December 31, 

2007 (including any carryback of the credits). 

3. Bonds guaranteed by Federal Home Loan Banks eligible for treatment as tax-exempt 

bonds (sec. 3023 of the bill and sec. 149 of the Code) 

Present Law

Interest paid on bonds issued by State and local governments generally is excluded from 

gross income for Federal income tax purposes. However, the exclusion generally does not apply 

to State and local bonds that are Federally guaranteed. Under present law, a bond is Federally 

guaranteed if: (1) the payment of principal or interest with respect to such bond is guaranteed (in 

whole or in part) by the United States (or any agency or instrumentality thereof); (2) such bond is 

issued as part of an issue and five percent or more of the proceeds of such issue is to be (a) used 

in making loans the payment of principal or interest with respect to which is guaranteed (in 

whole or in part) by the United States (or any agency or instrumentality thereof), or (b) invested 

directly or indirectly in Federally insured deposits or accounts; or (3) the payment of principal or 

interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States 

(or any agency or instrumentality thereof). 

The Federal guarantee restriction was enacted in 1984 with certain exceptions for certain 

guarantee programs in existence at that time. The exceptions include guarantees by: the Federal 

Housing Administration; the Department of Veterans’ Affairs; the Federal National Mortgage 

Association; the Federal Home Loan Mortgage Association; the Government National Mortgage 

Association; the Student Loan Marketing Association; and the Bonneville Power Authority. The 

exception also includes guarantees for certain housing programs. These are: (a) private activity 

bonds for a qualified residential rental project or a housing program obligation under section 

11(b) of the United States Housing Act of 1937; (b) a qualified mortgage bond; or (c) a qualified 

veterans’ mortgage bond. 

Explanation of Provision

Under the provision, bonds issued by State and local governments are not treated as 

Federally guaranteed by reason of any guarantee provided by any Federal Home Loan Bank of a 

bond issued after the date of enactment and before January 1, 2011, if such bank made a 

guarantee of such bond in connection with such issuance. 

The exception to the Federal guarantee prohibition does not apply to any guarantee by a 

Federal home loan bank unless such bank meets safety and soundness collateral requirements for 
32 

such guarantees which are at least as stringent as the regulatory requirements for guarantees by 

Federal home loan banks as in effect on April 9, 2008. 

Effective Date

The provision applies to guarantees made after the date of enactment. 

4. Modification of rules pertaining to FIRPTA nonforeign affidavits (sec. 3024 of the bill 

and sec. 1445 of the Code) 

Present Law

In general, nonresident aliens and foreign corporations are not taxed on capital gains.17 

However, such foreign persons must take into account gains and losses from the disposition of an 

interest in United States real property (“USRPI”), as if such persons were engaged in a trade or 

business in the United States during the taxable year, and such gain or loss were effectively 

connected with such trade or business.18

Although tax is imposed upon such dispositions on a net basis, in the case of any 

disposition of a USRPI by a foreign person, the transferee is generally required to deduct and 

withhold a tax equal to ten percent of the amount realized.19 The transferee is exempt from this 

withholding requirement if: 

In general, the transferred interest is not a USRPI; 

The transferee receives a “qualifying statement” from the Secretary of the 

Treasury (or his delegate) that states that the transferor is exempt from the tax on 

the disposition of the USRPI or has reached agreement with the Secretary for 

payment of such tax, and that any withholding tax has been satisfied or secured; 

The USRPI is acquired by the transferee for use by him as a residence and the 

amount realized does not exceed $300,000; or 

The transferor furnishes to the transferee an affidavit by the transferor stating, 

under penalties of perjury, the transferor’s United States taxpayer identification 

number and that the transferor is not a foreign person. However, this rule does 

not apply if the transferee has actual knowledge that such affidavit is false or if 

the transferee receives a notice from a transferor’s agent or a transferee’s agent 

that such affidavit is false, or if the transferee fails to meet the Secretary’s 

 17 Nonresident aliens present in the United States for a period or period aggregating 183 days or 

more during a taxable year are taxed at a flat 30 percent on their net U.S. source capital gains. Sec. 

871(a)(2). 

18 Sec. 897(a)(1). 

19 Sec. 1445(a). 
33 

requirement that the transferee furnish a copy of such affidavit to the Secretary.20 

Regulations require the transferee to retain the transferor’s affidavit until the end 

of the fifth taxable year following the taxable year in which the transfer takes 

place.21

In certain circumstances, agents may be liable for some or all of the withholding tax. In 

general, if the transferor’s agent or the transferee’s agent has actual knowledge that the affidavit 

is false, then such agent is required to notify the transferee pursuant to regulations.22 An agent 

that is required to notify the transferee pursuant to regulations yet fails to do so is under the same 

duty to deduct and withhold that the transferee would have been under if such agent had properly 

given such notice.23 However, an agent’s liability under these circumstances is limited to the 

amount of the agent’s compensation from the transaction.24

In the case of a real estate transaction, a “real estate reporting person” is required to file 

an information return and to furnish certain written statements to customers.25 A real estate 

reporting person means the person (including any attorney or title company) responsible for 

closing the transaction, if there is such a person.26

Explanation of Provision

The provision provides an alternate procedure with respect to the nonforeign affidavit. 

Under this procedure, in lieu of furnishing a nonforeign affidavit to the transferee, a transferor 

may furnish such affidavit to a “qualified substitute.” Such qualified substitute is then required 

to furnish a statement to the transferee stating, under penalties of perjury, that the qualified 

substitute has such affidavit in his or her possession. With respect to a disposition of a USRPI, 

the term “qualified substitute” means (1) the person, including any attorney or title company, 

responsible for closing the transaction, other than the transferor’s agent, and (2) the transferee’s 

agent. 

 20 Sec. 1445(b). 

21 Treas. Reg. sec. 1.1445-2(b)(3). 

22 Sec. 1445(d)(1). 

23 Sec. 1445(d)(2)(A). 

24 Sec. 1445(d)(2)(B). 

25 Sec. 6045(e)(1). There is an exception to this requirement for a sale or exchange of a 

residence for $250,000 or less ($500,000 if the seller is married), if certain conditions are met. Sec. 

6045(e)(5). 

26 If there is no such person, then the real estate reporting person with respect to that transaction 

is either the mortgage lender, seller’s broker, buyer’s broker, or other person designated under 

regulations, in that order. Sec. 6045(e)(2). 
34 

This exemption does not apply if the transferee or qualified substitute has actual 

knowledge that such affidavit or statement is false, if the transferee or qualified substitute 

receives a notice from a transferor’s agent, transferee’s agent, or qualified substitute that such 

affidavit or statement is false, or if the transferee or qualified substitute fails to meet a regulatory 

requirement that the transferee or qualified substitute furnish a copy of such affidavit or 

statement to the Secretary. 

Moreover, if the transferor’s agent, the transferee’s agent, or the qualified substitute has 

actual knowledge that the affidavit or statement is false, then such agent or qualified substitute is 

required to notify the transferee. As under present law, the time and manner of such notice is to 

be specified by regulations. An agent or qualified substitute that is required to notify the 

transferee pursuant to regulations yet fails to do so has the same duty to deduct and withhold that 

the transferee would have had if such agent or qualified substitute had properly given such 

notice. An agent’s or qualified substitute’s liability under these circumstances is limited to the 

amount of the compensation that such agent or qualified substitute derives from the transaction. 

The Secretary of the Treasury is required to prescribe such regulations as may be 

necessary or appropriate to carry out this provision. It is intended that such rules will require the 

qualified substitute and transferee to retain the documentation for a period commensurate with 

the period required under the present-law regulations. 

Effective Date

The provision is effective for dispositions after the date of enactment. 

5. Modify rehabilitation credit tax-exempt use safe harbor and definition of disqualified 

lease (sec. 3025 of the House bill and sec. 47 of the Code) 

Present Law

A 10-percent credit is provided for rehabilitation expenditures with respect to buildings 

first placed in service before 1936. A 20-percent credit is provided for rehabilitation 

expenditures with respect to a certified historic structure. 

Rehabilitation expenditures eligible for the credit do not include any expenditure in 

connection with the rehabilitation of a building that is allocable to the portion of the property that 

is (or may reasonably be expected to be) tax-exempt use property. In the case of nonresidential 

real property, tax-exempt use property generally means the portion of the property leased in a 

disqualified lease to tax-exempt entities (sec. 168(h)(1)). For this purpose, a tax-exempt entity 

means (1) the United States, a State or political subdivision, a U.S. possession, or an agency or 

instrumentality thereof, (2) a tax-exempt organization, (3) a foreign person or entity, or (4) an 

Indian tribal government. 

A safe harbor provides, however, that in the case of nonresidential real property, the 

property is treated as tax-exempt use property only if the portion of the property leased to taxexempt entities in disqualified leases is more than 35 percent of the property. 
35 

A disqualified lease for this purpose is a lease to a tax-exempt entity in specified 

circumstances. These are: (1) part or all of the property was financed, directly or indirectly, by 

tax-exempt bond financing and the entity (or a related entity) participated in the financing; (2) 

under the lease there is a fixed or determinable price purchase or sale involving the entity or a 

related entity (or the equivalent of such an option); (3) the term of the lease exceeds 20 years; or 

(4) there has been a sale and leaseback of the property and the entity (or a related entity) used the 

property before the sale, transfer, or lease (sec. 168(h)(1)(B)). 

Explanation of Provision

The provision increases from 35 percent to 50 percent the percentage of the property that 

may be leased to a tax-exempt entity in a disqualified lease without requiring allocation of 

rehabilitation expenditures under the rehabilitation credit. Under the provision, for determining 

rehabilitation expenditures eligible for the credit, nonresidential real property is treated as "taxexempt use" property only if the portion of the property leased to tax-exempt entities in 

disqualified leases is more than 50 percent of the property. For this purpose, a tax-exempt entity 

continues to have the same meaning provided by present law. 

Effective Date

The provision is effective for expenditures properly taken into account for periods after 

December 31, 2007. 

6. Special rules for mortgage revenue bonds in Presidentially declared disaster areas 

(sec. 3026 of the bill and sec. 143 of the Code) 

Present Law

In general

Under present law, gross income does not include interest on State or local bonds (sec. 

103). State and local bonds are classified generally as either governmental bonds or private 

activity bonds. Governmental bonds are bonds which are primarily used to finance 

governmental functions or which are repaid with governmental funds. Private activity bonds are 

bonds with respect to which the State or local government serves as a conduit providing 

financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion 

from income for State and local bonds does not apply to private activity bonds, unless the bonds 

are issued for certain permitted purposes (“qualified private activity bonds”) (secs. 103(b)(1) and 

141). 

