DESCRIPTION OF

COMMUNITY RENEWAL AND

NEW MARKETS ACT OF 2000

Scheduled for Markup 

By the

SENATE COMMITTEE ON FINANCE

on September 20, 2000

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 18, 2000

JCX-99-00
(i)

CONTENTS

Page

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

DESCRIPTION OF PROPOSALS ........................................ 2

A. Tax Incentives for Distressed Areas ................................... 2

B. New Markets Tax Credit ........................................... 7

C. Low-Income Housing Tax Credit Cap and Related Program Modifications ..... 10

D. Private Activity Bond State Volume Limits ............................. 12

E. Mortgage Revenue Bonds ........................................... 13

F. Tax Credit for Renovating Historic Homes ............................. 14

G. Expensing of Environmental Remediation Expenditures and Expansion of

Qualifying Sites (“Brownfields”) ..................................... 16

H. Tax Credit Bonds for the National Railroad Passenger Corporation 

(“Amtrak”) ...................................................... 17

I. Tax Treatment of Alaska Native Settlement Trusts ........................ 20

J. Treatment of Indian Tribes as Non-Profit Organizations and State or Local

Governments for Purposes of the Federal Unemployment Tax (“FUTA”) ...... 22

K. Elimination of the Tax on Awards Under National Health Service Corps

Scholarship Program and F. Edward Hebert Armed Forces Health Professions

Scholarship and Financial Assistance Program .......................... 23

L. Broadband Internet Access Tax Credit ................................. 25

M. Contribution in Aid of Construction ................................... 27
1

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

Chairman’s Mark of the “Community Renewal and New Markets of 2000” (JCX-99-00),

September 18, 2000.

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INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a

description of the Chairman’s Mark of an original bill, the “Community Renewal and New

Markets Act of 2000”, scheduled for markup by the Senate Committee on Finance on September

20, 2000.
2

 For wages paid in calendar years during the period 1994 through 2001, the credit rate is

20 percent. The credit rate is reduced to 15 percent for calendar year 2002, 10 percent for

calendar year 2003, and 5 percent for calendar year 2004. No wage credit is available after 2004

in the original nine empowerment zones. 

3

 The wage credit, however, is reduced to 15 percent for calendar year 2005, and then

reduced by five percentage points in each year in 2006 and 2007. No wage credit is available

after 2007.

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DESCRIPTION OF PROPOSALS

A. Tax Incentives for Distressed Areas

Present Law

In recent years, provisions have been added to the Internal Revenue Code that target

specific geographic areas for special Federal income tax treatment. As described in greater detail

below, empowerment zones and enterprise communities generally provide tax incentives for

businesses that locate within certain geographic areas designated by the Secretaries of Housing

and Urban Development (“HUD”) and Agriculture.

Round I empowerment zones

The Omnibus Budget Reconciliation Act of 1993 (“OBRA 1993”) authorized the

designation of nine empowerment zones (“Round I empowerment zones”) to provide tax incentives

for businesses to locate within targeted areas designated by the Secretaries of HUD and

Agriculture. The Taxpayer Relief Act of 1997 (“1997 Act”) authorized the designation of two

additional Round I urban empowerment zones.

Businesses in the 11 Round I empowerment zones qualify for the following tax incentives: 

(1) a 20-percent wage credit for the first $15,000 of wages paid to a zone resident who works in

the empowerment zone,2 (2) an additional $20,000 of section 179 expensing for qualifying zone

property, and (3) tax-exempt financing for certain qualifying zone facilities. The tax incentives

with respect to the empowerment zones designated by OBRA 1993 generally are available during

the 10-year period of 1995 through 2004. The tax incentives with respect to the two additional

Round I empowerment zones generally are available during the 10-year period of 2000 through

2009.3

Round II empowerment zones

The 1997 Act also authorized the designation of 20 additional empowerment zones

(“Round II empowerment zones”), of which 15 are located in urban areas and five are located in

rural areas. Businesses in the Round II empowerment zones are not eligible for the wage credit,

but are eligible to receive up to $20,000 of additional section 179 expensing. Businesses in the
4

 Portions of the District of Columbia were designated as an enterprise community under

section 1391 in 1994. Accordingly, the District of Columbia was entitled to issue tax-exempt

enterprise zone facility bonds. 

5

 Section 1400A(a).

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Round II empowerment zones also are eligible for more generous tax-exempt financing benefits

than those available in the Round I empowerment zones. Specifically, the tax-exempt financing

benefits for the Round II empowerment zones are not subject to the State private activity bond

volume caps (but are subject to separate per-zone volume limitations), and the per-business size

limitations that apply to the Round I empowerment zones and enterprise communities (i.e., $3

million for each qualified enterprise zone business with a maximum of $20 million for each

principal user for all zones and communities) do not apply to qualifying bonds issued for Round II

empowerment zones. The tax incentives with respect to the Round II empowerment zones

generally are available during the 10-year period of 1999 through 2008.

District of Columbia Enterprise Zone

The 1997 Act also designated certain economically depressed census tracts within the

District of Columbia as the “D.C. Enterprise Zone,” within which businesses and individual

residents are eligible for special tax incentives. The D.C. Enterprise Zone designation remains in

effect for the period from January 1, 1998, through December 31, 2002. In addition to the tax

incentives available with respect to a Round I empowerment zone, the D.C. Enterprise Zone also

has a zero-percent capital gains rate that applies to gain from the sale of certain qualified D.C.

zone assets acquired after December 31, 1997 and held for more than five years.

