69–006 

110TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 110–431 

TEMPORARY TAX RELIEF ACT OF 2007 

NOVEMBER 6, 2007.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

Mr. RANGEL, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 3996] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 3996) to amend the Internal Revenue Code of 1986 to extend certain expiring provisions, and for other purposes, having 

considered the same, report favorably thereon with an amendment 

and recommend that the bill as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE, ETC. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Temporary Tax Relief Act of 

2007’’. 

(b) REFERENCE.—Except as otherwise expressly provided, whenever in this Act an 

amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section 

or other provision of the Internal Revenue Code of 1986. 

(c) TABLE OF CONTENTS.—The table of contents for this Act is as follows: 

Sec. 1. Short title, etc. 

TITLE I—AMT RELIEF 

Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits. 

Sec. 102. Extension of increased alternative minimum tax exemption amount. 

Sec. 103. Increase of AMT refundable credit amount for individuals with long-term unused credits for prior year 

minimum tax liability, etc. 

TITLE II—ADDITIONAL INDIVIDUAL TAX RELIEF 

Sec. 201. Refundable child credit. 

Sec. 202. Additional standard deduction for real property taxes for nonitemizers. 


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TITLE III—ONE-YEAR EXTENDERS 

Subtitle A—Extenders Primarily Affecting Individuals 

Sec. 301. Deduction for State and local sales taxes. 

Sec. 302. Deduction of qualified tuition and related expenses. 

Sec. 303. Treatment of certain dividends of regulated investment companies. 

Sec. 304. Parity in the application of certain limits to mental health benefits. 

Sec. 305. Qualified conservation contributions. 

Sec. 306. Tax-free distributions from individual retirement plans for charitable purposes. 

Sec. 307. Deduction for certain expenses of elementary and secondary school teachers. 

Sec. 308. Election to include combat pay as earned income for purposes of earned income tax credit. 

Sec. 309. Modification of mortgage revenue bonds for veterans. 

Sec. 310. Distributions from retirement plans to individuals called to active duty. 

Sec. 311. Stock in RIC for purposes of determining estates of nonresidents not citizens. 

Sec. 312. Qualified investment entities. 

Sec. 313. State legislators’ travel expenses away from home. 

Subtitle B—Extenders Primarily Affecting Businesses 

Sec. 321. Research credit. 

Sec. 322. Indian employment credit. 

Sec. 323. New markets tax credit. 

Sec. 324. Railroad track maintenance. 

Sec. 325. Fifteen-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant 

property. 

Sec. 326. Seven-year cost recovery period for motorsports racing track facility. 

Sec. 327. Accelerated depreciation for business property on Indian reservation. 

Sec. 328. Expensing of environmental remediation costs. 

Sec. 329. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. Sec. 330. Modification of tax treatment of certain payments to controlling exempt organizations. 

Sec. 331. Extension and modification of credit to holders of qualified zone academy bonds. 

Sec. 332. Tax incentives for investment in the District of Columbia. 

Sec. 333. Extension of economic development credit for American Samoa. 

Sec. 334. Enhanced charitable deduction for contributions of food inventory. 

Sec. 335. Enhanced charitable deduction for contributions of book inventory to public schools. 

Sec. 336. Enhanced deduction for qualified computer contributions. 

Sec. 337. Basis adjustment to stock of S corporations making charitable contributions of property. 

Sec. 338. Extension of work opportunity tax credit for Hurricane Katrina employees. 

Subtitle C—Other Extenders 

Sec. 341. Disclosure for combined employment tax reporting. 

Sec. 342. Disclosure of return information to apprise appropriate officials of terrorist activities. 

Sec. 343. Disclosure upon request of information relating to terrorist activities. 

Sec. 344. Disclosure of return information to carry out income contingent repayment of student loans. 

Sec. 345. Authority for undercover operations. 

Sec. 346. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. 

Sec. 347. Disclosure of return information for certain veterans programs. 

TITLE IV—MORTGAGE FORGIVENESS DEBT RELIEF 

Sec. 401. Discharges of indebtedness on principal residence excluded from gross income. 

Sec. 402. Long-term extension of deduction for mortgage insurance premiums. 

Sec. 403. Alternative tests for qualifying as cooperative housing corporation. 

Sec. 404. Gain from sale of principal residence allocated to nonqualified use not excluded from income. 

TITLE V—ADMINISTRATIVE PROVISIONS 

Sec. 501. Repeal of authority to enter into private debt collection contracts. 

Sec. 502. Delay of application of withholding requirement on certain governmental payments for goods and 

services. 

Sec. 503. Clarification of entitlement of Virgin Islands residents to protections of limitations on assessment and 

collection of tax. 

Sec. 504. Revision of tax rules on expatriation. 

Sec. 505. Repeal of suspension of certain penalties and interest. 

Sec. 506. Unused merchandise drawback. 

TITLE VI—REVENUE PROVISIONS 

Subtitle A—Nonqualified Deferred Compensation From Certain Tax Indifferent Parties 

Sec. 601. Nonqualified deferred compensation from certain tax indifferent parties. 

Subtitle B—Provisions Related to Certain Investment Partnerships 

Sec. 611. Income of partners for performing investment management services treated as ordinary income received for performance of services. 

Sec. 612. Indebtedness incurred by a partnership in acquiring securities and commodities not treated as acquisition indebtedness for organizations which are partners with limited liability. 

Sec. 613. Application to partnership interests and tax sharing agreements of rule treating certain gain on sales 

between related persons as ordinary income. 

Subtitle C—Other Provisions 

Sec. 621. Delay in application of worldwide allocation of interest. 

Sec. 622. Broker reporting of customer’s basis in securities transactions. 

Sec. 623. Modification of penalty for failure to file partnership returns. 

Sec. 624. Penalty for failure to file S corporation returns. 

Sec. 625. Time for payment of corporate estimated taxes. 


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TITLE I—AMT RELIEF 

SEC. 101. EXTENSION OF ALTERNATIVE MINIMUM TAX RELIEF FOR NONREFUNDABLE PERSONAL CREDITS. 

(a) IN GENERAL.—Paragraph (2) of section 26(a) (relating to special rule for taxable years 2000 through 2006) is amended—

(1) by striking ‘‘or 2006’’ and inserting ‘‘2006, or 2007’’, and 

(2) by striking ‘‘2006’’ in the heading thereof and inserting ‘‘2007’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2006. 

SEC. 102. EXTENSION OF INCREASED ALTERNATIVE MINIMUM TAX EXEMPTION AMOUNT. 

(a) IN GENERAL.—Paragraph (1) of section 55(d) (relating to exemption amount) 

is amended—

(1) by striking ‘‘($62,550 in the case of taxable years beginning in 2006)’’ in 

subparagraph (A) and inserting ‘‘($66,250 in the case of taxable years beginning 

in 2007)’’, and 

(2) by striking ‘‘($42,500 in the case of taxable years beginning in 2006)’’ in 

subparagraph (B) and inserting ‘‘($44,350 in the case of taxable years beginning 

in 2007)’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2006. 

SEC. 103. INCREASE OF AMT REFUNDABLE CREDIT AMOUNT FOR INDIVIDUALS WITH LONGTERM UNUSED CREDITS FOR PRIOR YEAR MINIMUM TAX LIABILITY, ETC. 

(a) IN GENERAL.—Paragraph (2) of section 53(e) of the Internal Revenue Code of 

1986 is amended to read as follows: 

‘‘(2) AMT REFUNDABLE CREDIT AMOUNT.—For purposes of paragraph (1), the 

term ‘AMT refundable credit amount’ means, with respect to any taxable year, 

the amount (not in excess of the long-term unused minimum tax credit for such 

taxable year) equal to the greater of—

‘‘(A) 50 percent of the long-term unused minimum tax credit for such taxable year, or 

‘‘(B) the amount (if any) of the AMT refundable credit amount determined 

under this paragraph for the taxpayer’s preceding taxable year.’’. 

(b) TREATMENT OF CERTAIN UNDERPAYMENTS, INTEREST, AND PENALTIES ATTRIBUTABLE TO THE TREATMENT OF INCENTIVE STOCK OPTIONS.—Section 53 of such Code 

is amended by adding at the end the following new subsection: 

‘‘(f) TREATMENT OF CERTAIN UNDERPAYMENTS, INTEREST, AND PENALTIES ATTRIBUTABLE TO THE TREATMENT OF INCENTIVE STOCK OPTIONS.—

‘‘(1) ABATEMENT.—Any underpayment of tax outstanding on the date of the 

enactment of this subsection which is attributable to the application of section 

56(b)(3) for any taxable year ending before January 1, 2007 (and any interest 

or penalty with respect to such underpayment which is outstanding on such 

date of enactment), is hereby abated. No credit shall be allowed under this section with respect to any amount abated under this paragraph. 

‘‘(2) INCREASE IN CREDIT FOR CERTAIN INTEREST AND PENALTIES ALREADY

PAID.—Any interest or penalty paid before the date of the enactment of this subsection which would (but for such payment) have been abated under paragraph 

(1) shall be treated for purposes of this section as an amount of adjusted net 

minimum tax imposed for the taxable year of the underpayment to which such 

interest or penalty relates.’’. 

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendment made 

by this section shall apply to taxable years beginning after December 31, 2006. 

(2) ABATEMENT.—Section 53(f)(1) of the Internal Revenue Code of 1986, as 

added by subsection (b), shall take effect on the date of the enactment of this 

Act. 

TITLE II—ADDITIONAL INDIVIDUAL TAX 

RELIEF 

SEC. 201. REFUNDABLE CHILD CREDIT. 

(a) MODIFICATION OF THRESHOLD AMOUNT.—Clause (i) of section 24(d)(1)(B) is 

amended by inserting ‘‘($8,500 in the case of taxable years beginning in 2008)’’ after 

‘‘$10,000’’. 


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(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2007. 

SEC. 202. ADDITIONAL STANDARD DEDUCTION FOR REAL PROPERTY TAXES FOR NONITEMIZERS. 

(a) IN GENERAL.—Section 63(c)(1) (defining standard deduction) is amended by 

striking ‘‘and’’ at the end of subparagraph (A), by striking the period at the end of 

subparagraph (B) and inserting ‘‘, and’’, and by adding at the end the following new 

subparagraph: 

‘‘(C) in the case of any taxable year beginning in 2008, the real property 

tax deduction.’’. 

(b) DEFINITION.—Section 63(c) is amended by adding at the end the following new 

paragraph: 

‘‘(8) REAL PROPERTY TAX DEDUCTION.—For purposes of paragraph (1), the real 

property tax deduction is so much of the amount of State and local real property 

taxes (within the meaning of section 164) paid or accrued by the taxpayer during the taxable year which do not exceed $350 ($700 in the case of a joint return).’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2007. 

TITLE III—ONE-YEAR EXTENDERS 

Subtitle A—Extenders Primarily Affecting 

Individuals 

SEC. 301. DEDUCTION FOR STATE AND LOCAL SALES TAXES. 

(a) IN GENERAL.—Subparagraph (I) of section 164(b)(5) is amended by striking 

‘‘January 1, 2008’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2007. 

SEC. 302. DEDUCTION OF QUALIFIED TUITION AND RELATED EXPENSES. 

(a) IN GENERAL.—Subsection (e) of section 222 (relating to termination) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2007. 

SEC. 303. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES. 

(a) INTEREST-RELATED DIVIDENDS.—Subparagraph (C) of section 871(k)(1) (defining interest-related dividend) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) SHORT-TERM CAPITAL GAIN DIVIDENDS.—Subparagraph (C) of section 871(k)(2) 

(defining short-term capital gain dividend) is amended by striking ‘‘December 31, 

2007’’ and inserting ‘‘December 31, 2008’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to dividends with respect to taxable years of regulated investment companies beginning 

after December 31, 2007. 

SEC. 304. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH BENEFITS. 

(a) IN GENERAL.—Paragraph (3) of section 9812(f) (relating to application of section) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 

2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to benefits for services furnished after December 31, 2007. 

SEC. 305. QUALIFIED CONSERVATION CONTRIBUTIONS. 

(a) IN GENERAL.—Clause (vi) of section 170(b)(1)(E) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to contributions made in taxable years beginning after December 31, 2007. 

SEC. 306. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR CHARITABLE PURPOSES. 

(a) IN GENERAL.—Subparagraph (F) of section 408(d)(8) (relating to termination) 

is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to distributions made in taxable years beginning after December 31, 2007. 


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SEC. 307. DEDUCTION FOR CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL 

TEACHERS. 

(a) IN GENERAL.—Subparagraph (D) of section 62(a)(2) (relating to certain expenses of elementary and secondary school teachers) is amended by striking ‘‘or 

2007’’ and inserting ‘‘2007, or 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2007. 

SEC. 308. ELECTION TO INCLUDE COMBAT PAY AS EARNED INCOME FOR PURPOSES OF 

EARNED INCOME TAX CREDIT. 

(a) IN GENERAL.—Subclause (II) of section 32(c)(2)(B)(vi) (defining earned income) 

is amended by striking ‘‘January 1, 2008’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years ending after December 31, 2007. 

SEC. 309. MODIFICATION OF MORTGAGE REVENUE BONDS FOR VETERANS. 

(a) QUALIFIED MORTGAGE BONDS USED TO FINANCE RESIDENCES FOR VETERANS

WITHOUT REGARD TO FIRST-TIME HOMEBUYER REQUIREMENT.—Subparagraph (D) of 

section 143(d)(2) (relating to exceptions) is amended by striking ‘‘January 1, 2008’’

and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to bonds 

issued after December 31, 2007. 

SEC. 310. DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVIDUALS CALLED TO ACTIVE 

DUTY. 

(a) IN GENERAL.—Clause (iv) of section 72(t)(2)(G) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to individuals ordered or called to active duty on or after December 31, 2007. 

SEC. 311. STOCK IN RIC FOR PURPOSES OF DETERMINING ESTATES OF NONRESIDENTS NOT 

CITIZENS. 

(a) IN GENERAL.—Paragraph (3) of section 2105(d) (relating to stock in a RIC) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to decedents dying after December 31, 2007. 

SEC. 312. QUALIFIED INVESTMENT ENTITIES. 

(a) IN GENERAL.—Clause (ii) of section 897(h)(4)(A) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect on 

January 1, 2008. 

SEC. 313. STATE LEGISLATORS’ TRAVEL EXPENSES AWAY FROM HOME. 

(a) IN GENERAL.—Paragraph (2) of section 162(h) (relating to legislative days) is 

amended by adding at the end the following flush sentence: ‘‘In the case of taxable 

years beginning in 2008, a legislature shall be treated for purposes of this paragraph as in session on any day in which it is formally called into session without 

regard to whether legislation was considered on such day.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2007. 

Subtitle B—Extenders Primarily Affecting 

Businesses 

SEC. 321. RESEARCH CREDIT. 

(a) IN GENERAL.—Subparagraph (B) of section 41(h)(1) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) CONFORMING AMENDMENT.—Subparagraph (D) of section 45C(b)(1) (relating to 

qualified clinical testing expenses) is amended by striking ‘‘December 31, 2007’’ and 

inserting ‘‘December 31, 2008’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred after December 31, 2007. 

SEC. 322. INDIAN EMPLOYMENT CREDIT. 

(a) IN GENERAL.—Subsection (f) of section 45A (relating to termination) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2007. 


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SEC. 323. NEW MARKETS TAX CREDIT. 

Subparagraph (D) of section 45D(f)(1) (relating to national limitation on amount 

of investments designated) is amended by striking ‘‘and 2008’’ and inserting ‘‘2008, 

and 2009’’. 

SEC. 324. RAILROAD TRACK MAINTENANCE. 

(a) IN GENERAL.—Subsection (f) of section 45G (relating to application of section) 

is amended by striking ‘‘January 1, 2008’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to expenditures paid or incurred during taxable years beginning after December 31, 

2007. 

SEC. 325. FIFTEEN-YEAR STRAIGHT-LINE COST RECOVERY FOR QUALIFIED LEASEHOLD IMPROVEMENTS AND QUALIFIED RESTAURANT PROPERTY. 

(a) IN GENERAL.—Clauses (iv) and (v) of section 168(e)(3)(E) (relating to 15–year 

property) are each amended by striking ‘‘January 1, 2008’’ and inserting ‘‘January 

1, 2009’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to property placed in service after December 31, 2007. 

SEC. 326. SEVEN-YEAR COST RECOVERY PERIOD FOR MOTORSPORTS RACING TRACK FACILITY. 

(a) IN GENERAL.—Subparagraph (D) of section 168(i)(15) (relating to termination) 

is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to property placed in service after December 31, 2007. 

SEC. 327. ACCELERATED DEPRECIATION FOR BUSINESS PROPERTY ON INDIAN RESERVATION. 

(a) IN GENERAL.—Paragraph (8) of section 168(j) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to property placed in service after December 31, 2007. 

SEC. 328. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS. 

(a) IN GENERAL.—Subsection (h) of section 198 (relating to termination) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to expenditures paid or incurred after December 31, 2007. 

SEC. 329. DEDUCTION ALLOWABLE WITH RESPECT TO INCOME ATTRIBUTABLE TO DOMESTIC 

PRODUCTION ACTIVITIES IN PUERTO RICO. 

(a) IN GENERAL.—Subparagraph (C) of section 199(d)(8) (relating to termination) 

is amended—

(1) by striking ‘‘first 2 taxable years’’ and inserting ‘‘first 3 taxable years’’, and 

(2) by striking ‘‘January 1, 2008’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2007. 

SEC. 330. MODIFICATION OF TAX TREATMENT OF CERTAIN PAYMENTS TO CONTROLLING EXEMPT ORGANIZATIONS. 

(a) IN GENERAL.—Clause (iv) of section 512(b)(13)(E) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to payments received or accrued after December 31, 2007. 

SEC. 331. EXTENSION AND MODIFICATION OF CREDIT TO HOLDERS OF QUALIFIED ZONE 

ACADEMY BONDS. 

(a) IN GENERAL.—Subsection (e) of section 1397E (relating to limitation on 

amount of bonds designated) is amended by striking ‘‘1998, 1999, 2000, 2001, 2002, 

2003, 2004, 2005, 2006, and 2007’’ and inserting ‘‘each of calendar years 1998 

through 2008’’. 

(b) MODIFICATION OF ARBITRAGE RULES.—

(1) IN GENERAL.—Subsection (g) of section 1397E (relating to special rules relating to arbitrage) is amended to read as follows: 

‘‘(g) SPECIAL RULES RELATING TO ARBITRAGE.—

‘‘(1) IN GENERAL.—An issue shall be treated as meeting the requirements of 

this subsection if the issuer satisfies the requirements of section 148 with respect to the proceeds of the issue. 

‘‘(2) SPECIAL RULE FOR INVESTMENTS DURING EXPENDITURE PERIOD.—An issue 

shall not be treated as failing to meet the requirements of paragraph (1) by reason of any investment of available project proceeds during the 5–year period deVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00006 Fmt 6659 Sfmt 6621 E:\HR\OC\HR431.XXX HR431

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scribed in subsection (f)(1)(A) (including any extension of such period under subsection (f)(2)). 

‘‘(3) SPECIAL RULE FOR RESERVE FUNDS.—An issue shall not be treated as failing to meet the requirements of paragraph (1) by reason of any fund which is 

expected to be used to repay such issue if—

‘‘(A) such fund is funded at a rate not more rapid than equal annual installments, 

‘‘(B) such fund is funded in a manner that such fund will not exceed the 

amount necessary to repay the issue if invested at the maximum rate permitted under subparagraph (C), and 

‘‘(C) the yield on such fund is not greater than the discount rate determined under subsection (d)(3) with respect to the issue.’’. 

(2) APPLICATION OF AVAILABLE PROJECT PROCEEDS TO OTHER REQUIREMENTS.—

Subsections (d)(1)(A), (d)(2)(A), (f)(1)(A), (f)(1)(B), (f)(1)(C), and (f)(3) of section 

1397E are each amended by striking ‘‘proceeds’’ and inserting ‘‘available project 

proceeds’’

(3) AVAILABLE PROJECT PROCEEDS DEFINED.—Subsection (i) of section 1397E 

(relating to definitions) is amended by adding at the end the following new 

paragraph: 

‘‘(4) AVAILABLE PROJECT PROCEEDS.—The term ‘available project proceeds’’

means—

‘‘(A) the excess of—

‘‘(i) the proceeds from the sale of an issue, over 

‘‘(ii) the issuance costs financed by the issue (to the extent that such 

costs do not exceed 2 percent of such proceeds), and 

‘‘(B) the proceeds from any investment of the excess described in subparagraph (A).’’. 

(c) EFFECTIVE DATE.—

(1) EXTENSION.—The amendment made by subsection (a) shall apply to obligations issued after December 31, 2007. 

(2) MODIFICATION OF ARBITRAGE RULES.—The amendments made by subsection (b) shall apply to obligations issued after the date of the enactment of 

this Act. 

SEC. 332. TAX INCENTIVES FOR INVESTMENT IN THE DISTRICT OF COLUMBIA. 

(a) DESIGNATION OF ZONE.—

(1) IN GENERAL.—Subsection (f) of section 1400 is amended by striking ‘‘2007’’

both places it appears and inserting ‘‘2008’’. 

(2) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to periods beginning after December 31, 2007. 

(b) TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.—

(1) IN GENERAL.—Subsection (b) of section 1400A is amended by striking 

‘‘2007’’ and inserting ‘‘2008’’. 

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to 

bonds issued after December 31, 2007. 

(c) ZERO PERCENT CAPITAL GAINS RATE.—

(1) IN GENERAL.—Subsection (b) of section 1400B is amended by striking 

‘‘2008’’ each place it appears and inserting ‘‘2009’’. 

(2) CONFORMING AMENDMENTS.—

(A) Section 1400B(e)(2) is amended—

(i) by striking ‘‘2012’’ and inserting ‘‘2013’’, and 

(ii) by striking ‘‘2012’’ in the heading thereof and inserting ‘‘2013’’. 

(B) Section 1400B(g)(2) is amended by striking ‘‘2012’’ and inserting 

‘‘2013’’. 

(C) Section 1400F(d) is amended by striking ‘‘2012’’ and inserting ‘‘2013’’. 

(3) EFFECTIVE DATES.—

(A) EXTENSION.—The amendments made by paragraph (1) shall apply to 

acquisitions after December 31, 2007. 

(B) CONFORMING AMENDMENTS.—The amendments made by paragraph (2) 

shall take effect on the date of the enactment of this Act. 

(d) FIRST-TIME HOMEBUYER CREDIT.—

(1) IN GENERAL.—Subsection (i) of section 1400C is amended by striking 

‘‘2008’’ and inserting ‘‘2009’’. 

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to 

property purchased after December 31, 2007. 

SEC. 333. EXTENSION OF ECONOMIC DEVELOPMENT CREDIT FOR AMERICAN SAMOA. 

(a) IN GENERAL.—Subsection (d) of section 119 of division A of the Tax Relief and 

Health Care Act of 2006 is amended—


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(1) by striking ‘‘first two taxable years’’ and inserting ‘‘first 3 taxable years’’, 

and 

(2) by striking ‘‘January 1, 2008’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2007. 

SEC. 334. ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY. 

(a) IN GENERAL.—Clause (iv) of section 170(e)(3)(C) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to contributions made after December 31, 2007. 

SEC. 335. ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF BOOK INVENTORY 

TO PUBLIC SCHOOLS. 

(a) IN GENERAL.—Clause (iv) of section 170(e)(3)(D) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to contributions made after December 31, 2007. 

SEC. 336. ENHANCED DEDUCTION FOR QUALIFIED COMPUTER CONTRIBUTIONS. 

(a) IN GENERAL.—Subparagraph (G) of section 170(e)(6) (relating to termination) 

is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to contributions made during taxable years beginning after December 31, 2007. 

SEC. 337. BASIS ADJUSTMENT TO STOCK OF S CORPORATIONS MAKING CHARITABLE CONTRIBUTIONS OF PROPERTY. 

(a) IN GENERAL.—The last sentence of section 1367(a)(2) (relating to decreases in 

basis) is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 

2008’’. 

(b) TECHNICAL AMENDMENT RELATED TO SECTION 1203 OF THE PENSION PROTECTION ACT OF 2006.—Subsection (d) of section 1366 is amended by adding at the end 

the following new paragraph: 

‘‘(4) APPLICATION OF LIMITATION ON CHARITABLE CONTRIBUTIONS.—In the case 

of any charitable contribution of property to which the second sentence of section 1367(a)(2) applies, paragraph (1) shall not apply to the extent of the excess 

(if any) of—

‘‘(A) the shareholder’s pro rata share of such contribution, over 

‘‘(B) the shareholder’s pro rata share of the adjusted basis of such property.’’. 

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall apply to contributions made in taxable years beginning 

after December 31, 2007. 

(2) TECHNICAL AMENDMENT.—The amendment made by subsection (b) shall 

take effect as if included in the provision of the Pension Protection Act of 2006 

to which it relates. 

SEC. 338. EXTENSION OF WORK OPPORTUNITY TAX CREDIT FOR HURRICANE KATRINA EMPLOYEES. 

(a) IN GENERAL.—Paragraph (1) of section 201(b) of the Katrina Emergency Tax 

Relief Act of 2005 is amended by striking ‘‘2–year’’ and inserting ‘‘3–year’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to individuals hired after August 27, 2007. 

Subtitle C—Other Extenders 

SEC. 341. DISCLOSURE FOR COMBINED EMPLOYMENT TAX REPORTING. 

(a) IN GENERAL.—Subparagraph (B) of section 6103(d)(5) (relating to termination) 

is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to disclosures after December 31, 2007. 

SEC. 342. DISCLOSURE OF RETURN INFORMATION TO APPRISE APPROPRIATE OFFICIALS OF 

TERRORIST ACTIVITIES. 

(a) IN GENERAL.—Clause (iv) of section 6103(i)(3)(C) (relating to termination) is 

amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to disclosures after December 31, 2007. 


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SEC. 343. DISCLOSURE UPON REQUEST OF INFORMATION RELATING TO TERRORIST ACTIVITIES. 

(a) IN GENERAL.—Subparagraph (E) of section 6103(i)(7) (relating to termination) 

is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to disclosures after December 31, 2007. 

SEC. 344. DISCLOSURE OF RETURN INFORMATION TO CARRY OUT INCOME CONTINGENT REPAYMENT OF STUDENT LOANS. 

(a) IN GENERAL.—Subparagraph (D) of section 6103(l)(13) (relating to termination) 

is amended by striking ‘‘December 31, 2007’’ and inserting ‘‘December 31, 2008’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to requests made after December 31, 2007. 

SEC. 345. AUTHORITY FOR UNDERCOVER OPERATIONS. 

(a) IN GENERAL.—Paragraph (6) of section 7608(c) (relating to application of section) is amended by striking ‘‘January 1, 2008’’ each place it appears and inserting ‘‘January 1, 2009’’. (b) EFFECTIVE DATE.—The amendment made by this section shall take effect on 

January 1, 2008. 

SEC. 346. INCREASE IN LIMIT ON COVER OVER OF RUM EXCISE TAX TO PUERTO RICO AND 

THE VIRGIN ISLANDS. 

(a) IN GENERAL.—Paragraph (1) of section 7652(f) is amended by striking ‘‘January 1, 2008’’ and inserting ‘‘January 1, 2009’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to distilled spirits brought into the United States after December 31, 2007. 

SEC. 347. DISCLOSURE OF RETURN INFORMATION FOR CERTAIN VETERANS PROGRAMS. 

(a) IN GENERAL.—The last sentence of paragraph (7) of section 6103(l) is amended 

by striking ‘‘September 30, 2008’’ and inserting ‘‘December 31, 2008’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to requests made after September 30, 2008. 

TITLE IV—MORTGAGE FORGIVENESS DEBT 

RELIEF 

SEC. 401. DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE EXCLUDED FROM 

GROSS INCOME. 

(a) IN GENERAL.—Paragraph (1) of section 108(a) is amended by striking ‘‘or’’ at 

the end of subparagraph (C), by striking the period at the end of subparagraph (D) 

and inserting ‘‘, or’’, and by inserting after subparagraph (D) the following new subparagraph: 

‘‘(E) the indebtedness discharged is qualified principal residence indebtedness.’’. 

(b) SPECIAL RULES RELATING TO QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—Section 108 is amended by adding at the end the following new subsection: 

‘‘(h) SPECIAL RULES RELATING TO QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—

‘‘(1) BASIS REDUCTION.—The amount excluded from gross income by reason of 

subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of 

the principal residence of the taxpayer. 

‘‘(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—For purposes of this 

section, the term ‘qualified principal residence indebtedness’ means acquisition 

indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting ‘$2,000,000 ($1,000,000’ for ‘$1,000,000 ($500,000’ in clause (ii) thereof) 

with respect to the principal residence of the taxpayer. 

‘‘(3) EXCEPTION FOR CERTAIN DISCHARGES NOT RELATED TO TAXPAYER’S FINANCIAL CONDITION.—Subsection (a)(1)(E) shall not apply to the discharge of a loan 

if the discharge is on account of services performed for the lender or any other 

factor not directly related to a decline in the value of the residence or to the 

financial condition of the taxpayer. 