Qualified mortgage bonds

The definition of a qualified private activity bond includes a qualified mortgage bond 

(sec. 143). Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors 

for the purchase, improvement, or rehabilitation of owner-occupied residences. The Code 

imposes several limitations on qualified mortgage bonds, including income limitations for 

homebuyers and purchase price limitations for the home financed with bond proceeds. In 

addition to these limitations, qualified mortgage bonds generally cannot be used to finance a 
36 

mortgage for a homebuyer who had an ownership interest in a principal residence in the three 

years preceding the execution of the mortgage (the “first-time homebuyer” requirement). The 

first-time homebuyer requirement does not apply to targeted area residences. A targeted area 

residence is one located in either (1) a census tract in which at least 70 percent of the families 

have an income which is 80 percent or less of the state-wide median income or (2) an area of 

chronic economic distress. 

A temporary provision waived the first-time homebuyer requirement for residences 

located in certain Presidentially declared disaster areas (sec. 143(k)(11)). In addition, residences 

located in such areas were treated as targeted area residences for purposes of the income and 

purchase price limitations. The special rule for residences located in Presidentially declared 

disaster areas does not apply to bonds issued after December 31, 1998. 

Explanation of Provision

The provision waives the first-time homebuyer requirement for residences located in 

Presidentially declared disaster areas. In addition, residences located in such areas were treated 

as targeted area residences for purposes of the income and purchase price limitations. The 

provision applies to bonds issued after May 1, 2008 and before January 1, 2010. 

Effective Date

The provision is effective on the date of enactment. 

7. Transfer of funds appropriated to carry out 2008 recovery rebates to individuals 

(sec. 3027 of the bill) 

Present Law 

The Economic Stimulus Act of 2008 (Pub. L. No. 110-185) appropriated the following 

sums, for the fiscal year ending September 30, 2008 to the Department of the Treasury: (1) an 

additional amount for the Financial Management Service--Salaries and Expenses'', $64,175,000, 

to remain available until September 30, 2009; (2) an additional amount for the Internal Revenue 

Service--Taxpayer Services'', $50,720,000, to remain available until September 30, 2009; and (3) 

an additional amount for Internal Revenue Service--Operations Support'', $151,415,000, to 

remain available until September 30, 2009. The Economic Stimulus Act also appropriated an 

additional amount for the ``Social Security Administration--Limitation on Administrative 

Expenses'', $31,000,000, to remain available until September 30, 2008. 

Explanation of Provision

The bill provides that the Secretary of the Treasury may transfer funds among the three 

accounts specified for the Department of Treasury to carry out the purposes of the Economic 

Stimulus Act. 

Effective Date

The provision is effective on the date of enactment. 
37 

TITLE II – REFORMS RELATED TO REAL ESTATE INVESTMENT 

TRUSTS (“REITS”) 

(secs. 3031-3071 of the bill and secs. 856 and 857 of the Code) 

Present Law

In general

A real estate investment trust (“REIT”) is an entity that otherwise would be taxed as a 

U.S. corporation but elects to be taxed under a special REIT tax regime. In order to qualify as a 

REIT, an entity must meet a number of requirements. At least 90 percent of REIT income (other 

than net capital gain) must be distributed annually;27 the REIT must derive most of its income 

from passive, generally real-estate-related investments; and REIT assets must be primarily realestate related. In addition, a REIT must have transferable interests and at least 100 shareholders, 

and no more than 50 percent of the REIT interests may be owned by 5 or fewer individual 

shareholders (as determined using specified attribution rules). Other requirements also apply.28 

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

is distributed to its shareholders each year as a dividend is deductible by the REIT (unlike the 

case of a regular subchapter C corporation, which cannot deduct dividends). As a result, the 

distributed income of the REIT is not taxed at the entity level; instead, it is taxed only at the 

investor level.29 

Income tests 

In general

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

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

of real-estate-related income. Such income includes: rents from real property; income from the 

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

inventory, or held by the taxpayer primarily for sale to customers in the ordinary course of its 

trade or business; interest on mortgages secured by real property or interests in real property; and 

certain income from foreclosure property (the “75-percent income test”).30 Amounts attributable 

 27 Even if a REIT meets the 90 percent income distribution requirement for REIT qualification, 

more stringent distribution requirements must be met in order to avoid an excise tax under section 4981. 

28 Secs. 856 and 857. 

29 A REIT that has net capital gain can either distribute that gain as a “capital gain” dividend or 

retain that gain without distributing it but cause the shareholders to be treated as if they had received and 

reinvested a capital gain dividend. In either case, the gain in effect is taxed only as net capital gain of the 

shareholders. Sec. 857(b)(3). 

30 Secs. 856(c)(3) and 1221(a)(1). Income from sales that are not prohibited transactions solely 

by virtue of section 857(b)(6) also is qualified REIT income. 
38 

to most types of services provided to tenants (other than certain “customary services”), or to 

more than specified amounts of personal property, are not qualifying rents.31 In addition, rents 

received from any entity in which the REIT owns more than 10 percent of the vote or value also 

generally are not qualifying income. However, there is an exception for certain rents received 

from taxable REIT subsidiaries (described further below), in which a REIT may own more than 

10 percent of the vote or value. 

In addition, 95 percent of the gross income of a REIT for each taxable year must be from 

the 75-percent income sources and a second permitted category of other, generally passive 

investments such as dividends, capital gains, and interest income (the “95-percent income 

test”).32 

Income from certain hedging transactions

Except as provided by Treasury regulations, income from a hedging transaction that is 

clearly identified,33 including gain from the sale or disposition of such a transaction, is not 

included as gross income under the 95-percent income test, to the extent the transaction hedges 

any indebtedness incurred or to be incurred by the REIT to acquire or carry real estate assets.34 

Foreign currency exchange gain 

A REIT must be a U.S. domestic entity, but it is permitted to hold foreign real estate or 

other foreign-based assets, provided the 75-percent and 95-percent income tests and the other 

requirements for REIT qualification are met.35 A REIT that holds foreign real estate or other 

foreign-based assets may have foreign currency exchange gain under the foreign currency 

transaction rules of the Code (described below). Foreign currency exchange gain is not 

explicitly included in the statutory definitions of qualifying income for purposes of the 75-

percent and 95-percent income tests, though the IRS has issued guidance that allows foreign 

currency gain to be treated as qualified income in certain circumstances. 

The foreign currency transaction rules of sections 985 through 989 apply whenever a 

taxpayer engages in a business or investment activity using a currency other than the taxpayer’s 

functional currency (a “nonfunctional currency”). Section 985 provides in general that all 

determinations for Federal income tax purposes are made in the taxpayer’s functional currency. 

 31 Sec. 856(d). Amounts attributable to the provision of certain services by an independent 

contractor or by a taxable REIT subsidiary can be qualified rents. Sec. 856(d)(7). 

32 Sec. 856(c)(3). 

33 A hedging transaction for this purpose is one defined in clause (ii) or (iii) of section 

1221(b)(2)(A). The identification requirement is defined in section 1221(a)(7). 

34 Sec. 856(c)(5)(G). 

35 See Rev. Rul. 74-191, 1974-1 C.B. 170. 
39 

A taxpayer’s functional currency is the dollar except in the case of a qualified business unit 

(“QBU”), in which case the functional currency is “the currency of the economic environment in 

which a significant part of such unit’s activities are conducted and which is used by such unit in 

keeping its books and records.”36 A QBU is any separate and clearly identified unit of a trade or 

business of a taxpayer if the unit maintains separate books and records.37

A taxpayer that engages in a business or investment activity using a currency other than 

the U.S. dollar may have gain or loss under section 987 or 988, depending on the nature of the 

activity and type of entity (if any) through which the activity is conducted. 

A U.S. taxpayer becomes subject to section 988 when it enters into a “section 988 

transaction.” Among other things, a “section 988 transaction” includes the acquisition of a debt 

instrument, becoming an obligor under a debt instrument, the accrual of items of expense or 

gross income, or the disposition of any nonfunctional currency.38 

When a REIT holds a mortgage (or other instrument or arrangement described in section 

988)39 denominated in a nonfunctional currency or determined by reference to the value of a 

nonfunctional currency and the applicable foreign currency exchange rate changes between the 

time interest on an obligation to (or an obligation of) the REIT accrues and the time it is paid, the 

REIT may have foreign currency gain or loss under the rules of section 988. Foreign currency 

exchange gain under section 988 also can result when a REIT receives payment of principal on a 

debt instrument denominated in a nonfunctional currency or sells such a debt instrument, or 

when a REIT incurs a debt obligation denominated in a nonfunctional currency and pays interest 

or principal in that currency. 

 In May 2007, the IRS ruled in Rev. Rul. 2007-33 that if section 988 currency gain is 

recognized by a REIT with respect to an item of income, the section 988 gain will be qualifying 

income for purposes of the 95-percent and 75-percent income tests of section 856(c)(2) and (3), 

 36 Sec. 985(b)(1). 

37 Sec. 989(a). 

38 Sec. 988(c)(1)(B) and (C). 

39 Section 988 applies to (i) the acquisition of a debt instrument or becoming the obligor under a 

debt instrument; (ii) accruing (or otherwise taking into account) any item of expense or gross income or 

receipts which is to be paid after the date on which so accrued or taken into account, and (iii) entering into 

or acquiring any forward contract, futures contract, option, or similar financial instrument (except for any 

regulated futures contract or nonequity option which would be marked to market under section 1256 if 

held on the last day of the taxable year). Section 988 also applies to the disposition of any nonfunctional 

currency. Nonfunctional currency includes “coin or currency, and nonfunctional currency denominated 

demand or time deposits or similar instruments issued by a bank or other financial institution.” Sec. 

988(c)(1). 
40 

respectively, to the extent the underlying income so qualifies. Analogous relief was not provided 

for section 988 gain with respect to any items other than income items.40

Section 987 applies when there is a remittance from a foreign business or investment 

activity conducted through a QBU that is a branch that keeps its books and records in a 

functional currency other than the dollar. If a REIT has a QBU that keeps its books and records 

in a foreign currency, the REIT could have foreign currency exchange gain or loss under section 

987 with respect to remittances.41 

The IRS has ruled in several private rulings that a REIT may establish a REIT subsidiary 

that itself qualifies as a separate REIT (and thus would not be treated as a branch) to conduct 

qualified REIT activity with respect to foreign investments in a particular foreign currency, and 

that subsidiary can itself be treated as a QBU whose functional currency is that particular foreign 

currency, if that subsidiary keeps its books and records in that particular foreign currency.42 This 

structure provides a method for a REIT to conduct activities abroad and minimize any concerns 

regarding the treatment of foreign currency gain for purposes of the 75-percent and 95-percent 

income tests. However, this structure effectively requires a separate REIT subsidiary that itself 

qualifies as a REIT, for each different currency in which the REIT may conduct activities.43

 40 Rev. Rul. 2007-33, 2007-1 C.B. 1281. This ruling does not address the treatment of currency 

gain that might arise with respect to the payment of principal on an obligation that would produce 

qualified income. The ruling also does not address the treatment of foreign currency gain that might arise 

in connection with indebtedness denominated in a foreign currency that is incurred to acquire assets that 

produce qualifying income. A private letter ruling concluded that section 988 currency gain attributable 

to fluctuation in the exchange rates of currency used to make payments on non-dollar debt obligations 

incurred to acquire investments that produced qualifying non-dollar income would be treated as 

qualifying income, where the borrowings were to be used to finance the acquisition of the investments on 

a cost-effective basis, and not to speculate in foreign currency. PLR 200808024. A private letter ruling 

may be relied upon only by the taxpayer to which the ruling is issued. 