With respect to the tax-exempt financing incentives, the D.C. Enterprise Zone generally is

treated like a Round I empowerment zone;4 therefore, the issuance of such bonds is subject to the

District of Columbia's annual private activity bond volume limitation. However, the aggregate

face amount of all outstanding qualified enterprise zone facility bonds per qualified D.C. Zone

business may not exceed $15 million (rather than $3 million, as is the case for Round I

empowerment zones).5

Description of Proposal

Overview

As described in detail below, the proposal would conform the wage credit and tax-exempt

bond incentives for the Round I and Round II empowerment zones and extend their designations

through December 31, 2009. The proposal also would increase the incentives to existing

empowerment zones by (1) increasing the additional section 179 deduction to $35,000, and (2)

providing a zero-percent capital gain rate for qualifying assets held for more than five years.
6

 This would include, for example, the proposals relating to the historic homes credit and

the broadband Internet access tax credit described below.

7

 The additional $35,000 of section 179 expensing is available throughout all areas that

are part of a designated empowerment zone, including the non-contiguous “developable sites” that

were allowed to be part of the designated Round II empowerment zones under the 1997 Act. 

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In addition, the proposal would authorize the Secretaries of HUD and Agriculture to

designate 30 new “renewal zones” that would have the same tax incentives as empowerment

zones. The designations of the new renewal zones would take effect on January 1, 2002, and

terminate on December 31, 2009.

Thus, once the 30 new renewal zones have been designated, there will exist a total of 61

zones providing similar tax incentives for distressed areas, all of whose designations would

terminate on December 31, 2009. The renewal zones would be treated as empowerment zones for

all purposes of the Code.6 After taking into account existing empowerment zones, each State

would have at least one zone.

The proposal also would extend the D.C. Enterprise Zone designation through December

31, 2009.

Existing zones

Conforming and enhancing incentives for Round I and Round II empowerment zones.--The

proposal would extend the designation of empowerment zone status for Round I and II

empowerment zones through December 31, 2009. In addition, a 15-percent wage credit would be

made available in all Round I and II empowerment zones, effective in 2002 (except in the case of

the two additional Round I empowerment zones, for which the 15-percent wage credit would take

effect in 2005 as scheduled under present law). For all the empowerment zones, the 15-percent

wage credit would expire on December 31, 2009.

In addition, $35,000 (rather than $20,000) of additional section 179 expensing would be

available for qualified zone property placed in service in taxable years beginning after December

31, 2001, by a qualified business in any of the empowerment zones.7

Businesses located in Round I empowerment zones would be eligible for the more

generous tax-exempt bond rules that apply under present law to businesses in the Round II

empowerment zones (sec. 1394(f)). The proposal would apply to tax-exempt bonds issued after

December 31, 2001. Bonds that have been issued by businesses in Round I zones before January

1, 2002, would not be taken into account in applying the limitations on the amount of new

empowerment zone facility bonds that can be issued under the proposal.

Businesses located in any empowerment zone also would qualify for a zero-percent capital

gains rate for gain from the sale of a qualifying zone assets acquired after date of enactment and
8

 For areas not within census tracts, the equivalent county division (as defined by the

Bureau of the Census for purposes of defining poverty areas) shall be used for purposes of

defining poverty rates and median family income.

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before January 1, 2010, and held for more than five years. Assets that would qualify for this

incentive would be similar to the types of assets that qualify for the present-law zero percent

capital gains rate for qualifying D.C. Zone assets. The zero-percent capital gains rate would be

limited to an aggregate amount not to exceed $25 million of gain per taxpayer. Any gain

attributable to the period before the date of enactment or after December 31, 2014, would not be

eligible for the zero-percent capital gains rate.

D.C. Enterprise Zone.--The proposal would extend the D.C. Enterprise Zone designation

through December 31, 2009. The proposal also would conform the D.C. wage credit to the wage

credit to the other zones, so that there would be a 15-percent wage credit with respect to qualifying

wages beginning in 2003 (and ending on December 31, 2009).

Renewal zones

Designation of 30 renewal zones.--The Secretaries of HUD and Agriculture would be

authorized to designate up to 30 renewal zones from areas nominated by States and local

governments. At least six of the designated renewal zones must be in rural areas. The Secretary of

HUD is required to publish (within four months after enactment) regulations describing the

nomination and selection process. Designations of renewal zones would be made before January

1, 2002, and the designation (and tax incentives) would be effective for the period beginning on

January 1, 2002 through December 31, 2009.

Eligibility criteria.--To be designated as a renewal zone, a nominated area must meet the

following criteria: (1) each census tract must have a poverty rate of at least 20 percent; (2) in the

case of an urban area, at least 70 percent of the households have incomes below 80 percent of the

median income of households within the local government jurisdiction; (3) the unemployment rate

is at least 1.5 times the national unemployment rate; and (4) the area is one of pervasive poverty,

unemployment, and general distress.8 In general, the areas with the highest average ranking of

eligibility factors (1), (2) and (3), above would be designated as renewal zones. States without an

empowerment zone would be given priority in the designation process. Moreover, after taking into

account existing empowerment zones, each State would have at least one zone designation

(empowerment or renewal zone).

There would be no geographic size limitations placed on renewal zones. Instead, the

boundary of a renewal zone must be continuous. In addition, a renewal zone must have a minimum

population of 4,000 if the area is located within a metropolitan statistical area (at least 1,000 in all

other cases), and a maximum population of not more than 200,000. The population limitations

would not apply to any renewal zone that is entirely within an Indian reservation.
9

 Any gain attributable to the period before January 1, 2002, or after December 31, 2014,

would not be eligible for the zero-percent capital gains rate.

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Required State and local commitments.--In order for an area to be designated as a renewal

zone, State and local governments are required to submit a written course of action in which the

State and local governments promise to take at least four of the following governmental actions:

(1) a reduction of tax rates or fees; (2) an increase in the level of efficiency of local services; (3)

crime reduction strategies; (4) actions to remove or streamline governmental requirements; (5)

involvement by private entities and community groups, such as to provide jobs and job training and

financial assistance; and (6) the gift (or sale at below fair market value) of surplus realty by the

State or local government to community organizations or private companies.