‘‘(4) ORDERING RULE.—If any loan is discharged, in whole or in part, and only 

a portion of such loan is qualified principal residence indebtedness, subsection 

(a)(1)(E) shall apply only to so much of the amount discharged as exceeds the 

amount of the loan (as determined immediately before such discharge) which is 

not qualified principal residence indebtedness. 

‘‘(5) PRINCIPAL RESIDENCE.—For purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.’’. 


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(c) COORDINATION.—

(1) Subparagraph (A) of section 108(a)(2) is amended by striking ‘‘and (D)’’

and inserting ‘‘(D), and (E)’’. 

(2) Paragraph (2) of section 108(a) is amended by adding at the end the following new subparagraph: 

‘‘(C) PRINCIPAL RESIDENCE EXCLUSION TAKES PRECEDENCE OVER INSOLVENCY EXCLUSION UNLESS ELECTED OTHERWISE.—Paragraph (1)(B) shall not 

apply to a discharge to which paragraph (1)(E) applies unless the taxpayer 

elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to discharges of indebtedness on or after January 1, 2007. 

SEC. 402. LONG-TERM EXTENSION OF DEDUCTION FOR MORTGAGE INSURANCE PREMIUMS. 

(a) IN GENERAL.—Subparagraph (E) of section 163(h)(3) (relating to mortgage insurance premiums treated as interest) is amended by striking clauses (iii) and (iv) 

and inserting the following new clause: 

‘‘(iii) APPLICATION.—Clause (i) shall not apply with respect to any 

mortgage insurance contract issued before January 1, 2007, or after December 31, 2014.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to contracts issued after December 31, 2006. 

SEC. 403. ALTERNATIVE TESTS FOR QUALIFYING AS COOPERATIVE HOUSING CORPORATION. 

(a) IN GENERAL.—Subparagraph (D) of section 216(b)(1) (defining cooperative 

housing corporation) is amended to read as follows: 

‘‘(D) meeting 1 or more of the following requirements for the taxable year 

in which the taxes and interest described in subsection (a) are paid or incurred: 

‘‘(i) 80 percent or more of the corporation’s gross income for such taxable year is derived from tenant-stockholders. 

‘‘(ii) At all times during such taxable year, 80 percent or more of the 

total square footage of the corporation’s property is used or available 

for use by the tenant-stockholders for residential purposes or purposes 

ancillary to such residential use. 

‘‘(iii) 90 percent or more of the expenditures of the corporation paid 

or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-stockholders.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years ending after the date of the enactment of this Act. 

SEC. 404. GAIN FROM SALE OF PRINCIPAL RESIDENCE ALLOCATED TO NONQUALIFIED USE 

NOT EXCLUDED FROM INCOME. 

(a) IN GENERAL.—Subsection (b) of section 121 (relating to limitations) is amended 

by adding at the end the following new paragraph: 

‘‘(4) EXCLUSION OF GAIN ALLOCATED TO NONQUALIFIED USE.—

‘‘(A) IN GENERAL.—Subsection (a) shall not apply to so much of the gain 

from the sale or exchange of property as is allocated to periods of nonqualified use. 

‘‘(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED USE.—For purposes 

of subparagraph (A), gain shall be allocated to periods of nonqualified use 

based on the ratio which—

‘‘(i) the aggregate periods of nonqualified use during the period such 

property was owned by the taxpayer, bears to 

‘‘(ii) the period such property was owned by the taxpayer. 

‘‘(C) PERIOD OF NONQUALIFIED USE.—For purposes of this paragraph—

‘‘(i) IN GENERAL.—The term ‘period of nonqualified use’ means any 

period (other than the portion of any period preceding January 1, 2008) 

during which the property is not used as the principal residence of the 

taxpayer or the taxpayer’s spouse or former spouse. 

‘‘(ii) EXCEPTIONS.—The term ‘period of nonqualified use’ does not include—

‘‘(I) any portion of the 5–year period described in subsection (a) 

which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse, 

‘‘(II) any period (not to exceed an aggregate period of 10 years) 

during which the taxpayer or the taxpayer’s spouse is serving on 

qualified official extended duty (as defined in subsection (d)(9)(C)) 

described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and 


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‘‘(III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified 

by the Secretary. 

‘‘(D) COORDINATION WITH RECOGNITION OF GAIN ATTRIBUTABLE TO DEPRECIATION.—For purposes of this paragraph—

‘‘(i) subparagraph (A) shall be applied after the application of subsection (d)(6), and 

‘‘(ii) subparagraph (B) shall be applied without regard to any gain to 

which subsection (d)(6) applies.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to sales 

and exchanges after December 31, 2007. 

TITLE V—ADMINISTRATIVE PROVISIONS 

SEC. 501. REPEAL OF AUTHORITY TO ENTER INTO PRIVATE DEBT COLLECTION CONTRACTS. 

(a) IN GENERAL.—Subchapter A of chapter 64 is amended by striking section 6306. 

(b) CONFORMING AMENDMENTS.—

(1) Subchapter B of chapter 76 is amended by striking section 7433A. 

(2) Section 7811 is amended by striking subsection (g). 

(3) Section 1203 of the Internal Revenue Service Restructuring Act of 1998 

is amended by striking subsection (e). 

(4) The table of sections for subchapter A of chapter 64 is amended by striking the item relating to section 6306. 

(5) The table of sections for subchapter B of chapter 76 is amended by striking the item relating to section 7433A. 

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall take effect on the date of the enactment of 

this Act. 

(2) EXCEPTION FOR EXISTING CONTRACTS, ETC.—The amendments made by this 

section shall not apply to any contract which was entered into before July 18, 

2007, and is not renewed or extended on or after such date. 

(3) UNAUTHORIZED CONTRACTS AND EXTENSIONS TREATED AS VOID.—Any qualified tax collection contract (as defined in section 6306 of the Internal Revenue 

Code of 1986, as in effect before its repeal) which is entered into on or after 

July 18, 2007, and any extension or renewal on or after such date of any qualified tax collection contract (as so defined) shall be void. 

SEC. 502. DELAY OF APPLICATION OF WITHHOLDING REQUIREMENT ON CERTAIN GOVERNMENTAL PAYMENTS FOR GOODS AND SERVICES. 

(a) IN GENERAL.—Subsection (b) of section 511 of the Tax Increase Prevention and 

Reconciliation Act of 2005 is amended by striking ‘‘December 31, 2010’’ and inserting ‘‘December 31, 2011’’. 

(b) REPORT TO CONGRESS.—Not later than 6 months after the date of the enactment of this Act, the Secretary of the Treasury shall submit to the Committee on 

Ways and Means of the House of Representatives and the Committee on Finance 

of the Senate a report with respect to the withholding requirements of section 

3402(t) of the Internal Revenue Code of 1986, including a detailed analysis of—

(1) the problems, if any, which are anticipated in administering and complying with such requirements, 

(2) the burdens, if any, that such requirements will place on governments and 

businesses (taking into account such mechanisms as may be necessary to administer such requirements), and 

(3) the application of such requirements to small expenditures for services 

and goods by governments. 

SEC. 503. CLARIFICATION OF ENTITLEMENT OF VIRGIN ISLANDS RESIDENTS TO PROTECTIONS OF LIMITATIONS ON ASSESSMENT AND COLLECTION OF TAX. 

(a) IN GENERAL.—Subsection (c) of section 932 (relating to treatment of Virgin Islands residents) is amended by adding at the end the following new paragraph: 

‘‘(5) TREATMENT OF INCOME TAX RETURN FILED WITH VIRGIN ISLANDS.—An income tax return filed with the Virgin Islands by an individual claiming to be 

described in paragraph (1) for the taxable year shall be treated for purposes of 

subtitle F in the same manner as if such return were an income tax return filed 

with the United States for such taxable year. The preceding sentence shall not 

apply where such return is false or fraudulent with the intent to evade tax or 

otherwise is a willful attempt in any manner to defeat or evade tax.’’. 


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(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after 1986. 

SEC. 504. REVISION OF TAX RULES ON EXPATRIATION. 

(a) IN GENERAL.—Subpart A of part II of subchapter N of chapter 1 is amended 

by inserting after section 877 the following new section: 

‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION. 

‘‘(a) GENERAL RULES.—For purposes of this subtitle— ‘‘(1) MARK TO MARKET.—All property of a covered expatriate shall be treated 

as sold on the day before the expatriation date for its fair market value. ‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the case of any sale under paragraph 

(1)— ‘‘(A) notwithstanding any other provision of this title, any gain arising 

from such sale shall be taken into account for the taxable year of the sale, 

and ‘‘(B) any loss arising from such sale shall be taken into account for the 

taxable year of the sale to the extent otherwise provided by this title, except 

that section 1091 shall not apply to any such loss. 

Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3). ‘‘(3) EXCLUSION FOR CERTAIN GAIN.— ‘‘(A) IN GENERAL.—The amount which would (but for this paragraph) be 

includible in the gross income of any individual by reason of paragraph (1) 

shall be reduced (but not below zero) by $600,000. ‘‘(B) ADJUSTMENT FOR INFLATION.— ‘‘(i) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2008, the dollar amount in subparagraph (A) shall be 

increased by an amount equal to— ‘‘(I) such dollar amount, multiplied by 

‘‘(II) the cost-of-living adjustment determined under section 

1(f)(3) for the calendar year in which the taxable year begins, by 

substituting ‘calendar year 2007’ for ‘calendar year 1992’ in subparagraph (B) thereof. ‘‘(ii) ROUNDING.—If any amount as adjusted under clause (i) is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000. ‘‘(b) ELECTION TO DEFER TAX.— ‘‘(1) IN GENERAL.—If the taxpayer elects the application of this subsection 

with respect to any property treated as sold by reason of subsection (a), the time 

for payment of the additional tax attributable to such property shall be extended until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in 

which gain is not recognized in whole or in part, until such other date as the 

Secretary may prescribe). 

‘‘(2) DETERMINATION OF TAX WITH RESPECT TO PROPERTY.—For purposes of 

paragraph (1), the additional tax attributable to any property is an amount 

which bears the same ratio to the additional tax imposed by this chapter for 

the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain 

taken into account under subsection (a) with respect to all property to which 

subsection (a) applies. 

‘‘(3) TERMINATION OF EXTENSION.—The due date for payment of tax may not 

be extended under this subsection later than the due date for the return of tax 

imposed by this chapter for the taxable year which includes the date of death 

of the expatriate (or, if earlier, the time that the security provided with respect 

to the property fails to meet the requirements of paragraph (4), unless the taxpayer corrects such failure within the time specified by the Secretary). 

‘‘(4) SECURITY.—

‘‘(A) IN GENERAL.—No election may be made under paragraph (1) with respect to any property unless adequate security is provided with respect to 

such property. 

‘‘(B) ADEQUATE SECURITY.—For purposes of subparagraph (A), security 

with respect to any property shall be treated as adequate security if—

‘‘(i) it is a bond which is furnished to, and accepted by, the Secretary, 

which is conditioned on the payment of tax (and interest thereon), and 

which meets the requirements of section 6325, or 

‘‘(ii) it is another form of security for such payment (including letters 

of credit) that meets such requirements as the Secretary may prescribe. 


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‘‘(5) WAIVER OF CERTAIN RIGHTS.—No election may be made under paragraph 

(1) unless the taxpayer makes an irrevocable waiver of any right under any 

treaty of the United States which would preclude assessment or collection of 

any tax imposed by reason of this section. ‘‘(6) ELECTIONS.—An election under paragraph (1) shall only apply to property 

described in the election and, once made, is irrevocable. ‘‘(7) INTEREST.—For purposes of section 6601, the last date for the payment 

of tax shall be determined without regard to the election under this subsection. ‘‘(c) EXCEPTION FOR CERTAIN PROPERTY.—Subsection (a) shall not apply to— ‘‘(1) any deferred compensation item (as defined in subsection (d)(4)), 

‘‘(2) any specified tax deferred account (as defined in subsection (e)(2)), and 

‘‘(3) any interest in a nongrantor trust (as defined in subsection (f)(3)). ‘‘(d) TREATMENT OF DEFERRED COMPENSATION ITEMS.— ‘‘(1) WITHHOLDING ON ELIGIBLE DEFERRED COMPENSATION ITEMS.— ‘‘(A) IN GENERAL.—In the case of any eligible deferred compensation item, 

the payor shall deduct and withhold from any taxable payment to a covered 

expatriate with respect to such item a tax equal to 30 percent thereof. ‘‘(B) TAXABLE PAYMENT.—For purposes of subparagraph (A), the term ‘taxable payment’ means with respect to a covered expatriate any payment 

to the extent it would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States. A deferred compensation item shall be taken into 

account as a payment under the preceding sentence when such item would 

be so includible. 

‘‘(2) OTHER DEFERRED COMPENSATION ITEMS.—In the case of any deferred compensation item which is not an eligible deferred compensation item—

‘‘(A)(i) with respect to any deferred compensation item to which clause (ii) 

does not apply, an amount equal to the present value of the covered expatriate’s accrued benefit shall be treated as having been received by such individual on the day before the expatriation date as a distribution under the 

plan, and 

‘‘(ii) with respect to any deferred compensation item referred to in paragraph (4)(D), the rights of the covered expatriate to such item shall be 

treated as becoming transferable and not subject to a substantial risk of 

forfeiture on the day before the expatriation date, 

‘‘(B) no early distribution tax shall apply by reason of such treatment, 

and 

‘‘(C) appropriate adjustments shall be made to subsequent distributions 

from the plan to reflect such treatment. 

‘‘(3) ELIGIBLE DEFERRED COMPENSATION ITEMS.—For purposes of this subsection, the term ‘eligible deferred compensation item’ means any deferred compensation item with respect to which—

‘‘(A) the payor of such item is—

‘‘(i) a United States person, or 

‘‘(ii) a person who is not a United States person but who elects to be 

treated as a United States person for purposes of paragraph (1) and 

meets such requirements as the Secretary may provide to ensure that 

the payor will meet the requirements of paragraph (1), and 

‘‘(B) the covered expatriate—

‘‘(i) notifies the payor of his status as a covered expatriate, and 

‘‘(ii) makes an irrevocable waiver of any right to claim any reduction 

under any treaty with the United States in withholding on such item. 

‘‘(4) DEFERRED COMPENSATION ITEM.—For purposes of this subsection, the 

term ‘deferred compensation item’ means—

‘‘(A) any interest in a plan or arrangement described in section 219(g)(5), 

‘‘(B) any interest in a foreign pension plan or similar retirement arrangement or program, 

‘‘(C) any item of deferred compensation, and 

‘‘(D) any property, or right to property, which the individual is entitled 

to receive in connection with the performance of services to the extent not 

previously taken into account under section 83 or in accordance with section 83. 

‘‘(5) EXCEPTION.—Paragraphs (1) and (2) shall not apply to any deferred compensation item which is attributable to services performed outside the United 

States while the covered expatriate was not a citizen or resident of the United 

States. 

‘‘(6) SPECIAL RULES.—

‘‘(A) APPLICATION OF WITHHOLDING RULES.—Rules similar to the rules of 

subchapter B of chapter 3 shall apply for purposes of this subsection. 


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‘‘(B) APPLICATION OF TAX.—Any item subject to the withholding tax imposed under paragraph (1) shall be subject to tax under section 871. ‘‘(C) COORDINATION WITH OTHER WITHHOLDING REQUIREMENTS.—Any item 

subject to withholding under paragraph (1) shall not be subject to withholding under section 1441 or chapter 24. ‘‘(e) TREATMENT OF SPECIFIED TAX DEFERRED ACCOUNTS.— ‘‘(1) ACCOUNT TREATED AS DISTRIBUTED.—In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the 

expatriation date— ‘‘(A) the covered expatriate shall be treated as receiving a distribution of 

his entire interest in such account on the day before the expatriation date, ‘‘(B) no early distribution tax shall apply by reason of such treatment, 

and ‘‘(C) appropriate adjustments shall be made to subsequent distributions 

from the account to reflect such treatment. ‘‘(2) SPECIFIED TAX DEFERRED ACCOUNT.—For purposes of paragraph (1), the 

term ‘specified tax deferred account’ means an individual retirement plan (as 

defined in section 7701(a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a Coverdell education savings account (as defined in section 530), a 

health savings account (as defined in section 223), and an Archer MSA (as defined in section 220). 

‘‘(f) SPECIAL RULES FOR NONGRANTOR TRUSTS.—

‘‘(1) IN GENERAL.—In the case of a distribution (directly or indirectly) of any 

property from a nongrantor trust to a covered expatriate—

‘‘(A) the trustee shall deduct and withhold from such distribution an 

amount equal to 30 percent of the taxable portion of the distribution, and 

‘‘(B) if the fair market value of such property exceeds its adjusted basis 

in the hands of the trust, gain shall be recognized to the trust as if such 

property were sold to the expatriate at its fair market value. 

‘‘(2) TAXABLE PORTION.—For purposes of this subsection, the term ‘taxable 

portion’ means, with respect to any distribution, that portion of the distribution 

which would be includible in the gross income of the covered expatriate if such 

expatriate continued to be subject to tax as a citizen or resident of the United 

States. 

‘‘(3) NONGRANTOR TRUST.—For purposes of this subsection, the term ‘nongrantor trust’ means the portion of any trust that the individual is not considered the owner of under subpart E of part I of subchapter J. The determination 

under the preceding sentence shall be made immediately before the expatriation 

date. 

‘‘(4) SPECIAL RULES RELATING TO WITHHOLDING.—For purposes of this subsection—

‘‘(A) rules similar to the rules of subsection (d)(6) shall apply, and 

‘‘(B) the covered expatriate shall be treated as having waived any right 

to claim any reduction under any treaty with the United States in withholding on any distribution to which paragraph (1)(A) applies. 

‘‘(5) APPLICATION.—This subsection shall apply to a nongrantor trust only if 

the covered expatriate was a beneficiary of the trust on the day before the expatriation date. 

‘‘(g) DEFINITIONS AND SPECIAL RULES RELATING TO EXPATRIATION.—For purposes 

of this section—

‘‘(1) COVERED EXPATRIATE.—

‘‘(A) IN GENERAL.—The term ‘covered expatriate’ means an expatriate who 

meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2). 

‘‘(B) EXCEPTIONS.—An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—

‘‘(i) the individual—

‘‘(I) became at birth a citizen of the United States and a citizen 

of another country and, as of the expatriation date, continues to be 

a citizen of, and is taxed as a resident of, such other country, and 

‘‘(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 

15–taxable year period ending with the taxable year during which 

the expatriation date occurs, or 

‘‘(ii)(I) the individual’s relinquishment of United States citizenship occurs before such individual attains age 181⁄2, and 

‘‘(II) the individual has been a resident of the United States (as so 

defined) for not more than 10 taxable years before the date of relinquishment. 


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‘‘(C) COVERED EXPATRIATES ALSO SUBJECT TO TAX AS CITIZENS OR RESIDENTS.—In the case of any covered expatriate who is subject to tax as a citizen or resident of the United States for any period beginning after the expatriation date, such individual shall not be treated as a covered expatriate 

during such period for purposes of subsections (d)(1) and (f) and section 

2801. 

‘‘(2) EXPATRIATE.—The term ‘expatriate’ means—

‘‘(A) any United States citizen who relinquishes his citizenship, and 

‘‘(B) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 

7701(b)(6)). 

‘‘(3) EXPATRIATION DATE.—The term ‘expatriation date’ means—

‘‘(A) the date an individual relinquishes United States citizenship, or 

‘‘(B) in the case of a long-term resident of the United States, the date on 

which the individual ceases to be a lawful permanent resident of the United 

States (within the meaning of section 7701(b)(6)). 

‘‘(4) RELINQUISHMENT OF CITIZENSHIP.—A citizen shall be treated as relinquishing his United States citizenship on the earliest of—

‘‘(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 

1481(a)(5)), 

‘‘(B) the date the individual furnishes to the United States Department 

of State a signed statement of voluntary relinquishment of United States 

nationality confirming the performance of an act of expatriation specified 

in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)–(4)), 

‘‘(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or 

‘‘(D) the date a court of the United States cancels a naturalized citizen’s 

certificate of naturalization. 

Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to 

the individual of a certificate of loss of nationality by the United States Department of State. 

‘‘(5) LONG-TERM RESIDENT.—The term ‘long-term resident’ has the meaning 

given to such term by section 877(e)(2). 

‘‘(6) EARLY DISTRIBUTION TAX.—The term ‘early distribution tax’ means any 

increase in tax imposed under section 72(t), 220(e)(4), 223(f)(4), 409A(a)(1)(B), 

529(c)(6), or 530(d)(4). 

‘‘(h) OTHER RULES.—

‘‘(1) TERMINATION OF DEFERRALS, ETC.—In the case of any covered expatriate, 

notwithstanding any other provision of this title—

‘‘(A) any time period for acquiring property which would result in the reduction in the amount of gain recognized with respect to property disposed 

of by the taxpayer shall terminate on the day before the expatriation date, 

and 

‘‘(B) any extension of time for payment of tax shall cease to apply on the 

day before the expatriation date and the unpaid portion of such tax shall 

be due and payable at the time and in the manner prescribed by the Secretary. 

‘‘(2) STEP-UP IN BASIS.—Solely for purposes of determining any tax imposed 

by reason of subsection (a), property which was held by an individual on the 

date the individual first became a resident of the United States (within the 

meaning of section 7701(b)) shall be treated as having a basis on such date of 

not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable. 

‘‘(3) COORDINATION WITH SECTION 684.—If the expatriation of any individual 

would result in the recognition of gain under section 684, this section shall be 

applied after the application of section 684. 

‘‘(i) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.’’. 

(b) TAX ON GIFTS AND BEQUESTS RECEIVED BY UNITED STATES CITIZENS AND RESIDENTS FROM EXPATRIATES.—

(1) IN GENERAL.—Subtitle B (relating to estate and gift taxes) is amended by 

inserting after chapter 14 the following new chapter: 


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‘‘CHAPTER 15—GIFTS AND BEQUESTS FROM EXPATRIATES 

‘‘Sec. 2801. Imposition of tax. 

‘‘SEC. 2801. IMPOSITION OF TAX. 

‘‘(a) IN GENERAL.—If, during any calendar year, any United States citizen or resident receives any covered gift or bequest, there is hereby imposed a tax equal to 

the product of— ‘‘(1) the highest rate of tax specified in the table contained in section 2001(c) 

as in effect on the date of such receipt (or, if greater, the highest rate of tax 

specified in the table applicable under section 2502(a) as in effect on the date), 

and ‘‘(2) the value of such covered gift or bequest. ‘‘(b) TAX TO BE PAID BY RECIPIENT.—The tax imposed by subsection (a) on any 

covered gift or bequest shall be paid by the person receiving such gift or bequest. ‘‘(c) EXCEPTION FOR CERTAIN GIFTS.—Subsection (a) shall apply only to the extent 

that the value of covered gifts and bequests received by any person during the calendar year exceeds $10,000. ‘‘(d) TAX REDUCED BY FOREIGN GIFT OR ESTATE TAX.—The tax imposed by subsection (a) on any covered gift or bequest shall be reduced by the amount of any 

gift or estate tax paid to a foreign country with respect to such covered gift or bequest. ‘‘(e) COVERED GIFT OR BEQUEST.— ‘‘(1) IN GENERAL.—For purposes of this chapter, the term ‘covered gift or bequest’ means— ‘‘(A) any property acquired by gift directly or indirectly from an individual 

who, at the time of such acquisition, is a covered expatriate, and ‘‘(B) any property acquired directly or indirectly by reason of the death 

of an individual who, immediately before such death, was a covered expatriate. ‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE SUBJECT TO ESTATE OR GIFT

TAX.—Such term shall not include— ‘‘(A) any property shown on a timely filed return of tax imposed by chapter 12 which is a taxable gift by the covered expatriate, and ‘‘(B) any property included in the gross estate of the covered expatriate 

for purposes of chapter 11 and shown on a timely filed return of tax imposed by chapter 11 of the estate of the covered expatriate. ‘‘(3) TRANSFERS IN TRUST.— ‘‘(A) DOMESTIC TRUSTS.—In the case of a covered gift or bequest made to 

a domestic trust— ‘‘(i) subsection (a) shall apply in the same manner as if such trust 

were a United States citizen, and ‘‘(ii) the tax imposed by subsection (a) on such gift or bequest shall 

be paid by such trust. ‘‘(B) FOREIGN TRUSTS.— ‘‘(i) IN GENERAL.—In the case of a covered gift or bequest made to a 

foreign trust, subsection (a) shall apply to any distribution attributable 

to such gift or bequest from such trust (whether from income or corpus) 

to a United States citizen or resident in the same manner as if such 

distribution were a covered gift or bequest. ‘‘(ii) DEDUCTION FOR TAX PAID BY RECIPIENT.—There shall be allowed 

as a deduction under section 164 the amount of tax imposed by this 

section which is paid or accrued by a United States citizen or resident 

by reason of a distribution from a foreign trust, but only to the extent 

such tax is imposed on the portion of such distribution which is included in the gross income of such citizen or resident. 

‘‘(iii) ELECTION TO BE TREATED AS DOMESTIC TRUST.—Solely for purposes of this section, a foreign trust may elect to be treated as a domestic trust. Such an election may be revoked with the consent of the Secretary. 

‘‘(f) COVERED EXPATRIATE.—For purposes of this section, the term ‘covered expatriate’ has the meaning given to such term by section 877A(g)(1).’’. 

(2) CLERICAL AMENDMENT.—The table of chapters for subtitle B is amended 

by inserting after the item relating to chapter 14 the following new item: 

‘‘CHAPTER 15. GIFTS AND BEQUESTS FROM EXPATRIATES.’’. 

(c) DEFINITION OF TERMINATION OF UNITED STATES CITIZENSHIP.—

(1) IN GENERAL.—Section 7701(a) is amended by adding at the end the following new paragraph: 

‘‘(50) TERMINATION OF UNITED STATES CITIZENSHIP.—


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‘‘(A) IN GENERAL.—An individual shall not cease to be treated as a United 

States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4). 

‘‘(B) DUAL CITIZENS.—Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.’’. 

(2) CONFORMING AMENDMENTS.—

(A) Paragraph (1) of section 877(e) is amended to read as follows: 

‘‘(1) IN GENERAL.—Any long-term resident of the United States who ceases to 

be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 

2501, and 6039G in the same manner as if such resident were a citizen of the 

United States who lost United States citizenship on the date of such cessation 

or commencement.’’. 

(B) Paragraph (6) of section 7701(b) is amended by adding at the end the 

following flush sentence: 

‘‘An individual shall cease to be treated as a lawful permanent resident of the 

United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and 

the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement 

of such treatment.’’. 

(C) Section 7701 is amended by striking subsection (n) and by redesignating subsections (o) and (p) as subsections (n) and (o), respectively. 

(d) INFORMATION RETURNS.—Section 6039G is amended—

(1) by inserting ‘‘or 877A’’ after ‘‘section 877(b)’’ in subsection (a), and 

(2) by inserting ‘‘or 877A’’ after ‘‘section 877(a)’’ in subsection (d). 

(e) CLERICAL AMENDMENT.—The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by inserting after the item relating to section 

877 the following new item: 

‘‘Sec. 877A. Tax responsibilities of expatriation.’’. 

(f) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments 

made by this section shall apply to expatriates (as defined in section 877A(g) 

of the Internal Revenue Code of 1986, as added by this section) whose expatriation date (as so defined) is on or after the date of the enactment of this Act. 

(2) GIFTS AND BEQUESTS.—Chapter 15 of the Internal Revenue Code of 1986 

(as added by subsection (b)) shall apply to covered gifts and bequests (as defined 

in section 2801 of such Code, as so added) received on or after the date of the 

enactment of this Act, regardless of when the transferor expatriated. 

SEC. 505. REPEAL OF SUSPENSION OF CERTAIN PENALTIES AND INTEREST. 

(a) IN GENERAL.—Section 6404 is amended by striking subsection (g) and by redesignating subsection (h) as subsection (g). 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to notices provided by the Secretary of the Treasury, or his delegate, after the date which 

is 6 months after the date of the enactment of the Small Business and Work Opportunity Tax Act of 2007. 

SEC. 506. UNUSED MERCHANDISE DRAWBACK. 

(a) IN GENERAL.—Section 313(j)(2) of the Tariff Act of 1930 (19 U.S.C. 1313(j)(2)) 

is amended by adding at the end the following: ‘‘For purposes of subparagraph (A) 

of this paragraph, wine of the same color having a price variation not to exceed 50 

percent between the imported wine and the exported wine shall be deemed to be 

commercially interchangeable.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply with 

respect to claims filed for drawback under section 313(j)(2) of the Tariff Act of 1930 

on or after the date of the enactment of this Act. 


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TITLE VI—REVENUE PROVISIONS 

Subtitle A—Nonqualified Deferred Compensation 

From Certain Tax Indifferent Parties 

SEC. 601. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX INDIFFERENT PARTIES. 

(a) IN GENERAL.—Subpart B of part II of subchapter E of chapter 1 (relating to 

taxable year for which items of gross income included) is amended by inserting after 

section 457 the following new section: 

‘‘SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX INDIFFERENT 

PARTIES. 

