DESCRIPTION OF THE TAX PROVISIONS 

OF THE CHAIRMAN’S AMENDMENT IN THE NATURE 

OF A SUBSTITUTE TO H.R. 3920, THE 

“TRADE AND GLOBALIZATION ASSISTANCE ACT OF 2007” 

Scheduled for Markup 

By the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on October 24, 2007 

 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

October 23, 2007 

JCX-102-07
i 

CONTENTS 

Page

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

A. Modify the Health Coverage Tax Credit ............................................................................ 2 

B. Manufacturing Redevelopment Zones................................................................................ 9 

1. Manufacturing redevelopment zone tax credit bonds................................................. 10 

2. Manufacturing redevelopment zone private activity bonds........................................ 16 

3. Increase the low-income housing credit cap for manufacturing redevelopment 

zones ........................................................................................................................... 19 

4. Expansion of the Work Opportunity Tax Credit......................................................... 21 

C. Delay Implementation of Worldwide Interest Allocation ................................................ 27 
1 

INTRODUCTION 

The House Committee on Ways & Means has scheduled a markup on October 24, 2007. 

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

of the tax provisions of the Chairman’s amendment in the nature of a substitute to H.R. 3920, the 

Trade and Globalization Assistance Act of 2007.

 1

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

Provisions of the Chairman’s Amendment in the Nature of a Substitute to H.R. 3920, the “Trade and 

Globalization Assistance Act of 2007,” (JCX-102-07), October 23, 2007. This document can also be 

found on our website at www.house.gov/jct. 
2 

A. Modify the Health Coverage Tax Credit 

Present Law

In general 

Under the Trade Act of 2002,2 in the case of taxpayers who are eligible individuals, a 

refundable tax credit is provided for 65 percent of the taxpayer’s expenses for qualified health 

insurance of the taxpayer and qualifying family members for each eligible coverage month 

beginning in the taxable year. The credit is commonly referred to as the health coverage tax 

credit (“HCTC”). The credit is available only with respect to amounts paid by the taxpayer. The 

credit is available on an advance basis. 

Qualifying family members are the taxpayer’s spouse and any dependent of the taxpayer 

with respect to whom the taxpayer is entitled to claim a dependency exemption. Any individual 

who has other specified coverage is not a qualifying family member. 

Persons eligible for the credit

Eligibility for the credit is determined on a monthly basis. In general, an eligible 

coverage month is any month if, as of the first day of the month, the taxpayer (1) is an eligible 

individual, (2) is covered by qualified health insurance, (3) does not have other specified 

coverage, and (4) is not imprisoned under Federal, State, or local authority.3

 In the case of a 

joint return, the eligibility requirements are met if at least one spouse satisfies the requirements. 

An eligible individual is an individual who is (1) an eligible TAA recipient, (2) an 

eligible alternative TAA recipient, or (3) an eligible Pension Benefit Guaranty Corporation 

(“PBGC”) pension recipient. 

An individual is an eligible TAA recipient during any month if the individual (1) is 

receiving for any day of such month a trade readjustment allowance4

 or who would be eligible to 

receive such an allowance but for the requirement that the individual exhaust unemployment 

benefits before being eligible to receive an allowance and (2) with respect to such allowance, is 

covered under a certification issued under subchapter A or D of chapter 2 of title II of the Trade 

Act of 1974. An individual is treated as an eligible TAA recipient during the first month that 

such individual would otherwise cease to be an eligible TAA recipient. 

 2

 Pub. L. No. 107-210 (2002). 

3

 An eligible month must begin after November 4, 2002. This date is 90 days after the date of 

enactment of the Trade Act of 2002, which was August 6, 2002. 

4

 Part I of subchapter B, or subchapter D, of chapter 2 of title II of the Trade Act of 1974. 

Among other requirements, payment of a trade readjustment allowance is conditioned upon the individual 

enrolling in certain training programs or receiving a waiver of training requirements. 
3 

An individual is an eligible alternative TAA recipient during any month if the individual 

(1) is a worker described in section 246(a)(3)(B) of the Trade Act of 1974 who is participating in 

the program established under section 246(a)(1) of such Act, and (2) is receiving a benefit for 

such month under section 246(a)(2) of such Act. An individual is treated as an eligible 

alternative TAA recipient during the first month that such individual would otherwise cease to be 

an eligible TAA recipient. 

An individual is a PBGC pension recipient for any month if he or she (1) is age 55 or 

over as of the first day of the month, and (2) is receiving a benefit any portion of which is paid 

by the PBGC. The IRS has interpreted the definition of PBGC pension recipient to also include 

certain alternative recipients and recipients who have received certain lump-sum payments on or 

after August 6, 2002. 

An otherwise eligible taxpayer is not eligible for the credit for a month if, as of the first 

day of the month, the individual has other specified coverage. Other specified coverage is 

(1) coverage under any insurance which constitutes medical care (except for insurance 

substantially all of the coverage of which is for excepted benefits)5

 maintained by an employer 

(or former employer) if at least 50 percent of the cost of the coverage is paid by an employer6

 (or 

former employer) of the individual or his or her spouse or (2) coverage under certain 

governmental health programs. Specifically, an individual is not eligible for the credit if, as of 

the first day of the month, the individual is (1) entitled to benefits under Medicare Part A, 

enrolled in Medicare Part B, or enrolled in Medicaid or SCHIP, (2) enrolled in a health benefits 

plan under the Federal Employees Health Benefit Plan, or (3) entitled to receive benefits under 

chapter 55 of title 10 of the United States Code (relating to military personnel). An individual is 

not considered to be enrolled in Medicaid solely by reason of receiving immunizations. 

A person is not an eligible individual if he or she may be claimed as a dependent on 

another person’s tax return. A special rule applies with respect to alternative TAA recipients. 

For eligible alternative TAA recipients, an individual has other specified coverage if the 

individual is (1) eligible for coverage under any qualified health insurance (other than coverage 

 5

 Excepted benefits are: (1) coverage only for accident or disability income or any combination 

thereof; (2) coverage issued as a supplement to liability insurance; (3) liability insurance, including 

general liability insurance and automobile liability insurance; (4) worker’s compensation or similar 

insurance; (5) automobile medical payment insurance; (6) credit-only insurance; (7) coverage for on-site 

medical clinics; (8) other insurance coverage similar to the coverages in (1)-(7) specified in regulations 

under which benefits for medical care are secondary or incidental to other insurance benefits; (9) limited 

scope dental or vision benefits; (10) benefits for long-term care, nursing home care, home health care, 

community-based care, or any combination thereof; and (11) other benefits similar to those in (9) and (10) 

as specified in regulations; (12) coverage only for a specified disease or illness; (13) hospital indemnity or 

other fixed indemnity insurance; and (14) Medicare supplemental insurance. 