Enterprise community seeking designation as renewal zones.--An enterprise community

could apply for designation as a renewal zone. In making selections of renewal zones, the

Secretary shall take into account the status of a nominated area as an enterprise community. If a

renewal zone designation is granted, then an area's designation as an enterprise community would

cease as of the date the area’s designation as a renewal zone takes effect. 

Tax incentives for renewal zones.--Businesses in renewal zones would have the same tax

incentives as businesses in existing empowerment zones (as modified by this proposal), which

would be available during the period beginning January 1, 2002 and ending December 31, 2009

(i.e., a zero percent capital gains rate for qualifying assets;9 a 15-percent wage credit with respect

to qualifying wages; $35,000 in additional 179 expensing for qualifying property; and the enhanced

tax-exempt bond rules that currently are available to businesses in the Round II empowerment

zones).

Effective Date

The extension of the existing empowerment zone designations (including the D.C.

Enterprise Zone) would be effective after the date of enactment.

The additional section 179 expensing and the more generous tax-exempt bond rules for the

existing empowerment zones generally would be effective after December 31, 2001. The zeropercent capital gains rate would apply to qualifying property purchased after the date of enactment.

The 15-percent wage credit generally would be effective for qualifying wages paid after

December 31, 2001. With respect to the two additional Round I empowerment zones, however,

the wage credit would be effective for qualifying wages paid after December 31, 2004. For the

D.C. Enterprise Zone, the 15-percent wage credit would be effective for qualifying wages paid

after December 31, 2002.

The 30 new renewal zones would be designated by January 1, 2002, and the resulting tax

benefits would be available for the period beginning January 1, 2002, and ending December 31,

2009.
10 Thus, a credit would be available on the date on which the investment is made and for

each of the six anniversary dates thereafter.

11 A specialized small business investment company and a community development

financial institution are treated as satisfying the requirements for a CDE.

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B. New Markets Tax Credit

Present Law

Some tax incentives are available to taxpayers making investments and loans in lowincome communities. For example, tax incentives are available to taxpayers that invest in

specialized small business investment companies licensed by the Small Business Administration to

make loans to, or equity investments in, small businesses owned by persons who are socially or

economically disadvantaged.

Description of Proposal

The proposal would create a new tax credit for qualified equity investments made to

acquire stock in a selected community development entity (“CDE”). The maximum annual amount

of qualifying equity investments would be capped as follows:

Calendar Year

Maximum Qualifying Equity

Investment

2002 .................

2003-2006 ............

$1.0 billion

$1.5 billion per year

The amount of the new tax credit to the investor (either the original purchaser or a

subsequent holder) would be (1) a five-percent credit for the year in which the equity interest is

purchased from the CDE and the first two anniversary dates after the interest is purchased from the

CDE, and (2) a six percent credit on each anniversary date thereafter for the following four

years.10 The taxpayer’s basis in the investment would be reduced by the amount of the credit

(other than for purposes of calculating the zero-percent capital gains rules and section 1202). The

credit would be subject to the general business credit rules.

A CDE is any domestic corporation or partnership (1) whose primary mission is serving or

providing investment capital for low-income communities or low-income persons, (2) that

maintains accountability to residents of low-income communities through representation on

governing or advisory boards of the CDE, and (3) is certified by the Treasury Department as an

eligible CDE.11 No later than 120 days after enactment, the Treasury Department shall issue

guidance that specifies objective criteria to be used by the Treasury to allocate the credits among

eligible CDEs. In allocating the credits, the Treasury Department will give priority to entities
12 If at least 85 percent of the aggregate gross assets of the CDE are invested (directly or

indirectly) in equity interests in, or loans to, qualified active businesses located in low-income

communities, then there would be no need to trace the use of the proceeds from the particular stock

(or other equity ownership) issuance with respect to which the credit is claimed.

13 For areas not within census tracts, the equivalent county division (as defined by the

Bureau of the Census for purposes of defining poverty areas) shall be used for purposes of

defining poverty rates and median family income.

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with records of having successfully provided capital or technical assistance to disadvantaged

businesses or communities.

If a CDE fails to sell equity interests to investors up to the amount authorized within five

years of the authorization, then the remaining authorization is canceled. The Treasury Department

can authorize another CDE to issue equity interests for the unused portion. No authorization can be

made after 2015.

A “qualified equity investment” is defined as stock or a similar equity interest acquired

directly from a CDE in exchange for cash. Substantially all of the investment proceeds must be

used by the CDE to make “qualified low-income community investments.” Qualified low-income

community investments include: (1) equity investments in, or loans to, qualified active businesses

located in low-income communities, (2) certain financial counseling and other services specified

in regulations to businesses and residents in low-income communities, (3) the purchase from

another CDE of any loan made by such entity that is a qualified low income community investment,

or (4) an equity investment in, or loans to, another CDE if substantially all of the investment or

loan by such entity is used to make the qualified low-income community investments described in

(1), (2) or (3).12

The stock or equity interest cannot be redeemed (or otherwise cashed out) by the CDE for

at least seven years. If the entity ceases to be a qualified CDE during the seven-year period

following the taxpayer’s investment, or if the equity interest is redeemed by the issuing CDE

during that seven-year period, then any credits claimed with respect to the equity interest are

recaptured (with interest) and no further credits are allowed.