‘‘(a) IN GENERAL.—Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be taken into account for 

purposes of this chapter when there is no substantial risk of forfeiture of the rights 

to such compensation. 

‘‘(b) NONQUALIFIED ENTITY.—For purposes of this section, the term ‘nonqualified 

entity’ means—

‘‘(1) any foreign corporation unless substantially all of such income is—

‘‘(A) effectively connected with the conduct of a trade or business in the 

United States, or 

‘‘(B) subject to a comprehensive foreign income tax, and 

‘‘(2) any partnership unless substantially all of such income is allocated to 

persons other than—

‘‘(A) foreign persons with respect to whom such income is not subject to 

a comprehensive foreign income tax, and 

‘‘(B) organizations which are exempt from tax under this title. 

‘‘(c) ASCERTAINABILITY OF AMOUNTS OF COMPENSATION.—

‘‘(1) IN GENERAL.—If the amount of any compensation is not ascertainable at 

the time that such compensation is otherwise to be taken into account under 

subsection (a)—

‘‘(A) such amount shall be so taken into account when ascertainable, and 

‘‘(B) the tax imposed under this chapter for the taxable year in which 

such compensation is taken into account under subparagraph (A) shall be 

increased by the sum of—

‘‘(i) the amount of interest determined under paragraph (2), and 

‘‘(ii) an amount equal to 20 percent of the amount of such compensation. 

‘‘(2) INTEREST.—For purposes of paragraph (1)(B)(i), the interest determined 

under this paragraph for any taxable year is the amount of interest at the underpayment rate under section 6621 plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible 

in gross income for the taxable year in which first deferred or, if later, the first 

taxable year in which such deferred compensation is not subject to a substantial 

risk of forfeiture. 

‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section—

‘‘(1) SUBSTANTIAL RISK OF FORFEITURE.—The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such 

person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual. 

‘‘(2) COMPREHENSIVE FOREIGN INCOME TAX.—The term ‘comprehensive foreign 

income tax’ means, with respect to any foreign person, the income tax of a foreign country if—

‘‘(A) such person is eligible for the benefits of a comprehensive income tax 

treaty between such foreign country and the United States, or 

‘‘(B) such person demonstrates to the satisfaction of the Secretary that 

such foreign country has a comprehensive income tax. 

Such term shall not include any tax unless such tax includes rules for the deductibility of deferred compensation which are similar to the rules of this title. 

‘‘(3) NONQUALIFIED DEFERRED COMPENSATION PLAN.—The term ‘nonqualified 

deferred compensation plan’ has the meaning given such term under section 

409A(d), except that such term shall include any plan that provides a right to 

compensation based on the appreciation in value of a specified number of equity 

units of the service recipient. 

‘‘(4) APPLICATION OF RULES.—Rules similar to the rules of paragraphs (5) and 

(6) of section 409A(d) shall apply. 


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‘‘(e) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations 

disregarding a substantial risk of forfeiture in cases where necessary to carry out 

the purposes of this section.’’. 

(b) CONFORMING AMENDMENT.—Section 26(b)(2) is amended by striking ‘‘and’’ at 

the end of subparagraph (S), by striking the period at the end of subparagraph (T) 

and inserting ‘‘, and’’, and by adding at the end the following new subparagraph: 

‘‘(U) section 457A(c)(1)(B) (relating to ascertainability of amounts of compensation).’’. 

(c) CLERICAL AMENDMENT.—The table of sections of subpart B of part II of subchapter E of chapter 1 is amended by inserting after the item relating to section 

457 the following new item: 

‘‘Sec. 457A. Nonqualified deferred compensation from certain tax indifferent parties.’’. 

(d) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to amounts deferred which are attributable to services performed after December 31, 2007. 

(2) APPLICATION TO EXISTING DEFERRALS.—In the case of any amount deferred 

to which the amendments made by this section do not apply solely by reason 

of the fact that the amount is attributable to services performed before January 

1, 2008, to the extent such amount is not includible in gross income in a taxable 

year beginning before 2017, such amounts shall be includible in gross income 

in the later of—

(A) the last taxable year beginning before 2017, or 

(B) the taxable year in which there is no substantial risk of forfeiture of 

the rights to such compensation (determined in the same manner as determined for purposes of section 457A of the Internal Revenue Code of 1986, 

as added by this section). 

(3) ACCELERATED PAYMENTS.—No later than 60 days after the date of the enactment of this Act, the Secretary shall issue guidance providing a limited period of time during which a nonqualified deferred compensation arrangement 

attributable to services performed on or before December 31, 2007, may, without violating the requirements of section 409A(a) of the Internal Revenue Code 

of 1986, be amended to conform the date of distribution to the date the amounts 

are required to be included in income. 

Subtitle B—Provisions Related to Certain 

Investment Partnerships 

SEC. 611. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT SERVICES 

TREATED AS ORDINARY INCOME RECEIVED FOR PERFORMANCE OF SERVICES. 

(a) IN GENERAL.—Part I of subchapter K of chapter 1 is amended by adding at 

the end the following new section: 

‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT SERVICES 

TO PARTNERSHIP. 

‘‘(a) TREATMENT OF DISTRIBUTIVE SHARE OF PARTNERSHIP ITEMS.—For purposes of 

this title, in the case of an investment services partnership interest—

‘‘(1) IN GENERAL.—Notwithstanding section 702(b)—

‘‘(A) any net income with respect to such interest for any partnership taxable year shall be treated as ordinary income for the performance of services, and 

‘‘(B) any net loss with respect to such interest for such year, to the extent 

not disallowed under paragraph (2) for such year, shall be treated as an ordinary loss. 

‘‘(2) TREATMENT OF LOSSES.—

‘‘(A) LIMITATION.—Any net loss with respect to such interest shall be allowed for any partnership taxable year only to the extent that such loss 

does not exceed the excess (if any) of—

‘‘(i) the aggregate net income with respect to such interest for all 

prior partnership taxable years, over 

‘‘(ii) the aggregate net loss with respect to such interest not disallowed under this subparagraph for all prior partnership taxable 

years. 

‘‘(B) CARRYFORWARD.—Any net loss for any partnership taxable year 

which is not allowed by reason of subparagraph (A) shall be treated as an 


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item of loss with respect to such partnership interest for the succeeding 

partnership taxable year. ‘‘(C) BASIS ADJUSTMENT.—No adjustment to the basis of a partnership interest shall be made on account of any net loss which is not allowed by reason of subparagraph (A). ‘‘(D) EXCEPTION FOR BASIS ATTRIBUTABLE TO PURCHASE OF A PARTNERSHIP

INTEREST.—In the case of an investment services partnership interest acquired by purchase, paragraph (1)(B) shall not apply to so much of any net 

loss with respect to such interest for any taxable year as does not exceed 

the excess of— ‘‘(i) the basis of such interest immediately after such purchase, over 

‘‘(ii) the aggregate net loss with respect to such interest to which 

paragraph (1)(B) did not apply by reason of this subparagraph for all 

prior taxable years. 

Any net loss to which paragraph (1)(B) does not apply by reason of this subparagraph shall not be taken into account under subparagraph (A). ‘‘(E) PRIOR PARTNERSHIP YEARS.—Any reference in this paragraph to prior 

partnership taxable years shall only include prior partnership taxable years 

to which this section applies. ‘‘(3) NET INCOME AND LOSS.—For purposes of this section— ‘‘(A) NET INCOME.—The term ‘net income’ means, with respect to any investment services partnership interest, for any partnership taxable year, 

the excess (if any) of—

‘‘(i) all items of income and gain taken into account by the holder of 

such interest under section 702 with respect to such interest for such 

year, over 

‘‘(ii) all items of deduction and loss so taken into account. 

‘‘(B) NET LOSS.—The term ‘net loss’’ means with respect to such interest 

for such year, the excess (if any) of the amount described in subparagraph 

(A)(ii) over the amount described in subparagraph (A)(i). 

‘‘(b) DISPOSITIONS OF PARTNERSHIP INTERESTS.—

‘‘(1) GAIN.—Any gain on the disposition of an investment services partnership 

interest shall be treated as ordinary income for the performance of services. 

‘‘(2) LOSS.—Any loss on the disposition of an investment services partnership 

interest shall be treated as an ordinary loss to the extent of the excess (if any) 

of—

‘‘(A) the aggregate net income with respect to such interest for all partnership taxable years, over 

‘‘(B) the aggregate net loss with respect to such interest allowed under 

subsection (a)(2) for all partnership taxable years. 

‘‘(3) DISPOSITION OF PORTION OF INTEREST.—In the case of any disposition of 

an investment services partnership interest, the amount of net loss which otherwise would have (but for subsection (a)(2)(C)) applied to reduce the basis of such 

interest shall be disregarded for purposes of this section for all succeeding partnership taxable years. 

‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROPERTY.—In the case of any distribution of appreciated property by a partnership with respect to any investment 

services partnership interest, gain shall be recognized by the partnership in the 

same manner as if the partnership sold such property at fair market value at 

the time of the distribution. For purposes of this paragraph, the term ‘appreciated property’ means any property with respect to which gain would be determined if sold as described in the preceding sentence. 

‘‘(5) APPLICATION OF SECTION 751.—In applying section 751(a), an investment 

services partnership interest shall be treated as an inventory item. 

‘‘(c) INVESTMENT SERVICES PARTNERSHIP INTEREST.—For purposes of this section—

‘‘(1) IN GENERAL.—The term ‘investment services partnership interest’ means 

any interest in a partnership which is held by any person if such person provides (directly or indirectly) a substantial quantity of any of the following services with respect to the assets of the partnership in the conduct of the trade 

or business of providing such services: 

‘‘(A) Advising as to the advisability of investing in, purchasing, or selling 

any specified asset. 

‘‘(B) Managing, acquiring, or disposing of any specified asset. 

‘‘(C) Arranging financing with respect to acquiring specified assets. 

‘‘(D) Any activity in support of any service described in subparagraphs (A) 

through (C). 

For purposes of this paragraph, the term ‘specified asset’ means securities (as 

defined in section 475(c)(2) without regard to the last sentence thereof), real estate, commodities (as defined in section 475(e)(2))), or options or derivative conVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00020 Fmt 6659 Sfmt 6621 E:\HR\OC\HR431.XXX HR431

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tracts with respect to securities (as so defined), real estate, or commodities (as 

so defined). ‘‘(2) EXCEPTION FOR CERTAIN CAPITAL INTERESTS.— ‘‘(A) IN GENERAL.—If— ‘‘(i) a portion of an investment services partnership interest is acquired on account of a contribution of invested capital, and ‘‘(ii) the partnership makes a reasonable allocation of partnership 

items between the portion of the distributive share that is with respect 

to invested capital and the portion of such distributive share that is not 

with respect to invested capital, 

then subsection (a) shall not apply to the portion of the distributive share 

that is with respect to invested capital. An allocation will not be treated as 

reasonable for purposes of this subparagraph if such allocation would result 

in the partnership allocating a greater portion of income to invested capital 

than any other partner not providing services would have been allocated 

with respect to the same amount of invested capital. ‘‘(B) SPECIAL RULE FOR DISPOSITIONS.—In any case to which subparagraph (A) applies, subsection (b) shall not apply to any gain or loss allocable 

to invested capital. The portion of any gain or loss attributable to invested 

capital is the proportion of such gain or loss which is based on the distributive share of gain or loss that would have been allocable to invested capital 

under subparagraph (A) if the partnership sold all of its assets immediately 

before the disposition. 

‘‘(C) INVESTED CAPITAL.—For purposes of this paragraph, the term ‘invested capital’ means, the fair market value at the time of contribution of 

any money or other property contributed to the partnership. 

‘‘(D) TREATMENT OF CERTAIN LOANS.—

‘‘(i) PROCEEDS OF PARTNERSHIP LOANS NOT TREATED AS INVESTED CAPITAL OF SERVICE PROVIDING PARTNERS.—For purposes of this paragraph, 

an investment services partnership interest shall not be treated as acquired on account of a contribution of invested capital to the extent 

that such capital is attributable to the proceeds of any loan or other 

advance made or guaranteed, directly or indirectly, by any partner or 

the partnership. 

‘‘(ii) LOANS FROM NONSERVICE PROVIDING PARTNERS TO THE PARTNERSHIP TREATED AS INVESTED CAPITAL.—For purposes of this paragraph, 

any loan or other advance to the partnership made or guaranteed, directly or indirectly, by a partner not providing services to the partnership shall be treated as invested capital of such partner and amounts 

of income and loss treated as allocable to invested capital shall be adjusted accordingly. 

‘‘(d) OTHER INCOME AND GAIN IN CONNECTION WITH INVESTMENT MANAGEMENT

SERVICES.—

‘‘(1) IN GENERAL.—If—

‘‘(A) a person performs (directly or indirectly) investment management 

services for any entity, 

‘‘(B) such person holds a disqualified interest with respect to such entity, 

and 

‘‘(C) the value of such interest (or payments thereunder) is substantially 

related to the amount of income or gain (whether or not realized) from the 

assets with respect to which the investment management services are performed, 

any income or gain with respect to such interest shall be treated as ordinary 

income for the performance of services. Rules similar to the rules of subsection 

(c)(2) shall apply where such interest was acquired on account of invested capital in such entity. 

‘‘(2) DEFINITIONS.—For purposes of this subsection—

‘‘(A) DISQUALIFIED INTEREST.—The term ‘disqualified interest’ means, 

with respect to any entity—

‘‘(i) any interest in such entity other than indebtedness, 

‘‘(ii) convertible or contingent debt of such entity, 

‘‘(iii) any option or other right to acquire property described in clause 

(i) or (ii), and 

‘‘(iv) any derivative instrument entered into (directly or indirectly) 

with such entity or any investor in such entity. 

Such term shall not include a partnership interest and shall not include 

stock in a taxable corporation. 

‘‘(B) TAXABLE CORPORATION.—The term ‘taxable corporation’ means—

‘‘(i) a domestic C corporation, or 


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‘‘(ii) a foreign corporation subject to a comprehensive foreign income 

tax (as defined in section 457A(d)(4)). ‘‘(C) INVESTMENT MANAGEMENT SERVICES.—The term ‘investment management services’ means a substantial quantity of any of the services described 

in subsection (c)(1) which are provided in the conduct of the trade or business of providing such services. ‘‘(e) REGULATIONS.—The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this section, including regulations 

to— ‘‘(1) prevent the avoidance of the purposes of this section, and 

‘‘(2) coordinate this section with the other provisions of this subchapter. ‘‘(f) CROSS REFERENCE.—For 40 percent no fault penalty on certain underpayments due to the avoidance of this section, see section 6662.’’. (b) APPLICATION TO REAL ESTATE INVESTMENT TRUSTS.—Subsection (c) of section 

856 is amended by adding at the end the following new paragraph: ‘‘(8) EXCEPTION FROM RECHARACTERIZATION OF INCOME FROM INVESTMENT

SERVICES PARTNERSHIP INTERESTS.— ‘‘(A) IN GENERAL.—Paragraphs (2), (3), and (4) shall be applied without 

regard to section 710 (relating to special rules for partners providing investment management services to partnership). ‘‘(B) SPECIAL RULE FOR PARTNERSHIPS OWNED BY REITS.—Section 7704 

shall be applied without regard to section 710 in the case of a partnership 

which meets each of the following requirements: 

‘‘(i) Such partnership is treated as publicly traded under section 7704 

solely by reason of interests in such partnership being convertible into 

interests in a real estate investment trust which is publicly traded. 

‘‘(ii) 50 percent or more of the capital and profits interests of such 

partnership are owned, directly or indirectly, at all times during the 

taxable year by such real estate investment trust (determined with the 

application of section 267(c)). 

‘‘(iii) Such partnership meets the requirements of paragraphs (2), (3), 

and (4) (applied without regard to section 710).’’. 

(c) IMPOSITION OF PENALTY ON UNDERPAYMENTS.—

(1) IN GENERAL.—Subsection (b) of section 6662 is amended by inserting after 

paragraph (5) the following new paragraph: 

‘‘(6) The application of subsection (d) of section 710 or the regulations prescribed under section 710(e) to prevent the avoidance of the purposes of section 

710.’’. 

(2) AMOUNT OF PENALTY.—

(A) IN GENERAL.—Section 6662 is amended by adding at the end the following new subsection: 

‘‘(i) INCREASE IN PENALTY IN CASE OF PROPERTY TRANSFERRED FOR INVESTMENT

MANAGEMENT SERVICES.—In the case of any portion of an underpayment to which 

this section applies by reason of subsection (b)(6), subsection (a) shall be applied 

with respect to such portion by substituting ‘40 percent’ for ‘20 percent’.’’. 

(B) CONFORMING AMENDMENTS.—Subparagraph (B) of section 6662A(e)(2) 

is amended—

(i) by striking ‘‘section 6662(h)’’ and inserting ‘‘subsection (h) or (i) of 

section 6662’’, and 

(ii) by striking ‘‘GROSS VALUATION MISSTATEMENT PENALTY’’ in the 

heading and inserting ‘‘CERTAIN INCREASED UNDERPAYMENT PENALTIES’’. 

(3) REASONABLE CAUSE EXCEPTION NOT APPLICABLE.—Subsection (c) of section 

6664 is amended—

(A) by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively, 

(B) by striking ‘‘paragraph (2)’’ in paragraph (4), as so redesignated, and 

inserting ‘‘paragraph (3)’’, and 

(C) by inserting after paragraph (1) the following new paragraph: 

‘‘(2) EXCEPTION.—Paragraph (1) shall not apply to any portion of an underpayment to which this section applies by reason of subsection (b)(6).’’. 

(d) CONFORMING AMENDMENTS.—

(1) Subsection (d) of section 731 is amended by inserting ‘‘section 710(b)(4) 

(relating to distributions of partnership property),’’ before ‘‘section 736’’. 

(2) Section 741 is amended by inserting ‘‘or section 710 (relating to special 

rules for partners providing investment management services to partnership)’’

before the period at the end. 

(3) Paragraph (13) of section 1402(a) is amended—

(A) by striking ‘‘other than guaranteed’’ and inserting ‘‘other than—

‘‘(A) guaranteed’’, 


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(B) by striking the semi-colon at the end and inserting ‘‘, and’’, and 

(C) by adding at the end the following new subparagraph: 

‘‘(B) any income treated as ordinary income under section 710 received 

by an individual who provides investment management services (as defined 

in section 710(d)(2));’’. 

(4) Paragraph (12) of section 211(a) of the Social Security Act is amended—

(A) by striking ‘‘other than guaranteed’’ and inserting ‘‘other than—

‘‘(A) guaranteed’’, 

(B) by striking the semi-colon at the end and inserting ‘‘, and’’, and 

(C) by adding at the end the following new subparagraph: 

‘‘(B) any income treated as ordinary income under section 710 of the Internal Revenue Code of 1986 received by an individual who provides investment management services (as defined in section 710(d)(2) of such Code);’’. 

(5) The table of sections for part I of subchapter K of chapter 1 is amended 

by adding at the end the following new item: 

‘‘Sec. 710. Special rules for partners providing investment management services to partnership.’’. 

(e) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after November 

1, 2007. 

(2) PARTNERSHIP TAXABLE YEARS WHICH INCLUDE EFFECTIVE DATE.—In applying section 710(a) of the Internal Revenue Code of 1986 (as added by this section) in the case of any partnership taxable year which includes November 1, 

2007, the amount of the net income referred to in such section shall be treated 

as being the lesser of the net income for the entire partnership taxable year or 

the net income determined by only taking into account items attributable to the 

portion of the partnership taxable year which is after such date. 

(3) DISPOSITIONS OF PARTNERSHIP INTERESTS.—Section 710(b) of the Internal 

Revenue Code of 1986 (as added by this section) shall apply to dispositions and 

distributions after November 1, 2007. 

(4) OTHER INCOME AND GAIN IN CONNECTION WITH INVESTMENT MANAGEMENT

SERVICES.—Section 710(d) of such Code (as added by this section) shall take effect on November 1, 2007. 

(5) PUBLICLY TRADED PARTNERSHIPS.—For purposes of applying section 7704, 

the amendments made by this section shall apply to taxable years beginning 

after December 31, 2009. 

SEC. 612. INDEBTEDNESS INCURRED BY A PARTNERSHIP IN ACQUIRING SECURITIES AND 

COMMODITIES NOT TREATED AS ACQUISITION INDEBTEDNESS FOR ORGANIZATIONS WHICH ARE PARTNERS WITH LIMITED LIABILITY. 

(a) IN GENERAL.—Subsection (c) of section 514 (relating to acquisition indebtedness) is amended by adding at the end the following new paragraph: 

‘‘(10) SECURITIES AND COMMODITIES ACQUIRED BY PARTNERSHIPS IN WHICH AN

ORGANIZATION IS A PARTNER WITH LIMITED LIABILITY.—

‘‘(A) IN GENERAL.—In the case of any organization which is a partner with 

limited liability in a partnership, the term ‘acquisition indebtedness’ does 

not, for purposes of this section, include indebtedness incurred or continued 

by such partnership in purchasing or carrying any qualified security or 

commodity. 

‘‘(B) QUALIFIED SECURITY OR COMMODITY.—For purposes of this paragraph, the term ‘qualified security or commodity’ means any security (as defined in section 475(c)(2) without regard to the last sentence thereof), any 

commodity (as defined in section 475(e)(2)), or any option or derivative contract with respect to such a security or commodity. 

‘‘(C) APPLICATION TO TIERED PARTNERSHIPS AND OTHER PASS-THRU ENTITIES.—Rules similar to the rules of subparagraph (A) shall apply in the case 

of tiered partnerships and other pass-thru entities. 

‘‘(D) REGULATIONS.—The Secretary may prescribe such regulations as 

may be necessary or appropriate to carry out the purposes of this paragraph, including regulations to prevent the abuse of this paragraph.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after the date of the enactment of this Act. 

SEC. 613. APPLICATION TO PARTNERSHIP INTERESTS AND TAX SHARING AGREEMENTS OF 

RULE TREATING CERTAIN GAIN ON SALES BETWEEN RELATED PERSONS AS ORDINARY INCOME. 

(a) PARTNERSHIP INTERESTS.—Subsection (a) of section 1239 is amended to read 

as follows: 


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‘‘(a) TREATMENT OF GAIN AS ORDINARY INCOME.—In the case of a sale or exchange 

of property, directly or indirectly, between related persons, any gain recognized to 

the transferor shall be treated as ordinary income if— ‘‘(1) such property is, in the hands of the transferee, of a character which is 

subject to the allowance for depreciation provided in section 167, or ‘‘(2) such property is an interest in a partnership, but only to the extent of 

gain attributable to unrealized appreciation in property which is of a character 

subject to the allowance for depreciation provided in section 167.’’. (b) TAX SHARING AGREEMENTS.—Section 1239 (relating to gain from sale of depreciable property between certain related taxpayers) is amended by adding at the end 

the following new subsection: ‘‘(f) APPLICATION TO TAX SHARING AGREEMENTS.— ‘‘(1) IN GENERAL.—If there is a tax sharing agreement with respect to any sale 

or exchange, the transferee and the transferor shall be treated as related persons for purposes of this section. ‘‘(2) TAX SHARING AGREEMENT.—For purposes of this subsection, the term ‘tax 

sharing agreement’ means any agreement which provides for the payment to 

the transferor of any amount which is determined by reference to any portion 

of the tax benefit realized by the transferee with respect to the depreciation (or 

amortization) of the property transferred.’’. (c) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall apply to sales and exchanges after the date of the enactment of this Act. 

(2) EXCEPTION FOR BINDING CONTRACTS.—The amendment made by subsection 

(b) shall not apply to any sale or exchange pursuant to a written binding contract which includes a tax sharing agreement and which is in effect on November 1, 2007, and not modified thereafter in any material respect. 

Subtitle C—Other Provisions 

SEC. 621. DELAY IN APPLICATION OF WORLDWIDE ALLOCATION OF INTEREST. 

(a) IN GENERAL.—Paragraphs (5)(D) and (6) of section 864(f) are each amended 

by striking ‘‘December 31, 2008’’ and inserting ‘‘December 31, 2017’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2008. 

SEC. 622. BROKER REPORTING OF CUSTOMER’S BASIS IN SECURITIES TRANSACTIONS. 

(a) IN GENERAL.—

(1) BROKER REPORTING FOR SECURITIES TRANSACTIONS.—Section 6045 (relating 

to returns of brokers) is amended by adding at the end the following new subsection: 

‘‘(g) ADDITIONAL INFORMATION REQUIRED IN THE CASE OF SECURITIES TRANSACTIONS.—

‘‘(1) IN GENERAL.—If a broker is otherwise required to make a return under 

subsection (a) with respect to the gross proceeds of the sale of a covered security, the broker shall include in such return the information described in paragraph (2). 

‘‘(2) ADDITIONAL INFORMATION REQUIRED.—

‘‘(A) IN GENERAL.—The information required under paragraph (1) to be 

shown on a return with respect to a covered security of a customer shall 

include the customer’s adjusted basis in such security and whether any 

gain or loss with respect to such security is long-term or short-term (within 

the meaning of section 1222). 

‘‘(B) DETERMINATION OF ADJUSTED BASIS.—For purposes of subparagraph 

(A)—

‘‘(i) IN GENERAL.—The customer’s adjusted basis shall be determined—

‘‘(I) in the case of any stock (other than any stock in an openend fund), in accordance with the first-in first-out method unless 

the customer notifies the broker by means of making an adequate 

identification of the stock sold or transferred, 

‘‘(II) in the case of any stock in an open-end fund acquired before 

January 1, 2011, in accordance with any acceptable method under 

section 1012 with respect to the account in which such interest is 

held, 

‘‘(III) in the case of any stock in an open-end fund acquired after 

December 31, 2010, in accordance with the broker’s default method 


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unless the customer notifies the broker that he elects another acceptable method under section 1012 with respect to the account in 

which such interest is held, and 

‘‘(IV) in any other case, under the method for making such determination under section 1012. 

‘‘(ii) EXCEPTION FOR WASH SALES.—Except as otherwise provided by 

the Secretary, the customer’s adjusted basis shall be determined without regard to section 1091 (relating to loss from wash sales of stock or 

securities) unless the transactions occur in the same account with respect to identical securities. 

‘‘(3) COVERED SECURITY.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘covered security’ means any specified security acquired on or after the applicable date if such security—

‘‘(i) was acquired through a transaction in the account in which such 

security is held, or 

‘‘(ii) was transferred to such account from an account in which such 

security was a covered security, but only if the broker received a statement under section 6045A with respect to the transfer. 

‘‘(B) SPECIFIED SECURITY.—The term ‘specified security’ means—

‘‘(i) any share of stock in a corporation, 

‘‘(ii) any note, bond, debenture, or other evidence of indebtedness, 

‘‘(iii) any commodity, or contract or derivative with respect to such 

commodity, if the Secretary determines that adjusted basis reporting is 

appropriate for purposes of this subsection, and 

‘‘(iv) any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is appropriate for purposes of this subsection. 

‘‘(C) APPLICABLE DATE.—The term ‘applicable date’ means—

‘‘(i) January 1, 2009, in the case of any specified security which is 

stock in a corporation, and 

‘‘(ii) January 1, 2011, or such later date determined by the Secretary 

in the case of any other specified security. 

‘‘(4) OPEN-END FUND.—For purposes of this subsection, the term ‘open-end 

fund’ means a regulated investment company (as defined in section 851) which 

is offering for sale or has outstanding any redeemable security of which it is 

the issuer and the shares of which are not traded on an established securities 

exchange.’’. 

(2) BROKER INFORMATION REQUIRED WITH RESPECT TO OPTIONS.—Section 6045, 

as amended by subsection (a), is amended by adding at the end the following 

new subsection: 

‘‘(h) APPLICATION TO OPTIONS ON COVERED SECURITIES.—

‘‘(1) EXERCISE OF OPTION.—For purposes of this section, in the case of any exercise of an option on a covered security where the taxpayer is the grantor of 

the option and the option was acquired in the same account as the covered security, the amount received for the grant of an option on a covered security shall 

be treated as an adjustment to gross proceeds or as an adjustment to basis, as 

the case may be. A similar rule shall apply in the case of the exercise of an 

option where the taxpayer is not the grantor of the option. 

‘‘(2) LAPSE OR CLOSING TRANSACTION.—For purposes of this section, in the 

case of the lapse (or closing transaction (as defined in section 1234(b)(2)(A))) of 

an option on a covered security where the taxpayer is the grantor of the option, 

this section shall apply as if the premium received for such option were gross 

proceeds received on the date of the lapse or closing transaction, and the cost 

(if any) of the closing transaction shall be taken into account as adjusted basis. 

A similar rule shall apply in the case of a lapse or closing transaction where 

the taxpayer is not the grantor of the option. 

‘‘(3) PROSPECTIVE APPLICATION.—Paragraphs (1) and (2) shall not apply to any 

option which is granted or acquired before January 1, 2011. 

‘‘(4) COVERED SECURITY.—For purposes of this subsection, the term ‘covered 

security’ shall have the meaning given such term in subsection (g)(3).’’. 