6

 An amount is considered paid by the employer if it is excludable from income. Thus, for 

example, amounts paid for health coverage on a salary reduction basis under an employer plan are 

considered paid by the employer. A rule aggregating plans of the same employer applies in determining 

whether the employer pays at least 50 percent of the cost of coverage. 
4 

under a COBRA continuation provision, State-based continuation coverage, or coverage through 

certain State arrangements) under which at least 50 percent of the cost of coverage is paid or 

incurred by an employer of the taxpayer or the taxpayer’s spouse or (2) covered under any such 

qualified health insurance under which any portion of the cost of coverage is paid or incurred by 

an employer of the taxpayer or the taxpayer’s spouse. 

Qualified health insurance

Qualified health insurance eligible for the credit is: (1) COBRA continuation coverage; 

(2) State-based continuation coverage provided by the State under a State law that requires such 

coverage; (3) coverage offered through a qualified State high risk pool; (4) coverage under a 

health insurance program offered to State employees or a comparable program; (5) coverage 

through an arrangement entered into by a State and a group health plan, an issuer of health 

insurance coverage, an administrator, or an employer; (6) coverage offered through a State 

arrangement with a private sector health care coverage purchasing pool; (7) coverage under a 

State-operated health plan that does not receive any Federal financial participation; (8) coverage 

under a group health plan that is available through the employment of the eligible individual’s 

spouse; and (9) coverage under individual health insurance if the eligible individual was covered 

under individual health insurance during the entire 30-day period that ends on the date the 

individual became separated from the employment which qualified the individual for the TAA 

allowance, the benefit for an eligible alternative TAA recipient, or a pension benefit from the 

PBGC, whichever applies.7

Qualified health insurance does not include any State-based coverage (i.e., coverage 

described in (2)-(7) in the preceding paragraph), unless the State has elected to have such 

coverage treated as qualified health insurance and such coverage meets certain requirements.8

 

Such State coverage must provide that each qualifying individual is guaranteed enrollment if the 

individual pays the premium for enrollment or provides a qualified health insurance costs 

eligibility certificate and pays the remainder of the premium. In addition, the State-based 

coverage cannot impose any pre-existing condition limitation with respect to qualifying 

individuals. State-based coverage cannot require a qualifying individual to pay a premium or 

contribution that is greater than the premium or contribution for a similarly situated individual 

who is not a qualified individual. Finally, benefits under the State-based coverage must be the 

same as (or substantially similar to) benefits provided to similarly situated individuals who are 

not qualifying individuals. A qualifying individual is an eligible individual who seeks to enroll 

in the State-based coverage and who has aggregate periods of creditable coverage9

 of three 

 7

 For this purpose, “individual health insurance” means any insurance which constitutes medical 

care offered to individuals other than in connection with a group health plan. Such term does not include 

Federal- or State-based health insurance coverage. 

8

 For guidance on how a State elects a health program to be qualified health insurance for 

purposes of the credit, see Rev. Proc. 2004-12, 2004-1 C.B. 528. 

9

 Creditable coverage is determined under the Health Insurance Portability and Accountability 

Act. Sec. 9801(c). 
5 

months or longer, does not have other specified coverage, and who is not imprisoned. A 

qualifying individual also includes qualified family members of such an eligible individual. 

Qualified health insurance does not include coverage under a flexible spending or similar 

arrangement or any insurance if substantially all of the coverage is for excepted benefits. 

Other rules

Amounts taken into account in determining the credit may not be taken into account in 

determining the amount allowable under the itemized deduction for medical expenses or the 

deduction for health insurance expenses of self-employed individuals. Amounts distributed from 

a medical savings account or health savings accounts are not eligible for the credit. The amount 

of the credit available through filing a tax return is reduced by any credit received on an advance 

basis. Married taxpayers filing separate returns are eligible for the credit; however, if both 

spouses are eligible individuals and the spouses file separate returns, then the spouse of the 

taxpayer is not a qualifying family member. 

The Secretary of the Treasury is authorized to prescribe such regulations and other 

guidance as may be necessary or appropriate to carry out the provision. 

Health Insurance Portability and Accountability Act of 1996

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) imposes a 

number of requirements with respect to health coverage that are designed to provide protections 

to health plan participants. Among other things, HIPAA generally provides that a pre-existing 

condition exclusion may be imposed only if: (1) the exclusion relates to a condition (whether 

physical or mental), regardless of the cause of the condition, for which medical advice, 

diagnosis, care, or treatment was recommended or received within the 6-month period ending on 

the enrollment date; (2) the exclusion extends for a period of not more than 12 months after the 

enrollment date; and (3) the period of any pre-existing condition exclusion is reduced by the 

length of the aggregate of the periods of creditable coverage (if any) applicable to the participant 

as of the enrollment date. In general terms, creditable coverage includes health care coverage 

without a gap of more than 63 days. Special limitations to the preexisting condition exclusion 

rules apply in the case of newborns, adopted children, and pregnancy. 

Description of Proposal

In general

The proposal sunsets the health coverage tax credit and makes several other 

modifications. 

Increase in credit percentage amount

The proposal increases the amount of the credit to 85 percent of the taxpayer’s expenses 

for qualified health insurance of the taxpayer and qualifying family members. 
6 

Elimination of training requirement for individuals receiving unemployment compensation

The proposal modifies the definition of an eligible TAA recipient to eliminate the 

requirement that an individual be enrolled in training in the case of an individual receiving 

unemployment compensation. 

Eligibility made retroactive to TAA-related loss of employment

Under the proposal, in the case of an individual who is an eligible TAA recipient or 

eligible alternative TAA recipient for any month, such individual is treated as an eligible 

individual for any month preceding such month which begins after the later of (1) the date of 

separation from employment which gives rise to the individual being an eligible TAA recipient 

or eligible alternative TAA recipient, or (2) December 1, 2007. 

Continued qualification of family members after certain events

The proposal provides continued eligibility for the credit for family members after certain 

events. The rule applies in the case of (1) the eligible individual becoming entitled to Medicare, 

(2) divorce and (3) death. 

In the case of a month which would be an eligible coverage month with respect to an 

eligible individual except that the individual is entitled to benefits under Medicare Part A or 

enrolled in Medicare Part B, the month is treated as an eligible coverage month with respect to 

the individual solely for purposes of determining the amount of the credit with respect to 

qualifying family members (i.e., the credit is allowed for expenses paid for qualifying family 

members after the eligible individual is eligible for Medicare). Such treatment applies only with 

respect to the first 36 months after the eligible individual is first entitled to benefits under 

Medicare Part A or enrolled in Medicare Part B. 

In the case of the finalization of a divorce between an eligible individual and the 

individual’s spouse, the spouse is treated as an eligible individual for a period of 36 months 

beginning with the date of the finalization of the divorce. Under such rule, the only qualifying 

family members that may be taken into account with respect to the spouse are those individuals 

who were qualifying family members immediately before such divorce finalization. 

In the case of the death of an eligible individual, the spouse of such individual 

(determined at the time of death) is treated as an eligible individual for a period of 36 months 

beginning with the date of death. Under such rule, the only qualifying family members that may 

be taken into account with respect to the spouse are those individuals who were qualifying 

family members immediately before such death. In addition, any individual who was a 

qualifying family member of the decedent immediately before such death10 is treated as an 

eligible individual for a period of 36 months beginning with the date of death. In determining 

the amount of the credit, only such qualifying family member may be taken into account. 