41 Recent proposed regulations under section 987 would replace previously proposed rules in an 

attempt to limit the ability of taxpayers to recognize non-economic foreign currency losses that could 

reduce otherwise taxable income, as well as to prevent non-economic currency gains that could arise. The 

2006 proposed regulations would provide certain tracing-type rules. See REG-208270-86 (Sept. 7, 2006). 

See also, Notice 2000-20 (March 22, 2000), discussing concerns regarding earlier proposed regulations 

issued in 1991. The 2006 proposed regulations when originally issued did not by their terms apply to 

REITs, RICs, or certain other types of entities. Prop. Reg. Sec. 1.987-1(b)(iii). But see Notice 2007-42, 

2007-1 C.B. 1288, infra. 

42 See, e.g., PLR 200625019 and PLR 200550025. A private letter ruling may be relied upon 

only by the taxpayer to which the ruling was issued. 

43 In this structure, the parent REIT treats the dividends paid by the subsidiary REIT as a 

qualified REIT dividend, minimizing any currency gains by exchanging the foreign currency into dollars 

at the time of the dividend distribution. 
41 

At the same time that it issued Rev. Rul. 2007-33, the IRS also issued a notice regarding 

the application of section 987 to a QBU of a REIT. The notice states that until further guidance 

is issued, a REIT that has a QBU that uses a functional currency other than the U.S. dollar may 

apply the principles of proposed regulations issued on September 7, 2006, to determine whether 

section 987 currency gain is derived from income described in sections 856(c)(2) or (3).44 

Certain other items

Certain private letter rulings issued to particular taxpayers have permitted various other 

types of income to be ignored for purposes of the 75-percent or 95-percent income tests, due to 

the relationship of the income to REIT qualifying assets or income. A few examples include a 

settlement payment received by a REIT with respect to construction of a mall or a payment 

received as a “breakup” fee in a proposed merger.45 

Asset tests

At least 75 percent of the value of a REIT’s assets must be real estate assets, cash and 

cash items (including receivables), and Government securities (the “75-percent asset test”). Real 

estate assets are real property (including interests in real property and mortgages on real 

property) and shares (or transferable certificates of beneficial interest) in other REITs.46 No 

more than 25 percent of a REIT’s assets may be securities other than such real estate assets.47 

Except with respect to a taxable REIT subsidiary (described further below), not more 

than 5 percent of the value of a REIT’s assets may be securities of any one issuer, and the REIT 

may not possess securities representing more than 10 percent of the outstanding value or voting 

power of any one issuer.48 In addition, (except in the case of certain timber REITs for a limited 

time period), not more than 20 percent of the value of a REIT’s assets may be securities of one or 

more taxable REIT subsidiaries.49 

 44 Notice 2007-42, 2007-1 C.B. 1288. Compare REG-208270-86 (Sept. 7, 2006), which by its 

terms did not apply to REITs. 

45 PLR 200039027 and PLR 200127024. A private letter ruling may relied upon only by the 

taxpayer to which the ruling was issued. 

46 Sec. 856(c)(4)(A). Temporary investments in certain stock or debt instruments also can qualify 

if they are temporary investments of new capital, but only for the one-year period beginning on the date 

the REIT receives such capital. Sec. 856(c)(5)(B). 

47 Sec. 856(c)(4)(B)(i). 

48 Sec. 856(c)(4)(B)(iii). 

49 Sec. 856(c)(4)(B)(ii). In the case of a “timber REIT” defined as a REIT more than 50 percent 

of the value of whose assets consists of real property held in connection with the trade or business or 

producing timber, up to 25 percent of the value of the REITs assets may be securities of one or more 

taxable REIT subsidiaries. This special rule is in place only for taxable years beginning after the date of 
42 

The asset tests must be met as of the close of each quarter of a REIT’s taxable year. 

However, a REIT that has met the asset tests as of the close of any quarter does not lose its REIT 

status solely because of a discrepancy during a subsequent quarter between the value of the 

REIT’s investments and such requirements, unless such discrepancy exists immediately after the 

acquisition of any security or other property and is wholly or partly the result of such 

acquisition.50 

Taxable REIT subsidiaries

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

entity; however, there is an exception for ownership of a taxable REIT subsidiary (“TRS”) that is 

taxed as a corporation, provided that securities of one or more TRSs do not represent more than 

20 percent51 of the value of REIT assets. 

A TRS generally can engage in any kind of business activity except that it is not 

permitted directly or indirectly to operate either a lodging facility or a health care facility. 

However, a TRS is permitted to rent hotel, motel, or other transient lodging facilities from its 

parent REIT and is permitted to hire an independent contractor to operate such facilities.52 

Furthermore, rent paid to the parent REIT by the TRS with respect to hotel, motel, or 

other transient lodging facilities operated by an independent contractor is qualified rent for 

purposes of the REIT’s 75-percent and 95-percent income tests. This lodging facility rental rule 

is an exception to the general rule that rent paid to a REIT by any corporation (including a TRS) 

in which the REIT owns 10 percent or more of the vote or value is not qualified rental income 

for purposes of the 75-percent or 95-percent REIT income tests. An exception to the general rule 

exists in the case of a TRS that rents space in a building owned by its parent REIT if at least 90 

percent of the space in the building is rented to unrelated parties and the rent paid by the TRS to 

the REIT is comparable to the rent paid by the unrelated parties.53

 

enactment of the Food, Conservation, and Energy Act of 2008 (H.R. 2419, P.L. No. 110-234, enacted on 

May 22, 2008) and before the date that is one year after such date of enactment. 

50 Sec. 856(c)(4). In the case of such an acquisition, the REIT also has a grace period of 30 days 

after the close of the quarter to eliminate the discrepancy. 

51 25 percent for certain timber REITs for a one-year period. See “Asset tests,” supra. 

52 An independent contractor will not fail to be treated as such for this purpose because the TRS 

bears the expenses of operation of the facility under the contract, or because the TRS receives the 

revenues from the operation of the facility, net of expenses for such operation and fees payable to the 

operator pursuant to the contract, or both. Sec. 856(d)(9)(B). 

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

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

with a TRS of the REIT, to the extent such amounts differ from an arm’s length amount. 
43 

Prohibited transactions tax 

REITs are subject to a prohibited transaction tax (“PTT”) of 100 percent of the net 

income derived from prohibited transactions. For this purpose, a prohibited transaction is a sale 

or other disposition of property by the REIT that is “stock in trade of a taxpayer or other property 

which would properly be included in the inventory of the taxpayer if on hand at the close of the 

taxable year, or property held for sale to customers by the taxpayer in the ordinary course of his 

trade or business” (sec. 1221(a)(1))54 and is not foreclosure property. The PTT for a REIT does 

not apply to a sale if the REIT satisfies certain safe harbor requirements in sections 857(b)(6)(C) 

or (D), including an asset holding period of at least four years (2 years in the case of certain sales 

of timber property for a limited time period).55 If the conditions are met, a REIT may either i) 

make no more than 7 sales within a taxable year (other than sales of foreclosure property or 

involuntary conversions under section 1033), or ii) sell no more than 10 percent of the aggregate 

bases of all its assets as of the beginning of the taxable year (computed without regard to sales of 

foreclosure property or involuntary conversions under section 1033), without being subject to the 

PTT tax. 

Explanation of Provision

Foreign currency gain 

Exclusion of certain foreign currency gain for certain income tests

The provision excludes certain foreign currency gain recognized under section 987 or 

section 988 from the computation of qualifying income for purposes of the 75-percent income 

test or the 95-percent income test, respectively. 56 The exclusion is solely for purposes of the 

computations under these tests. 

 54 This definition is the same as the definition of certain property the sale or other disposition of 

which would produce ordinary income rather than capital gain under section 1221(a)(1). 

55 Additional requirements for the safe harbor limit the amount of expenditures the REIT can 

make during the four year period prior to the sale that are includible in the adjusted basis of the property, 

require marketing to be done by an independent contractor, and forbid a sales price that is based on the 

income or profits of any person. Under the Food, Conservation, and Energy Act of 2008 (H.R. 2419, 

P.L. No. 110-234, enacted on May 22, 2008), the four-year holding period is reduced to two years in the 

case of a sale of timber property under section 857(b)(1)(D), provided the sale is to a qualified 

organization (as defined in section 170(h)(3)), exclusively for conservation purposes (as defined in 

section 170(h)(1)(C). The rule is in place only for taxable years beginning after the date of enactment of 

that Act and before one year following such date of enactment. In addition, for the same one year period, 

any sale that is exempt from the prohibited transactions provision by virtue of section 857(b)(1)(D) is 

treated for all purposes of subtitle A of the Code as a sale of property held for investment or use in a trade 

or business, and not property described in section 1221(a)(1) of the Code. 

56 The excluded amounts are excluded from both the numerator and the denominator in the 

relevant computations. 
44 

The provision defines two new categories of income for purposes of the exclusion rules: 

“real estate foreign exchange gain” and “passive foreign exchange gain.” Real estate foreign 

exchange gain is excluded from gross income for purposes of both the 75-percent and 95-percent 

income tests. Passive foreign exchange gain is excluded for purposes of the 95-percent income 

test but is included in gross income and treated as non-qualifying income to the extent that it is 

not real estate foreign exchange gain, for purposes of the 75-percent income test. 

Real estate foreign exchange gain is foreign currency gain (as defined in section 

988(b)(1)) which is attributable to (i) any item of income or gain described in section 856(c)(3) 

(i.e., described in the 75-percent income test), (ii) the acquisition or ownership of obligations 

secured by mortgages on real property or interests in real property; or (iii) becoming or being the 

obligor under obligations secured by mortgages on real property or on interests in real property. 

Real estate foreign exchange gain also includes section 987 gain attributable to a qualified 

business unit (“QBU”) of the REIT if the QBU itself meets the 75-percent income test for the 

taxable year, and meets the 75-percent asset test at the close of each quarter of the REIT that has 

directly or indirectly held the QBU. The QBU is not required to meet the 95-percent income test 

in order for this 987 gain exclusion to apply. Real estate foreign exchange gain also includes any 

other foreign currency gain as determined by the Secretary of the Treasury. 