(3) EXTENSION OF PERIOD FOR STATEMENTS SENT TO CUSTOMERS.—

(A) IN GENERAL.—Subsection (b) of section 6045 is amended by striking 

‘‘January 31’’ and inserting ‘‘February 15’’. 

(B) STATEMENTS RELATED TO SUBSTITUTE PAYMENTS.—Subsection (d) of 

section 6045 is amended—

(i) by striking ‘‘at such time and’’, and 

(ii) by inserting after ‘‘other item.’’ the following new sentence: ‘‘The 

written statement required under the preceding sentence shall be furVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00025 Fmt 6659 Sfmt 6621 E:\HR\OC\HR431.XXX HR431

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nished on or before February 15 of the year following the calendar year 

during which such payment was made.’’. 

(C) OTHER STATEMENTS.—Subsection (b) of section 6045 is amended by 

adding at the end the following: ‘‘In the case of a consolidated reporting 

statement (as defined in regulations) with respect to any account which includes the statement required by this subsection, any statement which 

would otherwise be required to be furnished on or before January 31 under 

section 6042(c), 6049(c)(2)(A), or 6050N(b) with respect to any item in such 

account shall instead be required to be furnished on or before February 15 

if furnished as part of such consolidated reporting statement.’’. 

(b) DETERMINATION OF BASIS OF CERTAIN SECURITIES ON ACCOUNT BY ACCOUNT

METHOD.—Section 1012 (relating to basis of property–cost) is amended—

(1) by striking ‘‘The basis of property’’ and inserting the following: 

‘‘(a) IN GENERAL.—The basis of property’’, 

(2) by striking ‘‘The cost of real property’’ and inserting the following: 

‘‘(b) SPECIAL RULE FOR APPORTIONED REAL ESTATE TAXES.—The cost of real property’’, and 

(3) by adding at the end the following new subsection: 

‘‘(c) DETERMINATIONS BY ACCOUNT.—

‘‘(1) IN GENERAL.—In the case of the sale, exchange, or other disposition of 

a specified security on or after the applicable date, the conventions prescribed 

by regulations under this section shall be applied on an account by account 

basis. 

‘‘(2) APPLICATION TO OPEN-END FUNDS.—

‘‘(A) IN GENERAL.—Except as provided in subparagraph (B), any stock in 

an open-end fund acquired before January 1, 2009, shall be treated as a 

separate account from any such stock acquired on or after such date. 

‘‘(B) ELECTION BY OPEN-END FUND FOR TREATMENT AS SINGLE ACCOUNT.—

If an open-end fund elects (at such time and in such form and manner as 

the Secretary may prescribe) to have this subparagraph apply with respect 

to one or more of its stockholders—

‘‘(i) subparagraph (A) shall not apply with respect to any stock in 

such fund held by such stockholders, and 

‘‘(ii) all stock in such fund which is held by such stockholders shall 

be treated as covered securities described in section 6045(g)(3) without 

regard to the date of the acquisition of such stock. 

‘‘(3) DEFINITIONS.—For purposes of this section, the terms ‘specified security’, 

‘applicable date’, and ‘open-end fund’ shall have the meaning given such terms 

in section 6045(g).’’. 

(c) INFORMATION BY TRANSFERORS TO AID BROKERS.—

(1) IN GENERAL.—Subpart B of part III of subchapter A of chapter 61 is 

amended by inserting after section 6045 the following new section: 

‘‘SEC. 6045A. INFORMATION REQUIRED IN CONNECTION WITH TRANSFERS OF COVERED SECURITIES TO BROKERS. 

‘‘(a) FURNISHING OF INFORMATION.—Every applicable person which transfers to a 

broker (as defined in section 6045(c)(1)) a security which is a covered security (as 

defined in section 6045(g)(3)) in the hands of such applicable person shall furnish 

to such broker a written statement in such manner and setting forth such information as the Secretary may by regulations prescribe for purposes of enabling such 

broker to meet the requirements of section 6045(g). 

‘‘(b) APPLICABLE PERSON.—For purposes of subsection (a), the term ‘applicable person’ means—

‘‘(1) any broker (as defined in section 6045(c)(1)), and 

‘‘(2) any other person as provided by the Secretary in regulations. 

‘‘(c) TIME FOR FURNISHING STATEMENT.—Any statement required by subsection (a) 

shall be furnished not later than the earlier of—

‘‘(1) 45 days after the date of the transfer described in subsection (a), or 

‘‘(2) January 15 of the year following the calendar year during which such 

transfer occurred.’’. 

(2) ASSESSABLE PENALTIES.—Paragraph (2) of section 6724(d) (defining payee 

statement) is amended by redesignating subparagraphs (I) through (CC) as subparagraphs (J) through (DD), respectively, and by inserting after subparagraph 

(H) the following new subparagraph: 

‘‘(I) section 6045A (relating to information required in connection with 

transfers of covered securities to brokers).’’. 


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(3) CLERICAL AMENDMENT.—The table of sections for subpart B of part III of 

subchapter A of chapter 61 is amended by inserting after the item relating to 

section 6045 the following new item: 

‘‘Sec. 6045A. Information required in connection with transfers of covered securities to brokers.’’. 

(d) ADDITIONAL ISSUER INFORMATION TO AID BROKERS.—

(1) IN GENERAL.—Subpart B of part III of subchapter A of chapter 61 of the 

Internal Revenue Code of 1986, as amended by subsection (b), is amended by 

inserting after section 6045A the following new section: 

‘‘SEC. 6045B. RETURNS RELATING TO ACTIONS AFFECTING BASIS OF SPECIFIED SECURITIES. 

‘‘(a) IN GENERAL.—According to the forms or regulations prescribed by the Secretary, any issuer of a specified security shall make a return setting forth—

‘‘(1) a description of any organizational action which affects the basis of such 

specified security of such issuer, 

‘‘(2) the quantitative effect on the basis of such specified security resulting 

from such action, and 

‘‘(3) such other information as the Secretary may prescribe. 

‘‘(b) TIME FOR FILING RETURN.—Any return required by subsection (a) shall be 

filed not later than the earlier of—

‘‘(1) 45 days after the date of the action described in subsection (a), or 

‘‘(2) January 31 of the year following the calendar year during which such action occurred. 

‘‘(c) STATEMENTS TO BE FURNISHED TO HOLDERS OF SPECIFIED SECURITIES OR

THEIR NOMINEES.—According to the forms or regulations prescribed by the Secretary, every person required to make a return under subsection (a) with respect 

to a specified security shall furnish to the nominee with respect to the specified security (or certificate holder if there is no nominee) a written statement showing—

‘‘(1) the name, address, and phone number of the information contact of the 

person required to make such return, 

‘‘(2) the information required to be shown on such return with respect to such 

security, and 

‘‘(3) such other information as the Secretary may prescribe. 

The written statement required under the preceding sentence shall be furnished to 

the holder on or before January 31 of the year following the calendar year during 

which the action described in subsection (a) occurred. 

‘‘(d) SPECIFIED SECURITY.—For purposes of this section, the term ‘specified security’ has the meaning given such term by section 6045(g)(3)(B). No return shall be 

required under this section with respect to actions described in subsection (a) with 

respect to a specified security which occur before the applicable date (as defined in 

section 6045(g)(3)(C) with respect to such security. 

‘‘(e) PUBLIC REPORTING IN LIEU OF RETURN.—The Secretary may waive the requirements under subsections (a) and (c) with respect to a specified security, if the 

person required to make the return under subsection (a) makes publicly available, 

in such form and manner as the Secretary determines necessary to carry out the 

purposes of this section—

‘‘(1) the name, address, phone number, and email address of the information 

contact of such person, and 

‘‘(2) the information described in paragraphs (1), (2), and (3) of subsection 

(a).’’. 

(2) ASSESSABLE PENALTIES.—

(A) Subparagraph (B) of section 6724(d)(1) of such Code (defining information return) is amended by redesignating clauses (iv) through (xix) as 

clauses (v) through (xx), respectively, and by inserting after clause (iii) the 

following new clause: 

‘‘(iv) section 6045B(a) (relating to returns relating to actions affecting 

basis of specified securities),’’. 

(B) Paragraph (2) of section 6724(d) of such Code (defining payee statement), as amended by subsection (c)(2), is amended by redesignating subparagraphs (J) through (DD) as subparagraphs (K) through (EE), respectively, and by inserting after subparagraph (I) the following new subparagraph: 

‘‘(J) subsections (c) and (e) of section 6045B (relating to returns relating 

to actions affecting basis of specified securities).’’. 

(3) CLERICAL AMENDMENT.—The table of sections for subpart B of part III of 

subchapter A of chapter 61 of such Code, as amended by subsection (b)(3), is 

amended by inserting after the item relating to section 6045A the following new 

item: 

‘‘Sec. 6045B. Returns relating to actions affecting basis of specified securities.’’. 


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(e) EFFECTIVE DATE.—The amendments made by this section shall take effect on 

January 1, 2009. 

SEC. 623. MODIFICATION OF PENALTY FOR FAILURE TO FILE PARTNERSHIP RETURNS. 

Section 6698 is amended by adding at the end the following new subsection: 

‘‘(e) MODIFICATIONS.—In the case of any return required to be filed after the date 

of the enactment of this subsection—

‘‘(1) the dollar amount in effect under subsection (b)(1) shall be increased by 

$25, and 

‘‘(2) the limitation on the number of months taken into account under subsection (a) shall not be less than 12 months.’’. 

SEC. 624. PENALTY FOR FAILURE TO FILE S CORPORATION RETURNS. 

(a) IN GENERAL.—Part I of subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end the following new section: 

‘‘SEC. 6699A. FAILURE TO FILE S CORPORATION RETURN. 

‘‘(a) GENERAL RULE.—In addition to the penalty imposed by section 7203 (relating 

to willful failure to file return, supply information, or pay tax), if any S corporation 

required to file a return under section 6037 for any taxable year—

‘‘(1) fails to file such return at the time prescribed therefor (determined with 

regard to any extension of time for filing), or 

‘‘(2) files a return which fails to show the information required under section 

6037, 

such S corporation shall be liable for a penalty determined under subsection (b) for 

each month (or fraction thereof) during which such failure continues (but not to exceed 12 months), unless it is shown that such failure is due to reasonable cause. 

‘‘(b) AMOUNT PER MONTH.—For purposes of subsection (a), the amount determined 

under this subsection for any month is the product of—

‘‘(1) $25, multiplied by 

‘‘(2) the number of persons who were shareholders in the S corporation during 

any part of the taxable year. 

‘‘(c) ASSESSMENT OF PENALTY.—The penalty imposed by subsection (a) shall be assessed against the S corporation. 

‘‘(d) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall 

not apply in respect of the assessment or collection of any penalty imposed by subsection (a).’’. 

(b) CLERICAL AMENDMENT.—The table of sections for part I of subchapter B of 

chapter 68 is amended by adding at the end the following new item: 

‘‘Sec. 6699A. Failure to file S corporation return.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to returns required to be filed after the date of the enactment of this Act. 

SEC. 625. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES. 

Subparagraph (B) of section 401(1) of the Tax Increase Prevention and Reconciliation Act of 2005 is amended by striking ‘‘115 percent’’ and inserting ‘‘181 percent’’. 

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill, H.R. 3996, as amended, (1) provides a one-year increase 

in the individual AMT exemption amount for taxable years beginning in 2007 and makes certain related changes, (2) extends certain expiring provisions through 2008, and (3) makes other modifications to the tax laws. 

Individual AMT Relief 

The bill provides that the individual AMT exemption amount for 

taxable years beginning in 2007 is (1) $66,250, in the case of married individuals filing a joint return and surviving spouses; (2) 

$44,350 in the case of other unmarried individuals; and (3) $33,125 

in the case of married individuals filing separate returns. 


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For taxable years beginning in 2007, the bill allows an individual 

to offset the entire regular tax liability and alternative minimum 

tax liability by the nonrefundable personal credits. 

The bill also removes certain income limitations on the AMT refundable credit for long-term unused minimum tax credits. 

Extension of certain expiring provisions through 2008 

The bill extends for one year, through December 31, 2008, the 

following provisions: 

• deduction for State and local sales taxes 

• deduction for qualified tuition and related expenses 

• treatment of certain dividends of regulated investment 

companies 

• excise tax provisions relating to mental health parity rules 

• encourage contributions of property interests made for conservation purposes 

• tax-free distributions from IRAs to certain public charities 

• deduction for teacher classroom expenses 

• election to include combat pay in earned income for purposes of the earned income tax credit 

• use of qualified mortgage bonds to finance residences for 

veterans without regard to first-time homebuyer requirement 

• penalty-free withdrawals from retirement plans for individuals called to active duty 

• estate tax look-through for certain RIC stock held by nonresidents 

• treatment of certain RIC stock under FIRPTA 

• treatment of State legislators’ travel expenses away from 

home 

• the research and experimentation credit 

• tax incentives for business activities on Indian reservations 

• the new markets tax credit 

• tax credit for certain expenditures for maintaining railroad 

tracks 

• fifteen-year cost recovery for leasehold improvements 

• fifteen-year cost recovery for restaurant improvements 

• seven-year recovery period for certain motorsports racetrack property 

• expensing of ‘‘brownfield’’ environmental clean up costs 

• application of domestic production activity deduction to 

Puerto Rico 

• modification of tax treatment of certain payments to controlling exempt organizations 

• authority to issue qualified zone academy bonds 

• tax incentives for the District of Columbia Enterprise Zone 

• possession tax credit with respect to American Samoa 

• the enhanced deduction for corporate donations of food inventory, of book inventories to public schools, and of computer 

technology and equipment 

• basis of adjustment to stock of S corporations making 

charitable contributions of property 

• extension of work opportunity tax credit to Hurricane 

Katrina employees 


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• certain provisions relating to disclosure of confidential taxpayer information 

• authority for undercover operations 

• increase in limit on cover over of rum excise tax revenues 

Other provisions 

The bill contains other provisions, as follows: 

• Modifies the threshold amount for the refundable child 

credit 

• Additional standard deduction for real property taxes paid 

by non-itemizers 

• Certain provisions for housing-related tax relief 

• Repeal of the authority of the Internal Revenue Service 

(‘‘IRS’’) to use private debt collection companies, delay of implementation of withholding taxes on government payments, revision of rules on expatriation, and certain related changes 

• Changes to the treatment of certain offshore nonqualified 

deferred compensation arrangements 

• Changes to the treatment of income of partners performing 

investment management services as ordinary income received 

for the performance of services 

• Changes to the treatment of indebtedness incurred by a 

partnership in acquiring securities and commodities to tax-exempt limited partners 

• Application section 1239 to certain sales of partnership interests and sales between parties to a tax-sharing agreement 

• Delay of the implementation of the worldwide interest allocation rules 

• Broker reporting of customer’s basis in securities transactions 

• Increase in the penalty for the failure to file partnership 

returns 

• Imposition of a penalty for the failure to file S corporation 

returns 

• Modifications to corporate estimated tax payments 

B. BACKGROUND AND NEED FOR LEGISLATION

The provisions approved by the Committee reflect the need to 

avoid tax increases on families and businesses as a result of provisions that would otherwise expire, as well as other purposes. 

C. LEGISLATIVE HISTORY

The Committee on Ways and Means marked up the Temporary 

Tax Relief Act of 2007 on November 1, 2007, and ordered the bill, 

as amended, favorably reported. 


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II. EXPLANATION OF THE BILL 

TITLE I—EXTEND ALTERNATIVE MINIMUM TAX RELIEF 

FOR INDIVIDUALS 

1. Extension of alternative minimum relief for nonrefundable personal credits and extension of increased alternative minimum 

tax exemption amounts (secs. 101 and 102 of the bill and secs. 

26 and 55 of the Code) 

PRESENT LAW

Present law imposes an alternative minimum tax on individuals. 

The alternative minimum tax is the amount by which the tentative 

minimum tax exceeds the regular income tax. An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the 

taxable excess as does not exceed $175,000 ($87,500 in the case of 

a married individual filing a separate return) and (2) 28 percent of 

the remaining taxable excess. The taxable excess is so much of the 

alternative minimum taxable income (‘‘AMTI’’) as exceeds the exemption amount. The maximum tax rates on net capital gain and 

dividends used in computing the regular tax are used in computing 

the tentative minimum tax. AMTI is the individual’s taxable income adjusted to take account of specified preferences and adjustments. 

The present exemption amount is: (1) $62,550 ($45,000 in taxable 

years beginning after 2006) in the case of married individuals filing 

a joint return and surviving spouses; (2) $42,500 ($33,750 in taxable years beginning after 2006) in the case of other unmarried individuals; (3) $31,275 ($22,500 in taxable years beginning after 

2006) in the case of married individuals filing separate returns; 

and (4) $22,500 in the case of an estate or trust. The exemption 

amount is phased out by an amount equal to 25 percent of the 

amount by which the individual’s AMTI exceeds (1) $150,000 in the 

case of married individuals filing a joint return and surviving 

spouses, (2) $112,500 in the case of other unmarried individuals, 

and (3) $75,000 in the case of married individuals filing separate 

returns or an estate or a trust. These amounts are not indexed for 

inflation. 

Present law provides for certain nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and 

disabled, the adoption credit, the child tax credit, the credit for interest on certain home mortgages, the HOPE Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain 

nonbusiness energy property, the credit for residential energy efficient property, and the D.C. first-time homebuyer credit). 

For taxable years beginning before 2007, the nonrefundable personal credits are allowed to the extent of the full amount of the individual’s regular tax and alternative minimum tax. 

For taxable years beginning after 2006, the nonrefundable personal credits (other than the adoption credit, child credit and saver’s credit) are allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, determined without regard to the minimum tax foreign 

tax credit. The adoption credit, child credit, and saver’s credit are 


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1The rule applicable to the adoption credit and child credit is subject to the EGTRRA sunset. 

allowed to the full extent of the individual’s regular tax and alternative minimum tax.1

REASONS FOR CHANGE

The Committee is concerned about the projected increase in the 

number of individuals who will be affected by the individual alternative minimum tax for 2007. The provision will reduce the number of individuals who would otherwise be affected be the minimum 

tax. 

EXPLANATION OF PROVISION

The bill provides that the individual AMT exemption amount for 

taxable years beginning in 2007 is (1) $66,250, in the case of married individuals filing a joint return and surviving spouses; (2) 

$44,350 in the case of other unmarried individuals; and (3) $33,125 

in the case of married individuals filing separate returns. 

For taxable years beginning in 2007, the bill allows an individual 

to offset the entire regular tax liability and alternative minimum 

tax liability by the nonrefundable personal credits. 

EFFECTIVE DATE

The provision is effective for taxable years beginning in 2007. 

2. Alternative minimum tax credit relief for individuals (sec. 103 of 

the bill and sec. 53 of the Code) 

PRESENT LAW

In general 

Present law imposes an alternative minimum tax (‘‘AMT’’) on an 

individual taxpayer to the extent the taxpayer’s tentative minimum 

tax liability exceeds his or her regular income tax liability. An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 

in the case of a married individual filing a separate return) and (2) 

28 percent of the remaining taxable excess. The taxable excess is 

the amount by which the alternative minimum taxable income 

(‘‘AMTI’’) exceeds an exemption amount. 

An individual’s AMTI is the taxpayer’s taxable income increased 

by certain preference items and adjusted by determining the tax 

treatment of certain items in a manner that negates the deferral 

of income resulting from the regular tax treatment of those items. 

The individual AMT attributable to deferral adjustments generates a minimum tax credit that is allowable to the extent the regular tax (reduced by other nonrefundable credits) exceeds the tentative minimum tax in a future taxable year. Unused minimum tax 

credits are carried forward indefinitely. 

AMT treatment of incentive stock options 

One of the adjustments in computing AMTI is the tax treatment 

of the exercise of an incentive stock option. An incentive stock option is an option granted by a corporation in connection with an individual’s employment, so long as the option meets certain specified 


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33 

2Sec. 422. 

3Sec. 421. 

4 If the stock is sold at a loss before the required holding periods are met, the amount taken 

into account may not exceed the amount realized on the sale over the adjusted basis of the 

stock. If the stock is sold after the taxable year in which the option was exercised but before 

the required holding periods are met, the required inclusion is made in the year the stock is 

sold. 5 If the stock is sold in the same taxable year the option is exercised, no adjustment in computing AMTI is required. 6 If the stock is sold for less than the amount paid for the stock, the loss may not be allowed in full in computing AMTI by reason of the $3,000 limit on the deductibility of net capital losses. 

Thus, the excess of the regular tax over the tentative minimum tax may not reflect the full 

amount of the loss. 

requirements.2 Under the regular tax, the exercise of an incentive 

stock option is tax-free if the stock is not disposed of within one 

year of exercise of the option or within two years of the grant of 

the option.3 The individual then computes the long-term capital 

gain or loss on the sale of the stock using the amount paid for the 

stock as the cost basis. If the holding period requirements are not 

satisfied, the individual generally takes into account at the exercise 

of the option an amount of ordinary income equal to the excess of 

the fair market value of the stock on the date of exercise over the 

amount paid for the stock. The cost basis of the stock is increased 

by the amount taken into account.4

Under the individual alternative minimum tax, the exercise of an 

incentive stock option is treated as the exercise of an option other 

than an incentive stock option. Under this treatment, generally the 

individual takes into account as ordinary income for purposes of 

computing AMTI the excess of the fair market value of the stock 

at the date of exercise over the amount paid for the stock.5 When 

the stock is later sold, for purposes of computing capital gain or 

loss for purposes of AMTI, the adjusted basis of the stock includes 

the amount taken into account as AMTI. 

The adjustment relating to incentive stock options is a deferral 

adjustment and therefore generates an AMT credit in the year the 

stock is sold.6

Allowance of long-term unused credits 

Under present law, an individual’s minimum tax credit allowable 

for any taxable year beginning after December 31, 2006, and beginning before January 1, 2013, is not less than the ‘‘AMT refundable 

credit amount.’’ The ‘‘AMT refundable credit amount’’ is the greater of (1) the lesser of $5,000 or the long-term unused minimum tax 

credit, or (2) 20 percent of the long-term unused minimum tax 

credit. The long-term unused minimum tax credit for any taxable 

year means the portion of the minimum tax credit attributable to 

the adjusted net minimum tax for taxable years before the 3rd taxable year immediately preceding the taxable year (assuming the 

credits are used on a first-in, first-out basis). In the case of an individual whose adjusted gross income for a taxable year exceeds the 

threshold amount (within the meaning of section 151(d)(3)(C)), the 

AMT refundable credit amount is reduced by the applicable percentage (within the meaning of section 151(d)(3)(B)). The additional 

credit allowable by reason of this provision is refundable. 

REASONS FOR CHANGE

The individual alternative minimum tax is intended to accelerate 

the tax on certain items of income that are deferred under the regVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00033 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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ular tax by initially imposing a tax and later allowing a minimum 

tax credit when the deferral ends. One of these items relates to the 

exercise of incentive stock options. However, because of technical 

problems, the credit may not be properly allowable where the value 

of the stock acquired on the exercise of an incentive stock option 

has declined in value when the stock is sold. In 2006, Congress provided certain relief in these situations. The Committee believes 

that additional relief should be provided to correct this problem so 

that taxpayers are not paying tax on ‘‘phantom’’ income attributable to incentive stock options. 

EXPLANATION OF PROVISION

The bill generally allows the long-term unused minimum tax 

credit over two years and eliminates the AGI phase-out. Thus, if 

an individual has a long-term unused minimum tax credit of $1 

million for 2007, the AMT refundable credit amount for 2007 is 

$500,000 (50 percent of the $1 million long-term unused credit 

amount for 2007) and the AMT refundable credit amount for 2008 

is also $500,000 (the $500,000 amount of the AMT refundable credit amount for 2007 but not in excess of the $500,000 long-term unused minimum tax credit for 2008). 

The bill provides that any underpayment of tax outstanding on 

the date of enactment which is attributable to the application of 

the minimum tax adjustment for incentive stock options (including 

any interest or penalty relating thereto) is abated. No credit is allowed with respect to any amount abated. 

The bill provides that any interest and penalty paid before the 

date of enactment with respect to the application of the minimum 

adjustment for incentive stock options is treated as an amount of 

adjusted net minimum tax for the taxable year of the underpayment to which the interest or penalty relates for purposes of the 

minimum tax credit. 

EFFECTIVE DATE

The provision generally applies to taxable years beginning after 

December 31, 2006. 

The provision relating to the abatement of interest and penalties 

takes effect on date of enactment. 

TITLE II—ADDITIONAL INDIVIDUAL TAX RELIEF 

1. Refundable child credit (sec. 201 of the bill and sec. 24(d) of the 

Code) 

PRESENT LAW

An individual may claim a tax credit for each qualifying child 

under the age of 17. The amount of the credit per child is $1,000 

through 2010, and $500 thereafter. A child who is not a citizen, national, or resident of the United States cannot be a qualifying child. 

The credit is phased out for individuals with income over certain 

threshold amounts. Specifically, the otherwise allowable child tax 

credit is reduced by $50 for each $1,000 (or fraction thereof) of 

modified adjusted gross income over $75,000 for single individuals 

or heads of households, $110,000 for married individuals filing joint 

returns, and $55,000 for married individuals filing separate reVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00034 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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turns. For purposes of this limitation, modified adjusted gross income includes certain otherwise excludable income earned by U.S. 

citizens or residents living abroad or in certain U.S. territories. 

The credit is allowable against the regular tax and the alternative minimum tax. To the extent the child credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit 

(the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the ‘‘earned income’’

formula). The threshold dollar amount is $11,750 (2007), and is indexed for inflation. 

Families with three or more children may determine the additional child tax credit using the ‘‘alternative formula,’’ if this results in a larger credit than determined under the earned income 

formula. Under the alternative formula, the additional child tax 

credit equals the amount by which the taxpayer’s social security 

taxes exceed the taxpayer’s earned income credit (‘‘EIC’’). 

Earned income is defined as the sum of wages, salaries, tips, and 

other taxable employee compensation plus net self-employment 

earnings. Unlike the EIC, which also includes the preceding items 

in its definition of earned income, the additional child tax credit is 

based only on earned income to the extent it is included in computing taxable income. For example, some ministers’ parsonage allowances are considered self-employment income, and thus are considered earned income for purposes of computing the EIC, but the 

allowances are excluded from gross income for individual income 

tax purposes, and thus are not considered earned income for purposes of the additional child tax credit since the income is not included in taxable income. 

REASONS FOR CHANGE

The Committee believes it is appropriate to lower the threshold 

earnings level for the refundable child credit in order to increase 

the amount of available child credit for lower income households. 

EXPLANATION OF PROVISION

The provision modifies the earned income formula for the determination of the refundable child credit to apply to 15 percent of 

earned income in excess of $8,500 for taxable years beginning in 

2008. 

EFFECTIVE DATE

The provision is effective for taxable years beginning in 2008. 

2. Additional standard deduction for real property taxes for nonitemizers (sec. 202 of the bill and sec. 63 of the Code) 

PRESENT LAW

For purposes of determining regular tax liability, an itemized deduction is permitted for certain State and local taxes paid, including individual income taxes, real property taxes, and personal property taxes. The itemized deduction is not permitted for purposes of 

determining a taxpayer’s alternative minimum taxable income. 


ccoleman on PROD1PC71 with REPORTS
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REASONS FOR CHANGE

The Committee believes an additional standard deduction for 

real property taxes is appropriate in order to help lessen the impact of rising State and local property tax bills on those with insufficient total deductions to warrant itemizing such deductions. 

EXPLANATION OF PROVISION

The provision allows taxpayers an additional standard deduction 

for State and local real property taxes for taxpayers who claim the 

regular standard deduction. The additional standard deduction applies only for 2008, and is limited to $350 ($700 in the case of a 

married individual filing jointly). 

EFFECTIVE DATE

The provision applies to taxable years beginning in 2008. 

TITLE III—ONE YEAR EXTENDERS 

A. EXTENDERS PRIMARILY AFFECTING INDIVIDUALS

1. Deduction of State and local general sales taxes (sec. 301 of the 

bill and sec. 164 of the Code) 

PRESENT LAW

For purposes of determining regular tax liability, an itemized deduction is permitted for certain State and local taxes paid, including individual income taxes, real property taxes, and personal property taxes. The itemized deduction is not permitted for purposes of 

determining a taxpayer’s alternative minimum taxable income. For 

taxable years beginning in 2004 and 2005, at the election of the 

taxpayer, an itemized deduction may be taken for State and local 

general sales taxes in lieu of the itemized deduction provided under 

present law for State and local income taxes. As is the case for 

State and local income taxes, the itemized deduction for State and 

local general sales taxes is not permitted for purposes of determining a taxpayer’s alternative minimum taxable income. Taxpayers have two options with respect to the determination of the 

sales tax deduction amount. Taxpayers may deduct the total 

amount of general State and local sales taxes paid by accumulating 

receipts showing general sales taxes paid. Alternatively, taxpayers 

may use tables created by the Secretary of the Treasury that show 

the allowable deduction. The tables are based on average consumption by taxpayers on a State-by-State basis taking into account 

number of dependents, modified adjusted gross income and rates of 

State and local general sales taxation. Taxpayers who live in more 

than one jurisdiction during the tax year are required to pro-rate 

the table amounts based on the time they live in each jurisdiction. 