 10 In the case of a dependent, the rule applies to the taxpayer to whom the personal exemption 

deduction under section 151 is allowable. 
7 

Modification of creditable coverage requirement

The proposal eliminates the three-month requirement of creditable coverage in order for 

consumer protections to apply to State-based coverage. Under the proposal, in order for the 

consumer protections to apply in the case of an eligible TAA recipient or an eligible alternative 

TAA recipient, the individual must have a period of creditable coverage. 

In the case of an eligible PBGC pension recipient, for the consumer protections to apply, 

the individual must enroll in the qualifying coverage during the 90-day period beginning on the 

later of (1) the last day of the first month that the individual becomes an eligible PBGC pension 

recipient or (2) the date of enactment. Under the proposal, the Secretary of the Treasury must 

carry out a program to notify individuals prior to their becoming eligible PBGC pension 

recipients of this new requirement. 

Rules for determining lapse in creditable coverage

Under the proposal, in determining if there has been a 63-day lapse in coverage, in the 

case of a TAA-eligible individual, the period beginning on the date the individual has a TAArelated loss of coverage and ending on the date which is five days after the postmark date on the 

notice by the Secretary (or by any person designated by the Secretary) that the individual is 

eligible for a qualified health insurance costs credit eligibility certificate (under section 7527) is 

not taken into account. 

Rating system requirement for certain State-based coverage

The proposal adds an additional requirement to State-based coverage. Under the 

proposal, in the case of coverage through an arrangement entered into by a State and an issuer of 

health insurance, premiums for such coverage must be restricted, based on a community rating 

system with respect to eligible individuals and their qualifying family members, or based on a 

rate-band system under which the maximum rate which may be charged does not exceed 150 

percent of the standard rate with respect to eligible individuals and their qualifying family 

members. 

GAO study

The proposal requires the Comptroller General of the U.S. to conduct a study regarding 

the HCTC to be submitted to Congress no later than March 31, 2009. The study is to include an 

analysis of (1) the administrative costs of the Federal government with respect to the credit and 

the advance payment of the credit and of providers of qualified health insurance with respect to 

providing such insurance to eligible individuals and their families, (2) the health status and 

relative risk status of eligible individuals and qualified family members covered under such 

insurance, (3) participation in the credit and the advance payment of the credit by eligible 

individuals and their qualifying family members, including the reasons why such individuals did 

or did not participate and the effects of the proposal on participation, and (4) the extent to which 

eligible individuals and their qualifying family members obtained health insurance other then 

qualifying insurance or went without insurance coverage. The proposal provides the 

Comptroller General access to the records within the possession or control of providers of 

qualified health insurance if determined relevant to the study. The Comptroller General may not 
8 

disclose the identity of any provider of qualified health insurance or eligible individual in making 

information available to the public. 

Sunset of tax credit program

Under the proposal, the credit is not available for any month beginning after December 

31, 2009, except in the case of an individual who was an eligible individual for a continuous 

period of months ending with such month and beginning before such date. 

Effective date

The proposal is effective for months beginning after the December 31, 2007. 

The proposal relating to the rating system requirement for certain State-based coverage is 

effective for months beginning after March 31, 2008. 

For purposes of carrying out the advance payment program, the proposal provides that 

the Secretary may provide that the certain provisions do not apply to one or more months 

beginning after March 31, 2008, to the extent that the Secretary determines that such delay is 

necessary to properly implement the proposal as part of the advance payment program. This rule 

applies to the provisions relating to modification of the training requirement, eligibility made 

retroactive to TAA-related loss of employment, and continued qualification of family members 

after certain events. 
9 

B. Manufacturing Redevelopment Zones 

Designation and Eligibility Rules

Designation

The Secretary of the Treasury shall designate not more than 24 manufacturing 

redevelopment zones (the “zones”) during the two-year period beginning on the date of 

enactment of this proposal. These zones shall be selected from among areas nominated for 

designation by their State or local governments. The aggregate population of the designated 

zones shall not exceed 2 million. This determination of population shall be made on the basis of 

the most recent decennial census for which data area available. 

Any such designation shall remain in effect during the period beginning on the date of 

designation and ending the earliest of: (1) the close of the tenth calendar year beginning on or 

after the date of the designation; (2) the termination date designated by the State or local 

governments as provided for in their nomination; or (3) the date the Secretary revokes the 

designation. The Secretary may revoke a designation, if the Secretary determines that the local 

government or State in which it is located; (1) has modified the boundaries of the area; or (2) is 

not complying substantially with or fails to make progress in achieving the benchmarks set forth 

in the strategic plan included in the application. 

Rules similar to the rules for designation and application of enterprise communities and 

empowerment zones shall apply to manufacturing redevelopment zones (sec. 1391(e) and (f) of 

the Internal Revenue Code (the “Code”)).11

Eligibility criteria

A nominated area shall be eligible for designation as a manufacturing redevelopment 

zone on if three requirements are satisfied. The area: (1) must meet the eligibility criteria (e.g., 

population, distress, size and poverty rate12 criteria) applicable to enterprise communities and 

empowerment zones (sec. 1392); (2) must have experienced a significant decline in the number 

of individuals employed in manufacturing or has a high concentration of abandoned or 

underutilized manufacturing facilities; and (3) no portion of the nominated area is located in an 

empowerment zone (sec. 1391) or renewal community (sec. 1400E) unless the local government 

which nominated the area elects to terminate such designation as an empowerment zone or 

renewal community. 

The terms defined in sec. 1393 with regard to enterprise communities and empowerment 

zones shall have the same meaning with regard to manufacturing redevelopment zones. Finally, 

 11 All references are to the Internal Revenue Code of 1986. 

12 The Secretary may waive the poverty rate criteria, where necessary to carry out the purposes of 

this proposal, if the nominated area is within an MSA that has experienced a loss of manufacturing jobs in 

excess of 25 percent over the previous 20 years. 
10 

the special rules provided in sec. 1393 with regard to enterprise communities and empowerment 

zones shall apply with regard to manufacturing redevelopment zones. 

1. Manufacturing redevelopment zone tax credit bonds 

Present law

Tax-exempt bonds

In general

Subject to certain Code restrictions, interest on bonds issued by State and local 

government generally is excluded from gross income for Federal income tax purposes. Bonds 

issued by State and local governments may be classified as either governmental bonds or private 

activity bonds. Governmental bonds are bonds the proceeds of which are primarily used to 

finance governmental functions or which are repaid with governmental funds. Private activity 

bonds are bonds in which the State or local government serves as a conduit providing financing 

to nongovernmental persons. For this purpose, the term “nongovernmental person” generally 

includes the Federal Government and all other individuals and entities other than States or local 

governments. The exclusion from income for interest 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”) and other Code requirements are met. 