A “low-income community” is defined as census tracts with: (1) poverty rates of at least

20 percent (based on the most recent census data), or (2) median family income which does not

exceed 80 percent of the greater of metropolitan area income or statewide median family income

(for a non-metropolitan census tract, 80 percent of non-metropolitan statewide median family

income).13 Pursuant to regulations to be prescribed by the Secretary, a “low-income community”

also could be defined as a targeted population of low-income persons who satisfy the poverty rate

and median income requirements set forth above within the targeted area and who otherwise lack

adequate access to loans or equity investments.
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A “qualified active business” is defined as a business which satisfies the following

requirements: (1) at least 50 percent of the total gross income of the business is derived from the

active conduct of trade or business activities in low-income communities; (2) a substantial portion

of the use of the tangible property of such business is used within low-income communities; (3) a

substantial portion of the services performed for such business by its employees is performed in

low-income communities; and (4) less than 5 percent of the average aggregate of unadjusted bases

of the property of such business is attributable to certain financial property or to collectibles (other

than collectibles held for sale to customers). There is no requirement that employees of the

business be residents of the low-income community.

Rental of improved commercial real estate located in a low-income community is a

qualified active business, regardless of the characteristics of the commercial tenants of the

property. The purchase and holding of unimproved real estate is not a qualified active business. 

In addition, a qualified active business does not include (a) any business consisting predominantly

of the development or holding of intangibles for sale or license; (b) operation of any facility

described in sec. 144(c)(6)(B); or (c) any business if a significant equity interest in such business

is held by a person who also holds a significant equity interest in the CDE. A qualified active

business can include an organization that is organized on a non-profit basis.

Effective Date

The proposal would be effective for qualified investments made after December 31, 2001.
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C. Low-Income Housing Tax Credit Cap and

Related Program Modifications

Present Law

In general

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

cost of rental housing occupied by tenants having incomes below specified levels. The credit

percentage for newly constructed or substantially rehabilitated housing that is not Federally

subsidized is adjusted monthly by the IRS so that the 10 annual installments have a present value of

70 percent of the total qualified expenditures. The credit percentage for new substantially

rehabilitated housing also receiving most other Federal subsidies and for existing housing is

calculated to have a present value of 30 percent of the total qualified expenditures. The new credit

authority provided annually is $1.25 per resident of each State. Projects that receive financing

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

receive the low income housing credit are outside the State’s credit cap.

Stacking rule

The present-law stacking rule provides that a State is treated as using its annual allocation

of credit authority ($1.25 per State resident) and any returns during the calendar year followed by

any unused credits carried forward from the preceding year’s credit ceiling and finally any

applicable allocations from the National pool.

Description of Proposal

The proposal would increase the annual State credit caps from be $1.25 to $1.75 per

resident beginning in 2001. Also beginning in 2001, the per capita cap would modified so that

small population states are given a minimum of $2 million of annual credit cap. The $1.75 per

capita credit cap and the $2 million amount are indexed for inflation beginning in calendar year

2002.

The proposal also would make two programmatic changes to the credit. First, the proposal

would modify the stacking rule so that each State would be treated as using its allocation of the

unused State housing credit ceiling (if any) from the preceding calendar before the current year’s

allocation of credit (including any credits returned to the State) and then finally any National pool

allocations. Second, the proposal would provide that assistance received under the Native

American Housing Assistance and Self-Determination Act of 1986 would not be taken into account

in determining whether a building is Federally subsidized for purposes of the credit.
- 11 -

Effective Date

The proposals generally would be effective for calender years after December 31, 2000,

and buildings placed in service after such date in the case of projects that also receive financing

with proceeds of tax-exempt bonds which are issued after such date subject to the private activity

bond volume limit.
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D. Private Activity Bond State Volume Limits

Present Law

Interest on bonds issued by States and local governments is excluded from income if the

proceeds of the bonds are used to finance activities conducted or paid for by the governmental

units. Interest on bonds issued by these governmental units to finance activities carried out and

paid for by private persons (“private activity bonds”) is taxable unless the activities are specified

in the Code. Private activity bonds on which interest may be tax exempt include bonds for

privately-operated transportation facilities (airports, docks and wharves, mass transit, and high

speed rail facilities), privately-owned or privately-provided municipal services (water, sewer,

solid waste disposal, and certain electric and heating facilities), economic development (small

manufacturing facilities and redevelopment in economically depressed areas), and certain social

programs (low-income rental housing, qualified mortgage bonds, student loan bonds, and exempt

activities of charitable organizations described in Code sec. 501(c)(3)).

The volume of tax-exempt private activity bonds that States and local governments may

issue in each calendar year is limited by State-wide volume limits. The volume limits do not

apply to private activity bonds to finance airports, docks and wharves, certain governmentally

owned, but privately operated, solid waste disposal facilities, certain high speed rail facilities,

and certain types of private activity tax-exempt bonds that are subject to other limits on their

volume (qualified veterans’ mortgage bonds and certain empowerment zone and enterprise

community bonds). The current annual volume limits are $50 per resident of the State or $150

million (if greater). An increase in these volume limits to $75 per resident or $225 million (if

greater) is scheduled to be phased-in during calender years 2003-2007.

Description of Proposal

The bill accelerates the currently scheduled phased increase in the present-law annual

State private activity bond volume limits to $75 per resident of each State or $225 million (if

greater) beginning in calendar year 2001. In addition, the $75 per resident limit and the $225

million State limit would be indexed for inflation beginning in calendar year 2002.

Effective Date

The proposal would be effective for calendar years after December 31, 2000.
- 13 -

E. Mortgage Revenue Bonds

Present Law

Qualified mortgage bonds (QMBs) are tax-exempt bonds, the proceeds of which generally

must be used to make mortgage loans to first-time homebuyers. The recipients of QMB-financed

loans must meet purchase price, income, and other restrictions. Generally, the purchase price of

an assisted home may not exceed 90 percent (110 percent in targeted areas) of the average area

purchase price.