Taxpayers who use the tables created by the Secretary may, in addition to the table amounts, deduct eligible general sales taxes paid 

with respect to the purchase of motor vehicles, boats and other 

items specified by the Secretary. Sales taxes for items that may be 

added to the tables are not reflected in the tables themselves. 

The term ‘‘general sales tax’’ means a tax imposed at one rate 

with respect to the sale at retail of a broad range of classes of 

items. However, in the case of items of food, clothing, medical supVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00036 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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7Sec. 222. 

8The deduction generally is not available for expenses with respect to a course or education 

involving sports, games, or hobbies, and is not available for student activity fees, athletic fees, 

insurance expenses, or other expenses unrelated to an individual’s academic course of instruction. 

plies, and motor vehicles, the fact that the tax does not apply with 

respect to some or all of such items is not taken into account in 

determining whether the tax applies with respect to a broad range 

of classes of items, and the fact that the rate of tax applicable with 

respect to some or all of such items is lower than the general rate 

of tax is not taken into account in determining whether the tax is 

imposed at one rate. Except in the case of a lower rate of tax applicable with respect to food, clothing, medical supplies, or motor vehicles, no deduction is allowed for any general sales tax imposed with 

respect to an item at a rate other than the general rate of tax. 

However, in the case of motor vehicles, if the rate of tax exceeds 

the general rate, such excess shall be disregarded and the general 

rate is treated as the rate of tax. 

A compensating use tax with respect to an item is treated as a 

general sales tax, provided such tax is complementary to a general 

sales tax and a deduction for sales taxes is allowable with respect 

to items sold at retail in the taxing jurisdiction that are similar to 

such item. 

REASONS FOR CHANGE

The Committee believes an extension of the option to deduct 

State and local sales taxes in lieu of deducting State and local income taxes is appropriate to continue to provide similar Federal 

tax treatment to residents of States that rely on sales taxes, rather 

than income taxes, to fund State and local governmental functions. 

EXPLANATION OF PROVISION

The present-law provision allowing taxpayers to elect to deduct 

State and local sales taxes in lieu of State and local income taxes 

is extended for one year (through December 31, 2008). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2007. 

2. Above-the-line deduction for higher education expenses (sec. 302 

of the bill and sec. 222 of the Code) 

PRESENT LAW

An individual is allowed an above-the-line deduction for qualified 

tuition and related expenses for higher education paid by the individual during the taxable year.7 Qualified tuition and related expenses are defined in the same manner as for the Hope and Lifetime Learning credits, and includes tuition and fees required for 

the enrollment or attendance of the taxpayer, the taxpayer’s 

spouse, or any dependent of the taxpayer with respect to whom the 

taxpayer may claim a personal exemption, at an eligible institution 

of higher education for courses of instruction of such individual at 

such institution.8 The expenses must be in connection with enrollment at an institution of higher education during the taxable year, 


ccoleman on PROD1PC71 with REPORTS
38 

9Secs. 222(d)(1) and 25A(g)(2). 

10Sec. 222(c). These reductions are the same as those that apply to the Hope and Lifetime 

Learning credits. 

or with an academic period beginning during the taxable year or 

during the first three months of the next taxable year. The deduction is not available for tuition and related expenses paid for elementary or secondary education. 

The maximum deduction is $4,000 for an individual whose adjusted gross income for the taxable year does not exceed $65,000 

($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income does not exceed $80,000 

($160,000 in the case of a joint return). No deduction is allowed for 

an individual whose adjusted gross income exceeds the relevant adjusted gross income limitations, for a married individual who does 

not file a joint return, or for an individual with respect to whom 

a personal exemption deduction may be claimed by another taxpayer for the taxable year. The deduction is not available for taxable years beginning after December 31, 2007. 

The amount of qualified tuition and related expenses must be reduced by certain scholarships, educational assistance allowances, 

and other amounts paid for the benefit of such individual,9 and by 

the amount of such expenses taken into account for purposes of determining any exclusion from gross income of: (1) income from certain U.S. Savings Bonds used to pay higher education tuition and 

fees; and (2) income from a Coverdell education savings account.10

Additionally, such expenses must be reduced by the earnings portion (but not the return of principal) of distributions from a qualified tuition program if an exclusion under section 529 is claimed 

with respect to expenses eligible for the qualified tuition deduction. 

No deduction is allowed for any expense for which a deduction is 

otherwise allowed or with respect to an individual for whom a 

Hope credit or Lifetime Learning credit is elected for such taxable 

year. 

REASONS FOR CHANGE

The Committee observes that the cost of a college education continues to rise, and thus believes that the extension of the qualified 

tuition deduction is appropriate to mitigate the impact of rising tuition costs on students and their families. The Committee further 

believes that the tuition deduction provides an important financial 

incentive for individuals to pursue higher education. 

EXPLANATION OF PROVISION

The provision extends the qualified tuition deduction for one 

year. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2007, and prior to January 1, 2009. 


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39 

3. Extension of special withholding tax rule for interest-related 

dividends paid by regulated investment companies (sec. 303 of 

the bill and sec. 871(k) of the Code) 

PRESENT LAW

In general 

Under present law, a regulated investment company (‘‘RIC’’) that 

earns certain interest income that would not be subject to U.S. tax 

if earned by a foreign person directly may, to the extent of such income, designate a dividend it pays as derived from such interest income. A foreign person who is a shareholder in the RIC generally 

would treat such a dividend as exempt from gross-basis U.S. tax, 

as if the foreign person had earned the interest directly. 

INTEREST-RELATED DIVIDENDS

Under present law, a RIC may, under certain circumstances, designate all or a portion of a dividend as an ‘‘interest-related dividend,’’ by written notice mailed to its shareholders not later than 

60 days after the close of its taxable year. In addition, an interestrelated dividend received by a foreign person generally is exempt 

from U.S. gross-basis tax under sections 871(a), 881, 1441 and 

1442. 

However, this exemption does not apply to a dividend on shares 

of RIC stock if the withholding agent does not receive a statement, 

similar to that required under the portfolio interest rules, that the 

beneficial owner of the shares is not a U.S. person. The exemption 

does not apply to a dividend paid to any person within a foreign 

country (or dividends addressed to, or for the account of, persons 

within such foreign country) with respect to which the Treasury 

Secretary has determined, under the portfolio interest rules, that 

exchange of information is inadequate to prevent evasion of U.S. 

income tax by U.S. persons. 

In addition, the exemption generally does not apply to dividends 

paid to a controlled foreign corporation to the extent such dividends 

are attributable to income received by the RIC on a debt obligation 

of a person with respect to which the recipient of the dividend (i.e., 

the controlled foreign corporation) is a related person. Nor does the 

exemption generally apply to dividends to the extent such dividends are attributable to income (other than short-term original 

issue discount or bank deposit interest) received by the RIC on indebtedness issued by the RIC-dividend recipient or by any corporation or partnership with respect to which the recipient of the RIC 

dividend is a 10-percent shareholder. However, in these two circumstances the RIC remains exempt from its withholding obligation unless the RIC knows that the dividend recipient is such a 

controlled foreign corporation or 10-percent shareholder. To the extent that an interest-related dividend received by a controlled foreign corporation is attributable to interest income of the RIC that 

would be portfolio interest if received by a foreign corporation, the 

dividend is treated as portfolio interest for purposes of the de minimis rules, the high-tax exception, and the same country exceptions 

of subpart F (see sec. 881(c)(5)(A)). 

The aggregate amount designated as interest-related dividends 

for the RIC’s taxable year (including dividends so designated that 


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40 

are paid after the close of the taxable year but treated as paid during that year as described in section 855) generally is limited to the 

qualified net interest income of the RIC for the taxable year. The 

qualified net interest income of the RIC equals the excess of: (1) 

the amount of qualified interest income of the RIC; over (2) the 

amount of expenses of the RIC properly allocable to such interest 

income. 

Qualified interest income of the RIC is equal to the sum of its 

U.S.-source income with respect to: (1) bank deposit interest; (2) 

short term original issue discount that is currently exempt from 

the gross-basis tax under section 871; (3) any interest (including 

amounts recognized as ordinary income in respect of original issue 

discount, market discount, or acquisition discount under the provisions of sections 1271–1288, and such other amounts as regulations 

may provide) on an obligation which is in registered form, unless 

it is earned on an obligation issued by a corporation or partnership 

in which the RIC is a 10-percent shareholder or is contingent interest not treated as portfolio interest under section 871(h)(4); and (4) 

any interest-related dividend from another RIC. 

If the amount designated as an interest-related dividend is greater than the qualified net interest income described above, the portion of the distribution so designated which constitutes an interestrelated dividend will be only that proportion of the amount so designated as the amount of the qualified net interest income bears to 

the amount so designated. 

This withholding tax rule for interest-related dividends received 

from a RIC does not apply to any taxable year of a RIC beginning 

after December 31, 2007. 

REASONS FOR CHANGE

The committee believes that, to the extent a RIC distributes to 

a foreign person a dividend attributable to amounts that would 

have been exempt from U.S. withholding tax had the foreign person received it directly (such as portfolio interest and capital gains, 

including short-term capital gains), such dividend similarly should 

be exempt from the U.S. gross-basis withholding tax. Therefore, the 

committee believes that it is desirable to extend the present law 

provision for an additional year. 

EXPLANATION OF PROVISION

The provision extends the exemption from withholding tax of interest-related dividends received from a RIC to taxable years of a 

RIC beginning before January 1, 2009. 

EFFECTIVE DATE

The provision applies to estates of decedents dying after December 31, 2007. 

4. Extension of parity in the application of certain limits to mental 

health benefits (sec. 304 of the bill and sec. 9812(f) of the Code) 

PRESENT LAW

The Code, the Employee Retirement Income Security Act of 1974 

(‘‘ERISA’’) and the Public Health Service Act (‘‘PHSA’’) contain provisions under which group health plans that provide both medical 


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41 

and surgical benefits and mental health benefits cannot impose aggregate lifetime or annual dollar limits on mental health benefits 

that are not imposed on substantially all medical and surgical benefits (‘‘mental health parity requirements’’). In the case of a group 

health plan which provides benefits for mental health, the mental 

health parity requirements do not affect the terms and conditions 

(including cost sharing, limits on numbers of visits or days of coverage, and requirements relating to medical necessity) relating to 

the amount, duration, or scope of mental health benefits under the 

plan, except as specifically provided in regard to parity in the imposition of aggregate lifetime limits and annual limits. 

The Code imposes an excise tax on group health plans which fail 

to meet the mental health parity requirements. The excise tax is 

equal to $100 per day during the period of noncompliance and is 

generally imposed on the employer sponsoring the plan if the plan 

fails to meet the requirements. The maximum tax that can be imposed during a taxable year cannot exceed the lesser of 10 percent 

of the employer’s group health plan expenses for the prior year or 

$500,000. No tax is imposed if the Secretary determines that the 

employer did not know, and in exercising reasonable diligence 

would not have known, that the failure existed. 

The mental health parity requirements do not apply to group 

health plans of small employers nor do they apply if their application results in an increase in the cost under a group health plan 

of at least one percent. Further, the mental health parity requirements do not require group health plans to provide mental health 

benefits. 

The Code, ERISA and PHSA mental health parity requirements 

are scheduled to expire with respect to benefits for services furnished after December 31, 2007. 

REASONS FOR CHANGE

The Committee recognizes that the Code provisions relating to 

mental health parity are important to carrying out the purposes of 

the Mental Health Parity Act. Thus, the Committee believes that 

extending the Code provisions relating to mental health parity is 

warranted. 

EXPLANATION OF PROVISION

The provision extends the present-law Code excise tax for failure 

to comply with the mental health parity requirements through December 31, 2008. 

EFFECTIVE DATE

The provision is effective for benefits for services furnished after 

December 31, 2007. 


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42 

11Secs. 170, 2055, and 2522, respectively. Unless otherwise provided, all section references are 

to the Internal Revenue Code of 1986, as amended (the ‘‘Code’’). 

5. Extend the special rule encouraging contributions of capital gain 

real property for conservation purposes (sec. 305 of the bill and 

sec. 170 of the Code) 

PRESENT LAW

Charitable contributions generally 

In general, a deduction is permitted for charitable contributions, 

subject to certain limitations that depend on the type of taxpayer, 

the property contributed, and the donee organization. The amount 

of deduction generally equals the fair market value of the contributed property on the date of the contribution. Charitable deductions are provided for income, estate, and gift tax purposes.11

In general, in any taxable year, charitable contributions by a corporation are not deductible to the extent the aggregate contributions exceed 10 percent of the corporation’s taxable income computed without regard to net operating or capital loss carrybacks. 

For individuals, the amount deductible is a percentage of the taxpayer’s contribution base, which is the taxpayer’s adjusted gross income computed without regard to any net operating loss carryback. 

The applicable percentage of the contribution base varies depending on the type of donee organization and property contributed. 

Cash contributions of an individual taxpayer to public charities, 

private operating foundations, and certain types of private nonoperating foundations may not exceed 50 percent of the taxpayer’s 

contribution base. Cash contributions to private foundations and 

certain other organizations generally may be deducted up to 30 

percent of the taxpayer’s contribution base. 

In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if the donor transfers an interest in property to a charity while also either retaining an interest in that 

property or transferring an interest in that property to a noncharity for less than full and adequate consideration. Exceptions to 

this general rule are provided for, among other interests, remainder interests in charitable remainder annuity trusts, charitable remainder unitrusts, and pooled income funds, present interests in 

the form of a guaranteed annuity or a fixed percentage of the annual value of the property, and qualified conservation contributions. 

Capital gain property 

Capital gain property means any capital asset or property used 

in the taxpayer’s trade or business the sale of which at its fair market value, at the time of contribution, would have resulted in gain 

that would have been long-term capital gain. Contributions of capital gain property to a qualified charity are deductible at fair market value within certain limitations. Contributions of capital gain 

property to charitable organizations described in section 

170(b)(1)(A) (e.g., public charities, private foundations other than 

private non-operating foundations, and certain governmental units) 

generally are deductible up to 30 percent of the taxpayer’s contribution base. An individual may elect, however, to bring all these 

contributions of capital gain property for a taxable year within the 


ccoleman on PROD1PC71 with REPORTS
43 

12Sec. 170(b)(1)(E). 

50-percent limitation category by reducing the amount of the contribution deduction by the amount of the appreciation in the capital 

gain property. Contributions of capital gain property to charitable 

organizations described in section 170(b)(1)(B) (e.g., private non-operating foundations) are deductible up to 20 percent of the taxpayer’s contribution base. 

For purposes of determining whether a taxpayer’s aggregate 

charitable contributions in a taxable year exceed the applicable 

percentage limitation, contributions of capital gain property are 

taken into account after other charitable contributions. Contributions of capital gain property that exceed the percentage limitation 

may be carried forward for five years. 

Qualified conservation contributions 

Qualified conservation contributions are not subject to the ‘‘partial interest’’ rule, which generally bars deductions for charitable 

contributions of partial interests in property. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire 

interest of the donor other than a qualified mineral interest; (2) a 

remainder interest; or (3) a restriction (granted in perpetuity) on 

the use that may be made of the real property. Qualified organizations include certain governmental units, public charities that meet 

certain public support tests, and certain supporting organizations. 

Conservation purposes include: (1) the preservation of land areas 

for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, 

or plants, or similar ecosystem; (3) the preservation of open space 

(including farmland and forest land) where such preservation will 

yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy; and (4) the 

preservation of an historically important land area or a certified 

historic structure. 

Qualified conservation contributions of capital gain property are 

subject to the same limitations and carryover rules of other charitable contributions of capital gain property. 

Special rule regarding contributions of capital gain real property for 

conservation purposes 

In general 

Under a temporary provision that is effective for contributions 

made in taxable years beginning after December 31, 2005,12 the 30- 

percent contribution base limitation on contributions of capital gain 

property by individuals does not apply to qualified conservation 

contributions (as defined under present law). Instead, individuals 

may deduct the fair market value of any qualified conservation contribution to an organization described in section 170(b)(1)(A) to the 

extent of the excess of 50 percent of the contribution base over the 

amount of all other allowable charitable contributions. These conVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00043 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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13Sec. 170(b)(2)(B). 

tributions are not taken into account in determining the amount of 

other allowable charitable contributions. 

Individuals are allowed to carryover any qualified conservation 

contributions that exceed the 50-percent limitation for up to 15 

years. 

For example, assume an individual with a contribution base of 

$100 makes a qualified conservation contribution of property with 

a fair market value of $80 and makes other charitable contributions subject to the 50-percent limitation of $60. The individual is 

allowed a deduction of $50 in the current taxable year for the nonconservation contributions (50 percent of the $100 contribution 

base) and is allowed to carryover the excess $10 for up to 5 years. 

No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution 

may be carried forward for up to 15 years. 

Farmers and ranchers 

In the case of an individual who is a qualified farmer or rancher 

for the taxable year in which the contribution is made, a qualified 

conservation contribution is allowable up to 100 percent of the excess of the taxpayer’s contribution base over the amount of all 

other allowable charitable contributions. 

In the above example, if the individual is a qualified farmer or 

rancher, in addition to the $50 deduction for non-conservation contributions, an additional $50 for the qualified conservation contribution is allowed and $30 may be carried forward for up to 15 

years as a contribution subject to the 100-percent limitation. 

In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in 

which the contribution is made, any qualified conservation contribution is allowable up to 100 percent of the excess of the corporation’s taxable income (as computed under section 170(b)(2)) 

over the amount of all other allowable charitable contributions. 

Any excess may be carried forward for up to 15 years as a contribution subject to the 100-percent limitation.13

As an additional condition of eligibility for the 100 percent limitation, with respect to any contribution of property in agriculture 

or livestock production, or that is available for such production, by 

a qualified farmer or rancher, the qualified real property interest 

must include a restriction that the property remain generally available for such production. (There is no requirement as to any specific use in agriculture or farming, or necessarily that the property 

be used for such purposes, merely that the property remain available for such purposes.) Such additional condition does not apply 

to contributions made on or before August 17, 2006. 

A qualified farmer or rancher means a taxpayer whose gross income from the trade or business of farming (within the meaning of 

section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s 

gross income for the taxable year. 


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14Secs. 170(c)(3)–(5). 15Sec. 170(c)(1). 16Secs. 170(b) and (e). 

Termination 

The special rule regarding contributions of capital gain real property for conservation purposes does not apply to contributions made 

in taxable years beginning after December 31, 2007. 

REASONS FOR CHANGE

The Committee believes that the special rule that provides an increased incentive to make charitable contributions of partial interests in real property for conservation purposes is an important way 

of encouraging conservation and preservation, and should be extended for an additional year. 

EXPLANATION OF PROVISION

The provision extends the special rule regarding contributions of 

capital gain real property for conservation purposes for contributions made in taxable years beginning before January 1, 2009. 

EFFECTIVE DATE

The provision is effective for contributions made in taxable years 

beginning after December 31, 2007. 

6. Tax-free distributions from individual retirement plans for charitable purposes (sec. 306 of the bill and sec. 408 of the Code) 

PRESENT LAW

In general 

If an amount withdrawn from a traditional individual retirement 

arrangement (‘‘IRA’’) or a Roth IRA is donated to a charitable organization, the rules relating to the tax treatment of withdrawals 

from IRAs apply to the amount withdrawn and the charitable contribution is subject to the normally applicable limitations on deductibility of such contributions. An exception applies in the case 

of a qualified charitable distribution. 

Charitable contributions 

In computing taxable income, an individual taxpayer who 

itemizes deductions generally is allowed to deduct the amount of 

cash and up to the fair market value of property contributed to a 

charity described in section 501(c)(3), to certain veterans’ organizations, fraternal societies, and cemetery companies,14 or to a Federal, State, or local governmental entity for exclusively public purposes.15 The deduction also is allowed for purposes of calculating 

alternative minimum taxable income. 

The amount of the deduction allowable for a taxable year with 

respect to a charitable contribution of property may be reduced depending on the type of property contributed, the type of charitable 

organization to which the property is contributed, and the income 

of the taxpayer.16


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17Sec. 6115. 18Sec. 170(f)(8). 19Sec. 6115. 

A taxpayer who takes the standard deduction (i.e., who does not 

itemize deductions) may not take a separate deduction for charitable contributions.17

A payment to a charity (regardless of whether it is termed a ‘‘contribution’’) in exchange for which the donor receives an economic benefit is not deductible, except to the extent that the donor 

can demonstrate, among other things, that the payment exceeds 

the fair market value of the benefit received from the charity. To 

facilitate distinguishing charitable contributions from purchases of 

goods or services from charities, present law provides that no charitable contribution deduction is allowed for a separate contribution 

of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the charity indicating whether the charity provided any good or service (and an estimate of the value of any such good or service) to the taxpayer in 

consideration for the contribution.18 In addition, present law re- quires that any charity that receives a contribution exceeding $75 

made partly as a gift and partly as consideration for goods or services furnished by the charity (a ‘‘quid pro quo’’ contribution) is required to inform the contributor in writing of an estimate of the 

value of the goods or services furnished by the charity and that 

only the portion exceeding the value of the goods or services may 

be deductible as a charitable contribution.19

Under present law, total deductible contributions of an individual 

taxpayer to public charities, private operating foundations, and certain types of private nonoperating foundations may not exceed 50 

percent of the taxpayer’s contribution base, which is the taxpayer’s 

adjusted gross income for a taxable year (disregarding any net operating loss carryback). To the extent a taxpayer has not exceeded 

the 50-percent limitation, (1) contributions of capital gain property 

to public charities generally may be deducted up to 30 percent of 

the taxpayer’s contribution base, (2) contributions of cash to private 

foundations and certain other charitable organizations generally 

may be deducted up to 30 percent of the taxpayer’s contribution 

base, and (3) contributions of capital gain property to private foundations and certain other charitable organizations generally may 

be deducted up to 20 percent of the taxpayer’s contribution base. 

Contributions by individuals in excess of the 50-percent, 30-percent, and 20-percent limits may be carried over and deducted over 

the next five taxable years, subject to the relevant percentage limitations on the deduction in each of those years. 

In addition to the percentage limitations imposed specifically on 

charitable contributions, present law imposes a reduction on most 

itemized deductions, including charitable contribution deductions, 

for taxpayers with adjusted gross income in excess of a threshold 

amount, which is indexed annually for inflation. The threshold 

amount for 2007 is $156,400 ($78,200 for married individuals filing 

separate returns). For those deductions that are subject to the 

limit, the total amount of itemized deductions is reduced by three 

percent of adjusted gross income over the threshold amount, but 

not by more than 80 percent of itemized deductions subject to the 

limit. Beginning in 2006, the overall limitation on itemized deducVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00046 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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20Secs. 170(f), 2055(e)(2), and 2522(c)(2). 21Sec. 170(f)(2). 22Minimum distribution rules also apply in the case of distributions after the death of a traditional or Roth IRA owner. 

tions phases-out for all taxpayers. The overall limitation on 

itemized deductions is reduced by one-third in taxable years beginning in 2006 and 2007, and by two-thirds in taxable years beginning in 2008 and 2009. The overall limitation on itemized deductions is eliminated for taxable years beginning after December 31, 

2009; however, this elimination of the limitation sunsets on December 31, 2010. 

In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if the donor transfers an interest in property to a charity (e.g., a remainder) while also either retaining an 

interest in that property (e.g., an income interest) or transferring 

an interest in that property to a noncharity for less than full and 

adequate consideration.20 Exceptions to this general rule are provided for, among other interests, remainder interests in charitable 

remainder annuity trusts, charitable remainder unitrusts, and 

pooled income funds, and present interests in the form of a guaranteed annuity or a fixed percentage of the annual value of the property.21 For such interests, a charitable deduction is allowed to the 

extent of the present value of the interest designated for a charitable organization. 

IRA rules 

Within limits, individuals may make deductible and nondeductible contributions to a traditional IRA. Amounts in a traditional 

IRA are includible in income when withdrawn (except to the extent 

the withdrawal represents a return of nondeductible contributions). 

Individuals also may make nondeductible contributions to a Roth 

IRA. Qualified withdrawals from a Roth IRA are excludable from 

gross income. Withdrawals from a Roth IRA that are not qualified 

withdrawals are includible in gross income to the extent attributable to earnings. Includible amounts withdrawn from a traditional IRA or a Roth IRA before attainment of age 591⁄2 are subject 

to an additional 10-percent early withdrawal tax, unless an exception applies. Under present law, minimum distributions are required to be made from tax-favored retirement arrangements, including IRAs. Minimum required distributions from a traditional 

IRA must generally begin by the April 1 of the calendar year following the year in which the IRA owner attains age 701⁄2.22

If an individual has made nondeductible contributions to a traditional IRA, a portion of each distribution from an IRA is nontaxable until the total amount of nondeductible contributions has 

been received. In general, the amount of a distribution that is nontaxable is determined by multiplying the amount of the distribution by the ratio of the remaining nondeductible contributions to 

the account balance. In making the calculation, all traditional IRAs 

of an individual are treated as a single IRA, all distributions during any taxable year are treated as a single distribution, and the 

value of the contract, income on the contract, and investment in 

the contract are computed as of the close of the calendar year. 

In the case of a distribution from a Roth IRA that is not a qualified distribution, in determining the portion of the distribution atVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00047 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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23 Conversion contributions refer to conversions of amounts in a traditional IRA to a Roth IRA. 24Sec. 3405. 25The exclusion does not apply to distributions from employer-sponsored retirements plans, 

including SIMPLE IRAs and simplified employee pensions (‘‘SEPs’’). 

tributable to earnings, contributions and distributions are deemed 

to be distributed in the following order: (1) regular Roth IRA contributions; (2) taxable conversion contributions; 23 (3) nontaxable 

conversion contributions; and (4) earnings. In determining the 

amount of taxable distributions from a Roth IRA, all Roth IRA distributions in the same taxable year are treated as a single distribution, all regular Roth IRA contributions for a year are treated as 

a single contribution, and all conversion contributions during the 

year are treated as a single contribution. 

Distributions from an IRA (other than a Roth IRA) are generally 

subject to withholding unless the individual elects not to have 

withholding apply.24 Elections not to have withholding apply are to 

be made in the time and manner prescribed by the Secretary. 

Qualified charitable distributions 

Present law provides an exclusion from gross income for otherwise taxable IRA distributions from a traditional or a Roth IRA in 

the case of qualified charitable distributions.25 The exclusion may not exceed $100,000 per taxpayer per taxable year. Special rules 

apply in determining the amount of an IRA distribution that is otherwise taxable. The otherwise applicable rules regarding taxation 

of IRA distributions and the deduction of charitable contributions 

continue to apply to distributions from an IRA that are not qualified charitable distributions. Qualified charitable distributions are 

taken into account for purposes of the minimum distribution rules 

applicable to traditional IRAs to the same extent the distribution 

would have been taken into account under such rules had the distribution not been directly distributed under the qualified charitable distribution provision. An IRA does not fail to qualify as an 

IRA merely because qualified charitable distributions have been 

made from the IRA. 

A qualified charitable distribution is any distribution from an 

IRA directly by the IRA trustee to an organization described in section 170(b)(1)(A) (other than an organization described in section 

509(a)(3) or a donor advised fund (as defined in section 4966(d)(2)). 

Distributions are eligible for the exclusion only if made on or after 

the date the IRA owner attains age 701⁄2. The exclusion applies only if a charitable contribution deduction 

for the entire distribution otherwise would be allowable (under 

present law), determined without regard to the generally applicable 

percentage limitations. Thus, for example, if the deductible amount 

is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient 

substantiation, the exclusion is not available with respect to any 

part of the IRA distribution. 

If the IRA owner has any IRA that includes nondeductible contributions, a special rule applies in determining the portion of a 

distribution that is includible in gross income (but for the qualified 

charitable distribution provision) and thus is eligible for qualified 

charitable distribution treatment. Under the special rule, the distribution is treated as consisting of income first, up to the aggreVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00048 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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26The adjusted gross income threshold is $78,200 in the case of a married individual filing 

a separate return (for 2007). 27Sec. 62(a)(2)(D). 

gate amount that would be includible in gross income (but for the 

qualified charitable distribution provision) if the aggregate balance 

of all IRAs having the same owner were distributed during the 

same year. In determining the amount of subsequent IRA distributions includible in income, proper adjustments are to be made to 

reflect the amount treated as a qualified charitable distribution 

under the special rule. 

Distributions that are excluded from gross income by reason of 

the qualified charitable distribution provision are not taken into account in determining the deduction for charitable contributions 

under section 170. 

The exclusion for qualified charitable distributions applies to distributions made in taxable years beginning after December 31, 

2005. Under present law, the exclusion does not apply to distributions made in taxable years beginning after December 31, 2007. 

REASONS FOR CHANGE

The Committee believes that facilitating charitable contributions 

from IRAs will help increase giving to charitable organizations. 

Therefore, the Committee believes that the present-law exclusion 

for qualified charitable distributions should be extended for one 

year. 