Private activity bond tests

Present law provides two tests for determining whether a State or local bond is in 

substance a private activity bond, the private business test and the private loan test.13 

Private business tests

Private business use and private payments result in State and local bonds being private 

activity bonds if both parts of the two-part private business test are satisfied– 

• More than 10 percent of the bond proceeds is to be used (directly or indirectly) by a 

private business (the “private business use test”); and 

• More than 10 percent of the debt service on the bonds is secured by an interest in 

property to be used in a private business use or to be derived from payments in 

respect of such property (the “private payment test”).14 

 13 Sec. 141(b) and (c). 

14 The 10-percent private business use and payment threshold is reduced to five percent for 

private business uses that are unrelated to a governmental purpose also being financed with proceeds of 

the bond issue. In addition, as described more fully below, the 10-percent private business use and 

private payment thresholds are phased-down for larger bond issues for the financing of certain “output” 

facilities. The term output facility includes electric generation, transmission, and distribution facilities. 
11 

Private business use generally includes any use by a business entity (including the 

Federal government), which occurs pursuant to terms not generally available to the general 

public. For example, if bond-financed property is leased to a private business (other than 

pursuant to certain short-term leases for which safe harbors are provided under Treasury 

regulations), bond proceeds used to finance the property are treated as used in a private business 

use, and rental payments are treated as securing the payment of the bonds. Private business use 

also can arise when a governmental entity contracts for the operation of a governmental facility 

by a private business under a management contract that does not satisfy Treasury regulatory safe 

harbors regarding the types of payments made to the private operator and the length of the 

contract.15 

Private loan test

The second standard for determining whether a State or local bond is a private activity 

bond is whether an amount exceeding the lesser of (1) five percent of the bond proceeds or (2) $5 

million is used (directly or indirectly) to finance loans to private persons. Private loans include 

both business and other (e.g., personal) uses and payments by private persons; however, in the 

case of business uses and payments, all private loans also constitute private business uses and 

payments subject to the private business test. Present law provides that the substance of a 

transaction governs in determining whether the transaction gives rise to a private loan. In 

general, any transaction which transfers tax ownership of property to a private person is treated 

as a loan. 

Qualified private activity bonds

As stated, interest on private activity bonds is taxable unless the bonds meet the 

requirements for qualified private activity bonds. Qualified private activity bonds permit States 

or local governments to act as conduits providing tax-exempt financing for certain private 

activities. The definition of qualified private activity bonds includes an exempt facility bond, or 

qualified mortgage, veterans’ mortgage, small issue, redevelopment, 501(c)(3), or student loan 

bond (sec. 141(e)). The definition of exempt facility bond includes bonds issued to finance 

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

facilities); qualified residential rental projects; privately owned and/or operated utility facilities 

(sewage, water, solid waste disposal, and local district heating and cooling facilities, certain 

private electric and gas facilities, and hydroelectric dam enhancements); public/private 

educational facilities; qualified green building and sustainable design projects; and qualified 

highway or surface freight transfer facilities (sec. 142(a)). 

In most cases, the aggregate volume of these tax-exempt private activity bonds is 

restricted by annual aggregate volume limits imposed on bonds issued by issuers within each 

State. For calendar year 2007, the State volume cap, which is indexed for inflation, equals $85 

per resident of the State, or $256.24 million, if greater. 

 15 See Treas. Reg. sec. 1.141-3(b)(4) and Rev. Proc. 97-13, 1997-1 C.B. 632. 
12 

Arbitrage restrictions

The tax exemption for State and local bonds also does not apply to any arbitrage bond.16 

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

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

or to replace funds that are used to acquire higher yielding investments.17 In general, arbitrage 

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

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

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

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

Government. 

Tax Credit Bonds

In general

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

bonds (“QZABS”), clean renewable energy bonds (“CREBS”), and “Gulf tax credit bonds.”18 

A common feature of the present law tax-credit bonds is that the taxpayer holding such a 

bond receives a tax credit, rather than an interest payment. The amount of the credit is 

determined by multiplying the bond’s credit rate by the face amount on the taxpayer’s bond. The 

credit rate on the bonds is determined by the Secretary and is to be a rate that permits issuance of 

such bonds without discount and interest cost to the qualified issuer. The credit is includible in 

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

income tax liability and alternative minimum tax liability. 

Clean renewable energy bonds

CREBs are defined as any bond issued by a qualified issuer if, in addition to the 

requirements discussed below, 95 percent or more of the proceeds of such bonds are used to 

finance capital expenditures incurred by qualified borrowers for qualified projects. “Qualified 

projects” are facilities that qualify for the tax credit under section 45 (other than Indian coal 

production facilities), without regard to the placed-in-service date requirements of that section.19 

The term “qualified issuers” includes (1) governmental bodies (including Indian tribal 

 16 Sec. 103(a) and (b)(2). 

17 Sec. 148. 

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

19 In addition, Notice 2006-7 provides that qualified projects include any facility owned by a 

qualified borrower that is functionally related and subordinate to any facility described in section 45(d)(1) 

through (d)(9) and owned by such qualified borrower. 
13 

governments); (2) mutual or cooperative electric companies (described in section 501(c)(12) or 

section 1381(a)(2)(C), or a not-for-profit electric utility which has received a loan or guarantee 

under the Rural Electrification Act); and (3) clean renewable energy bond lenders. The term 

“qualified borrower” includes a governmental body (including an Indian tribal government) and 

a mutual or cooperative electric company. A clean renewable energy bond lender means a 

cooperative which is owned by, or has outstanding loans to, 100 or more cooperative electric 

companies and is in existence on February 1, 2002. 

In addition to the above requirements, at least 95 percent of the proceeds of CREBs must 

be spent on qualified projects within the five-year period that begins on the date of issuance. To 

the extent less than 95 percent of the proceeds are used to finance qualified projects during the 

five-year spending period, bonds will continue to qualify as CREBs if unspent proceeds are used 

within 90 days from the end of such five-year period to redeem any “nonqualified bonds.” The 

five-year spending period may be extended by the Secretary upon the qualified issuer’s request 

demonstrating that the failure to satisfy the five-year requirement is due to reasonable cause and 

the projects will continue to proceed with due diligence. 

CREBs also are subject to the arbitrage requirements of section 148 that apply to taxexempt bonds. Principles under section 148 and the regulations thereunder apply for purposes of 

determining the yield restriction and arbitrage rebate requirements applicable to CREBs. 

Issuers of CREBs are required to report issuance to the IRS in a manner similar to the 

information returns required for tax-exempt bonds. There is a national CREB limitation of $1.2 

billion. The maximum amount of CREBs that may be allocated to qualified projects of 

governmental bodies is $750 million. CREBs must be issued before January 1, 2009. 

Qualified zone academy bonds

“QZABs” are defined as any bond issued by a State or local government, provided that 

(1) at least 95 percent of the proceeds are used for the purpose of renovating, providing 

equipment to, developing course materials for use at, or training teachers and other school 

personnel in a “qualified zone academy,” and (2) private entities have promised to contribute to 

the qualified zone academy certain equipment, technical assistance or training, employee 

services, or other property or services with a value equal to at least 10 percent of the bond 

proceeds. Eligible holders of QZABs are limited to financial institutions. 