Passive foreign exchange gain includes all real estate foreign exchange gain, and in 

addition includes foreign currency gain which is attributable to (i) any item of income or gain 

described in section 856(c)(2) (i.e., described in the 95-percent income test), (ii) the acquisition 

or ownership of obligations, (iii) becoming or being the obligor under obligations, and (iv) any 

other foreign currency gain as determined by the Secretary of the Treasury. 

Notwithstanding the foregoing rules, except in the case of certain income that is excluded 

under the hedging rules of section 856(c)(5)(G) (as amended by the provision), any section 988 

gain derived from engaging in dealing, or substantial and regular trading, in securities (as defined 

in section 475(c)(2)) shall constitute gross income that does not qualify under either the 75-

percent or 95-percent income test. 

The effect of these rules is to change the result of Rev. Rul. 2007-33 in the case of 

foreign currency gain attributable to an item of REIT income that qualifies under sections 

856(c)(2) or 856(c)(3), respectively, because the provision excludes such gain (solely for 

purposes of the relevant income test) rather than treating such gain as qualified income for 

purposes of that test. The provision in addition excludes foreign currency gain attributable to 

principal payments received on certain REIT assets, or to principal or interest payments with 

respect to certain liabilities of a REIT, situations not addressed in the revenue ruling. 

 The rules of the provision also supersede Notice 2007-42 in the case of remittances from 

a QBU that uses a functional currency other than the dollar. The provision excludes section 987 

gain on a remittance from such a QBU to the REIT from the computation of both the 75-percent 

and the 95-percent income tests of the REIT, provided the QBU itself both meets the 75-percent 

income test for the taxable year and meets the 75-percent asset test at the close of each quarter of 

the taxable year. If the QBU meets these requirements, the 987 gain is excluded entirely for 

purposes of the REIT gross income tests, and no tracing-type rules with respect to 987 gain are 

imposed, as would have been the case under Notice 2007-42. For this purpose, the QBU is 
45 

tested as if it were a separate entity that is independently required to meet the 75-percent income 

test and the 75-percent asset test applicable to REIT qualification. However, the QBU need not 

meet any of the other REIT requirements, nor itself be treated as a REIT. It is expected that the 

Treasury Department will use its regulatory authority57 to provide appropriate rules with respect 

to the treatment of section 987 currency gain for purposes of the REIT gross income tests if a 

QBU does not meet the requirements of the provision. 

In the case of a section 988 transaction, it is intended that the provision only apply to 

foreign currency gain that is directly attributable to income items that otherwise are treated as 

qualifying income for purposes of the 75-percent and 95-percent income tests, respectively, (or 

directly attributable to the acquisition or ownership of, or to becoming the obligor under, 

obligations secured by mortgages on real property or on interests on real property). As one 

example, foreign currency gain attributable to exchange rate fluctuations between the time of the 

accrual of interest income on a foreign-currency denominated obligation secured by a mortgage 

on real property and the time of payment, would constitute excluded income for purposes of both 

the 75-percent and 95-percent income tests. However, any additional foreign currency gain 

arising from subsequent disposition of the foreign currency received upon payment of the 

accrued interest would be attributable to holding the foreign currency after its receipt and would 

not constitute excluded income under either test; rather it would be non-qualifying income. 

Similarly, in the case of section 987 foreign currency gain on remittances, only section 

987 gain as of the time of, and resulting from, the remittance is attributable to the QBU and is 

excluded income. Any currency gain arising from holding currency after remittance is not 

attributable to the QBU. Such gain is not excluded income for purposes of the 75-percent or 95-

percent income tests and is not qualifying income for purposes of those tests. 

The following examples demonstrate the operation of the distinction between “real estate 

foreign exchange gain”, which is excluded for purposes of both the 75-percent and 95-percent 

income tests, and “passive foreign exchange gain,” which is excluded only for purposes of the 

95-percent income test and which is non-qualifying income for purposes of the 75-percent 

income test. 

Example 1.–Assume that a REIT whose functional currency is the dollar holds an 

obligation that is secured by a mortgage on real property, which instrument pays interest at a date 

later than the date the interest is accrued by the REIT. The obligation is denominated in a 

foreign currency. Under sections 856(c)(3) and 856(c)(2), the REIT’s interest income accrued 

on such a mortgage obligation is qualified income for purposes of the 75-percent and 95-percent 

income tests. Under the provision, any section 988 gain attributable to currency fluctuations 

between the time the interest is accrued by the REIT and the time the interest is paid to the REIT 

is real estate foreign exchange gain because it is directly attributable to the qualified interest 

income, and thus the section 988 gain is excluded for purposes of the 75-percent and 95-percent 

income tests. 

 57 See, e.g. Sec. 989(c). 
46 

Example 2.–Assume the same facts as in Example 1, except that the instrument held by 

the REIT is a debt instrument that is not an obligation secured by a mortgage on real property or 

an interest in real property. Under sections 856(c)(3) and 856(c)(2), interest income accrued by 

the REIT is qualified income for purposes of the 95-percent income test but is not qualified 

income for purposes of the 75-percent income test. Under the provision, any section 988 gain 

attributable to currency fluctuations between the time the interest is accrued and the time the 

interest is paid is passive foreign exchange gain because it is directly attributable to the interest 

income that is qualified for purposes of the 95-percent income test. Such passive foreign 

exchange gain is excluded for purposes of the 95-percent income test but is not excluded (and is 

not qualified income) for purposes of the 75-percent income test. 

Example 3.–Assume the same facts as in Example 1, and further assume that the REIT 

receives a repayment of the principal on the obligation. Under the provision, any section 988 

gain attributable to the receipt of principal is real estate foreign exchange gain because it is 

attributable to the acquisition or ownership of an obligation secured by a mortgage on real 

property. Such section 988 gain is excluded for purposes of both the 75-percent and 95-percent 

income tests. 

Example 4.–Assume the same facts as in Example 2, and further assume that the REIT 

receives a repayment of the principal on the obligation. Under the provision, any section 988 

gain attributable to the receipt of principal is passive foreign exchange gain because it is 

attributable to the acquisition or ownership of an obligation not secured by a mortgage on real 

property or an interest in real property. Such section 988 gain is excluded for purposes of the 95-

percent income test but is not excluded, and is not qualified income, for purposes of the 75-

percent income test. 

Other rules

The provision makes several changes to other REIT provisions. 

First, the provision extends the present law rule of section 856(c)(5)(G), which excludes 

certain hedging income from the computation of the 95-percent income test, to exclude such 

hedging income from the computation of the 75-percent income test as well. As under present 

law, except to the extent determined by the Secretary of the Treasury, such income is income of 

a REIT from a hedging transaction (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)), 

which is clearly identified pursuant to section 1221(a)(7), including gain from the sale or 

disposition of such a transaction, to the extent that the transaction hedges any indebtedness 

incurred or to be incurred by the REIT to acquire or carry real estate assets. 

Second, the provision extends section 856(c)(5)(G) to encompass, (except to the extent 

determined by the Secretary of the Treasury), income of a REIT from a transaction entered into 

by the REIT primarily to manage risk of currency fluctuations with respect to any item of income 

or gain that would be qualified income under the 75-percent or 95-percent income tests, (or any 

property which generates such income or gain) provided the transaction is clearly identified as 

such before the close of the day on which it was acquired, originated, or entered into (or such 

other time as the Secretary may prescribe). Such income is excluded from gross income for 

purposes of both the 75-percent and 95-percent income tests. 
47 

Third, the rule that if a REIT has met the asset tests as of the close of any quarter it will 

not fail them solely because of a discrepancy due to variations in value that are not attributable to 

the acquisition of investments is clarified to include a discrepancy caused solely by the change in 

the foreign currency exchange rate used to value a foreign asset.58

Fourth, the term “cash” for purposes of the REIT asset qualification rules is defined to 

include foreign currency59 if the REIT60 or its QBU uses such currency as its functional currency, 

but only to the extent such foreign currency is held for use in the normal course of the activities 

of the REIT or the QBU giving rise to income or gain described in sections 856(c)(2) or (3), or 

directly related to acquiring or holding assets described in section 856(c)(4), and is not held in 

connection with a trade or business of trading or dealing in securities (as defined in section 

475(c)(2).61

 58 For example, suppose a REIT meets the 75-percent asset test as of the close of a quarter, but as 

of the close of the following quarter, a change in the foreign currency exchange rate has increased the 

value of certain foreign currency-denominated securities that are not qualifying assets for purposes of that 

test, such that the value of those securities exceeds the 25 percent permitted amount. If the REIT does not 

acquire any other asset during that next quarter, the REIT will not lose its status by reason of failure to 

meet the 75-percent asset test. However, if in that next quarter the REIT acquires another foreigncurrency denominated (or any other) asset that is not a qualifying asset, and immediately after that 

acquisition the total value of non-qualifying assets, including the new acquisition, fails the test, then the 

REIT has until 30 days after the end of that quarter to adjust its asset value so that it satisfies the test. 

59 Although foreign currency thus may be considered a qualified asset for purposes of the 75-

percent asset test of section 856(c)(4), foreign currency gain with respect to such currency is excluded 

income for purposes of the 75-percent or 95-percent income tests only to the extent such gain is 

attributable to the income items or other specific 988 transactions described in the rules of the provision 

that govern such income exclusions. 

60 Because a REIT must be a U.S. entity, it is normally required to use the dollar as its functional 

currency. However, under private rulings, the IRS has permitted REITs to use a functional currency other 

than the dollar where the operations and record-keeping requirements for treatment as a QBU that uses a 

functional currency other than the dollar are met. See, e.g., PLR 200625019 and PLR 200550025. A 

private letter ruling may be relied upon only by the taxpayer to which the ruling was issued. 

61 This test applies to a REIT in determining whether it meets the 75-percent asset test. This test 

also independently applies to any QBU of a REIT in determining whether such QBU meets the 75-percent 

asset requirement. If that 75 percent asset requirement (along with the 75 percent income test) is met, 

then section 987 gain of the REIT attributable to that QBU is excluded from the REIT’s gross income for 

the 75-percent and 95-percent income tests. In applying the 75-percent asset test to the REIT or a QBU, 

respectively, it is intended that currency held by such REIT or QBU, respectively, is treated as cash only 

to the extent used in the normal course of the activities of such REIT or QBU giving rise to income or 

gain described in sections 856(c)(2) or (3) or directly related to acquiring or holding assets described in 

section 856(c)(4) (other than such cash), and not held in connection with a trade or business of trading or 

dealing in securities (as defined in section 475(c)(2)). 
48 

Fifth, permitted foreclosure property income also includes foreign currency gain that is 

attributable to otherwise permitted income from foreclosure property.62

Finally, foreign currency gain under section 988(b)(1), or loss under section 988(b)(2), 

that is attributable to any prohibited transaction is taken into account in determining the amount 

of prohibited transaction net income subject to the 100-percent tax. 