EXPLANATION OF PROVISION

The provision extends the exclusion for qualified charitable distributions to distributions made in taxable years beginning after 

December 31, 2007, and before January 1, 2009. 

EFFECTIVE DATE

The provision is effective for distributions made in taxable years 

beginning after December 31, 2007. 

7. Deduction for certain expenses of elementary and secondary (sec. 

307 of the bill and sec. 62(a)(2) of the Code) 

PRESENT LAW

In general, ordinary and necessary business expenses are deductible. However, unreimbursed employee business expenses generally 

are deductible only as an itemized deduction and only to the extent 

that the individual’s total miscellaneous deductions (including employee business expenses) exceed two percent of adjusted gross income. An individual’s otherwise allowable itemized deductions may 

be further limited by the overall limitation on itemized deductions, 

which reduces itemized deductions for taxpayers with adjusted 

gross income in excess of $156,400 (for 2007).26 In addition, miscellaneous itemized deductions are not allowable under the alternative minimum tax. 

Eligible educators are allowed an above-the-line deduction for 

certain expenses.27 Specifically, for taxable years beginning after 

December 31, 2001, and prior to January 1, 2008, an above-the-line 

deduction is allowed for up to $250 annually of expenses paid or 


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50 

incurred by an eligible educator for books, supplies (other than 

nonathletic supplies for courses of instruction in health or physical 

education), computer equipment (including related software and 

services) and other equipment, and supplementary materials used 

by the eligible educator in the classroom. To be eligible for this deduction, the expenses must be otherwise deductible under section 

162 as a trade or business expense. A deduction is allowed only to 

the extent the amount of expenses exceeds the amount excludable 

from income under section 135 (relating to education savings 

bonds), 529(c)(1) (relating to qualified tuition programs), and section 530(d)(2) (relating to Coverdell education savings accounts). 

An eligible educator is a kindergarten through grade 12 teacher, 

instructor, counselor, principal, or aide in a school for at least 900 

hours during a school year. A school means any school that provides elementary education or secondary education, as determined 

under State law. 

The above-the-line deduction for eligible educators is not allowed 

for taxable years beginning after December 31, 2007. 

REASONS FOR CHANGE

The Committee recognizes that many elementary and secondary 

school teachers provide substantial classroom resources at their 

own expense, and believe that it is appropriate to extend the 

present law deduction for such expenses in order to continue to 

partially offset the substantial costs such educators incur for the 

benefit of their students. 

EXPLANATION OF PROVISION

The provision extends the deduction for eligible educator expenses for one year. 

EFFECTIVE DATE

The provision is effective for expenses paid or incurred in taxable 

years beginning after December 31, 2007, and prior to January 1, 

2009. 

8. One year extension of the election to treat combat pay as earned 

income for purposes of the earned income credit (sec. 308 of the 

bill and sec. 32(c)(2) of the Code) 

PRESENT LAW

In general 

Subject to certain limitations, military compensation earned by 

members of the Armed Forces while serving in a combat zone may 

be excluded from gross income. In addition, for up to two years following service in a combat zone, military personnel may also exclude compensation earned while hospitalized from wounds, disease, or injuries incurred while serving in the combat zone. 

Child credit 

Combat pay that is otherwise excluded from gross income under 

section 112 is treated as earned income which is taken into account 


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51 

28 Unless otherwise provided, all section references are to the Internal Revenue Code of 1986, 

as amended (the ‘‘Code’’). 

in computing taxable income for purposes of calculating the refundable portion of the child credit.28

Earned income credit 

Any taxpayer may elect to treat combat pay that is otherwise excluded from gross income under section 112 as earned income for 

purposes of the earned income credit. This election is available 

with respect to any taxable year ending after the date of enactment 

and before January 1, 2008. 

REASONS FOR CHANGE

The Committee believes that members of the armed forces serving in combat should have full availability of the earned income 

credit, notwithstanding the exclusion of combat pay from gross income for purposes of determining federal tax liability. The Committee believes an extension of the election to treat combat pay as 

earnings for purposes of the earned income credit is necessary to 

achieve this result. 

EXPLANATION OF PROVISION

The provision extends for one year the availability of the election 

to treat combat pay that is otherwise excluded from gross income 

under section 112 as earned income for purposes of the earned income credit. 

EFFECTIVE DATE

The provision is effective in taxable years beginning after December 31, 2007 and before January 1, 2009. 

9. Extension of qualified mortgage bond program rules for veterans 

(sec. 309 of the bill and sec. 143 of the Code) 

PRESENT LAW

Private activity bonds are bonds that nominally are issued by 

States or local governments, but the proceeds of which are used (directly or indirectly) by a private person and payment of which is 

derived from funds of such private person. 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’’). The definition of a qualified private activity bond includes both qualified mortgage bonds and 

qualified veterans’ mortgage bonds. 

Qualified mortgage bonds are issued to make mortgage loans to 

qualified mortgagors for owner-occupied residences. The Code imposes several limitations on qualified mortgage bonds, including income limitations for homebuyers and purchase price limitations for 

the home financed with bond proceeds. In addition, qualified mortgage bonds generally cannot be used to finance a mortgage for a 

homebuyer who had an ownership interest in a principal residence 

in the three years preceding the execution of the mortgage (the 

‘‘first-time homebuyer’’ requirement). 


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29Pub. L. No. 109–280. 

Under a special rule, qualified mortgage bonds may be issued to 

finance mortgages for veterans who served in the active military 

without regard to the first-time homebuyer requirement. Presentlaw income and purchase price limitations apply to loans to veterans financed with the proceeds of qualified mortgage bonds. Veterans are eligible for the exception from the first-time homebuyer 

requirement without regard to the date they last served on active 

duty or the date they applied for a loan after leaving active duty. 

However, veterans may only use the exception one time. This provision applies to bonds issued before January 1, 2008. 

REASONS FOR CHANGE

The Committee believes that the mortgage bond program provides an effective tool for providing the benefits of homeownership 

to military veterans. The present-law exception to the first-time 

homebuyer rule allows a broader class of veterans to benefit from 

the program and the Committee believes it is appropriate to extend 

the exception for an additional year. 

EXPLANATION OF PROVISION

The provision extends for one year the first-time homebuyer exception for veterans under the qualified mortgage bond program. 

EFFECTIVE DATE

The provision applies to bonds issued after December 31, 2007 

and before January 1, 2009. 

10. Treatment of distributions to individuals called to active duty 

for at least 180 days (sec. 310 of the bill and sec. 72(t) of the 

Code) 

PRESENT LAW

Under present law, a taxpayer who receives a distribution from 

a qualified retirement plan prior to age 591⁄2, death, or disability 

generally is subject to a 10-percent early withdrawal tax on the 

amount includable in income, unless an exception to the tax applies. Among other exceptions, the early distribution tax does not 

apply to distributions made to an employee who separates from 

service after age 55, or to distributions that are part of a series of 

substantially equal periodic payments made for the life (or life expectancy) of the employee or the joint lives (or life expectancies) of 

the employee and his or her beneficiary. 

Certain amounts held in a qualified cash or deferred arrangement (a ‘‘section 401(k) plan’’) or in a tax-sheltered annuity (a ‘‘section 403(b) annuity’’) may not be distributed before severance from 

employment, age 591⁄2, death, disability, or financial hardship of 

the employee. 

Pursuant to amendments to section 72(t) made by the Pension 

Protection Act of 2006,29 the 10-percent early withdrawal tax does 

not apply to a qualified reservist distribution. A qualified reservist 

distribution is a distribution (1) from an IRA or attributable to 

elective deferrals under a section 401(k) plan, section 403(b) annuity, or certain similar arrangements, (2) made to an individual who 


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30Sec. 2031. The Economic Growth and Tax Relief Reconciliation Act of 2001 (‘‘EGTRRA’’) repealed the estate tax for estates of decedents dying after December 31, 2009. EGTRRA, however, 

included a termination provision under which EGTRRA’s rules, including estate tax repeal, do 

not apply to estates of decedents dying after December 31, 2010. 

(by reason of being a member of a reserve component as defined 

in section 101 of title 37 of the U.S. Code) was ordered or called 

to active duty for a period in excess of 179 days or for an indefinite 

period, and (3) that is made during the period beginning on the 

date of such order or call to duty and ending at the close of the 

active duty period. A section 401(k) plan or section 403(b) annuity 

does not violate the distribution restrictions applicable to such 

plans by reason of making a qualified reservist distribution. 

An individual who receives a qualified reservist distribution may, 

at any time during the two-year period beginning on the day after 

the end of the active duty period, make one or more contributions 

to an IRA of such individual in an aggregate amount not to exceed 

the amount of such distribution. The dollar limitations otherwise 

applicable to contributions to IRAs do not apply to any contribution 

made pursuant to this special repayment rule. No deduction is allowed for any contribution made under the special repayment rule. 

The special rules applicable to a qualified reservist distribution 

apply to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007. 

REASONS FOR CHANGE

The Committee believes that the exception to the 10-percent 

early withdrawal tax is an important tax relief provision for reservists called to active duty. Reservists called to active duty may need 

access to amounts that they have contributed to tax-favored retirement savings programs in order to meet their personal financial obligations while serving our country. Given the continuing need for 

activation of reservists, the Committee believes that this tax relief 

provision should be extended so that it applies to reservists called 

to active duty on or after December 31, 2007. 

EXPLANATION OF PROVISION

The provision extends the rules applicable to qualified reservist 

distributions to individuals ordered or called to active duty before 

January 1, 2009. 

EFFECTIVE DATE

The provision is effective upon enactment. 

11. Extension of special rule for regulated investment company 

stock held in the estate of a nonresident non-citizen (sec. 311 

of the bill and sec. 2105(d) of the Code) 

PRESENT LAW

The gross estate of a decedent who was a U.S. citizen or resident 

generally includes all property—real, personal, tangible, and intangible—wherever situated.30 The gross estate of a nonresident noncitizen decedent, by contrast, generally includes only property that 

at the time of the decedent’s death is situated within the United 


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31Sec. 2103. 32Secs. 2104(c), 2105(b). 33Sec. 2104(a); Treas. Reg. sec. 20.2104–1(a)(5). 34Sec. 2105(d). 

States.31 Property within the United States generally includes debt 

obligations of U.S. persons, including the Federal government and 

State and local governments, but does not include either bank deposits or portfolio obligations the interest on which would be exempt from U.S. income tax under section 871.32 Stock owned and 

held by a nonresident non-citizen generally is treated as property 

within the United States if the stock was issued by a domestic corporation.33

Treaties may reduce U.S. taxation of transfers of the estates of 

nonresident non-citizens. Under recent treaties, for example, U.S. 

tax generally may be eliminated except insofar as the property 

transferred includes U.S. real property or business property of a 

U.S. permanent establishment. 

Although stock issued by a domestic corporation generally is 

treated as property within the United States, stock of a regulated 

investment company (‘‘RIC’’) that was owned by a nonresident noncitizen is not deemed property within the United States in the proportion that, at the end of the quarter of the RIC’s taxable year immediately before a decedent’s date of death, the assets held by the 

RIC are debt obligations, deposits, or other property that would be 

treated as situated outside the United States if held directly by the 

estate (the ‘‘estate tax look-through rule for RIC stock’’).34 This estate tax look-through rule for RIC stock does not apply to estates 

of decedents dying after December 31, 2007. 

REASONS FOR CHANGE

If a RIC satisfies certain income, asset, and distribution requirements, only one level of income tax generally is imposed on the income and gains of a RIC, and this tax is imposed on the RIC stockholders. By extension, the Committee believes it is appropriate to 

treat a RIC as a conduit under the rules for determining the extent 

to which the transfer of the estate of a nonresident non-citizen is 

subject to U.S. Federal estate tax. To the extent the assets of a RIC 

would not be subject to U.S. estate tax if held directly by an estate, 

the Committee believes there should be no estate tax when the assets are owned indirectly by ownership of stock in a RIC. 

EXPLANATION OF PROVISION

The provision permits the estate tax look-through rule for RIC 

stock to apply to estates of decedents dying before January 1, 2009. 

EFFECTIVE DATE

The provision applies to estates of decedents dying after December 31, 2007. 

12. Extend RIC ‘‘qualified investment entity’’ treatment under 

FIRPTA (sec. 312 of the bill and sec. 897(h) of the Code). 

PRESENT LAW

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

that are attributable to dispositions of interests in U.S. real propVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00054 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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35Section 897(h) 

erty. In general, a foreign person (a foreign corporation or a nonresident alien individual) is not generally taxed on U.S. source capital gains unless certain personal presence or effectively connected 

business requirements are met. However, under the Foreign Investment in Real Property Tax Act (‘‘FIRPTA’’) provisions codified 

in section 897 of the Code, a foreign person who sells a U.S. real 

property interest (USRPI) is treated as if the gain from such a sale 

is effectively connected with a U.S. business, and is subject to tax 

at the same rates as a U.S. person. Withholding tax is also imposed 

under section 1445. 

A USPRI, the sale of which is subject to FIRPTA tax, includes 

stock or a beneficial interest in any U.S. real property holding corporation (as defined), unless the stock is regularly traded on an established securities market and the selling foreign corporation or 

nonresident alien individual held no more than 5 percent of that 

stock within the 5-year period ending on date of disposition (or, if 

shorter, during the period in which the entity was in existence). 

There is an exception, however, for stock of a domestically controlled ‘‘qualified investment entity.’’ However, if stock of a domestically controlled qualified investment entity is disposed of within 

the 30 days preceding a dividend distribution in an ‘‘applicable 

wash sale transaction,’’ in which an amount that would have been 

a taxable distribution (as described below) is instead treated as 

nontaxable sales proceeds, but substantially similar stock is reacquired (or an option to obtain it is acquired) within a 61 day period, 

then the amount that would have been a taxable distribution continues to be taxed. 

A distribution from a ‘‘qualified investment entity’’ that is attributable to the sale of a USRPI is subject to tax under FIRPTA unless the distribution is with respect to an interest that is regularly 

traded on an established securities market located in the United 

States and the recipient foreign corporation or nonresident alien individual held no more than 5 percent of that class of stock or beneficial interest within the 1-year period ending on the date of distribution. Special rules apply to situations involving tiers of qualified investment entities. 

The term ‘‘qualified investment entity’’ includes a regulated investment company (‘‘RIC’’) that meets certain requirements, although the inclusion of a RIC in that definition is scheduled to expire, for certain purposes, on December 31, 2007.35 The definition 

does not expire for purposes of taxing distributions from the RIC 

that are attributable directly or indirectly to a distribution to the 

entity from a real estate investment trust, nor for purposes of the 

applicable wash sale rules. 

REASONS FOR CHANGE

The committee believes it is desirable to extend the present law 

provision for an additional year. 

EXPLANATION OF PROVISION

The proposal would extend the inclusion of a regulated investment company (RIC) within the definition of a ‘‘qualified investment entity’’ under section 897 of the Code through December 31, 


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36Sec. 162(h). 37Sec. 162(h)(2)(A). 38Sec. 162(h)(2)(B). 39Sec. 162(h)(1)(B)(i). 40Sec. 162(h)(1)(B)(ii). 41Sec. 162(h)(4). 

2008, for those situations in which that that inclusion would otherwise expire at the end of 2007. 

EFFECTIVE DATE

The proposal would take effect on January 1, 2008. 

13. State legislators’ travel expenses away from home (sec. 313 of 

the bill and sec. 162 of the Code) 

PRESENT LAW

In general, for Federal income tax purposes, any individual who 

is a State legislator, at any time during the year, may elect to deduct deemed living expenses while away from home as a miscellaneous itemized deduction.36 If such election is made, the State legislator’s place of residence within the legislative district is considered his home. A State legislator is deemed to incur for living expenses an amount equal to the product of the State legislator’s legislative days and the per diem amount. 

The State legislator’s legislative days is the number of days the 

legislature was in session (including any day not in session for a 

period of four consecutive days or less),37 plus any day the physical 

presence of the individual was recorded at a committee meeting.38

The per diem amount is the greater of: (1) the per diem amount 

allowable to employees of the State, for which he or she is a legislator, while away from home, not to exceed 110 percent of the Federal government amount,39 or (2) the amount allowable to executive branch employees of the Federal government for per diem 

while away from home.40

The election is not available if the legislator’s place of residence 

within the legislative district is within 50 miles of the State Capitol.41

REASONS FOR CHANGE

The Committee believes that the definition of what constitutes a 

legislative day should be clarified. The Committee is aware that 

the IRS and Treasury are working on authoritative guidance on the 

issue. However, in the absence of such guidance, the Committee believes that a temporary statutory rule is necessary so that taxpayers are provided certainty in their positions. 

It is intended that the Committee will revisit the appropriateness 

of the provision after a thorough study of the issue. 

EXPLANATION OF PROVISION

The provision clarifies the definition of legislative days to include 

any day in which the legislature is formally called into session 

without regard to whether legislation was considered on such day. 

The provision applies in the case of the taxpayer’s taxable year beginning in 2008. 


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42Sec. 41. 43Sec. 41(e). 44The research tax credit was initially enacted in the Economic Recovery Tax Act of 1981. 

It has been subsequently extended and modified numerous times. Most recently, the Tax Relief 

and Health Care Act of 2006 extended the research credit through December 31, 2007, modified 

the alternative incremental research credit, and added an election to claim an alternative simplified credit. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2007. 

B. EXTENDERS PRIMARILY AFFECTING BUSINESSES

1. Extend the research and experimentation tax credit (sec. 321 of 

the bill and sec. 41 of the Code) 

PRESENT LAW

General rule 

A taxpayer may claim a research credit equal to 20 percent of the 

amount by which the taxpayer’s qualified research expenses for a 

taxable year exceed its base amount for that year.42 Thus, the research credit is generally available with respect to incremental increases in qualified research. 

A 20-percent research tax credit is also available with respect to 

the excess of (1) 100 percent of corporate cash expenses (including 

grants or contributions) paid for basic research conducted by universities (and certain nonprofit scientific research organizations) 

over (2) the sum of (a) the greater of two minimum basic research 

floors plus (b) an amount reflecting any decrease in nonresearch 

giving to universities by the corporation as compared to such giving 

during a fixed-base period, as adjusted for inflation. This separate 

credit computation is commonly referred to as the university basic 

research credit.43

Finally, a research credit is available for a taxpayer’s expenditures on research undertaken by an energy research consortium. 

This separate credit computation is commonly referred to as the 

energy research credit. Unlike the other research credits, the energy research credit applies to all qualified expenditures, not just 

those in excess of a base amount. 

The research credit, including the university basic research credit and the energy research credit, is scheduled to expire and generally will not apply to amounts paid or incurred after December 

31, 2007.44

Computation of allowable credit 

Except for energy research payments and certain university basic 

research payments made by corporations, the research tax credit 

applies only to the extent that the taxpayer’s qualified research expenses for the current taxable year exceed its base amount. The 

base amount for the current year generally is computed by multiplying the taxpayer’s fixed-base percentage by the average amount 

of the taxpayer’s gross receipts for the four preceding years. If a 

taxpayer both incurred qualified research expenses and had gross 

receipts during each of at least three years from 1984 through 

1988, then its fixed-base percentage is the ratio that its total qualiVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00057 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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45The Small Business Job Protection Act of 1996 expanded the definition of start-up firms 

under section 41(c)(3)(B)(i) to include any firm if the first taxable year in which such firm had 

both gross receipts and qualified research expenses began after 1983. A special rule (enacted 

in 1993) is designed to gradually recompute a start-up firm’s fixed-base percentage based on its 

actual research experience. Under this special rule, a start-up firm is assigned a fixed-base percentage of three percent for each of its first five taxable years after 1993 in which it incurs 

qualified research expenses. A start-up firm’s fixed-base percentage for its sixth through tenth 

taxable years after 1993 in which it incurs qualified research expenses is a phased-in ratio 

based on the firm’s actual research experience. For all subsequent taxable years, the taxpayer’s 

fixed-base percentage is its actual ratio of qualified research expenses to gross receipts for any 

five years selected by the taxpayer from its fifth through tenth taxable years after 1993. Sec. 

41(c)(3)(B). 46Sec. 41(f)(1). 47Sec. 41(f)(3). 48Sec. 41(c)(4). 49 A special transition rule applies for fiscal year 2006–2007 taxpayers. 

fied research expenses for the 1984–1988 period bears to its total 

gross receipts for that period (subject to a maximum fixed-base percentage of 16 percent). All other taxpayers (so-called start-up firms) 

are assigned a fixed-base percentage of three percent.45

In computing the credit, a taxpayer’s base amount can not be 

less than 50 percent of its current-year qualified research expenses. 

To prevent artificial increases in research expenditures by shifting expenditures among commonly controlled or otherwise related 

entities, a special aggregation rule provides that all members of the 

same controlled group of corporations are treated as a single taxpayer.46 Under regulations prescribed by the Secretary, special 

rules apply for computing the credit when a major portion of a 

trade or business (or unit thereof) changes hands, under which 

qualified research expenses and gross receipts for periods prior to 

the change of ownership of a trade or business are treated as transferred with the trade or business that gave rise to those expenses 

and receipts for purposes of recomputing a taxpayer’s fixed-base 

percentage.47

Alternative incremental research credit regime 

Taxpayers are allowed to elect an alternative incremental research credit regime.48 If a taxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tiered fixed-base 

percentage (that is lower than the fixed-base percentage otherwise 

applicable under present law) and the credit rate likewise is reduced. 

Generally, for amounts paid or incurred prior to 2007, under the 

alternative incremental credit regime, a credit rate of 2.65 percent 

applies to the extent that a taxpayer’s current-year research expenses exceed a base amount computed by using a fixed-base percentage of one percent (i.e., the base amount equals one percent of 

the taxpayer’s average gross receipts for the four preceding years) 

but do not exceed a base amount computed by using a fixed-base 

percentage of 1.5 percent. A credit rate of 3.2 percent applies to the 

extent that a taxpayer’s current-year research expenses exceed a 

base amount computed by using a fixed-base percentage of 1.5 percent but do not exceed a base amount computed by using a fixedbase percentage of two percent. A credit rate of 3.75 percent applies to the extent that a taxpayer’s current-year research expenses 

exceed a base amount computed by using a fixed-base percentage 

of two percent. Generally, for amounts paid or incurred after 2006, 

the credit rates listed above are increased to three percent, four 

percent, and five percent, respectively.49


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50 A special transition rule applies for fiscal year 2006–2007 taxpayers. 51 Under a special rule, 75 percent of amounts paid to a research consortium for qualified research are treated as qualified research expenses eligible for the research credit (rather than 

65 percent under the general rule under section 41(b)(3) governing contract research expenses) 

if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) 

(other than a private foundation) or section 501(c)(6) and is organized and operated primarily 

to conduct scientific research, and (2) such qualified research is conducted by the consortium 

on behalf of the taxpayer and one or more persons not related to the taxpayer. Sec. 41(b)(3)(C). 

An election to be subject to this alternative incremental credit regime can be made for any taxable year beginning after June 30, 

1996, and such an election applies to that taxable year and all subsequent years unless revoked with the consent of the Secretary of 

the Treasury. 

Alternative simplified credit 

Generally, for amounts paid or incurred after 2006, taxpayers 

may elect to claim an alternative simplified credit for qualified research expenses.50 The alternative simplified research credit is 

equal to 12 percent of qualified research expenses that exceed 50 

percent of the average qualified research expenses for the three 

preceding taxable years. The rate is reduced to six percent if a taxpayer has no qualified research expenses in any one of the three 

preceding taxable years. 

An election to use the alternative simplified credit applies to all 

succeeding taxable years unless revoked with the consent of the 

Secretary. An election to use the alternative simplified credit may 

not be made for any taxable year for which an election to use the 

alternative incremental credit is in effect. A transition rule applies 

which permits a taxpayer to elect to use the alternative simplified 

credit in lieu of the alternative incremental credit if such election 

is made during the taxable year which includes January 1, 2007. 

The transition rule applies only to the taxable year which includes 

that date. 

Eligible expenses 

Qualified research expenses eligible for the research tax credit 

consist of: (1) in-house expenses of the taxpayer for wages and supplies attributable to qualified research; (2) certain time-sharing 

costs for computer use in qualified research; and (3) 65 percent of 

amounts paid or incurred by the taxpayer to certain other persons 

for qualified research conducted on the taxpayer’s behalf (so-called 

contract research expenses).51 Notwithstanding the limitation for 

contract research expenses, qualified research expenses include 100 

percent of amounts paid or incurred by the taxpayer to an eligible 

small business, university, or Federal laboratory for qualified energy research. 

To be eligible for the credit, the research does not only have to 

satisfy the requirements of present-law section 174 (described 

below) but also must be undertaken for the purpose of discovering 

information that is technological in nature, the application of which 

is intended to be useful in the development of a new or improved 

business component of the taxpayer, and substantially all of the activities of which constitute elements of a process of experimentation 

for functional aspects, performance, reliability, or quality of a business component. Research does not qualify for the credit if substantially all of the activities relate to style, taste, cosmetic, or seasonal 


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52Sec. 41(d)(3). 53Sec. 41(d)(4). 54Taxpayers may elect 10–year amortization of certain research expenditures allowable as a 

deduction under section 174(a). Secs. 174(f)(2) and 59(e). 55Sec. 280C(c). 56Sec. 280C(c)(3). 

design factors.52 In addition, research does not qualify for the credit: (1) if conducted after the beginning of commercial production of 

the business component; (2) if related to the adaptation of an existing business component to a particular customer’s requirements; 

(3) if related to the duplication of an existing business component 

from a physical examination of the component itself or certain 

other information; or (4) if related to certain efficiency surveys, 

management function or technique, market research, market testing, or market development, routine data collection or routine quality control.53 Research does not qualify for the credit if it is conducted outside the United States, Puerto Rico, or any U.S. possession. 

Relation to deduction 

Under section 174, taxpayers may elect to deduct currently the 

amount of certain research or experimental expenditures paid or 

incurred in connection with a trade or business, notwithstanding 

the general rule that business expenses to develop or create an 

asset that has a useful life extending beyond the current year must 

be capitalized.54 However, deductions allowed to a taxpayer under 

section 174 (or any other section) are reduced by an amount equal 

to 100 percent of the taxpayer’s research tax credit determined for 

the taxable year.55 Taxpayers may alternatively elect to claim a reduced research tax credit amount under section 41 in lieu of reducing deductions otherwise allowed.56

REASONS FOR CHANGE

The Committee acknowledges that research is important to the 

economy. Research is the basis of new products, new services, new 

industries, and new jobs for the domestic economy. Therefore the 

Committee believes it is appropriate to extend the present-law research credit. 

EXPLANATION OF PROVISION

The provision extends the research credit for one year. 

EFFECTIVE DATE

The provision is effective for amounts paid or incurred after December 31, 2007. 

2. Indian employment tax credit (sec. 322 of the bill and sec. 45A 

of the Code) 

PRESENT LAW

In general, a credit against income tax liability is allowed to employers for the first $20,000 of qualified wages and qualified employee health insurance costs paid or incurred by the employer 

with respect to certain employees (sec. 45A). The credit is equal to 

20 percent of the excess of eligible employee qualified wages and 


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57See Form 8845, Indian Employment Credit (Rev. December 2006). 

health insurance costs during the current year over the amount of 

such wages and costs incurred by the employer during 1993. The 

credit is an incremental credit, such that an employer’s currentyear qualified wages and qualified employee health insurance costs 

(up to $20,000 per employee) are eligible for the credit only to the 

extent that the sum of such costs exceeds the sum of comparable 

costs paid during 1993. No deduction is allowed for the portion of 

the wages equal to the amount of the credit. 

Qualified wages means wages paid or incurred by an employer 

for services performed by a qualified employee. A qualified employee means any employee who is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe, 

who performs substantially all of the services within an Indian reservation, and whose principal place of abode while performing such 

services is on or near the reservation in which the services are performed. An ‘‘Indian reservation’’ is a reservation as defined in section 3(d) of the Indian Financing Act of 1974 or section 4(1) of the 

Indian Child Welfare Act of 1978. For purposes of the preceding 

sentence, section 3(d) is applied by treating ‘‘former Indian reservations in Oklahoma’’ as including only lands that are (1) within the 

jurisdictional area of an Oklahoma Indian tribe as determined by 

the Secretary of the Interior, and (2) recognized by such Secretary 

as an area eligible for trust land status under 25 CFR Part 151 (as 

in effect on August 5, 1997). 

An employee is not treated as a qualified employee for any taxable year of the employer if the total amount of wages paid or incurred by the employer with respect to such employee during the 

taxable year exceeds an amount determined at an annual rate of 

$30,000 (which after adjustment for inflation is currently 

$40,000).57 In addition, an employee will not be treated as a qualified employee under certain specific circumstances, such as where 

the employee is related to the employer (in the case of an individual employer) or to one of the employer’s shareholders, partners, 

or grantors. Similarly, an employee will not be treated as a qualified employee where the employee has more than a 5 percent ownership interest in the employer. Finally, an employee will not be 

considered a qualified employee to the extent the employee’s services relate to gaming activities or are performed in a building housing such activities. 

The wage credit is available for wages paid or incurred on or 

after January 1, 1994, in taxable years that begin before January 

1, 2007. 