An issuer of QZABs must reasonably expect to and actually spend 95 percent or more of 

the proceeds of such bonds on qualified zone academy property within the five-year period that 

begins on the date of issuance. To the extent less than 95 percent of the proceeds are used to 

finance qualified zone academy property during the five-year spending period, bonds will 

continue to qualify as QZABs if unspent proceeds are used within 90 days from the end of such 

five-year period to redeem any nonqualified bonds. For these purposes, the amount of 

nonqualified bonds is to be determined in the same manner as Treasury regulations under section 

142. The provision provides that the five-year spending period may be extended by the 

Secretary if the issuer establishes that the failure to meet the spending requirement is due to 

reasonable cause and the related purposes for issuing the bonds will continue to proceed with due 

diligence. 
14 

A total of $400 million of qualified zone academy bonds is authorized to be issued 

annually in calendar years 1998 through 2007. The $400 million aggregate bond cap is allocated 

to the States according to their respective populations of individuals below the poverty line. 

Each State, in turn, allocates the credit authority to qualified zone academies within such State. 

Issuers of QZABs are required to report issuance to the IRS in a manner similar to the 

information returns required for tax-exempt bonds. In addition, QZABs are subject to the 

arbitrage requirements of section 148 that apply to tax-exempt bonds. Principles under section 

148 and the regulations thereunder apply for purposes of determining the yield restriction and 

arbitrage rebate requirements applicable to QZABs. 

Gulf tax credit bonds

Gulf tax credit bonds were authorized for issuance by the States of Louisiana, 

Mississippi, and Alabama in calendar year 2006. To qualify as Gulf tax credit bonds, 95 percent 

or more of the proceeds of such bonds must be used to (i) pay principal, interest, or premium on 

a bond (other than a private activity bond) that was outstanding on August 28, 2005, and was 

issued by the State issuing the Gulf tax credit bonds, or any political subdivision thereof, or (ii) 

make a loan to any political subdivision of such State to pay principal, interest, or premium on a 

bond issued by such political subdivision. 

The maximum amount of Gulf tax credit bonds authorized to be issued was $200 million 

in the case of Louisiana, $100 million in the case of Mississippi, and $50 million in the case of 

Alabama. As with CREBs and QZABs, issuers of Gulf tax credit bonds are required to report 

issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds. 

Description of Proposal

The proposal creates a new category of tax-credit bonds, “Manufacturing Redevelopment 

Tax Credit Bonds.” A Manufacturing Redevelopment Tax Credit Bond means any bond if: (1) 

100 percent of the available project proceeds of the bond are to be used for qualified 

manufacturing redevelopment purposes within the three-year period that begins on the date of 

issuance; (2) the bond is not a private activity bond (as defined in section 141); and (3) the bond 

is designated as a manufacturing redevelopment bond by the local government which nominated 

the area to which such bond relates. 

Under the proposal, the term “qualified manufacturing redevelopment purpose” means 

capital expenditures paid or incurred with respect to property located in a manufacturing 

redevelopment zone for purposes of promoting development or other economic activity. 

Examples of qualified manufacturing redevelopment purposes include, but are not limited to, 

expenditures for environmental remediation, improvements to public infrastructure, and 

construction of public facilities. 

The proposal defines “available project proceeds” as proceeds from the sale of an issue of 

Manufacturing Redevelopment Tax Credit Bonds, less issuance costs (not to exceed two percent) 

and any investment earnings on such sale proceeds. To the extent less than 100 percent of the 

available project proceeds are used to finance qualified manufacturing redevelopment purposes 

during the three-year spending period, bonds will continue to qualify as Manufacturing 
15 

Redevelopment Tax Credit Bonds if outstanding bonds are redeemed within 90 days from the 

end of such three-year period. The three-year spending period may be extended by the Secretary 

upon the issuer’s request demonstrating that the failure to satisfy the three-year requirement is 

due to reasonable cause and the projects will continue to proceed with due diligence. 

Manufacturing Redevelopment Tax Credit Bonds generally are subject to the arbitrage 

requirements of section 148. However, available project proceeds invested during the three-year 

spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate 

requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage 

restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual 

installments; (2) such fund is funded in a manner such that the fund will not exceed the amount 

necessary to repay the issue if invested at the average annual interest rate of tax-exempt 

obligations having a term of 10 years or more that are issued during the month the 

Manufacturing Redevelopment Bonds are issued; and (3) the yield on such fund is not greater 

than the average annual interest rate of tax-exempt obligations having a term of 10 years or more 

that are issued during the month the Manufacturing Redevelopment Tax Credit Bonds are issued. 

The maturity of Manufacturing Redevelopment Tax Credit Bonds is the term that the 

Secretary estimates will result in the present value of the obligation to repay the principal on 

such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate 

the average annual interest rate of tax-exempt obligations having a term of 10 years or more that 

are issued during the month the Manufacturing Redevelopment Tax Credit Bonds are issued. 

As with present-law tax credit bonds, the taxpayer holding Manufacturing 

Redevelopment Tax Credit Bonds on a credit allowance date is entitled to a tax credit. The 

credit rate on the bonds is determined by the Secretary to be a rate that permits issuance of the 

bonds without discount and interest cost to the qualified issuer. The amount of the tax credit to 

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

bond. The credit accrues quarterly, is includible in gross income (as if it were an interest 

payment on the bond), and can be claimed against regular income tax liability and alternative 

minimum tax liability. Unused credits in one year may be carried forward to succeeding taxable 

years. 

Under the proposal, the maximum aggregate face amount of Manufacturing 

Redevelopment Tax Credit Bonds that can be issued in any manufacturing redevelopment zone 

is $150 million. 

Effective Date

The proposal is effective for bonds issued after December 31, 2007. 
16 

2. Manufacturing redevelopment zone private activity bonds 

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 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”). 

Qualified private activity bonds

Qualified private activity bonds permit States or local governments to act as conduits 

providing tax-exempt financing for certain private activities. The definition of qualified private 

activity bonds includes an exempt facility bond, or qualified mortgage, veterans’ mortgage, small 

issue, redevelopment, 501(c)(3), or student loan bond (sec. 141(e)). 

The definition of an exempt facility bond includes bonds issued to finance certain 

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

qualified residential rental projects; privately owned and/or operated utility facilities (sewage, 

water, solid waste disposal, and local district heating and cooling facilities, certain private 

electric and gas facilities, and hydroelectric dam enhancements); public/private educational 

facilities; qualified green building and sustainable design projects; and qualified highway or 

surface freight transfer facilities (sec. 142(a)). 

In most cases, the aggregate volume of qualified private activity bonds is restricted by 

annual aggregate volume limits imposed on bonds issued by issuers within each State (“State 

volume cap”). For calendar year 2007, the State volume cap, which is indexed for inflation, 

equals $85 per resident of the State, or $256.24 million, if greater. Exceptions to the State 

volume cap are provided for bonds for certain governmentally owned facilities (e.g., airports, 

ports, high-speed intercity rail, and solid waste disposal) and bonds which are subject to separate 

local, State, or national volume limits (e.g., public/private educational facility bonds, enterprise 

zone facility bonds, qualified green building bonds, and qualified highway or surface freight 

transfer facility bonds). 