Treasury authority regarding other items of income

The provision authorizes the Treasury Department to issue guidance that would allow 

other items of income to be excluded for purposes of the computation of qualifying gross income 

under either the 75 percent or the 95 percent test, respectively, or to be included as qualifying 

income for either of such tests, respectively, in appropriate cases consistent with the purposes of 

the REIT provisions.63 

Taxable REIT subsidiary limit increase 

The provision increases the percentage of the value of REIT assets that can be held in 

securities of a taxable REIT subsidiary to 25 percent from the present 20 percent.64 

Holding period under safe harbor for prohibited transactions 

The provision shortens from four years to two years the minimum holding period under 

the prohibited transactions tax safe harbors of 857(b)(6)(C) and 857(b)(6)(D). The requirement 

that timber property under section 857(b)(6)(D) be sold to a qualified organization (as defined in 

section 170(h)(3)) exclusively for conservation purposes (as defined in section 170(h)(1)(C)) in 

order for the 2-year holding period to apply under the safe harbor, and the one-year limited 

application of the 2-year holding period rule under 857(b)(6)(D), are generally removed. The 

provision makes clear that the safe harbor is an exception from the prohibited transactions tax 

only, and does not cause a gain on a sale that otherwise does not qualify for capital gains 

treatment (i.e., because it was a sale of property held for sale to customers in the ordinary course 

of business under section 1221(a)(1)) to become a capital gain transaction.65 Consequently, such 

 62 Such foreign currency gain is also included as foreclosure property income for purposes of any 

tax on such income under section 857(b)(4)(B)(i). 

63 Income that is statutorily excluded from gross income computations under the provision is not 

intended to be within the authority to include as qualifying income. In all cases, the Treasury regulatory 

authority applies solely for purposes of applying the relevant percentage tests for REIT qualification, and 

does not affect the substantive characterization of an item as income for purposes of computing the 

REIT’s taxable income. 

64 The special 25 percent rule for timber REITs is made permanent under the provision, since 

timber REITs are treated in the same manner as other REITs for this purpose. 

65 In the case of a sale of timber property that qualifies for the safe harbor under section 

857(b)(1)(D), for the one year period prescribed in the Food, Conservation and Energy Act of 2008, such 

a sale is considered to be a sale of property held for investment or use in a trade or business, and not of 
49 

capital gain treatment continues to be determined based on all the facts and circumstances as 

under present law, without regard to the prohibited transactions tax safe harbor. However, in the 

case of timber property under section 857(b)(6)(D), the provision retains for the one-year period 

prescribed in the Food, Energy and Conservation Act of 2008 the rule that qualification of the 

sale under the safe harbor also means that the sale is considered to be a sale of property held for 

investment or use in a trade or business, and not of property described in section 1221(a)(1), for 

all purposes of subtitle A of the Code, but only if the sale would have qualified under section 

857(b)(6)(D) as in effect prior to the enactment of the provision. 

Permitted extent of sales under safe harbor for prohibited transactions

The provision changes the prohibited transactions tax safe harbor provisions concerning 

maximum amount of sales within a taxable year that are consistent with the alternative prohibited 

transactions tax safe harbor (that is an alternative to the test for no more than 7 sales). Instead of 

the present alternative limit of 10-percent of the aggregate bases of all the assets of the REIT as 

of the beginning of the taxable year, the limit under the provision is either 10-percent of such 

aggregate basis or 10 percent of the aggregate fair market value of all the assets of the REIT as 

of such time. 

Health care facilities held by a taxable REIT subsidiary

The provision expands the taxable REIT subsidiary exception for hotel, motel, and other 

transient facilities so that it also applies to health care facilities. Thus, a taxable REIT subsidiary 

is permitted to rent a health care facility from its parent REIT and hire an independent contractor 

to operate such a facility; the rents paid to the parent REIT are qualifying rental income for 

purposes of the 75-percent and 95-percent income tests. 

Rules regarding operating a health care or lodging facility through an independent 

contractor

Under the provision, a taxable REIT subsidiary is not to be considered to be operating or 

managing a qualified health care property or a qualified lodging facility other than through an 

independent contractor solely because the taxable REIT subsidiary directly or indirectly 

possesses a license, permit, or similar instrument enabling it to do so. 

Under the provision, a taxable REIT subsidiary is not to be considered to be operating or 

managing a qualified health care property or qualified lodging facility solely because it employs 

individuals working at such property or facility located outside the United States, but only if an 

eligible independent contractor is responsible for the daily supervision and direction of such 

individuals on behalf of the taxable REIT subsidiary pursuant to a management agreement or 

similar service contract. 

 

property described in section 1221(a)(1), for all purposes of subtitle A of the Code, for such one-year 

period. 
50 

Effective Date

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

enactment. However, the rules treating certain foreign currency gain as excluded income for 

purposes of the income tests apply to gain and items of income recognized after the date of 

enactment. The new rules of section 856(c)(5)(G), relating to hedging and managing risk, are 

effective for transactions entered into after such date of enactment. The Treasury authority to 

exclude items from income or to add items of qualifying income for purposes of the income 

qualification tests applies to gains and items of income recognized after the date of enactment. 

The foreign currency amendment relating to gain from foreclosure property applies to gain 

recognized after the date of enactment, and the provision relating to net prohibited transactions 

income applies to gain and deductions recognized after the date of enactment. The provisions 

relating to the prohibited transactions tax safe harbor apply to sales made after the date of 

enactment. 
51 

TITLE III – REVENUE PROVISIONS 

A. General Provisions 

1. Election to accelerate AMT and research credits in lieu of bonus depreciation (sec. 3081 

of the bill and sec. 168(k) of the Code) 

Present Law

Bonus depreciation

Taxpayers are permitted an additional first-year depreciation deduction equal to 50 

percent of the adjusted basis of qualified property generally placed in service in 2008.66 The 

additional first-year depreciation deduction is allowed for both regular tax and alternative 

minimum tax purposes for the taxable year in which the property is placed in service. The basis 

of the property and the depreciation allowances in the year the property is placed in service and 

later years are appropriately adjusted to reflect the additional first-year depreciation deduction. 

In order for property to qualify for the additional first-year depreciation deduction it must 

meet all of the following requirements: (1) the property must be (a) property to which MACRS 

applies with an applicable recovery period of 20 years or less, (b) water utility property (as 

defined in section 168(e)(5)), (c) computer software other than computer software covered by 

section 197, or (d) qualified leasehold improvement property (as defined in section 168(k)(3)); 

(2) the original use of the property must commence with the taxpayer after December 31, 2007; 

(3) the taxpayer must purchase the property either (a) after December 31, 2007, and before 

January 1, 2009, but only if no binding written contract for the acquisition is in effect before 

January 1, 2008, or (b) pursuant to a binding written contract which was entered into after 

December 31, 2007, and before January 1, 2009;67 and (4) the property must be placed in service 

after December 31, 2007, and before January 1, 2009. An extension of the placed in service date 

of one year (i.e., to January 1, 2010) is provided for certain property with a recovery period of 10 

years or longer and certain transportation property. 

Corporate AMT credit

If a corporation is subject to the alternative minimum tax ("AMT") in any year, the 

amount of AMT paid is allowed as a credit in any subsequent taxable year to the extent the 

taxpayer’s regular tax liability exceeds its tentative minimum tax. 

 66 H.R. 5140, section 103. 

67 Special rules apply to property manufactured, constructed, or produced by the taxpayer for use 

by the taxpayer. 
52 

Research credit

As part of the general business credit, section 38 limits credits for increasing research 

activities (“research credit”) generally to the amount of regular tax in excess of tentative 

minimum tax. 

Explanation of Provision

Corporations otherwise eligible for additional first year depreciation under section 168(k) 

may elect to claim additional research or minimum tax credits in lieu of claiming depreciation 

under section 168(k) for “eligible qualified property” placed in service after March 31, 2008.68 

A corporation making the election forgoes the depreciation deductions allowable under section 

168(k) and instead increases the limitation under section 38(c) on the use of research credits or 

section 53(c) on the use of minimum tax credits. The increases in the allowable credits are 

treated as refundable for purposes of this provision. The depreciation for qualified property is 

calculated for both regular tax and AMT purposes using the straight-line method in place of the 

method that would otherwise be used absent the election under this provision. 

The research credit or minimum tax credit limitation is increased by an amount equal to 

20 percent of the bonus depreciation amount69 for certain eligible qualified property that would 

be claimed absent an election under this provision. Generally, eligible qualified property 

included in the calculation is bonus depreciation property that meets the following requirements: 

(1) the original use of the property must commence with the taxpayer after March 31, 2008; (2) 

the taxpayer must purchase the property either (a) after March 31, 2008, and before January 1, 

2009, but only if no binding written contract for the acquisition is in effect before April 1, 

2008,70 or (b) pursuant to a binding written contract which was entered into after March 31, 

2008, and before January 1, 2009;71 and (3) the property must be placed in service after March 

31, 2008, and before January 1, 2009 (January 1, 2010 for certain longer-lived and transportation 

property). 

The bonus depreciation amount is limited to the lesser of: (1) $30 million, or (2) six 

percent of the sum of research credit carryforwards from taxable years beginning before January 

1, 2006 and minimum tax credits allocable to the adjusted minimum tax imposed for taxable 

 68 In the case of a electing corporation that is a partner in a partnership, the corporate partner’s 

distributive share of partnership items is determined as if 168(k) does not apply to any eligible qualified 

property and the straight line method is used to calculate depreciation of such property. 

69 The bonus depreciation amount is the difference between the amount of depreciation, without 

regard to straight line elections, that would be determined if the election under this provision is not made 

and the amount if the election is made. 

70 In the case of passenger aircraft, the written binding contract limitation does not apply. 

71 Special rules apply to property manufactured, constructed, or produced by the taxpayer for use 

by the taxpayer. 
53 

years beginning before January 1, 2006. All corporations treated as a single employer under 

section 52(a) shall be treated as one taxpayer for purposes of the limitation, as well as for 

electing the application of this provision. 

The provision also provides that an applicable partnership may elect to be treated as 

making a deemed payment of tax for any applicable taxable year in the amount of the least of the 

following: (1) the bonus depreciation amount that would be determined if an election under this 

provision were in effect for the partnership; (2) the amount of the partnership’s research credit 

for the taxable year; or (3) $30 million (reduced by any deemed payment for any preceding 

taxable year). The deemed payment may not be used as an offset or credit against any tax 

liability of the partnership or any partner, but is instead refunded to the partnership. For 

purposes of this provision, an applicable partnership is a domestic partnership that was formed 

on August 3, 2007, and will produce in excess of 675,000 automobiles during the period 

beginning on January 1, 2008, and ending on June 30, 2008. An applicable taxable year is any 

taxable year during which eligible qualified property is placed in service. If an applicable 

partnership makes this election, the amount of the deduction allowable to the partnership or any 

partner for any eligible qualified property is computed without applying section 168(k), the 

straight line method must be used by the partnership and any partner for such property, the 

election to increase minimum tax credits and research credits under this provision is not 

available, and the research credit amount for any applicable taxable year with respect to the 

partnership is reduced by the amount of the deemed payment. 