REASONS FOR CHANGE

To further encourage employment on Indian reservations, the 

Committee believes it is appropriate to extend the Indian employment credit an additional year. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law employment 

credit provision (through taxable years beginning on or before December 31, 2008). 


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58Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, 

Pub. L. No. 106–554 (December 21, 2000). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2007. 

3. Extend the new markets tax credit (sec. 323 of the bill and sec. 

45D of the Code) 

PRESENT LAW

Section 45D provides a new markets tax credit for qualified equity investments made to acquire stock in a corporation, or a capital interest in a partnership, that is a qualified community development entity (‘‘CDE’’).58 The amount of the credit allowable to the 

investor (either the original purchaser or a subsequent holder) is 

(1) a five-percent credit for the year in which the equity interest 

is purchased from the CDE and for each of the following two years, 

and (2) a six-percent credit for each of the following four years. The 

credit is determined by applying the applicable percentage (five or 

six percent) to the amount paid to the CDE for the investment at 

its original issue, and is available for a taxable year to the taxpayer who holds the qualified equity investment on the date of the 

initial investment or on the respective anniversary date that occurs 

during the taxable year. The credit is recaptured if at any time 

during the seven-year period that begins on the date of the original 

issue of the investment the entity ceases to be a qualified CDE, the 

proceeds of the investment cease to be used as required, or the equity investment is redeemed. 

A qualified 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 by 

their representation on any governing board of or any advisory 

board to the CDE; and (3) that is certified by the Secretary as 

being a qualified CDE. A qualified equity investment means stock 

(other than nonqualified preferred stock) in a corporation or a capital interest in a partnership that is acquired directly from a CDE 

for cash, and includes an investment of a subsequent purchaser if 

such investment was a qualified equity investment in the hands of 

the prior holder. Substantially all of the investment proceeds must 

be used by the CDE to make qualified low-income community investments. For this purpose, qualified low-income community investments include: (1) capital or equity investments in, or loans to, 

qualified active low-income community businesses; (2) certain financial counseling and other services 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 loan to, another CDE. 

A ‘‘low-income community’’ is a population census tract with either (1) a poverty rate of at least 20 percent or (2) median family 

income which does not exceed 80 percent of the greater of metropolitan area median family income or statewide median family income (for a non-metropolitan census tract, does not exceed 80 perVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00062 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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59 12 U.S.C. 4702(17) (defines ‘‘low-income’’ for purposes of 12 U.S.C. 4702(20)). 

cent of statewide median family income). In the case of a population census tract located within a high migration rural county, 

low-income is defined by reference to 85 percent (rather than 80 

percent) of statewide median family income. For this purpose, a 

high migration rural county is any county that, during the 20-year 

period ending with the year in which the most recent census was 

conducted, has a net out-migration of inhabitants from the county 

of at least 10 percent of the population of the county at the beginning of such period. 

The Secretary has the authority to designate ‘‘targeted populations’’ as low-income communities for purposes of the new markets tax credit. For this purpose, a ‘‘targeted population’’ is defined 

by reference to section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. 

4702(20)) to mean individuals, or an identifiable group of individuals, including an Indian tribe, who (A) are low-income persons; or 

(B) otherwise lack adequate access to loans or equity investments. 

Under such Act, ‘‘low-income’’ means (1) for a targeted population 

within a metropolitan area, less than 80 percent of the area median family income; and (2) for a targeted population within a nonmetropolitan area, less than the greater of 80 percent of the area 

median family income or 80 percent of the statewide non-metropolitan area median family income.59 Under such Act, a targeted population is not required to be within any census tract. In addition, a 

population census tract with a population of less than 2,000 is 

treated as a low-income community for purposes of the credit if 

such tract is within an empowerment zone, the designation of 

which is in effect under section 1391, and is contiguous to one or 

more low-income communities. 

A qualified active low-income community business is defined as 

a business that satisfies, with respect to a taxable year, 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 any low-income community; (2) a substantial 

portion of the tangible property of such business is used in a lowincome community; (3) a substantial portion of the services performed for such business by its employees is performed in a lowincome community; and (4) less than five percent of the average of 

the aggregate unadjusted bases of the property of such business is 

attributable to certain financial property or to certain collectibles. 

The maximum annual amount of qualified equity investments is 

capped at $2.0 billion per year for calendar years 2004 and 2005, 

and at $3.5 billion per year for calendar years 2006, 2007, and 

2008. 

REASONS FOR CHANGE

The Committee believes that the new markets tax credit has 

proved to be an effective means of providing equity and other investments to benefit businesses in low income communities, and 

that it is appropriate to provide for the allocation of additional investments for another calendar year. 


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60Sec. 45G(a). 61Sec. 45G(b)(1). 62Sec. 45G(d). 63Sec. 45G(c). 64Sec. 45G(e)(1). 

EXPLANATION OF PROVISION

The provision extends the new markets tax credit for one year, through 2009, permitting up to $3.5 billion in qualified equity investments for that calendar year. The Committee is concerned that 

the Treasury Department has not exercised its authority under section 45D(e)(2) to prescribe regulations with regard to the definition 

of ‘‘targeted populations.’’ The Committee urges the Treasury Department to do so in a timely manner. Should the Treasury Department continue to delay prescription of such regulations, the Committee may take legislative action with regard to that definition. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

4. Extend railroad track maintenance credit (sec. 324 of the bill 

and sec. 45G of the Code) 

PRESENT LAW

Present law provides a 50-percent business tax credit for qualified railroad track maintenance expenditures paid or incurred by 

an eligible taxpayer during the taxable year.60 The credit is limited 

to the product of $3,500 times the number of miles of railroad track 

(1) owned or leased by an eligible taxpayer as of the close of its taxable year, and (2) assigned to the eligible taxpayer by a Class II 

or Class III railroad that owns or leases such track at the close of 

the taxable year.61 Each mile of railroad track may be taken into 

account only once, either by the owner of such mile or by the owner’s assignee, in computing the per-mile limitation. Under the provision, the credit is limited in respect of the total number of miles 

of track (1) owned or leased by the Class II or Class III railroad 

and (2) assigned to the Class II or Class III railroad for purposes 

of the credit. 

Qualified railroad track maintenance expenditures are defined as 

gross expenditures (whether or not otherwise chargeable to capital 

account) for maintaining railroad track (including roadbed, bridges, 

and related track structures) owned or leased as of January 1, 

2005, by a Class II or Class III railroad (determined without regard 

to any consideration for such expenditure given by the Class II or 

Class III railroad which made the assignment of such track).62

An eligible taxpayer means any Class II or Class III railroad, 

and any person who transports property using the rail facilities of 

a Class II or Class III railroad or who furnishes railroad-related 

property or services to a Class II or Class III railroad, but only 

with respect to miles of railroad track assigned to such person by 

such railroad under the provision.63

The terms Class II or Class III railroad have the meanings given 

by the Surface Transportation Board.64

The provision applies to qualified railroad track maintenance expenditures paid or incurred during taxable years beginning after 

December 31, 2004, and before January 1, 2008. 


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65Sec. 168. 

REASONS FOR CHANGE

The Committee believes that Class II and Class III railroads are 

an important part of the nation’s railway system. Therefore, the 

Committee believes that this incentive for railroad track maintenance expenditures should be extended. 

EXPLANATION OF PROVISION

The provision extends the present law provision for one year, for 

qualified railroad track maintenance expenditures paid or incurred 

before January 1, 2009. 

EFFECTIVE DATE

The provision is effective for expenditures paid or incurred after 

December 31, 2007. 

5. Fifteen-year straight-line cost recovery for qualified leasehold 

improvements and qualified restaurant improvements (sec. 325 

of the bill and sec. 168 of the Code) 

PRESENT LAW

In general 

A taxpayer generally must capitalize the cost of property used in 

a trade or business and recover such cost over time through annual 

deductions for depreciation or amortization. Tangible property generally is depreciated under the modified accelerated cost recovery 

system (‘‘MACRS’’), which determines depreciation by applying specific recovery periods, placed-in-service conventions, and depreciation methods to the cost of various types of depreciable property.65

The cost of nonresidential real property is recovered using the 

straight-line method of depreciation and a recovery period of 39 

years. Nonresidential real property is subject to the mid-month 

placed-in-service convention. Under the mid-month convention, the 

depreciation allowance for the first year property is placed in service is based on the number of months the property was in service, 

and property placed in service at any time during a month is treated as having been placed in service in the middle of the month. 

Depreciation of leasehold improvements 

Generally, depreciation allowances for improvements made on 

leased property are determined under MACRS, even if the MACRS 

recovery period assigned to the property is longer than the term of 

the lease. This rule applies regardless of whether the lessor or the 

lessee places the leasehold improvements in service. If a leasehold 

improvement constitutes an addition or improvement to nonresidential real property already placed in service, the improvement 

generally is depreciated using the straight-line method over a 39- 

year recovery period, beginning in the month the addition or improvement was placed in service. However, exceptions exist for certain qualified leasehold improvements and certain qualified restaurant property. 


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Qualified leasehold improvement property 

Section 168(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified leasehold improvement property placed in service 

before January 1, 2008. Qualified leasehold improvement property 

is recovered using the straight-line method. Leasehold improvements placed in service in 2008 and later will be subject to the general rules described above. 

Qualified leasehold improvement property is any improvement to 

an interior portion of a building that is nonresidential real property, provided certain requirements are met. The improvement 

must be made under or pursuant to a lease either by the lessee (or 

sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The improvement 

must be placed in service more than three years after the date the 

building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common 

area, or the internal structural framework of the building. 

If a lessor makes an improvement that qualifies as qualified 

leasehold improvement property, such improvement does not qualify as qualified leasehold improvement property to any subsequent 

owner of such improvement. An exception to the rule applies in the 

case of death and certain transfers of property that qualify for nonrecognition treatment. 

Qualified restaurant property 

Section 168(e)(3)(E)(v) provides a statutory 15-year recovery period for qualified restaurant property placed in service before January 1, 2008. For purposes of the provision, qualified restaurant 

property means any improvement to a building if such improvement is placed in service more than three years after the date such 

building was first placed in service and more than 50 percent of the 

building’s square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals. Qualified restaurant property is recovered using the straight-line method. 

REASONS FOR CHANGE

The Committee believes that it is appropriate to extend the 15- 

year recovery period for qualified leasehold improvements and 

qualified restaurant property. 

EXPLANATION OF PROVISION

The present-law provisions for qualified leasehold improvement 

property and qualified restaurant property are extended for one 

year (through December 31, 2008). 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2007. 


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66Sec. 168. 67Sec. 168(e)(3)(C)(ii). 68Sec. 168(i)(15). 

6. 7-year recovery period for motorsports racetrack property (sec. 

326 of the bill and sec. 168 of the Code) 

PRESENT LAW

A taxpayer generally must capitalize the cost of property used in 

a trade or business and recover such cost over time through annual 

deductions for depreciation or amortization. Tangible property generally is depreciated under the modified accelerated cost recovery 

system (‘‘MACRS’’), which determines depreciation by applying specific recovery periods, placed-inservice conventions, and depreciation methods to the cost of various types of depreciable property.66

The cost of nonresidential real property is recovered using the 

straight-line method of depreciation and a recovery period of 39 

years. Nonresidential real property is subject to the mid-month 

placed-in-service convention. Under the mid-month convention, the 

depreciation allowance for the first year property is placed in service is based on the number of months the property was in service, 

and property placed in service at any time during a month is treated as having been placed in service in the middle of the month. 

Land improvements (such as roads and fences) are recovered over 

15 years. An exception exists for the theme and amusement park 

industry, whose assets are assigned a recovery period of seven 

years. Additionally, a motorsports entertainment complex placed in 

service before December 31, 2007 is assigned a recovery period of 

seven years.67 For these purposes, a motorsports entertainment 

complex means a racing track facility which is permanently situated on land that during the 36 month period following its placed 

in service date it hosts a racing event.68 The term motorsports entertainment complex also includes ancillary facilities, land improvements (e.g., parking lots, sidewalks, fences), support facilities (e.g., 

food and beverage retailing, souvenir vending), and appurtenances 

associated with such facilities (e.g., ticket booths, grandstands). 

REASONS FOR CHANGE

The Committee believes that extending the depreciation incentive will encourage economic development. Therefore, the provision 

extends the 7-year recovery period for motorsports entertainment 

complex property. 

EXPLANATION OF PROVISION

The provision extends the present law seven year recovery period 

for one year (through December 31, 2008). 

EFFECTIVE DATE

The provision is effective for property placed in service after December 31, 2007. 


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69For these purposes, related persons is defined in Sec. 465(b)(3)(C). 70Sec. 168(j)(4)(A). 71Sec. 168(j)(4)(C). 

7. Accelerated depreciation for business property on Indian reservations (Sec. 327 of the bill and Sec. 168 of the Code) 

PRESENT LAW

With respect to certain property used in connection with the conduct of a trade or business within an Indian reservation, depreciation deductions under section 168(j) are determined using the following recovery periods: 

Years 

3-year property ....................................................................................................... 2 

5-year property ....................................................................................................... 3 

7-year property ....................................................................................................... 4 

10-year property ..................................................................................................... 6 

15-year property ..................................................................................................... 9 

20-year property ..................................................................................................... 12 

Nonresidential real property ................................................................................. 22 

‘‘Qualified Indian reservation property’’ eligible for accelerated 

depreciation includes property described in the table above which 

is: (1) used by the taxpayer predominantly in the active conduct of 

a trade or business within an Indian reservation; (2) not used or 

located outside the reservation on a regular basis; (3) not acquired 

(directly or indirectly) by the taxpayer from a person who is related 

to the taxpayer; 69 and (4) is not property placed in service for purposes of conducting gaming activities.70 Certain ‘‘qualified infrastructure property’’ may be eligible for the accelerated depreciation 

even if located outside an Indian reservation, provided that the 

purpose of such property is to connect with qualified infrastructure 

property located within the reservation (e.g., roads, power lines, 

water systems, railroad spurs, and communications facilities).71

An ‘‘Indian reservation’’ means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 or section 4(10) of the 

Indian Child Welfare Act of 1978. For purposes of the preceding 

sentence, section 3(d) is applied by treating ‘‘former Indian reservations in Oklahoma’’ as including only lands that are (1) within the 

jurisdictional area of an Oklahoma Indian tribe as determined by 

the Secretary of the Interior, and (2) recognized by such Secretary 

as an area eligible for trust land status under 25 CFR part 151 (as 

in effect on August 5, 1997). 

The depreciation deduction allowed for regular tax purposes is 

also allowed for purposes of the alternative minimum tax. The accelerated depreciation for Indian reservations is available with respect to property placed in service on or after January 1, 1994, and 

before January 1, 2008. 

REASONS FOR CHANGE

The Committee believes that extending the depreciation incentive will encourage economic development within Indian reservations and expand employment opportunities on such reservations. 


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72Sec. 162. 73Sec. 198. 74 418 U.S. 1 (1974). 

EXPLANATION OF PROVISION

The provision extends for one year the present-law incentive relating to depreciation of qualified Indian reservation property (to 

apply to property placed in service through December 31, 2008). 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2007. 

8. Extend expensing of brownfields remediation costs (sec. 328 of 

the bill and sec. 198 of the Code) 

PRESENT LAW

Present law allows a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business.72

Treasury regulations provide that the cost of incidental repairs 

that neither materially add to the value of property nor appreciably 

prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted currently as a business expense. Section 

263(a)(1) limits the scope of section 162 by prohibiting a current deduction for certain capital expenditures. Treasury regulations define ‘‘capital expenditures’’ as amounts paid or incurred to materially add to the value, or substantially prolong the useful life, of 

property owned by the taxpayer, or to adapt property to a new or 

different use. Amounts paid for repairs and maintenance do not 

constitute capital expenditures. The determination of whether an 

expense is deductible or capitalizable is based on the facts and circumstances of each case. 

Taxpayers may elect to treat certain environmental remediation 

expenditures that would otherwise be chargeable to capital account 

as deductible in the year paid or incurred.73 The deduction applies 

for both regular and alternative minimum tax purposes. The expenditure must be incurred in connection with the abatement or 

control of hazardous substances at a qualified contaminated site. In 

general, any expenditure for the acquisition of depreciable property 

used in connection with the abatement or control of hazardous substances at a qualified contaminated site does not constitute a qualified environmental remediation expenditure. However, depreciation 

deductions allowable for such property, which would otherwise be 

allocated to the site under the principles set forth in Commissioner 

v. Idaho Power Co.74 and section 263A, are treated as qualified environmental remediation expenditures. 

A ‘‘qualified contaminated site’’ (a so-called ‘‘brownfield’’) generally is any property that is held for use in a trade or business, 

for the production of income, or as inventory and is certified by the 

appropriate State environmental agency to be an area at or on 

which there has been a release (or threat of release) or disposal of 

a hazardous substance. Both urban and rural property may qualify. 

However, sites that are identified on the national priorities list 

under the Comprehensive Environmental Response, Compensation, 


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75Pub. L. No. 96–510 (1980). 76Pub. L. No. 109–135 (2005). 77Pub. L. No. 109–432 (2006). 

and Liability Act of 1980 (‘‘CERCLA’’) 75 cannot qualify as targeted 

areas. Hazardous substances generally are defined by reference to 

sections 101(14) and 102 of CERCLA, subject to additional limitations applicable to asbestos and similar substances within buildings, certain naturally occurring substances such as radon, and certain other substances released into drinking water supplies due to 

deterioration through ordinary use, as well as petroleum products 

defined in section 4612(a)(3) of the Code. 

In the case of property to which a qualified environmental remediation expenditure otherwise would have been capitalized, any deduction allowed under section 198 is treated as a depreciation deduction and the property is treated as section 1245 property. Thus, 

deductions for qualified environmental remediation expenditures 

are subject to recapture as ordinary income upon a sale or other 

disposition of the property. In addition, sections 280B (demolition 

of structures) and 468 (special rules for mining and solid waste reclamation and closing costs) do not apply to amounts that are treated as expenses under this provision. 

Eligible expenditures are those paid or incurred before January 

1, 2008. 

The Gulf Opportunity Zone Act of 2005 76 added section 1400N(g) 

to the Code, which extended for two years (through December 31, 

2007) the expensing of environmental remediation expenditures 

paid or incurred to abate contamination at qualified contaminated 

sites located in the Gulf Opportunity Zone. As a result of the extension of section 198 contained in the Tax Relief and Health Care Act 

of 2006,77 eligible expenditures covered under both section 

1400N(g) and section 198 must be paid or incurred prior to January 1, 2008. 

REASONS FOR CHANGE

The Committee believes that the expensing of brownfields remediation costs promotes the goal of environmental remediation and 

promotes new investment and employment opportunities by lowering the net capital cost of a development project. Therefore, the 

Committee believes it is appropriate to extend the present-law provision permitting the expensing of these environmental remediation costs. 

EXPLANATION OF PROVISION

The provision extends the present law expensing provision under 

section 198 for one year through December 31, 2008. 

EFFECTIVE DATE

The provision is effective for expenditures paid or incurred after 

December 31, 2007. 


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78Qualifying production property generally includes any tangible personal property, computer 

software, and sound recordings. 79Qualified film includes any motion picture film or videotape (including live or delayed television programming, but not including certain sexually explicit productions) if 50 percent or 

more of the total compensation relating to the production of the film (including compensation 

in the form of residuals and participations) constitutes compensation for services performed in 

the United States by actors, production personnel, directors, and producers. 

9. Extension of deduction for income attributable to domestic production activities in Puerto Rico (sec. 329 of the bill and sec. 

199 of the Code) 

PRESENT LAW

In general 

Present law provides a deduction from taxable income (or, in the 

case of an individual, adjusted gross income) that is equal to a portion of the taxpayer’s qualified production activities income. For 

taxable years beginning after 2009, the deduction is nine percent 

of that income. For taxable years beginning in 2005 and 2006, the 

deduction is three percent of qualified production activities income 

and for taxable years beginning in 2007, 2008, and 2009, the deduction is six percent of qualified production activities income. For 

taxpayers subject to the 35-percent corporate income tax rate, the 

nine-percent deduction effectively reduces the corporate income tax 

rate to just under 32 percent on qualified production activities income. 

Qualified production activities income 

In general, qualified production activities income is equal to domestic production gross receipts (defined by section 199(c)(4)), reduced by the sum of: (1) the costs of goods sold that are allocable 

to those receipts and (2) other expenses, losses, or deductions which 

are properly allocable to those receipts. 

Domestic production gross receipts 

Domestic production gross receipts generally are gross receipts of 

a taxpayer that are derived from (1) any sale, exchange, or other 

disposition, or any lease, rental, or license, of qualifying production 

property 78 that was manufactured, produced, grown or extracted 

by the taxpayer in whole or in significant part within the United 

States; (2) any sale, exchange, or other disposition, or any lease, 

rental, or license, of qualified film 79 produced by the taxpayer; (3) 

any lease, rental, license, sale, exchange, or other disposition of 

electricity, natural gas, or potable water produced by the taxpayer 

in the United States; (4) construction of real property performed in 

the United States by a taxpayer in the ordinary course of a construction trade or business; or (5) engineering or architectural services performed in the United States for the construction of real 

property located in the United States. 

Wage limitation 

For taxable years beginning after May 17, 2006, the amount of 

the deduction for a taxable year is limited to 50 percent of the 

wages paid by the taxpayer, and properly allocable to domestic production gross receipts, during the calendar year that ends in such 


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80For purposes of the provision, ‘‘wages’’ include the sum of the amounts of wages as defined 

in section 3401(a) and elective deferrals that the taxpayer properly reports to the Social Security 

Administration with respect to the employment of employees of the taxpayer during the calendar year ending during the taxpayer’s taxable year. For taxable years beginning before May 

18, 2006, the limitation is based upon all wages paid by the taxpayer, rather than only wages 

properly allocable to domestic production gross receipts. 81Sec. 3401(a)(8)(C). 82Sec. 7701(a)(9). 83Sec. 199(d)(8)(A). 84Sec. 199(d)(8)(B). 85Sec. 511. 

taxable year.80 Wages paid to bona fide residents of Puerto Rico 

generally are not included in the wage limitation amount.81

Rules for Puerto Rico 

When used in the Code in a geographical sense, the term ‘‘United 

States’’ generally includes only the States and the District of Columbia.82 A special rule for determining domestic production gross 

receipts, however, provides that in the case of any taxpayer with 

gross receipts from sources within the Commonwealth of Puerto 

Rico, the term ‘‘United States’’ includes the Commonwealth of 

Puerto Rico, but only if all of the taxpayer’s gross receipts are taxable under the Federal income tax for individuals or corporations.83

In computing the 50-percent wage limitation, that taxpayer is permitted to take into account wages paid to bona fide residents of 

Puerto Rico for services performed in Puerto Rico.84

The special rules for Puerto Rico apply only with respect to the 

first two taxable years of a taxpayer beginning after December 31, 

2005 and before January 1, 2008. 

REASONS FOR CHANGE

The Committee believes that given the expiration of the Puerto 

Rico economic activity credit after 2005, it is appropriate to use 

other means to encourage investment in Puerto Rico. In particular, 

the Committee believes it is appropriate to treat a U.S. taxpayer’s 

manufacturing activities in Puerto Rico in a manner similar to the 

treatment of manufacturing activities in the United States. 

EXPLANATION OF PROVISION

The provision allows the special domestic production activities 

rules for Puerto Rico to apply for one additional taxable year of a 

taxpayer. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2007. 

10. Modify tax treatment of certain payments to controlling exempt 

organizations (sec. 330 of the bill and sec. 512 of the Code) 

PRESENT LAW

In general, organizations exempt from Federal income tax are 

subject to the unrelated business income tax on income derived 

from a trade or business regularly carried on by the organization 

that is not substantially related to the performance of the organization’s tax-exempt functions.85 In general, interest, rents, royalties, 


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86Sec. 512(b). 87Sec. 512(b)(13)(E). 

and annuities are excluded from the unrelated business income of 

tax-exempt organizations.86

Section 512(b)(13) provides special rules regarding income derived by an exempt organization from a controlled subsidiary. In 

general, section 512(b)(13) treats otherwise excluded rent, royalty, 

annuity, and interest income as unrelated business income if such 

income is received from a taxable or tax-exempt subsidiary that is 

50-percent controlled by the parent tax-exempt organization to the 

extent the payment reduces the net unrelated income (or increases 

any net unrelated loss) of the controlled entity (determined as if 

the entity were tax exempt). However, a special rule enacted as 

part of the Pension Protection Act of 2006 provides that, for payments made pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such a contract on substantially similar terms), the general rule of section 512(b)(13) applies only to the 

portion of payments received or accrued (before January 1, 2008) 

in a taxable year that exceeds the amount of the payment that 

would have been paid or accrued if the amount of such payment 

had been determined under the principles of section 482 (i.e., at 

arm’s length).87 In addition, the special rule imposes a 20-percent 

penalty on the larger of such excess determined without regard to 

any amendment or supplement to a return of tax, or such excess 

determined with regard to all such amendments and supplements. 

In the case of a stock subsidiary, ‘‘control’’ means ownership by 

vote or value of more than 50 percent of the stock. In the case of 

a partnership or other entity, ‘‘control’’ means ownership of more 

than 50 percent of the profits, capital, or beneficial interests. In addition, present law applies the constructive ownership rules of section 318 for purposes of section 512(b)(13). Thus, a parent exempt 

organization is deemed to control any subsidiary in which it holds 

more than 50 percent of the voting power or value, directly (as in 

the case of a first-tier subsidiary) or indirectly (as in the case of 

a second-tier subsidiary). 

REASONS FOR CHANGE

In enacting the special rule described above, the Pension Protection Act also required that, not later than January 1, 2009, the 

Secretary shall submit a report to the Committee on Finance of the 

Senate and the Committee on Ways and Means of the House of 

Representatives a report on the effectiveness of the Internal Revenue Service in administering the special rule and on the extent to 

which payments by controlled entities to the controlling exempt organization meet the requirements of section 482 of the Code. Such 

report is required to include the results of any audit of any controlling organization or controlled entity and recommendations relating 

to the tax treatment of payments from controlled entities to controlling organizations. Considering that the report is not due until 

January 1, 2009, the Committee believes it is appropriate to extend 

the special rule for one year. 


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88Sec. 103. 89Sec. 149(e). 90Sec. 103(a) and (b)(2). 91Sec. 148. 

EXPLANATION OF PROVISION

The provision extends the special rule of the Pension Protection 

Act to payments received or accrued before January 1, 2009. Accordingly, under the provision, payments of rent, royalties, annuities, or interest income by a controlled organization to a controlling organization pursuant to a binding written contract in effect 

on August 17, 2006 (or renewal of such a contract on substantially 

similar terms), may be includible in the unrelated business taxable 

income of the controlling organization only to the extent the payment exceeds the amount of the payment determined under the 

principles of section 482 (i.e., at arm’s length). Any such excess is 

subject to a 20-percent penalty on the larger of such excess determined without regard to any amendment or supplement to a return 

of tax, or such excess determined with regard to all such amendments and supplements. 

EFFECTIVE DATE

The provision is effective for payments received or accrued after 

December 31, 2007. 

11. Extend and modify qualified zone academy bonds (sec. 331 of 

the bill and sec. 1397E of the Code) 

PRESENT LAW

Tax-exempt bonds 

Interest on State and local governmental bonds generally is excluded from gross income for Federal income tax purposes if the 

proceeds of the bonds are used to finance direct activities of these 

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

governmental units. Activities that can be financed with these taxexempt bonds include the financing of public schools.88 An issuer 

must file with the IRS certain information about the bonds issued 

by them in order for that bond issue to be tax-exempt.89 Generally, 

this information return is required to be filed no later than the 

15th day of the second month after the close of the calendar quarter in which the bonds were issued. 

The tax exemption for State and local bonds does not apply to 

any arbitrage bond.90 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.91 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. 


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92Sec. 1397E. 93Pub. L. 109–432. 

Qualified zone academy bonds 

As an alternative to traditional tax-exempt bonds, State and 

local governments were given the authority to issue ‘‘qualified zone 

academy bonds.’’ 92 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 each year 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. 

Financial institutions that hold qualified zone academy bonds are 

entitled to a nonrefundable tax credit in an amount equal to a credit rate multiplied by the face amount of the bond. A taxpayer holding a qualified zone academy bond on the credit allowance date is 

entitled to a credit. The credit is includable in gross income (as if 

it were a taxable interest payment on the bond), and may be 

claimed against regular income tax and alternative minimum tax 

liability. 

The Treasury Department sets the credit rate at a rate estimated 

to allow issuance of qualified zone academy bonds without discount 

and without interest cost to the issuer. The maximum term of the 

bond is determined by the Treasury Department, so that the 

present value of the obligation to repay the bond was 50 percent 

of the face value of the bond. 

‘‘Qualified zone academy bonds’’ 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. 

A school is a ‘‘qualified zone academy’’ if (1) the school is a public 

school that provides education and training below the college level, 

(2) the school operates a special academic program in cooperation 

with businesses to enhance the academic curriculum and increase 

graduation and employment rates, and (3) either (a) the school is 

located in an empowerment zone or enterprise community designated under the Code, or (b) it is reasonably expected that at 

least 35 percent of the students at the school will be eligible for 

free or reduced-cost lunches under the school lunch program established under the National School Lunch Act. 