Qualified private activity bonds generally are subject to restrictions on the use of 

proceeds for the acquisition of land and existing property. In addition, qualified private activity 

bonds generally are subject to restrictions on the use of proceeds to finance certain specified 

facilities (e.g., airplanes, skyboxes, other luxury boxes, health club facilities, gambling facilities, 

and liquor stores), and use of proceeds to pay costs of issuance (e.g., bond counsel and 

underwriter fees). Small issue and redevelopment bonds also are subject to additional 

restrictions on the use of proceeds for certain facilities (e.g., golf courses and massage parlors). 
17 

Moreover, the term of qualified private activity bonds generally may not exceed 120 

percent of the economic life of the property being financed and certain public approval 

requirements (similar to requirements that typically apply under State law to issuance of 

governmental debt) apply under Federal law to issuance of private activity bonds. 

New York Liberty Zone Bonds

Present law permits an aggregate of $8 billion in exempt facility bonds for the purpose of 

financing the construction and rehabilitation of nonresidential real property and residential rental 

real property in a designated “Liberty Zone” (the “Zone”) of New York City (“Liberty Zone 

bonds”). The Zone consists of all business addresses located on or south of Canal Street, East 

Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with 

East Broadway) in the Borough of Manhattan. 

Property eligible for financing with these bonds includes buildings and their structural 

components,fixed tenant improvements, and public utility property (e.g., gas, water, electric, and 

telecommunication lines). Fixtures and equipment that could be removed from the designated 

zone for use elsewhere are not eligible for financing with these bonds. Issuance of these bonds is 

limited to projects approved by the Mayor of New York City or the Governor of New York 

State, each of whom may designate up to $4 billion of the aggregate bond authority. 

Liberty Zone Bonds must be issued before January 1, 2010, and are not subject to the 

State volume cap. 

Gulf Opportunity Zone Bonds

Present law permits the issuance of qualified private activity bonds to finance the 

construction and rehabilitation of residential and nonresidential property located in the Gulf 

Opportunity Zone (“Gulf Opportunity Zone Bonds”).20 Gulf Opportunity Zone Bonds must be 

issued before January 1, 2011. 

Gulf Opportunity Zone Bonds may be issued by the State of Alabama, Louisiana, or 

Mississippi, or any political subdivision thereof. Gulf Opportunity Zone Bonds are not subject to 

the State volume cap. Rather, the maximum aggregate face amount of Gulf Opportunity Zone 

Bonds that may be issued in any State is limited to $2,500 multiplied by the population of the 

respective State within the Gulf Opportunity Zone. Depending on the purpose for which such 

bonds are issued, Gulf Opportunity Zone Bonds are treated as either exempt facility bonds or 

qualified mortgage bonds. 

Gulf Opportunity Zone Bonds are treated as exempt facility bonds if 95 percent or more 

of the net proceeds of such bonds are to be used for qualified project costs located in the Gulf 

 20 The “Gulf Opportunity 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. 
18 

Opportunity Zone. Qualified project costs include the cost of acquisition, construction, 

reconstruction, and renovation of nonresidential real property, qualified residential rental projects 

(as defined in section 142(d) with certain modifications), and public utility property. 

Empowerment Zones

 The Omnibus Budget Reconciliation Act of 1993 authorized the designation of nine 

empowerment zones to provide tax incentives for businesses to locate within targeted areas 

(section 1391(b)(2)). The Taxpayer Relief Act of 1997 authorized the designation of 22 

additional empowerment zones (1391(g)(1)). The Community Renewal Tax Relief Act of 2000 

authorized the designation of nine additional empowerment zones (bringing the total to 40 

empowerment zones) (1391(h)). To be designated as an empowerment zone, the nominated area 

must satisfy certain size, population, and poverty criteria (that vary depending on whether the 

area is urban or rural). 

The 40 empowerment zones permit businesses located in the empowerment zones to 

qualify for a number of tax incentives, including expanded tax-exempt private activity bond 

authority to finance certain depreciable property in an empowerment zone. The tax incentives 

with respect to the empowerment zones generally are available through December 31, 2009. 

Description of Proposal

The proposal creates a new category of qualified private activity bonds, “Manufacturing 

Redevelopment Zone Bonds.” A Manufacturing Redevelopment Zone Bond means any bond 

issued as part of an issue if: (1) 95 percent or more of the net proceeds of such issue are to be 

used for manufacturing zone property and (2) the bond is designated as a Manufacturing 

Redevelopment Zone Bond by the local government which nominated the area to which such 

bond relates. 

Under the proposal, the term “manufacturing zone property” means any property subject 

to depreciation (to which section 168 applies) if (1) such property was acquired by the taxpayer 

by purchase after the date on which the designation of the manufacturing redevelopment zone 

took effect; (2) the original use of such property in the manufacturing redevelopment zone 

commences with the taxpayer; and (3) substantially all of the use of such property is in the 

manufacturing redevelopment zone and is in the active conduct of a qualified business by the 

taxpayer in such zone. The term “qualified business” means any trade or business except that the 

rental to others of real property located in a manufacturing redevelopment zone shall be treated 

as a qualified business only if the property is not residential rental property (as defined in section 

168(e)(2)). 

Subject to the following exceptions and modifications, issuance of Manufacturing 

Redevelopment Zone Bonds is subject to the general rules applicable to issuance of qualified 

private activity bonds: 

(1) Issuance of the bonds is not subject to the aggregate annual State private activity 

bond volume limits (sec. 146); 
19 

(2) The restriction on acquisition of existing property does not apply (sec. 147(d)), 

unless such acquisition is inconsistent with the definition of manufacturing zone 

property; 

(3) Interest on the bonds is not a preference item for purposes of the alternative 

minimum tax preference for private activity bond interest (sec. 57(a)(5)); and 

(4) No portion of the proceeds of the bonds may be used to provide any property 

described in section 144(c)(6)(B) (i.e., 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 purpose of which is the sale 

alcoholic beverages for consumption off premises). 

Under the proposal, the maximum aggregate face amount of Manufacturing 

Redevelopment Zone Bonds that can be issued in any manufacturing redevelopment zone is 

$230 million. In addition, the amount of Manufacturing Redevelopment Zone Bonds that can be 

allocated to any person cannot exceed (1) $15 million in any one manufacturing redevelopment 

zone or (2) $20 million in all manufacturing redevelopment zones. 

Effective Date

The proposal is effective for bonds issued after December 31, 2007. 

3. Increase the low-income housing credit cap for manufacturing redevelopment zones 

Present Law

In general

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

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 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. 

Credit cap

Generally, the aggregate credit authority provided annually to each State for calendar 

year 2007 is $1.95 per resident with a minimum annual cap of $2,275,000 for certain small 

population States. These amounts are indexed for inflation. These limits do not apply in the 
20 

case of projects that also receive financing with proceeds of tax-exempt bonds issued subject to 

the private activity bond volume limit. 

Stacking rule

Authority to allocate credits remains at the State (as opposed to local) government level 

unless State law provides otherwise. Generally, credits may be allocated only from volume 

authority arising during the calendar year in which the building is placed in service, except in the 

case of: (1) credits claimed on additions to qualified basis; (2) credits allocated in a later year 

pursuant to an earlier binding commitment made no later than the year in which the building is 

placed in service; and (3) carryover allocations. 