Description of Proposal

The proposal would modify the purchase price rule for QMB financing. Specifically,

QMB financing would be allowable to qualified residences the purchase price of which does not

exceed the greater of (1) 90 percent of the average area purchase price; or (2) 3.5 times the

applicable median family income. The applicable median family income would be defined as

under the present-law QMB income restriction. The purchase price requirement applicable to

targeted areas (i.e., 110 percent) would not be changed.

Effective Date

The proposal would be effective for bonds issued after the date of enactment.
- 14 -

F. Tax Credit for Renovating Historic Homes

Present Law

Present law provides an income tax credit for certain expenditures incurred in

rehabilitating certified historic structures and certain nonresidential buildings placed in service

before 1936 (sec. 47). The amount of the credit is determined by multiplying the applicable

rehabilitation percentage by the basis of the property that is attributable to qualified rehabilitation

expenditures. The applicable rehabilitation percentage is 20 percent for certified historic

structures and 10 percent for qualified rehabilitated buildings (other than certified historic

structures) that were originally placed in service before 1936.

A nonresidential building is eligible for the 10-percent credit only if the building is

substantially rehabilitated and a specific portion of the existing structure of the building is retained

in place upon completion of the rehabilitation. A residential or nonresidential building is eligible

for the 20-percent credit that applies to certified historic structures only if the building is

substantially rehabilitated (as determined under the eligibility rules for the 10-percent credit). In

addition, the building must be listed in the National Register or the building must be located in a

registered historic district and must be certified by the Secretary of the Interior as being of

historical significance to the district.

Description of Proposal

The proposal would permit a taxpayer to claim a 20-percent credit for qualified

rehabilitation expenditures made with respect to a qualified historic home which the taxpayer

subsequently occupies as his or her principal residence for at least five years. The total credit

which could be claimed by the taxpayer would be limited to $20,000. Any eligible credit not

claimed by the taxpayer in the year in which the qualified rehabilitation expenditures are made

may be carried forward to each of the succeeding 10 years.

The proposal would apply to (1) structures listed in the National Register; (2) structures

located in a registered national, State, or local historic district, and certified by the Secretary of

the Interior as being of historic significance to the district, but only if the median income of the

census tract within which the building is located is less than twice the State median income; (3)

any structure designated as being of historic significance under a State or local statute, if such

statute is certified by the Secretary of the Interior as achieving the purpose of preserving and

rehabilitating buildings of historic significance.

A building generally would be considered substantially rehabilitated if the qualified

rehabilitation expenditures incurred during a 24-month measuring period exceed the greater of (1)

the adjusted basis of the building as of the later of the first day of the 24-month period or the

beginning of the taxpayer's holding period for the building, or (2) $5,000. In the case of structures

in empowerment zones, in enterprise communities, in a census tract in which 70 percent of families

have income which is 80 percent or less of the State median family income, and areas of chronic
- 15 -

distress as designated by the State and approved by the Secretary of Housing and Urban

Development, only the $5,000 expenditure requirement would apply. In addition, for all

structures, at least 5 percent of the rehabilitation expenditures would have to be allocable to the

exterior of the structure.

To qualify for the credit, the rehabilitation must be certified by a State or local government

subject to conditions specified by the Secretary of the Interior.

A taxpayer who purchases a structure on which qualified rehabilitation expenditures have

been made may claim credit for such expenditures if the taxpayer is the first purchaser of the

structure within five years of the date the rehabilitation was completed and if no credit was

allowed to the seller with respect to the qualified expenditures. Alternatively, a taxpayer may

elect to receive a historic rehabilitation mortgage credit certificate in lieu of the credit otherwise

allowable. A historic rehabilitation mortgage credit certificate may be transferred to a lending

institution in exchange for which the lending institution provides the taxpayer with a reduction in

interest rate on a mortgage on a qualifying structure. The lending institution would then claim the

allowable credits against its tax liability. In the case of a targeted area or enterprise community or

empowerment zone, the taxpayer may elect to allocate all or a portion of the mortgage credit

certificate to reduce the down payment required for purchase of the structure.

If a taxpayer ceases to maintain the structure as his or her personal residence within five

years from the date of the rehabilitation, the credit would be recaptured on a pro rata basis.

Effective Date

The proposal would be effective for expenditures paid or incurred beginning after

December 31, 2001.
- 16 -

G. Expensing of Environmental Remediation Expenditures

and Expansion of Qualifying Sites (“Brownfields”)

Present Law

Taxpayers can elect to treat certain environmental remediation expenditures that would

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

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

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

contaminated site.

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

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

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

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

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

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

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

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

described in (3) above. However, sites that are identified on the national priorities list under the

Comprehensive Environmental Response, Compensation, and Liability Act of 1980 cannot qualify

as targeted areas.

Eligible expenditures are those paid or incurred before January 1, 2002.

Description of Proposal

The proposal would extend the expiration date for eligible expenditures to include those

paid or incurred before January 1, 2004.

In addition, the proposal would eliminate the targeted area requirement, thereby, expanding

eligible sites to include any site containing (or potentially containing) a hazardous substance that is

certified by the appropriate State environmental agency. However, expenditures undertaken at

sites that are identified on the national priorities list under the Comprehensive Environmental

Response, Compensation, and Liability Act of 1980 would continue to not qualify as eligible

expenditures.

Effective Date

The proposal to extend the expiration date would be effective upon the date of enactment. 

The proposal to expand the class of eligible sites would be effective for expenditures paid or

incurred after the date of enactment.
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H. Tax Credit Bonds for the National Railroad

Passenger Corporation (“Amtrak”)

Present Law

Present law does not authorize the issuance by any private, for-profit corporation of bonds

the interest on which is tax-exempt or eligible for an income tax credit. Tax-exempt bonds may be

issued by States or local governments to finance their governmental activities or to finance certain

capital expenditures of private businesses or loans to individuals. Additionally, States or local

governments may issue tax-credit bonds to finance the operation of "qualified zone academies."