Effective Date

The provision is effective for taxable years ending after March 31, 2008. 

2. Certain GO Zones incentives 

(a) Election to amend returns for hurricane-related casualty losses (sec. 3082(a) of the 

bill) 

Present Law

Under present law, a taxpayer may generally claim a deduction for any loss sustained 

during the taxable year and not compensated by insurance or otherwise.72 For individual 

taxpayers, deductible losses must be incurred in a trade or business or other profit-seeking 

activity or consist of property losses arising from fire, storm, shipwreck, or other casualty, or 

from theft.73 Generally, personal casualty or theft losses are deductible only if they exceed $100 

per casualty or theft and net casualty and theft losses are deductible only to the extent it exceeds 

 72 Sec. 165. 

73 Sec. 165(c)(3). 
54 

10 percent of adjusted gross income.74 However, for hurricane-related casualty losses, these two 

casualty loss limitations are removed.75 

Casualty losses are generally allowed for the taxable year of the loss. However, in the 

case of a disaster loss arising in an area determined by the President of the United States to 

warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and 

Emergency Assistance Act, the taxpayer may elect to take the loss into account for the taxable 

year immediately before the taxable year in which the disaster occurred.76

When a taxpayer receives reimbursement for such loss in a subsequent taxable year, the 

deductible loss is not recomputed for the taxable year in which the deduction was taken, the 

reimbursement amount is taken into income in the taxable year received.77

Explanation of Provision

The provision allows a taxpayer who claimed a casualty loss to a principal residence 

(within the meaning of section 121) resulting from Hurricane Katrina, Hurricane Rita, or 

Hurricane Wilma and in a subsequent year receives a grant as reimbursement of such loss to 

elect to file an amended return for the taxable year to which such deduction was allowed.78 The 

casualty loss deduction is reduced, but not below zero, by the amount of such reimbursement. 

The time for filing such amended return is the later of three years after the original due date for 

filing the tax return or four months after the date of enactment of this Act. Any underpayment of 

tax shall be subject to one year of interest, but no penalty or additional interest if paid not later 

than one year after the filing of the amended return. 

Effective Date

The provision is effective on the date of enactment. 

 74 Sec. 165(h). 

75 Sec. 1400S(b). 

76 Sec. 165(i). 

77 Treas. Reg. sec. 165-1(d)(2)(iii). 

78 To qualify the grant must be received under Public Law 109-148, 109-234, or 110-116. 
55 

(b) Waiver of deadline on construction of GO Zone property eligible for bonus 

depreciation (sec. 3082(b) of the bill) 

Present Law

In general

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

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

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

under the modified accelerated cost recovery system (“MACRS”). Under MACRS, different 

types of property generally are assigned applicable recovery periods and depreciation methods. 

The recovery periods applicable to most tangible personal property (other than residential rental 

property and nonresidential real property) range from three to 25 years. The depreciation 

methods generally applicable to tangible personal property are the 200-percent and 150-percent 

declining balance methods, switching to the straight-line method for the taxable year in which 

the depreciation deduction would be maximized. 

Gulf Opportunity Zone

The “Gulf Opportunity Zone” or “GO Zone” is defined as that portion of the Hurricane Katrina 

Disaster Area determined by the President to warrant individual or individual and public assistance from 

the Federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by 

reason of Hurricane Katrina. The term “Hurricane Katrina disaster area” means an area with respect to 

which a major disaster has been declared by the President before September 14, 2005, under section 401 

of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina.

Gulf Opportunity Zone property

Present law provides an additional first-year depreciation deduction equal to 50 percent 

of the adjusted basis of qualified Gulf Opportunity Zone property. In order to qualify, property 

generally must be placed in service on or before December 31, 2007 (December 31, 2008 in the 

case of nonresidential real property and residential rental property).

The additional first-year depreciation deduction is allowed for both regular tax and 

alternative minimum tax purposes for the taxable year in which the property is placed in service. 

The additional first-year depreciation deduction is subject to the general rules regarding whether 

an item is deductible under section 162 or subject to capitalization under section 263 or section 

263A. The basis of the property and the depreciation allowances in the year of purchase and 

later years are appropriately adjusted to reflect the additional first-year depreciation deduction. 

In addition, the provision provides that there is no adjustment to the allowable amount of 

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

respect to property to which the provision applies. A taxpayer is allowed to elect out of the 

additional first-year depreciation for any class of property for any taxable year. 

In order for property to qualify for the additional first-year depreciation deduction, it 

must meet all of the following requirements. First, the property must be property (1) to which 

the general rules of the Modified Accelerated Cost Recovery System (“MACRS”) apply with an 
56 

applicable recovery period of 20 years or less, (2) computer software other than computer 

software covered by section 197, (3) water utility property (as defined in section 168(e)(5)), (4) 

certain leasehold improvement property, or (5) certain nonresidential real property and 

residential rental property. Second, substantially all of the use of such property must be in the 

Gulf Opportunity Zone and in the active conduct of a trade or business by the taxpayer in the 

Gulf Opportunity Zone. Third, the original use of the property in the Gulf Opportunity Zone 

must commence with the taxpayer on or after August 28, 2005. (Thus, used property may 

constitute qualified property so long as it has not previously been used within the Gulf 

Opportunity Zone. In addition, it is intended that additional capital expenditures incurred to 

recondition or rebuild property the original use of which in the Gulf Opportunity Zone began 

with the taxpayer would satisfy the “original use” requirement. See Treasury Regulation 1.48-2 

Example 5.) Finally, the property must be acquired by purchase (as defined under section 

179(d)) by the taxpayer on or after August 28, 2005 and placed in service on or before 

December 31, 2007. For qualifying nonresidential real property and residential rental property, 

the property must be placed in service on or before December 31, 2008, in lieu of December 31, 

2007. Property does not qualify if a binding written contract for the acquisition of such property 

was in effect before August 28, 2005. However, property is not precluded from qualifying for 

the additional first-year depreciation merely because a binding written contract to acquire a 

component of the property is in effect prior to August 28, 2005. 

Property that is manufactured, constructed, or produced by the taxpayer for use by the 

taxpayer qualifies if the taxpayer begins the manufacture, construction, or production of the 

property on or after August 28, 2005 and before January 1, 2008, and the property is placed in 

service on or before December 31, 2007 (and all other requirements are met). In the case of 

qualified nonresidential real property and residential rental property, the property must be placed 

in service on or before December 31, 2008. Property that is manufactured, constructed, or 

produced for the taxpayer by another person under a contract that is entered into prior to the 

manufacture, construction, or production of the property is considered to be manufactured, 

constructed, or produced by the taxpayer. 

Under a special rule, property any portion of which is financed with the proceeds of a 

tax-exempt obligation under section 103 is not eligible for the additional first-year depreciation 

deduction. Recapture rules apply under the provision if the property ceases to be qualified Gulf 

Opportunity Zone property. 

Gulf Opportunity Zone extension property

The placed-in-service deadline is extended for specified Gulf Opportunity Zone extension 

property to qualify for the additional first-year depreciation deduction. Specified Gulf 

Opportunity Zone extension property is defined as property substantially all the use of which is 

in one or more specified portions of the Gulf Opportunity Zone and which is either: (1) 

nonresidential real property or residential rental property which is placed in service by the 

taxpayer on or before December 31, 2010, or (2) in the case of a taxpayer who places in service a 
57 

building described in (1), property described in section 168(k)(2)(A)(i)79 placed in service on or 

before December 31, 2010, if substantially all the use of such property is in such building and 

such property is placed in service within 90 days of the date the building is placed in service. 

However, in the case of nonresidential real property or residential rental property, only the 

adjusted basis of such property attributable to manufacture, construction, or production before 

January 1, 2010 (“progress expenditures”) is eligible for the additional first-year depreciation. 

The specified portions of the Gulf Opportunity Zone are defined as those portions of the 

Gulf Opportunity Zone which are in a county or parish which is identified by the Secretary of the 

Treasury (or his delegate) as being a county or parish in which hurricanes occurring in 2005 

damaged (in the aggregate) more than 60 percent of the housing units in such county or parish 

which were occupied (determined according to the 2000 Census). These areas include the 

Louisiana parishes of Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany, and 

Washington, and the Mississippi counties of Hancock, Harrison, Jackson, Pearl River, and 

Stone.80

Description of Proposal

The bill removes the commencement date of January 1, 2008, for self-constructed Gulf 

Opportunity Zone extension property. The placed in service date of December 31, 2010 and the 

progress expenditure date of January 1, 2010 are not modified. 

Effective Date

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

 79 Property described in section 168(k)(2)(A)(i) includes (1) property to which the general rules 

of the Modified Accelerated Cost Recovery System (“MACRS”) apply with an applicable recovery 

period of 20 years or less, (2) computer software other than computer software covered by section 197, 

(3) water utility property (as defined in section 168(e)(5)), and (4) certain leasehold improvement 

property. 

80 Notice 2007-36, 2007-17 I.R.B. 1000. 
58 

(c) Inclusion of certain counties in GO Zone for purposes of tax-exempt bond financing 

(sec. 3082(c) of the bill and sec. 1400N(a) of the Code) 

Present Law

The Gulf Opportunity Zone Act of 2005 established certain tax benefits for areas affected 

by Hurricanes Katrina, Wilma and Rita.81 Under present law, the "Gulf Opportunity Zone" or 

"GO Zone" means that portion of the Hurricane Katrina disaster area determined by the President 

to warrant individual or individual and public assistance from the Federal Government under the 

Robert T. Stafford Disaster Relief and Emergency Assistance Act (the "Stafford Act") by reason 

of Hurricane Katrina.82 The "Hurricane Katrina disaster area" is the area with respect to which a 

major disaster has been declared by the President before September 14, 2005, under section 401 

of the Stafford Act by reason of Hurricane Katrina.83 The Code authorizes the States of 

Alabama, Louisiana and Mississippi to issue certain exempt facility bonds and qualified 

mortgage bonds for property located in the GO Zone ("GO Zone bonds").84 In Alabama, the 

following counties have been identified as warranting individual or individual and public 

assistance: Baldwin, Chocktaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, 

Tuscaloosa and Washington.85

 81 Pub. L. No. 109-135. 

82 Sec. 1400M(1). 

83 Sec. 1400M(2). 

84 Sec. 1400N(a). For purposes of these bonds, qualified project costs are the cost of any 

qualified residential rental project (as defined in section 142(d)) located in the GO Zone, the cost of 

acquisition, construction, reconstruction and renovation of nonresidential real property (including fixed 

improvements associated with such property) located in the GO Zone, and the cost of acquisition, 

construction, reconstruction and renovation of public utility property (as defined in section 168(i)(10) 

located in the GO Zone (sec. 1400N(a)(4)). GO Zone bonds cannot be used for movable fixtures or 

equipment (sec. 1400N(a)(3)(B)). Nor can GO Zone bonds be used to provide any private or commercial 

golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used 

for gambling or any store the principal businesses of which is the sale of alcoholic beverages for 

consumption off premises (sec. 1400N(a)(2)(E) and sec. 144(c)(6)(B)). GO Zone bonds are treated as 

qualified mortgage bonds if the issue meets the general requirements of a qualified mortgage issue and the 

residences financed with such bonds are located in the GO Zone. For these residences, the first-time 

homebuyer rule is waived and purchase and income rules for targeted area residences apply. In addition, 

100 percent of the mortgages must be made to mortgagors whose family income is 140 percent or less of 

the applicable median family income. 