Each State annually receives low-income housing credit authority equal to $1.90 per 

State resident for allocation to qualified low-income projects. In addition to this $1.90 per 

resident amount, each State’s “housing credit ceiling” includes the following amounts: (1) the 

unused State housing credit ceiling (if any) of such State for the preceding calendar year; (2) the 

amount of the State housing credit ceiling (if any) returned in the calendar year; and (3) the 

amount of the national pool (if any) allocated to such State by the Treasury Department. 

The national pool consists of States’ unused housing credit carryovers. For each State, 

the unused housing credit carryover for a calendar year consists of the excess (if any) of the 

unused State housing credit ceiling for such year over the excess (if any) of the aggregate 

housing credit dollar amount allocated for such year over the sum of $1.90 per resident and the 

credit returns for such year. The amounts in the national pool are allocated only to States that 

allocated their entire housing credit ceiling for the preceding calendar year and requested a share 

in the national pool not later than May 1 of the calendar year. The national pool allocation to 

qualified States is made on a pro rata basis equivalent to the fraction that a State’s population 

enjoys relative to the total population of all qualified States for that year. 

The present-law stacking rule provides that each State is 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. 

Description of Proposal

Credit cap

Under the proposal, the Secretary of the Treasury may designate a specified number of 

manufacturing redevelopment zones subject to an overall population cap. 

While a designation of a manufacturing redevelopment zone is in effect (up to 10 years 

beginning with the calendar year in which the designation goes into effect) a State’s otherwise 

applicable housing credit ceiling is increased by the manufacturing zone housing amount for 

each manufacturing redevelopment zone located within such State. The manufacturing zone 

housing amount equals $20 times the number of such State’s residents within the manufacturing 

redevelopment zone..

 For purposes of the manufacturing zone housing amount, the 
21 

determination of population for any calendar year is made on the basis of the most recent census 

estimate. 

The amount of the State’s increase in the otherwise applicable housing credit ceiling is 

the lesser of: (a) the actual housing credit dollar amount allocated from the State housing credit 

agency to buildings located in the manufacturing redevelopment zone for a calendar year; or (b) 

the aggregate manufacturing zone housing amount for that manufacturing redevelopment zone 

minus all the increases under this proposal in the State’s ceiling in previous calendar years of that 

manufacturing redevelopment zone’s designation. 

Any subsequent returns (from the developer to the State housing credit agency) of a 

credit allocation from the manufacturing zone housing amount are eligible to be reallocated 

under this special rule but are not treated as returns under the otherwise applicable housing credit 

ceiling. 

Effective Date

The proposals are generally effective for calendar years beginning after 2007. 

4. Expansion of the Work Opportunity Tax Credit 

Present Law

In general

The work opportunity tax credit is available on an elective basis for employers hiring 

individuals from one or more of nine targeted groups. The amount of the credit available to an 

employer is determined by the amount of qualified wages paid by the employer. Generally, 

qualified wages consist of wages attributable to service rendered by a member of a targeted 

group during the one-year period beginning with the day the individual begins work for the 

employer (two years in the case of an individual in the long-term family assistance recipient 

category). 

Targeted groups eligible for the credit

Generally an employer is eligible for the credit only for qualified wages paid to members 

of a targeted group. 

(1) Families receiving TANF

An eligible recipient is an individual certified by a designated local employment agency 

(e.g., a State employment agency) as being a member of a family eligible to receive benefits 

under the Temporary Assistance for Needy Families Program (“TANF”) for a period of at least 

nine months part of which is during the 18-month period ending on the hiring date. For these 

purposes, members of the family are defined to include only those individuals taken into account 

for purposes of determining eligibility for the TANF. 
22 

(2) Qualified veteran

A qualified veteran is a veteran who is certified by the designated local agency: (1) as a 

member of a family certified as receiving assistance under a food stamp program under the Food 

Stamp Act of 1977 for a period of at least three months part of which is during the 12-month 

period ending on the hiring date;21 or (2) as entitled to compensation for a service-connected 

disability and: (a) having a hiring date which is not more than one year after having been 

discharged or released from active duty in the Armed Forces of the United States, or (b) having 

been unemployed for six months or more (whether or not consecutive) during the one-year 

period ending on the date of hiring.22 

For these purposes, a veteran is an individual who has served on active duty (other than 

for training) in the Armed Forces for more than 180 days or who has been discharged or released 

from active duty in the Armed Forces for a service-connected disability. However, any 

individual who has served for a period of more than 90 days during which the individual was on 

active duty (other than for training) is not a qualified veteran if any of this active duty occurred 

during the 60-day period ending on the date the individual was hired by the employer. This latter 

rule is intended to prevent employers who hire current members of the armed services (or those 

departed from service within the last 60 days) from receiving the credit. 

(3) Qualified ex-felon

A qualified ex-felon is an individual certified as: (1) having been convicted of a felony 

under any State or Federal law, and (2) having a hiring date within one year of release from 

prison or date of conviction. 

(4) Designated community residents

A designated community resident is an individual certified as being at least age 18 but 

not yet age 40 on the hiring date and as having a principal place of abode within an 

empowerment zone, enterprise community, renewal community (as defined under Subchapter U 

of Subtitle A, Chapter 1 of the Code) or rural renewal county (defined as a county outside a 

metropolitan statistical area (as defined by the Office of Management and Budget) which had a 

net population loss during the five-year periods 1990-1994 and 1995-1999). Qualified wages do 

not include wages paid or incurred for services performed after the individual moves outside an 

empowerment zone, enterprise community, renewal community, or rural renewal community. 

 21 For these purposes, members of a family are defined to include only those individuals taken 

into account for purposes of determining eligibility for a food stamp program under the Food Stamp Act 

of 1977. 

22 Being entitled to compensation for a service-connected disability is defined with reference to 

section 101 of Title 38, U.S.C., which means having a disability rating of 10-percent or higher for service 

connected injuries. 
23 

(5) Vocational rehabilitation referral

A vocational rehabilitation referral is an individual who is certified by a designated local 

agency as an individual who has a physical or mental disability that constitutes a substantial 

handicap to employment and who has been referred to the employer while receiving, or after 

completing: (a) vocational rehabilitation services under an individualized, written plan for 

employment under a State plan approved under the Rehabilitation Act of 1973; (b) a 

rehabilitation plan for veterans carried out under Chapter 31 of Title 38, U.S. Code; or (c) an 

individual work plan developed and implemented by an employment network pursuant to 

subsection (g) of section 1148 of the Social Security Act with respect to which the requirements 

of such subsection are met. Certification will be provided by the designated local employment 

agency upon assurances from the vocational rehabilitation agency that the employee has met the 

above conditions. 