Tax-exempt bonds

Interest on bonds issued by States or local governments to finance direct activities of those

governmental units is excluded from tax (sec. 103). In addition, interest on certain bonds ("private

activity bonds") issued by States or local governments acting as conduits to provide financing for

private businesses or individuals is excluded from income if the purpose of the borrowing is

specifically approved in the Code (sec. 141). Examples of approved private activities for which

States or local governments may provide tax-exempt financing include transportation facilities

(airports, ports, mass commuting facilities, and certain high speed intercity rail facilities); public

works facilities such as water, sewer, and solid waste disposal; and certain social welfare

programs such as low-income rental housing, student loans, and mortgage loans to certain firsttime homebuyers. High speed intercity rail facilities eligible for tax-exempt financing include

land, rail, and stations (but not rolling stock) for fixed guideway rail transportation of passengers

and their baggage using vehicles that are reasonably expected to operate at speeds in excess of 150

miles per hour between scheduled stops.

Issuance of most private activity bonds is subject to annual State volume limits of $50 per

resident ($150 million if greater). These volume limits are scheduled to increase to $75 per

resident ($225 million if greater) over the period 2003 through 2007.

Investment earnings on all tax-exempt bonds, including earnings on invested sinking funds

associated with such bonds is restricted by the Code to prevent the issuance of bonds earlier or in

a greater amount than necessary for the purpose of the borrowing. In general, all profits on

investment of such proceeds must be rebated to the Federal Government. Interest on bonds

associated with invested sinking funds is taxable.

Tax credit bonds for qualified zone academies

As an alternative to traditional tax-exempt bonds, certain States or local governments are

given authority to issue "qualified zone academy bonds." A total of $400 million of qualified zone

academy bonds is authorized to be issued in each year of 1998 through 2001. The $400 million is

allocated to States according to their respective populations of individuals below the poverty line. 
14 The Secretary of Transportation could allocate a portion of Amtrak's tax credit bond

authority in any year to the Alaska Railroad for use in financing projects of that railroad that would

qualify under the restrictions applicable to Amtrak.

15 $92 million of Amtrak's tax credit bond authority for Northeast corridor projects would

be set aside for the acquisition and installation of platform facilities, performance of railroad force

account work necessary to complete improvements below street grade, and any other necessary

improvements related to construction at the new railroad station at the James A. Farley Post Office

Building in New York City. Projects financed with this $92 million of tax credit bonds would not

be subject to the State contribution requirement, described below.

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Qualified zone academy bonds are taxable bonds with respect to which the investor

receives an income tax credit equal to an assumed interest rate set by the Treasury Department to

allow issuance of the bonds without discount and without interest cost to the issuer. The bonds

may be used for renovating, providing equipment to, developing course materials for, or training

teachers in eligible schools. Eligible schools are elementary and secondary schools with respect

to which private entities make contributions equaling at least 10 percent of the bond proceeds.

Only financial institutions are eligible to claim the credits on qualified zone academy

bonds. The amount of the credit is taken into income. The credit may be claimed against both

regular income tax and AMT liability.

There are no arbitrage restrictions applicable to investment earnings on qualified zone

academy bond proceeds.

Description of Proposal

The proposal would authorize the National Railroad Passenger Corporation ("Amtrak") to

issue an aggregate amount of $10 billion of tax credit bonds to finance its capital projects.14

Annual issuance of the bonds could not exceed $1 billion per year (plus any authorized amount that

was not issued in previous years) during the ten Federal fiscal year period, 2001-2010. Unused

bond authority could be carried forward to succeeding years until used, subject to a limitation that

no tax credit bonds could be issued after fiscal year 2015.

Projects eligible for tax-credit bond financing would be defined as the acquisition,

financing, or refinancing of equipment, rolling stock, and other capital improvements for (1) the

northeast rail corridor between Washington, D.C. and Boston, Massachusetts;15 (2) high-speed rail

corridors designated under section 104(d)(2) of Title 23 of the United States Code; and (3) nondesignated high-speed rail corridors, including station rehabilitation, track or signal

improvements, or grade crossing elimination. The last purpose would be limited to a maximum of

10 percent of the proceeds of any bond issue. At least 70 percent of the tax credit bonds would be

required to be issued for the purposes described in (2) and (3).
16 The required State matching contributions could not be derived from Federal monies. 

Any Federal Highway Trust Fund monies transferred to the States would be treated as Federal

monies for this purpose.

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As with qualified zone academy bonds, the interest rate on Amtrak tax credit bonds would

be set to allow issuance of the bonds at par, i.e., without any interest cost to Amtrak. In general,

proceeds of Amtrak tax credit bonds would have to be spent within 36 months after the bonds were

issued.

Amtrak tax credit bonds could only be issued for projects that were approved by the

Department of Transportation and with respect to which Amtrak had binding commitments from

one or more States to make matching contributions of at least 20 percent of the project cost.16 The

State matching contributions, along with earnings on investment of the tax-credit bond proceeds

would be invested in a trust account (i.e., an sinking fund) and used along with earnings on the trust

account for repayment of the principal amount of the bonds.

Amtrak tax credit bonds could be owned (and income tax credits claimed) by any taxpayer. 

The amount of the credit would be includable in the bondholder's income. Additionally,

provisions are included in the proposal to allow the credits to be stripped and sold to different

investors than the investors in the bond principal.

The proposal requires Amtrak to issue a multi-year capital plan to Congress and the

Administration. It also includes provisions for independent project management oversight by a

professional non-Amtrak entity (similar to the Federal Transit Administration); provisions for

vertification by the DOT Inspector General that the funds deposited in the escrow account are

sufficient to ensure full repayment of the bond principal; and criteria to evaluate and select capital

projects in order to optimize the investments made.