85 Internal Revenue Service, Notice 2006-21, GO Zone Resident Population Estimates (March 

20, 2006). 
59 

Explanation of Provision

For purposes of GO Zone bonds only, the provision includes the following counties for 

purposes of defining the GO Zone: Colbert County, Alabama and Dallas County, Alabama. 

Effective Date

The provision is effective as if included in the Gulf Opportunity Zone Act of 2005 to 

which it relates. 
60 

B. Revenue Offsets 

1. Require information reporting on payment card and third party payment transactions 

(sec. 3091 of the bill and new sec. 6050(W) of the Code) 

Present Law

Present law imposes a variety of information reporting requirements on participants in 

certain transactions. These requirements are intended to assist taxpayers in preparing their 

income tax returns and to help the Internal Revenue Service (“IRS”) determine whether such 

returns are correct and complete. For example, every person engaged in a trade or business 

generally is required to file information returns for each calendar year for payments of $600 or 

more made in the course of the payor’s trade or business.86 Payments to corporations generally 

are excepted from this requirement. Certain payments subject to information reporting also are 

subject to backup withholding if the payee has not provided a valid taxpayer identification 

number (“TIN”). 

Under present law, any person required to file a correct information return who fails to do 

so on or before the prescribed filing date is subject to a penalty that varies based on when, if at 

all, the correct information return is filed. 

Explanation of Provision

The provision requires any payment settlement entity making payment to a participating 

payee in settlement of reportable payment transactions to report annually to the IRS and to the 

participating payee the gross amount of such reportable payment transactions, as well as the 

name, address, and TIN of the participating payees. A “reportable payment transaction” means 

any payment card transaction and any third party network transaction. 

Under the provision, a “payment settlement entity” means, in the case of a payment card 

transaction, a merchant acquiring entity and, in the case of a third party network transaction, a 

third party settlement organization. A “participating payee” means, in the case of a payment 

card transaction, any person who accepts a payment card as payment and, in the case of a third 

party network transaction, any person who accepts payment from a third party settlement 

organization in settlement of such transaction. 

For purposes of the reporting requirement, the term “merchant acquiring entity” means 

the bank or other organization with the contractual obligation to make payment to participating 

payees in settlement of payment card transactions. A “payment card transaction” means any 

transaction in which a payment card is accepted as payment.87 A “payment card” is defined as 

 86 Sec. 6041(a). Unless otherwise stated, all section references are to the Internal Revenue Code 

of 1986, as amended (the “Code”). 

87 For this purpose, the acceptance as payment of any account number or other indicia associated 

with a payment card also qualifies a payment card transaction. 
61 

any card (e.g., a credit card or debit card) which is issued pursuant to an agreement or 

arrangement which provides for: (1) one or more issuers of such cards; (2) a network of persons 

unrelated to each other, and to the issuer, who agree to accept such cards as payment; and (3) 

standards and mechanisms for settling the transactions between the merchant acquiring entities 

and the persons who agree to accept such cards as payment. Thus, under the provision, a bank 

that enrolls a business to accept credit cards and contracts with the business to make payment on 

credit card transactions is required to report to the IRS the business’s gross credit card 

transactions for each calendar year. The bank also is required to provide a copy of the 

information report to the business. 

The provision also requires reporting on a third party network transaction. The term 

“third party network transaction” means any transaction which is settled through a third party 

payment network. A “third party payment network” is defined as any agreement or arrangement 

which (1) involves the establishment of accounts with a central organization by a substantial 

number of persons (e.g., more than 50) who are unrelated to such organization, provide goods or 

services, and have agreed to settle transactions for the provision of such goods or services 

pursuant to such agreement or arrangement; (2) which provides for standards and mechanisms 

for settling such transactions; and (3) which guarantees persons providing goods or services 

pursuant to such agreement or arrangement that such persons will be paid for providing such 

goods or services. In the case of a third party network transaction, the payment settlement entity 

is the third party settlement organization, which is defined as the central organization which has 

the contractual obligation to make payment to participating payees of third party network 

transactions. Thus, an organization generally is required to report if it provides a network 

enabling buyers to transfer funds to sellers who have established accounts with the organization 

and have a contractual obligation to accept payment through the network. However, an 

organization operating a network which merely processes electronic payments (such as wire 

transfers, electronic checks, and direct deposit payments) between buyers and sellers, but does 

not have contractual agreements with sellers to use such network, is not required to report under 

the provision. Similarly, an agreement to transfer funds between two demand deposit accounts 

will not, by itself, constitute a third party network transaction. 

A third party payment network does not include any agreement or arrangement which 

provides for the issuance of payment cards as defined by the provision. In addition, a third party 

settlement organization is not required to report unless the aggregate value of third party network 

transactions for the year exceeds $20,000 and the aggregate number of such transactions exceeds 

200. For the avoidance of doubt, if a payment of funds is made to a third party settlement 

organization by means of a payment card (i.e., as part of a transaction that is a payment card 

transaction), the $20,000 and 200 transaction de minimis rule continues to apply to any reporting 

obligation with respect to payment of such funds to a participating payee by the third party 

settlement organization made as part of a third party network transaction. 

The provision also imposes reporting requirements on intermediaries who receive 

payments from a payment settlement entity and distribute such payments to one or more 

participating payees. The provision treats such intermediaries as participating payees with 

respect to the payment settlement entity and as payment settlement entities with respect to the 

participating payees to whom the intermediary distributes payments. Thus, for example, in the 

case of a corporation that receives payment from a bank for credit card sales effectuated at the 
62 

corporation’s independently-owned franchise stores, the bank is required to report the gross 

amount of reportable payment transactions settled through the corporation (notwithstanding the 

fact that the corporation does not accept payment cards and would not otherwise be treated as a 

participating payee). In turn, the corporation, as an intermediary, would be required to report the 

gross amount of reportable payment transactions allocable to each franchise store. The bank 

would have no reporting obligation with respect to payments made by the corporation to its 

franchise stores. 

If a payment settlement entity contracts with a third party to settle reportable payment 

transactions on behalf of the payment settlement entity, the provision requires the third party to 

file the annual information return in lieu of the payment settlement entity. 

The provision grants authority to the Secretary to issue guidance to implement the 

reporting requirement, including rules to prevent the reporting of the same transaction more than 

once. 

Under the provision, reportable payment transactions subject to information reporting 

generally are subject to backup withholding requirements. Finally, present law penalties relating 

to the failure to file correct information returns would apply to the new information reporting 

requirements required under the provision. 

Effective Date

The provision generally is effective for information returns for reportable payment 

transactions for calendar years beginning after December 31, 2010. The amendments to the 

backup withholding requirements apply to amounts paid after December 31, 2011. 

2. Exclusion of gain on sale of a principal residence not to apply to nonqualified use 

(sec. 3092 of the bill and sec. 121 of the Code) 

Present Law

In general

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

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

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

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

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

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

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

fraction of the two years that the ownership and use requirements are met. 
63 

Present law also contains an election relating to members of the uniformed services, the 

Foreign Service, and certain employees of the intelligence community.88 If the election is made, 

the five-year period ending on the date of the sale or exchange of a principal residence does not 

include any period up to 10 years during which the taxpayer or the taxpayer’s spouse is on 

qualified official extended duty. For these purposes, qualified official extended duty is any 

period of extended duty while serving at a place of duty at least 50 miles away from the 

taxpayer’s principal residence or under orders compelling residence in government furnished 

quarters. The election may be made with respect to only one property for a suspension period. 

The exclusion does not apply to gain to the extent the gain is attributable to depreciation 

allowable with respect to the rental or business use of a principal residence for periods after 

May 6, 1997. 

Explanation of Provision

Under the bill, gain from the sale or exchange of a principal residence allocated to 

periods of nonqualified use is not excluded from gross income. The amount of gain allocated to 

periods of nonqualified use is the amount of gain multiplied by a fraction the numerator of which 

is the aggregate periods of nonqualified use during the period the property was owned by the 

taxpayer and the denominator of which is the period the taxpayer owned the property. 

A period of nonqualified use means any period (not including any period before 

January 1, 2009) during which the property is not used by the taxpayer or the taxpayer's spouse 

or former spouse as a principal residence. For purposes of determining periods of nonqualified 

use, (i) any period after the last date the property is used as the principal residence of the 

taxpayer or spouse (regardless of use during that period), and (ii) any period (not to exceed two 

years) that the taxpayer is temporarily absent by reason of a change in place of employment, 

health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into 

account. The present-law election for the uniformed services, Foreign Service and employees of 

the intelligence community is unchanged. 

If any gain is attributable to post-May 6, 1997, depreciation, the exclusion does not apply 

to that amount of gain, as under present law, and that gain is not taken into account in 

determining the amount of gain allocated to nonqualified use. 

These provisions may be illustrated by the following examples:

Example 1.–Assume that an individual buys a property on January 1, 2009, for $400,000, 

and uses it as rental property for two years claiming $20,000 of depreciation deductions. On 

January 1, 2011, the taxpayer converts the property to his principal residence. On January 1, 

2013, the taxpayer moves out, and the taxpayer sells the property for $700,000 on January 1, 

2014. As under present law, $20,000 gain attributable to the depreciation deductions is included 

in income. Of the remaining $300,000 gain, 40% of the gain (2 years divided by 5 years), or 

 88 The provision relating to employees of the intelligence community is effective for sales and 

exchanges before January 1, 2011. 
64 

$120,000, is allocated to nonqualified use and is not eligible for the exclusion. Since the 

remaining gain of $180,000 is less than the maximum gain of $250,000 that may be excluded, 

gain of $180,000 is excluded from gross income. 