(6) Qualified summer youth employee

A qualified summer youth employee is an individual: (1) who performs services during 

any 90-day period between May 1 and September 15, (2) who is certified by the designated local 

agency as being 16 or 17 years of age on the hiring date, (3) who has not been an employee of 

that employer before, and (4) who is certified by the designated local agency as having a 

principal place of abode within an empowerment zone, enterprise community, or renewal 

community (as defined under Subchapter U of Subtitle A, Chapter 1 of the Code. As with highrisk youths, no credit is available on wages paid or incurred for service performed after the 

qualified summer youth moves outside of an empowerment zone, enterprise community, or 

renewal community. If, after the end of the 90-day period, the employer continues to employ a 

youth who was certified during the 90-day period as a member of another targeted group, the 

limit on qualified first year wages will take into account wages paid to the youth while a 

qualified summer youth employee. 

(7) Qualified food stamp recipient

A qualified food stamp recipient is an individual aged 18 but not yet 40 certified by a 

designated local employment agency as being a member of a family receiving assistance under a 

food stamp program under the Food Stamp Act of 1977 for a period of at least six months ending 

on the hiring date. In the case of families that cease to be eligible for food stamps under section 

6(o) of the Food Stamp Act of 1977, the six-month requirement is replaced with a requirement 

that the family has been receiving food stamps for at least three of the five months ending on the 

date of hire. For these purposes, members of the family are defined to include only those 

individuals taken into account for purposes of determining eligibility for a food stamp program 

under the Food Stamp Act of 1977. 

(8) Qualified SSI recipient

A qualified SSI recipient is an individual certified by a designated local agency as 

receiving supplemental security income (“SSI”) benefits under Title XVI of the Social Security 

Act for any month ending within the 60-day period ending on the hiring date. 
24 

(9) Long-term family assistance recipients

A qualified long-term family assistance recipient is an individual certified by a 

designated local agency as being: (1) a member of a family that has received family assistance 

for at least 18 consecutive months ending on the hiring date; (2) a member of a family that has 

received such family assistance for a total of at least 18 months (whether or not consecutive) 

after August 5, 1997 (the date of enactment of the welfare-to-work tax credit)23 if the individual 

is hired within two years after the date that the 18-month total is reached; or (3) a member of a 

family who is no longer eligible for family assistance because of either Federal or State time 

limits, if the individual is hired within two years after the Federal or State time limits made the 

family ineligible for family assistance. 

Qualified wages

Generally, qualified wages are defined as cash wages paid by the employer to a member 

of a targeted group. The employer’s deduction for wages is reduced by the amount of the credit. 

For purposes of the credit, generally, wages are defined by reference to the FUTA 

definition of wages contained in sec. 3306(b) (without regard to the dollar limitation therein 

contained). Special rules apply in the case of certain agricultural labor and certain railroad labor. 

Calculation of the credit

The credit available to an employer for qualified wages paid to members of all targeted 

groups except for long-term family assistance recipients equals 40 percent (25 percent for 

employment of 400 hours or less) of qualified first-year wages. Generally, qualified first-year 

wages are qualified wages (not in excess of $6,000) attributable to service rendered by a member 

of a targeted group during the one-year period beginning with the day the individual began work 

for the employer. Therefore, the maximum credit per employee is $2,400 (40 percent of the first 

$6,000 of qualified first-year wages). There are two exceptions to this general rule. First, with 

respect to qualified summer youth employees, the maximum credit is $1,200 (40 percent of the 

first $3,000 of qualified first-year wages). Second, with respect to qualified veterans who are 

entitled to compensation for a service-connected disability, the maximum credit is $4,800 

because qualified first-year wages are $12,000 rather than $6,000 for such individuals.24 Except 

for long-term family assistance recipients, no credit is allowed for second-year wages. 

In the case of long-term family assistance recipients, the credit equals 40 percent (25 

percent for employment of 400 hours or less) of $10,000 for qualified first-year wages and 50 

percent of the first $10,000 of qualified second-year wages. Generally, qualified second-year 

 23 The welfare-to-work tax credit was consolidated into the work opportunity tax credit in the 

Tax Relief and Health Care Act of 2006 for qualified individuals who begin to work for an employer after 

December 31, 2006. 

24 The expanded definition of qualified first-year wages does not apply to the veterans qualified 

with reference to a food stamp program, as defined under present law. 
25 

wages are qualified wages (not in excess of $10,000) attributable to service rendered by a 

member of the long-term family assistance category during the one-year period beginning on the 

day after the one-year period beginning with the day the individual began work for the employer. 

Therefore, the maximum credit per employee is $9,000 (40 percent of the first $10,000 of 

qualified first-year wages plus 50 percent of the first $10,000 of qualified second-year wages). 

Certification rules

An individual is not treated as a member of a targeted group unless: (1) on or before the 

day on which an individual begins work for an employer, the employer has received a 

certification from a designated local agency that such individual is a member of a targeted group; 

or (2) on or before the day an individual is offered employment with the employer, a prescreening notice is completed by the employer with respect to such individual, and not later than 

the 28th day after the individual begins work for the employer, the employer submits such 

notice, signed by the employer and the individual under penalties of perjury, to the designated 

local agency as part of a written request for certification. For these purposes, a pre-screening 

notice is a document (in such form as the Secretary may prescribe) which contains information 

provided by the individual on the basis of which the employer believes that the individual is a 

member of a targeted group. 

Minimum employment period

No credit is allowed for qualified wages paid to employees who work less than 120 hours 

in the first year of employment. 

Other rules

The work opportunity tax credit is not allowed for wages paid to a relative or dependent 

of the taxpayer. No credit is allowed for wages paid to an individual who is a more than fiftypercent owner of the entity. Similarly, wages paid to replacement workers during a strike or 

lockout are not eligible for the work opportunity tax credit. Wages paid to any employee during 

any period for which the employer received on-the-job training program payments with respect 

to that employee are not eligible for the work opportunity tax credit. The work opportunity tax 

credit generally is not allowed for wages paid to individuals who had previously been employed 

by the employer. In addition, many other technical rules apply. 

Expiration

The work opportunity tax credit is not available for individuals who begin work for an 

employer after August 31, 2011. 

Description of Proposal

The proposal would add residents of manufacturing redevelopment zones to the category 

of designated community residents for purposes of the work opportunity tax credit. 
26 

Effective Date

The proposal is effective for wages paid or incurred for individuals who begin work for 

an employer after the date of enactment. 
27 

C. Delay Implementation of Worldwide Interest Allocation 

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.25 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. 

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.26 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 

 25 However, exceptions to the fungibility principle are provided in particular cases, some of 

which are described below. 

26 One such exception is that the affiliated group for interest allocation purposes includes section 

936 corporations that are excluded from the consolidated group. 
28 

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”)27 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 

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,28 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 

 27 Pub. L. No. 108-357, sec. 401 (2004). 

28 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. 
29 

principles of worldwide interest allocation were applied separately to the foreign members of the 

group.29

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,30 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. 

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 provides 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.31 For these purposes, items of income or gain from a transaction or series of 

 29 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. 

30 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. 

31 See Treas. Reg. sec. 1.904-4(e)(2). 
30 

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. 

Description of Proposal

The proposal delays the effective date of worldwide interest allocation rules for three 

years, until taxable years beginning after December 31, 2011. The required dates for making the 

worldwide affiliated group election and the financial institution group election are changed 

accordingly. 

Effective Date

The proposal is effective on the date of enactment.