Effective Date

The proposal would be effective for tax credit bonds issued by Amtrak after September 30,

2000.
17 43 U.S.C. 1601 et. seq.

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I. Tax Treatment of Alaska Native Settlement Trusts

Present Law

An Alaska Native Settlement Corporation (“ANC”) may establish a Settlement Trust

(“Trust”) under section 39 of the Alaska Native Claims Settlement Act (“ANCSA”) 17 and transfer

money or other property to such Trust for the benefit of beneficiaries who constitute all or a class

of the shareholders of the ANC, to promote the health, education and welfare of the beneficiaries

and preserve the heritage and culture of Alaska Natives.

With certain exceptions, once an ANC has made a conveyance to a Trust, the assets

conveyed shall not be subject to attachment, distraint, or sale or execution of judgement, except

with respect to the lawful debts and obligations of the Trust.

The Internal Revenue Service has indicated that contributions to a Trust constitute

distributions to the beneficiary-shareholders at the time of the contribution and are treated as

dividends to the extent of earnings and profits as provided under section 301 of the Code. The

Trust and its beneficiaries are taxed in accordance with trust rules.

Description of Proposal

An Alaska Native Corporation may establish a Trust under section 39 of ANCSA and if the

Trust makes an election for its first taxable year ending after the date of enactment of the proposal,

no amount will be included in the gross income of a beneficiary of such Trust by reason of a

contribution to the Trust. In addition, unless the Trust fails to meet the transferability requirements

of the provision, income of the Trust, whether accumulated or distributed, will be taxed only to the

Trust (and not to beneficiaries) at the lowest individual tax rates of 15 percent for ordinary income

(and the capital gains rate applicable to individuals subject to such 15 percent rate), rather than at

the higher rates generally applicable to trusts or to higher tax bracket beneficiaries.

The earnings and profits of the ANC would not be reduced by the amount of contributions

to the Trust at the time of the contributions. However, the ANC earnings and profits would be

reduced (up to the amount of the contributions) as distributions are thereafter made by the Trust

that would exceed the Trusts’s total undistributed net income (less taxes paid) plus tax-exempt

income for all prior years during which an election is in effect plus for the current year, computed

under Subchapter J. In addition, such distributions that exceed such amounts would be reported

and taxed to beneficiaries as if distributed by the ANC in the year of the distribution by the Trust,

and would be treated as dividends to beneficiaries to the extent the ANC then has current or

accumulated earnings and profits.

If the beneficial interests in the Trust or the shares of the ANC may be sold or exchanged to

a person in a manner that would not be permitted under ANCSA if the interests were Settlement
- 21 -

Common Stock (generally, to a person other than an Alaska Native), then all assets of the Trust that

had not been distributed as of the beginning of that taxable year of the Trust are taxed to the extent

they would be if they were distributed at that time. Thereafter, the Trust and its beneficiaries are

generally subject to the rules of subchapter J and to the generally applicable trust income tax rates.

Effective Date

The provision would be effective for taxable years of electing Settlement Trusts, their

beneficiaries, and sponsoring Native Corporations ending after the date of enactment, and to

contributions made to electing Settlement Trusts during such year and thereafter.
- 22 -

J. Treatment of Indian Tribes as Non-Profit Organizations

and State or Local Governments for Purposes

of the Federal Unemployment Tax (“FUTA”)

Present Law

Present law imposes a net tax on employers equal to 0.8 percent of the first $7,000 paid

annually to each employee. The current gross FUTA tax is 6.2 percent, but employers in States

meeting certain requirements and having no delinquent loans are eligible for a 5.4 percent credit

making the net Federal tax rate 0.8 percent. Both non-profit organizations and State and local

governments are not required to pay FUTA taxes. Instead they may elect to reimburse the

unemployment compensation system for unemployment compensation benefits actually paid to their

former employees. Generally, Indian tribes are not eligible for the reimbursement treatment

allowable to non-profit organizations and State and local governments.

Description of Proposal

The proposal would provide that an Indian tribe (including any subdivision, subsidiary, or

business enterprise chartered and wholly owned by an Indian tribe) would be treated like a nonprofit organization or State or local government for FUTA purposes (i.e., given an election to

choose the reimbursement treatment).

Effective Date

The proposal would be effective with respect to service performed in calendar years

beginning after the date of enactment.
- 23 -

K. Elimination of the Tax on Awards Under National Health Service Corps Scholarship

Program and F. Edward Hebert Armed Forces Health Professions

Scholarship and Financial Assistance Program

Present Law

The National Health Service Corps Scholarship Program (the “NHSC Scholarship

Program”) and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial

Assistance Program (the “Armed Forces Scholarship Program”) provide education awards to

participants on condition that the participants provide certain services. In the case of the NHSC

Scholarship Program, the recipient of the scholarship is obligated to provide medical services in a

geographic area (or to an underserved population group or designated facility) identified by the

Public Health Service as having a shortage of health-care professionals. In the case of the Armed

Forces Scholarship Program, the recipient of the scholarship is obligated to serve a certain number

of years in the military at an armed forces medical facility. Because the recipients are required to

perform services in exchange for the education awards, the awards used to pay higher education

expenses are taxable income to the recipient.

Section 117 excludes from gross income amounts received as a qualified scholarship by an

individual who is a candidate for a degree and used for tuition and fees required for the enrollment

or attendance (or for fees, books, supplies, and equipment required for courses of instruction) at a

primary, secondary, or post-secondary educational institution. The tax-free treatment provided by

section 117 does not extend to scholarship amounts covering regular living expenses, such as room

and board. In addition to the exclusion for qualified scholarships, section 117 provides an

exclusion from gross income for qualified tuition reductions for certain education provided to

employees (and their spouses and dependents) of certain educational organizations.