Example 2.–Assume that an individual buys a principal residence on January 1, 2009, for 

$400,000, moves out on January 1, 2019, and on December 1, 2021 sells the property for 

$600,000. The entire $200,000 gain is excluded from gross income, as under present law, 

because periods after the last qualified use do not constitute nonqualified use. 

Effective Date

The provision is effective for sales and exchanges after December 31, 2008. 

3. Delay implementation of worldwide interest allocation (sec. 3093 of the bill and 

sec. 864(f) of the Code) 

Present Law

In general

In order to compute the foreign tax credit limitation, a taxpayer must determine the 

amount of its taxable income from foreign sources. Thus, the taxpayer must allocate and 

apportion deductions between items of U.S.-source gross income, on the one hand, and items of 

foreign-source gross income, on the other. 

In the case of interest expense, the rules generally are based on the approach that money 

is fungible and that interest expense is properly attributable to all business activities and property 

of a taxpayer, regardless of any specific purpose for incurring an obligation on which interest is 

paid.89 For interest allocation purposes, all members of an affiliated group of corporations 

generally are treated as a single corporation (the so-called “one-taxpayer rule”) and allocation 

must be made on the basis of assets rather than gross income. The term “affiliated group” in this 

context generally is defined by reference to the rules for determining whether corporations are 

eligible to file consolidated returns. 

For consolidation purposes, the term “affiliated group” means one or more chains of 

includible corporations connected through stock ownership with a common parent corporation 

which is an includible corporation, but only if: (1) the common parent owns directly stock 

possessing at least 80 percent of the total voting power and at least 80 percent of the total value 

of at least one other includible corporation; and (2) stock meeting the same voting power and 

value standards with respect to each includible corporation (excluding the common parent) is 

directly owned by one or more other includible corporations. 

 89 However, exceptions to the fungibility principle are provided in particular cases, some of 

which are described below. 
65 

Generally, the term “includible corporation” means any domestic corporation except 

certain corporations exempt from tax under section 501 (for example, corporations organized and 

operated exclusively for charitable or educational purposes), certain life insurance companies, 

corporations electing application of the possession tax credit, regulated investment companies, 

real estate investment trusts, and domestic international sales corporations. A foreign 

corporation generally is not an includible corporation. 

Subject to exceptions, the consolidated return and interest allocation definitions of 

affiliation generally are consistent with each other.90 For example, both definitions generally 

exclude all foreign corporations from the affiliated group. Thus, while debt generally is 

considered fungible among the assets of a group of domestic affiliated corporations, the same 

rules do not apply as between the domestic and foreign members of a group with the same 

degree of common control as the domestic affiliated group. 

Banks, savings institutions, and other financial affiliates

The affiliated group for interest allocation purposes generally excludes what are referred 

to in the Treasury regulations as “financial corporations” (Treas. Reg. sec. 1.861-11T(d)(4)). 

These include any corporation, otherwise a member of the affiliated group for consolidation 

purposes, that is a financial institution (described in section 581 or section 591), the business of 

which is predominantly with persons other than related persons or their customers, and which is 

required by State or Federal law to be operated separately from any other entity which is not a 

financial institution (sec. 864(e)(5)(C)). The category of financial corporations also includes, to 

the extent provided in regulations, bank holding companies (including financial holding 

companies), subsidiaries of banks and bank holding companies (including financial holding 

companies), and savings institutions predominantly engaged in the active conduct of a banking, 

financing, or similar business (sec. 864(e)(5)(D)). 

A financial corporation is not treated as a member of the regular affiliated group for 

purposes of applying the one-taxpayer rule to other non-financial members of that group. 

Instead, all such financial corporations that would be so affiliated are treated as a separate single 

corporation for interest allocation purposes. 

Worldwide interest allocation

In general

The American Jobs Creation Act of 2004 (“AJCA”)91 modifies the interest expense 

allocation rules described above (which generally apply for purposes of computing the foreign 

tax credit limitation) by providing a one-time election (the “worldwide affiliated group election”) 

under which the taxable income of the domestic members of an affiliated group from sources 

 90 One such exception is that the affiliated group for interest allocation purposes includes section 

936 corporations that are excluded from the consolidated group. 

91 Pub. L. No. 108-357, sec. 401 (2004). 
66 

outside the United States generally is determined by allocating and apportioning interest expense 

of the domestic members of a worldwide affiliated group on a worldwide-group basis (i.e., as if 

all members of the worldwide group were a single corporation). If a group makes this election, 

the taxable income of the domestic members of a worldwide affiliated group from sources 

outside the United States is determined by allocating and apportioning the third-party interest 

expense of those domestic members to foreign-source income in an amount equal to the excess 

(if any) of (1) the worldwide affiliated group’s worldwide third-party interest expense multiplied 

by the ratio which the foreign assets of the worldwide affiliated group bears to the total assets of 

the worldwide affiliated group,92 over (2) the third-party interest expense incurred by foreign 

members of the group to the extent such interest would be allocated to foreign sources if the 

principles of worldwide interest allocation were applied separately to the foreign members of the 

group.93

For purposes of the new elective rules based on worldwide fungibility, the worldwide 

affiliated group means all corporations in an affiliated group as well as all controlled foreign 

corporations that, in the aggregate, either directly or indirectly,94 would be members of such an 

affiliated group if section 1504(b)(3) did not apply (i.e., in which at least 80 percent of the vote 

and value of the stock of such corporations is owned by one or more other corporations included 

in the affiliated group). Thus, if an affiliated group makes this election, the taxable income from 

sources outside the United States of domestic group members generally is determined by 

allocating and apportioning interest expense of the domestic members of the worldwide affiliated 

group as if all of the interest expense and assets of 80-percent or greater owned domestic 

corporations (i.e., corporations that are part of the affiliated group, as modified to include 

insurance companies) and certain controlled foreign corporations were attributable to a single 

corporation. 

The common parent of the domestic affiliated group must make the worldwide affiliated 

group election. It must be made for the first taxable year beginning after December 31, 2008, in 

which a worldwide affiliated group exists that includes at least one foreign corporation that 

meets the requirements for inclusion in a worldwide affiliated group. Once made, the election 

applies to the common parent and all other members of the worldwide affiliated group for the 

taxable year for which the election was made and all subsequent taxable years, unless revoked 

with the consent of the Secretary of the Treasury. 

 92 For purposes of determining the assets of the worldwide affiliated group, neither stock in 

corporations within the group nor indebtedness (including receivables) between members of the group is 

taken into account. 

93 Although the interest expense of a foreign subsidiary is taken into account for purposes of 

allocating the interest expense of the domestic members of the electing worldwide affiliated group for 

foreign tax credit limitation purposes, the interest expense incurred by a foreign subsidiary is not 

deductible on a U.S. return. 

94 Indirect ownership is determined under the rules of section 958(a)(2) or through applying rules 

similar to those of section 958(a)(2) to stock owned directly or indirectly by domestic partnerships, trusts, 

or estates. 
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Financial institution group election

Taxpayers are allowed to apply the bank group rules to exclude certain financial 

institutions from the affiliated group for interest allocation purposes under the worldwide 

fungibility approach. The rules also provide a one-time “financial institution group” election that 

expands the bank group. At the election of the common parent of the pre-election worldwide 

affiliated group, the interest expense allocation rules are applied separately to a subgroup of the 

worldwide affiliated group that consists of (1) all corporations that are part of the bank group, 

and (2) all “financial corporations.” For this purpose, a corporation is a financial corporation if 

at least 80 percent of its gross income is financial services income (as described in section 

904(d)(2)(C)(i) and the regulations thereunder) that is derived from transactions with unrelated 

persons.95 For these purposes, items of income or gain from a transaction or series of 

transactions are disregarded if a principal purpose for the transaction or transactions is to qualify 

any corporation as a financial corporation. 

The common parent of the pre-election worldwide affiliated group must make the 

election for the first taxable year beginning after December 31, 2008, in which a worldwide 

affiliated group includes a financial corporation. Once made, the election applies to the financial 

institution group for the taxable year and all subsequent taxable years. In addition, anti-abuse 

rules are provided under which certain transfers from one member of a financial institution group 

to a member of the worldwide affiliated group outside of the financial institution group are 

treated as reducing the amount of indebtedness of the separate financial institution group. 

Regulatory authority is provided with respect to the election to provide for the direct allocation 

of interest expense in circumstances in which such allocation is appropriate to carry out the 

purposes of these rules, to prevent assets or interest expense from being taken into account more 

than once, or to address changes in members of any group (through acquisitions or otherwise) 

treated as affiliated under these rules. 

Effective date of worldwide interest allocation under AJCA

The worldwide interest allocation rules under AJCA are effective for taxable years 

beginning after December 31, 2008. 

Explanation of Provision

The provision delays the effective date of worldwide interest allocation rules for two 

years, until taxable years beginning after December 31, 2010. The required dates for making the 

worldwide affiliated group election and the financial institution group election are changed 

accordingly. 

The provision also provides a special phase-in rule in the case of the first taxable year to 

which the worldwide interest allocation rules apply. For that year, the amount of the taxpayer’s 

taxable income from foreign sources is reduced by 70 percent of the excess of (i) the amount of 

its taxable income from foreign sources as calculated using the worldwide interest allocation 

 95 See Treas. Reg. sec. 1.904-4(e)(2). 
68 

rules over (ii) the amount of its taxable income from foreign sources as calculated using the 

present-law interest allocation rules. Any foreign tax credits disallowed by virtue of this 

reduction in foreign-source taxable income may be carried back or forward under the normal 

rules for carrybacks and carryforwards of excess foreign tax credits. 

Effective Date

The provision is effective on the date of enactment. 

4. Modifications to corporate estimated tax payments (sec. 3094 of the bill) 

Present Law

In general

In general, corporations are required to make quarterly estimated tax payments of their 

income tax liability. For a corporation whose taxable year is a calendar year, these estimated tax 

payments must be made by April 15, June 15, September 15, and December 15. 

Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) 

TIPRA provided the following special rules: 

In case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2012, shall be increased to 106.25 percent of the payment otherwise due 

and the next required payment shall be reduced accordingly. 

In case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2013, shall be increased to 100.75 percent of the payment otherwise due 

and the next required payment shall be reduced accordingly. 

Subsequent legislation

Several public laws have been enacted since TIPRA which further increase the 

percentage of payments due under each of the two special rules enacted by TIPRA described 

above. 

Explanation of Provision

The provision makes two modifications to the corporate estimated tax payment rules. 

First, in case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2013, are increased by 16.75 percent points of the payment otherwise 

due and the next required payment shall be reduced accordingly. 

Second, in case of a corporation with assets of at least $1 billion, the increased payments 

due in July, August, and September, 2012 under the special rules in TIPRA and subsequent 

legislation are repealed. In effect the general rule is applied (i.e., such corporations are required 

to make quarterly estimated tax payments based on their income tax liability.) 
69 

Effective Date

The provision is effective on the date of enactment.