Section 117(c) specifically provides that the exclusion for qualified scholarships and

qualified tuition reductions does not apply to any amount received by a student that represents

payment for teaching, research, or other services by the student required as a condition for

receiving the scholarship or tuition reduction.

Section 134 provides that any “qualified military benefit,” which includes any allowance,

is excluded from gross income if received by a member or former member of the uniformed

services if such benefit was excludable from gross income on September 9, 1986.

Description of Proposal

The proposal would provide that amounts received by an individual under the NHSC

Scholarship Program or the Armed Forces Scholarship Program are eligible for tax-free treatment

as qualified scholarships under section 117, without regard to any service obligation by the

recipient.
- 24 -

Effective Date

The proposal would be effective for education awards received after December 31, 1993.
18 The taxpayer’s basis in the equipment would be reduced by the amount of credit

claimed. 

- 25 -

L. Broadband Internet Access Tax Credit

Present Law

Present law does not provide a credit for investments in telecommunications infrastructure.

Description of Proposal

The proposal would provide a 10 percent credit of the qualified expenditures incurred by

the taxpayer with respect to qualified equipment with which the taxpayer offers “current

generation” broadband services to subscribers in rural and underserved areas. In the addition, the

proposal would provide a 20 percent credit of the qualified expenditures incurred by the taxpayer

with respect to qualified equipment with which the taxpayer offers “next generation” broadband

services to subscribers in rural areas, underserved areas, and to residential subscribers. Current

generation broadband services would be defined as the transmission of signals at a rate of at least

1.5 million bits per second to the subscriber and at a rate of at least 200,000 bits per second from

the subscriber. Next generation broadband services would be defined as the transmission of

signals at a rate of at least 22 million bits per second to the subscriber and at a rate of at least 10

million bits per second from the subscriber.

Qualified expenditures would be those amounts otherwise chargeable to the capital account

with respect to the purchase and installation of qualified equipment for which depreciation is

allowable under section 168.18 In the case of current generation broadband services, qualified

expenditures would be those which are incurred by the taxpayer before January 1, 2003. In the

case of next generation broadband services, qualified expenditures would be those which are

incurred by the taxpayer after December 31, 2001, and before January 1, 2005. The expenditures

would be taken into account for purposes of claiming the credit in the first taxable year in which

the taxpayer provides broadband service to at least 10 percent of the potential subscribers. In the

case of a taxpayer who incurs expenditures for equipment capable of serving both subscribers in

qualifying areas and other areas, qualifying expenditures are determined by multiplying otherwise

qualifying expenditures by the ratio of the number of potential qualifying subscribers to all

potential subscribers the qualifying equipment would be capable of serving.

Qualifying equipment must be capable of providing broadband services at any time to each

subscriber who is utilizing such services. In the case of a telecommunications carrier, qualifying

equipment is only that equipment that extends from the last point of switching to the outside of the

building in which the subscriber is located. In the case of a commercial mobile service carrier,

qualifying equipment is only that equipment that extends from the customer side of a mobile

telephone switching office to a transmission/reception antenna (including the antenna) of the

subscriber. In the case of a cable operator or open video system operator, qualifying equipment is

only that equipment that extends from the customer side of the headend to the outside of the
19 In the case of an area outside of a metropolitan area, this area median family income

must be less than 70 percent of statewide median family income.

- 26 -

building in which the subscriber is located. In the case of a satellite carrier or other wireless

carrier (other than a telecommunications carrier), qualifying equipment is only that equipment that

extends from a transmission/reception antenna (including the antenna) to a transmission/reception

antenna on the outside of the building used by the subscriber. In addition, any packet switching

equipment deployed in connection with other qualifying equipment would be qualifying equipment,

regardless of location, provided that it is the last such equipment in a series as part of transmission

of a signal to a subscriber or the first in a series in the transmission of a signal from a subscriber.

A rural area would be any census tract which is not within 10 miles of any incorporated or

census designated place with a population of more than 25,000 and which is not within a county

with a population density of more than 500 people per square mile. An underserved area would

be any census tract which is located in an empowerment zone, enterprise community, renewal

zone, or any census tract in which the poverty level is greater than or equal to 30 percent and in

which the median family income is less than 70 percent of the greater of metropolitan area median

family income or statewide median family income.19 A residential subscriber would be any

individual who purchases broadband service to be delivered to his or her dwelling.

Effective Date

The proposal would be effective for expenditures incurred after December 31, 2000.
- 27 -

M. Contribution in Aid of Construction

Present Law

Section 118(a) provides that gross income of a corporation does not include a contribution

to its capital. In general, section 118(b) provides that a contribution to the capital of a corporation

does not include any contribution in aid of construction or any other contribution as a customer or

potential customer and, as such, is includible in gross income of the corporation. However, for

any amount of money or property received by a regulated public utility that provides water or

sewerage disposal services such amount shall be considered a contribution to capital (excludible

from gross income) so long as such amount: (1) is a contribution in aid of construction, and (2) is

not included in the taxpayer’s rate base for rate-making purposes. If the contribution is in property

other than water or sewerage disposal facilities, the amount is generally excludible from gross

income only if the amount is expended to acquire or construct water or sewerage disposal

facilities within a specified time period. A contribution in aid of construction does not include

customer connection fees or amounts paid as service charges for starting or stopping services.

Description of Proposal

The proposal would define contribution in aid of construction to include customer

connection fees (including amounts paid to connect the customer’s line to, or extend, a main water

or sewer line). Thus, the proposal would permit customer connection fees received by a regulated

public utility that provides water or sewerage disposal services to be treated as nontaxable

contributions to capital (excludible from gross income). Amounts paid as a service charge for

starting or stopping services to a customer would continue to be includible in gross income of a

taxpayer.

Effective Date

The proposal would be effective for amounts received after date of enactment.