The Tax Relief and Health Care Act of 2006 (‘‘TRHCA’’) 93 imposed the arbitrage requirements that generally apply to interestbearing tax-exempt bonds to qualified zone academy bonds. In addition, an issuer of qualified zone academy bonds 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 conVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00075 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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tinue to qualify as qualified zone academy bonds 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 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. Issuers of qualified zone academy 

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

REASONS FOR CHANGE

The Committee believes that tax-credit bonds provide an effective 

means of subsidizing rehabilitation and repairs to public school facilities. Thus, the Committee believes that the extension of authority to issue qualified zone academy bonds is appropriate in light of 

the educational needs that exist today. However, the Committee 

also recognizes that modifications to the present law qualified zone 

academy bond program may be necessary to increase the marketability of such bonds. These modifications also will promote additional investment in the beneficiary public schools. 

EXPLANATION OF PROVISION

The provision authorizes issuance of up to $400 million of qualified zone academy bonds annually through 2008. 

The provision also modifies the spending and arbitrage rules that 

apply to qualified zone academy bonds. The provision modifies the 

spending rule by requiring 95 percent of available project proceeds 

to be spent on qualified zone academy property. In addition, the 

provision modifies the arbitrage rules by providing that available 

project proceeds invested during the five-year period beginning on 

the date of issue are not subject to the arbitrage restrictions (i.e., 

yield restriction and rebate requirements). The provision defines 

‘‘available project proceeds’’ as proceeds from the sale of an issue 

of qualified zone academy bonds, less issuance costs (not to exceed 

two percent) and any investment earnings on such proceeds. Thus, 

available project proceeds invested during the five-year spending 

period may be invested at unrestricted yields, but the earnings on 

such investments must be spent on qualified zone academy property. 

The provision also provides that 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 qualified zone academy 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 qualified zone academy bonds 

are issued. 


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94 However, the wage credit is not available for wages paid in connection with certain business 

activities described in section 144(c)(6)(B) or certain farming activities. In addition, wages are 

not eligible for the wage credit if paid to (1) a person who owns more than five percent of the 

stock (or capital or profits interests) of the employer, (2) certain relatives of the employer, or 

(3) if the employer is a corporation or partnership, certain relatives of a person who owns more 

than 50 percent of the business. 

EFFECTIVE DATE

The provision to extend authority to issue qualified zone academy bonds through 2008 applies to bonds issued after December 

31, 2007. The provision to modify the spending and arbitrage rules 

applies to bonds issued after the date of enactment. 

12. Tax incentives for investment in the District of Columbia (sec. 

332 of the bill and secs. 1400, 1400A, 1400B, and 1400C of the 

Code) 

PRESENT LAW

In general 

The Taxpayer Relief Act of 1997 designated certain economically 

depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone (the ‘‘D.C. Zone’’), within which 

businesses and individual residents are eligible for special tax incentives. The census tracts that compose the D.C. Zone are (1) all 

census tracts that presently are part of the D.C. enterprise community designated under section 1391 (i.e., portions of Anacostia, Mt. 

Pleasant, Chinatown, and the easternmost part of the District), and 

(2) all additional census tracts within the District of Columbia 

where the poverty rate is not less than 20 percent. The D.C. Zone 

designation remains in effect for the period from January 1, 1998, 

through December 31, 2007. In general, the tax incentives available in connection with the D.C. Zone are a 20-percent wage credit, 

an additional $35,000 of section 179 expensing for qualified zone 

property, expanded tax-exempt financing for certain zone facilities, 

and a zero-percent capital gains rate from the sale of certain qualified D.C. zone assets. 

Wage credit 

A 20-percent wage credit is available to employers for the first 

$15,000 of qualified wages paid to each employee (i.e., a maximum 

credit of $3,000 with respect to each qualified employee) who (1) is 

a resident of the D.C. Zone, and (2) performs substantially all employment services within the D.C. Zone in a trade or business of 

the employer. 

Wages paid to a qualified employee who earns more than $15,000 

are eligible for the wage credit (although only the first $15,000 of 

wages is eligible for the credit). The wage credit is available with 

respect to a qualified full-time or part-time employee (employed for 

at least 90 days), regardless of the number of other employees who 

work for the employer. In general, any taxable business carrying 

out activities in the D.C. Zone may claim the wage credit, regardless of whether the employer meets the definition of a ‘‘D.C. Zone 

business.’’ 94


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95Sec. 280C(a). 96Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2). 97Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2). 98Sec. 38(c)(2). 99Sec. 1397A. 100Sec. 1397D. 101Sec. 1400A. 102Sec. 1400B. 

An employer’s deduction otherwise allowed for wages paid is reduced by the amount of wage credit claimed for that taxable year.95

Wages are not to be taken into account for purposes of the wage 

credit if taken into account in determining the employer’s work opportunity tax credit under section 51 or the welfare-to-work credit 

under section 51A.96 In addition, the $15,000 cap is reduced by any 

wages taken into account in computing the work opportunity tax 

credit or the welfare-to-work credit.97 The wage credit may be used 

to offset up to 25 percent of alternative minimum tax liability.98

Section 179 expensing 

In general, a D.C. Zone business is allowed an additional $35,000 

of section 179 expensing for qualifying property placed in service 

by a D.C. Zone business.99 The section 179 expensing allowed to a 

taxpayer is phased out by the amount by which 50 percent of the 

cost of qualified zone property placed in service during the year by 

the taxpayer exceeds $200,000 ($500,000 for taxable years beginning after 2006 and before 2011). The term ‘‘qualified zone property’’ is defined as depreciable tangible property (including buildings), provided that (1) the property is acquired by the taxpayer 

(from an unrelated party) after the designation took effect, (2) the 

original use of the property in the D.C. Zone commences with the 

taxpayer, and (3) substantially all of the use of the property is in 

the D.C. Zone in the active conduct of a trade or business by the 

taxpayer.100 Special rules are provided in the case of property that 

is substantially renovated by the taxpayer. 

Tax-exempt financing 

A qualified D.C. Zone business is permitted to borrow proceeds 

from tax-exempt qualified enterprise zone facility bonds (as defined 

in section 1394) issued by the District of Columbia.101 Such bonds 

are subject to the District of Columbia’s annual private activity 

bond volume limitation. Generally, qualified enterprise zone facility 

bonds for the District of Columbia are bonds 95 percent or more 

of the net proceeds of which are used to finance certain facilities 

within the D.C. Zone. The aggregate face amount of all outstanding 

qualified enterprise zone facility bonds per qualified D.C. Zone 

business may not exceed $15 million and may be issued only while 

the D.C. Zone designation is in effect. 

Zero-percent capital gains 

A zero-percent capital gains rate applies to capital gains from the 

sale of certain qualified D.C. Zone assets held for more than five 

years.102 In general, a qualified ‘‘D.C. Zone asset’’ means stock or 

partnership interests held in, or tangible property held by, a D.C. 

Zone business. For purposes of the zero-percent capital gains rate, 

the D.C. Enterprise Zone is defined to include all census tracts 


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103 However, sole proprietorships and other taxpayers selling assets directly cannot claim the 

zero-percent rate on capital gain from the sale of any intangible property (i.e., the integrally 

related test does not apply). 104Sec. 1400C(i). 

within the District of Columbia where the poverty rate is not less 

than 10 percent. 

In general, gain eligible for the zero-percent tax rate means gain 

from the sale or exchange of a qualified D.C. Zone asset that is (1) 

a capital asset or property used in the trade or business as defined 

in section 1231(b), and (2) acquired before January 1, 2008. Gain 

that is attributable to real property, or to intangible assets, qualifies for the zero-percent rate, provided that such real property or 

intangible asset is an integral part of a qualified D.C. Zone business.103 However, no gain attributable to periods before January 1, 

1998, and after December 31, 2012, is qualified capital gain. 

District of Columbia homebuyer tax credit 

First-time homebuyers of a principal residence in the District of 

Columbia are eligible for a nonrefundable tax credit of up to $5,000 

of the amount of the purchase price. The $5,000 maximum credit 

applies both to individuals and married couples. Married individuals filing separately can claim a maximum credit of $2,500 each. 

The credit phases out for individual taxpayers with adjusted gross 

income between $70,000 and $90,000 ($110,000-$130,000 for joint 

filers). For purposes of eligibility, ‘‘first-time homebuyer’’ means 

any individual if such individual did not have a present ownership 

interest in a principal residence in the District of Columbia in the 

one-year period ending on the date of the purchase of the residence 

to which the credit applies. The credit expires for purchases after 

December 31, 2007.104

REASONS FOR CHANGE

The Committee believes that it continues to be important to provide tax incentives to individuals and businesses in the D.C. Zone 

and that it is appropriate to extend such incentives for an additional year. 

EXPLANATION OF PROVISION

The provision extends the designation of the D.C. Zone for one 

year (through December 31, 2008), thus extending the wage credit 

and section 179 expensing for one year. 

The provision extends the tax-exempt financing authority for one 

year, applying to bonds issued during the period beginning on January 1, 1998, and ending on December 31, 2008. 

The provision extends the zero-percent capital gains rate applicable to capital gains from the sale of certain qualified D.C. Zone assets for one year. 

The provision extends the first-time homebuyer credit for one 

year, through December 31, 2008. 

EFFECTIVE DATE

The provision is effective for periods beginning after, bonds 

issued after, acquisitions after, and property purchased after December 31, 2007. 


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105Secs. 27(b), 936. 106Domestic corporations with activities in Puerto Rico are eligible for the section 30A economic activity credit. That credit is calculated under the rules set forth in section 936. 107 Under phase-out rules described below, investment only in Guam, American Samoa, and 

the Northern Mariana Islands (and not in other possessions) now may give rise to income eligible for the section 936 credit. 108Sec. 936(c). 

13. Extension of economic development credit for American Samoa 

(sec. 333 of the bill and sec. 119 of Pub. L. No. 109–432) 

PRESENT AND PRIOR LAW

In general 

For taxable years beginning before January 1, 2006, certain domestic corporations with business operations in the U.S. possessions were eligible for the possession tax credit.105 This credit offset the U.S. tax imposed on certain income related to operations in 

the U.S. possessions.106 For purposes of the credit, possessions included, among other places, American Samoa. Subject to certain 

limitations described below, the amount of the possession tax credit 

allowed to any domestic corporation equaled the portion of that corporation’s U.S. tax that was attributable to the corporation’s nonU.S. source taxable income from (1) the active conduct of a trade 

or business within a U.S. possession, (2) the sale or exchange of 

substantially all of the assets that were used in such a trade or 

business, or (3) certain possessions investment.107 No deduction or 

foreign tax credit was allowed for any possessions or foreign tax 

paid or accrued with respect to taxable income that was taken into 

account in computing the credit under section 936.108 The section 

936 credit generally expired for taxable years beginning after December 31, 2005, but a special credit, described below, was allowed 

with respect to American Samoa. 

To qualify for the possession tax credit for a taxable year, a domestic corporation was required to satisfy two conditions. First, the 

corporation was required to derive at least 80 percent of its gross 

income for the three-year period immediately preceding the close of 

the taxable year from sources within a possession. Second, the corporation was required to derive at least 75 percent of its gross income for that same period from the active conduct of a possession 

business. 

The possession tax credit was available only to a corporation that 

qualified as an existing credit claimant. The determination of 

whether a corporation was an existing credit claimant was made 

separately for each possession. The possession tax credit was computed separately for each possession with respect to which the corporation was an existing credit claimant, and the credit was subject 

to either an economic activity-based limitation or an income-based 

limitation. 

Qualification as existing credit claimant 

A corporation was an existing credit claimant with respect to a 

possession if (1) the corporation was engaged in the active conduct 

of a trade or business within the possession on October 13, 1995, 

and (2) the corporation elected the benefits of the possession tax 

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109 A corporation will qualify as an existing credit claimant if it acquired all the assets of a 

trade or business of a corporation that (1) actively conducted that trade or business in a possession on October 13, 1995, and (2) had elected the benefits of the possession tax credit in an election in effect for the taxable year that included October 13, 1995. 

tober 13, 1995.109 A corporation that added a substantial new line 

of business (other than in a qualifying acquisition of all the assets 

of a trade or business of an existing credit claimant) ceased to be 

an existing credit claimant as of the close of the taxable year ending before the date on which that new line of business was added. 

Economic activity-based limit 

Under the economic activity-based limit, the amount of the credit 

determined under the rules described above was not permitted to 

exceed an amount equal to the sum of (1) 60 percent of the taxpayer’s qualified possession wages and allocable employee fringe 

benefit expenses, (2) 15 percent of depreciation allowances with respect to short-life qualified tangible property, plus 40 percent of depreciation allowances with respect to medium-life qualified tangible 

property, plus 65 percent of depreciation allowances with respect to 

long-life qualified tangible property, and (3) in certain cases, a portion of the taxpayer’s possession income taxes. 

Income-based limit 

As an alternative to the economic activity-based limit, a taxpayer 

was permitted to elect to apply a limit equal to the applicable percentage of the credit that otherwise would have been allowable 

with respect to possession business income; in taxable years beginning in 1998 and subsequent years, the applicable percentage was 

40 percent. 

Repeal and phase out 

In 1996, the section 936 credit was repealed for new claimants 

for taxable years beginning after 1995 and was phased out for existing credit claimants over a period including taxable years beginning before 2006. The amount of the available credit during the 

phase-out period generally was reduced by special limitation rules. 

These phase-out period limitation rules did not apply to the credit 

available to existing credit claimants for income from activities in 

Guam, American Samoa, and the Northern Mariana Islands. As described previously, the section 936 credit generally was repealed for 

all possessions, including Guam, American Samoa, and the Northern Mariana Islands, for all taxable years beginning after 2005, but 

a modified credit was allowed for activities in American Samoa. 

American Samoa economic development credit 

A domestic corporation that was an existing credit claimant with 

respect to American Samoa and that elected the application of section 936 for its last taxable year beginning before January 1, 2006 

is allowed a credit based on the economic activity-based limitation 

rules described above. The credit is not part of the Code but is computed based on the rules secs. 30A and 936. The credit is allowed 

for the first two taxable years of a corporation that first two taxable years of a corporation that begin after December 31, 2005, and 

before January 1, 2008. 


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110Sec. 170(e)(3). 111Sec. 170(b)(2). 

The amount of the credit allowed to a qualifying domestic corporation under the provision is equal to the sum of the amounts 

used in computing the corporation’s economic activity-based limitation (described previously) with respect to American Samoa, except 

that no credit is allowed for the amount of any American Samoa 

income taxes. Thus, for any qualifying corporation the amount of 

the credit equals the sum of (1) 60 percent of the corporation’s 

qualified American Samoa wages and allocable employee fringe 

benefit expenses and (2) 15 percent of the corporation’s depreciation allowances with respect to short-life qualified American Samoa 

tangible property, plus 40 percent of the corporation’s depreciation 

allowances with respect to medium-life qualified American Samoa 

tangible property, plus 65 percent of the corporation’s depreciation 

allowances with respect to long-life qualified American Samoa tangible property. 

The section 936(c) rule denying a credit or deduction for any possessions or foreign tax paid with respect to taxable income taken 

into account in computing the credit under section 936 does not 

apply with respect to the credit allowed by the provision. 

The credit is not available for taxable years beginning after December 31, 2007. 

REASONS FOR CHANGE

The Committee believes that it is important to encourage investment in American Samoa. With the expiration of the possession tax 

credit, the American Samoa economic development credit is an appropriate temporary provision while Congress considers long-term 

tax policy toward the U.S. possessions. 

EXPLANATION OF PROVISION

The provision allows the American Samoa economic development 

credit for one additional taxable year of a taxpayer. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2007. 

14. Extend the enhanced charitable deduction for contributions of 

food inventory (sec. 334 of the bill and sec. 170 of the Code) 

PRESENT LAW

General rules regarding contributions of food inventory 

Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis 

(typically, cost) in the inventory, or if less the fair market value of 

the inventory. 

For certain contributions of inventory, C corporations may claim 

an enhanced deduction equal to the lesser of (1) basis plus one-half 

of the item’s appreciation (i.e., basis plus one-half of fair market 

value in excess of basis) or (2) two times basis.110 In general, a C 

corporation’s charitable contribution deductions for a year may not 

exceed 10 percent of the corporation’s taxable income.111 To be eliVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00082 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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112Treas. Reg. sec. 1.170A–4A(c)(3). 113Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) (holding that the value of surplus 

bread inventory donated to charity was the full retail price of the bread rather than half the 

retail price, as the IRS asserted). 114Sec. 170(e)(3)(C). 

gible for the enhanced deduction, the contributed property generally must be inventory of the taxpayer, contributed to a charitable organization described in section 501(c)(3) (except for private 

nonoperating foundations), and the donee must (1) use the property 

consistent with the donee’s exempt purpose solely for the care of 

the ill, the needy, or infants, (2) not transfer the property in exchange for money, other property, or services, and (3) provide the 

taxpayer a written statement that the donee’s use of the property 

will be consistent with such requirements. In the case of contributed property subject to the Federal Food, Drug, and Cosmetic Act, 

the property must satisfy the applicable requirements of such Act 

on the date of transfer and for 180 days prior to the transfer. 

A donor making a charitable contribution of inventory must 

make a corresponding adjustment to the cost of goods sold by decreasing the cost of goods sold by the lesser of the fair market 

value of the property or the donor’s basis with respect to the inventory.112 Accordingly, if the allowable charitable deduction for inventory is the fair market value of the inventory, the donor reduces 

its cost of goods sold by such value, with the result that the difference between the fair market value and the donor’s basis may 

still be recovered by the donor other than as a charitable contribution. 

To use the enhanced deduction, the taxpayer must establish that 

the fair market value of the donated item exceeds basis. The valuation of food inventory has been the subject of disputes between 

taxpayers and the IRS.113

Temporary rule expanding and modifying the enhanced deduction 

for contributions of food inventory 

Under a temporary provision enacted as part of the Katrina 

Emergency Tax Relief Act of 2005 and extended by the Pension 

Protection Act of 2006, any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim the enhanced deduction for donations of food inventory.114 For taxpayers 

other than C corporations, the total deduction for donations of food 

inventory in a taxable year generally may not exceed 10 percent of 

the taxpayer’s net income for such taxable year from all sole proprietorships, S corporations, or partnerships (or other non C corporation) from which contributions of apparently wholesome food 

are made. For example, if a taxpayer is a sole proprietor, a shareholder in an S corporation, and a partner in a partnership, and 

each business makes charitable contributions of food inventory, the 

taxpayer’s deduction for donations of food inventory is limited to 10 

percent of the taxpayer’s net income from the sole proprietorship 

and the taxpayer’s interests in the S corporation and partnership. 

However, if only the sole proprietorship and the S corporation 

made charitable contributions of food inventory, the taxpayer’s deduction would be limited to 10 percent of the net income from the 

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115The 10 percent limitation does not affect the application of the generally applicable percentage limitations. For example, if 10 percent of a sole proprietor’s net income from the proprietor’s trade or business was greater than 50 percent of the proprietor’s contribution base, the 

available deduction for the taxable year (with respect to contributions to public charities) would 

be 50 percent of the proprietor’s contribution base. Consistent with present law, such contributions may be carried forward because they exceed the 50 percent limitation. Contributions of 

food inventory by a taxpayer that is not a C corporation that exceed the 10 percent limitation 

but not the 50 percent limitation could not be carried forward. 116Sec. 170(e)(3). 117Sec. 170(b)(2). 

terest in the S corporation, but not the taxpayer’s interest in the 

partnership.115

Under the temporary provision, the enhanced deduction for food 

is available only for food that qualifies as ‘‘apparently wholesome 

food.’’ ‘‘Apparently wholesome food’’ is defined as food intended for 

human consumption that meets all quality and labeling standards 

imposed by Federal, State, and local laws and regulations even 

though the food may not be readily marketable due to appearance, 

age, freshness, grade, size, surplus, or other conditions. 

The temporary provision does not apply to contributions made 

after December 31, 2007. 

REASONS FOR CHANGE

The Committee believes that charitable organizations benefit 

from charitable contributions of food by non C corporations and 

that the enhanced deduction is a useful incentive for the making 

of such contributions. Accordingly, the Committee believes it is appropriate to extend the special rule for charitable contributions of 

food inventory for one year. 

EXPLANATION OF PROVISION

The provision extends the expansion of, and modifications to, the 

enhanced deduction for charitable contributions of food inventory to 

contributions made before January 1, 2009. 

EFFECTIVE DATE

The provision is effective for contributions made after December 

31, 2007. 

15. Extend the enhanced deduction for charitable contributions of 

book inventory (sec. 335 of the bill and sec. 170 of the Code) 

PRESENT LAW

Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis 

(typically, cost) in the inventory, or, if less, the fair market value 

of the inventory. 

In general, for certain contributions of inventory, C corporations 

may claim an enhanced deduction equal to the lesser of (1) basis 

plus one-half of the item’s appreciation (i.e., basis plus one-half of 

fair market value in excess of basis) or (2) two times basis.116 In 

general, a C corporation’s charitable contribution deductions for a 

year may not exceed 10 percent of the corporation’s taxable income.117 To be eligible for the enhanced deduction, the contributed 

property generally must be inventory of the taxpayer contributed 

to a charitable organization described in section 501(c)(3) (except 


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118Treas. Reg. sec. 1.170A–4A(c)(3). 

for private nonoperating foundations), and the donee must (1) use 

the property consistent with the donee’s exempt purpose solely for 

the care of the ill, the needy, or infants, (2) not transfer the property in exchange for money, other property, or services, and (3) provide the taxpayer a written statement that the donee’s use of the 

property will be consistent with such requirements. In the case of 

contributed property subject to the Federal Food, Drug, and Cosmetic Act, the property must satisfy the applicable requirements of 

such Act on the date of transfer and for 180 days prior to the transfer. 

A donor making a charitable contribution of inventory must 

make a corresponding adjustment to the cost of goods sold by decreasing the cost of goods sold by the lesser of the fair market 

value of the property or the donor’s basis with respect to the inventory.118 Accordingly, if the allowable charitable deduction for inventory is the fair market value of the inventory, the donor reduces 

its cost of goods sold by such value, with the result that the difference between the fair market value and the donor’s basis may 

still be recovered by the donor other than as a charitable contribution. 

To use the enhanced deduction, the taxpayer must establish that 

the fair market value of the donated item exceeds basis. 

The Katrina Emergency Tax Relief Act of 2005 expanded the 

generally applicable enhanced deduction for C corporations to certain qualified book contributions made after August 28, 2005, and 

before January 1, 2006. The Pension Protection Act of 2006 extended such deduction for qualified book contributions to contributions made before January 1, 2008. A qualified book contribution 

means a charitable contribution of books to a public school that 

provides elementary education or secondary education (kindergarten through grade 12) and that is an educational organization 

that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The enhanced deduction for qualified book contributions is 

not allowed unless the donee organization certifies in writing that 

the contributed books are suitable, in terms of currency, content, 

and quantity, for use in the donee’s educational programs and that 

the donee will use the books in such educational programs. The 

donee also must make the certifications required for the generally 

applicable enhanced deduction, i.e., the donee will (1) use the property consistent with the donee’s exempt purpose solely for the care 

of the ill, the needy, or infants, (2) not transfer the property in exchange for money, other property, or services, and (3) provide the 

taxpayer a written statement that the donee’s use of the property 

will be consistent with such requirements. 

REASONS FOR CHANGE

The Committee believes that public schools benefit from charitable contributions of book inventory and that the enhanced deduction is a useful incentive for the making of such contributions. Accordingly, the Committee believes it is appropriate to extend the 


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119Sec. 170(e)(1). 120Secs. 170(e)(4) and 170(e)(6). 121 If the taxpayer constructed the property and reacquired such property, the contribution 

must be within three years of the date the original construction was substantially completed. 

Sec. 170(e)(6)(D)(i). 122This requirement does not apply if the property was reacquired by the manufacturer and 

contributed. Sec. 170(e)(6)(D)(ii). 

enhanced deduction for charitable contributions of book inventory 

to public schools for one year. 

EXPLANATION OF PROVISION

The provision extends the enhanced deduction for contributions 

of book inventory to contributions made before January 1, 2009. 

EFFECTIVE DATE

The provision is effective for contributions made after December 

31, 2007. 

16. Extend the enhanced charitable deduction for computer technology and equipment (sec. 336 of the bill and sec. 170 of the 

Code) 

PRESENT LAW

In the case of a charitable contribution of inventory or other ordinary-income or short-term capital gain property, the amount of the 

charitable deduction generally is limited to the taxpayer’s basis in 

the property. In the case of a charitable contribution of tangible 

personal property, the deduction is limited to the taxpayer’s basis 

in such property if the use by the recipient charitable organization 

is unrelated to the organization’s tax-exempt purpose. In cases involving contributions to a private foundation (other than certain 

private operating foundations), the amount of the deduction is limited to the taxpayer’s basis in the property.119

Under present law, a taxpayer’s deduction for charitable contributions of computer technology and equipment generally is limited to the taxpayer’s basis (typically, cost) in the property. However, certain corporations may claim a deduction in excess of basis 

for a ‘‘qualified computer contribution.’’ 120 This enhanced deduction 

is equal to the lesser of (1) basis plus one-half of the item’s appreciation (i.e., basis plus one half of fair market value in excess of 

basis) or (2) two times basis. The enhanced deduction for qualified 

computer contributions expires for any contribution made during 

any taxable year beginning after December 31, 2007. 

A qualified computer contribution means a charitable contribution of any computer technology or equipment, which meets standards of functionality and suitability as established by the Secretary 

of the Treasury. The contribution must be to certain educational organizations or public libraries and made not later than three years 

after the taxpayer acquired the property or, if the taxpayer constructed or assembled the property, not later than the date construction or assembly of the property is substantially completed.121

The original use of the property must be by the donor or the 

donee,122 and in the case of the donee, must be used substantially 

for educational purposes related to the function or purpose of the 

donee. The property must fit productively into the donee’s education plan. The donee may not transfer the property in exchange 


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123Sec. 170(e)(6)(C). 124Sec. 1366(a)(1)(A). 125Sec. 1367(a)(2)(B). 

for money, other property, or services, except for shipping, installation, and transfer costs. To determine whether property is constructed or assembled by the taxpayer, the rules applicable to 

qualified research contributions apply. Contributions may be made 

to private foundations under certain conditions.123

REASONS FOR CHANGE

The Committee believes that public libraries and educational organizations continue to benefit from corporate contributions of computer technology and equipment and that it is appropriate to extend the enhanced deduction for such contributions for one year. 

EXPLANATION OF PROVISION

The provision extends the enhanced deduction for computer technology and equipment for one year to apply to contributions made 

during any taxable year beginning after December 31, 2007, and 

before January 1, 2009. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2007. 

17. Basis adjustment to stock of S corporation contributing property (sec. 337 of the bill and secs. 1366 and 1367 of the Code) 

PRESENT LAW

Under present law, if an S corporation contributes money or 

other property to a charity, each shareholder takes into account the 

shareholder’s pro rata share of the contribution in determining its 

own income tax liability.124 A shareholder of an S corporation reduces the basis in the stock of the S corporation by the amount of 

the charitable contribution that flows through to the shareholder.125

In the case of contributions made in taxable years beginning 

after December 31, 2005, and before January 1, 2008, the amount 

of a shareholder’s basis reduction in the stock of an S corporation 

by reason of a charitable contribution made by the corporation is 

equal to the shareholder’s pro rata share of the adjusted basis of 

the contributed property. For contributions made in taxable years 

beginning after December 31, 2008, the reduction in basis is the 

fair market value of the contributed property. 

REASONS FOR CHANGE

The Committee believes that the present-law treatment of contributions of property by S corporations is appropriate and should 

be extended. 

EXPLANATION OF PROVISION

The bill extends the rule relating to the basis reduction on account of charitable contributions of property for one year to contributions made in taxable years beginning before January 1, 2009. 


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The bill also makes a technical correction to the present-law rule 

limiting the amount of losses and deductions which a shareholder 

of an S corporation may take into account in any taxable year to 

the shareholder’s adjusted basis in his stock and indebtedness of 

the corporation. The technical correction provides that this limitation does not apply to a contribution of appreciated property to the 

extent the shareholder’s pro rata share of the contribution exceeds 

the shareholder’s pro rata share of the adjusted basis of the property. 

EFFECTIVE DATE

The provision extending the basis reduction rule applies to contributions made in taxable years beginning after December 31, 

2007. 

The technical correction is effective as if included in the legislation enacting the basis reduction rule which is being extended by 

the bill. 

18. Extension of the Hurricane Katrina work opportunity tax credit 

(sec. 338 of the bill and sec. 51 of the Code) 

PRESENT LAW

Work opportunity tax credit 

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. There are nine targeted groups: (1) families receiving Temporary Assistance for 

Needy Families Program (‘‘TANF’’); (2) qualified veterans; (3) qualified ex-felons; (4) designated community residents; (5) vocational 

rehabilitation referrals; (6) qualified summer youth employees; (7) 

qualified food stamp recipients; (8) qualified supplemental security 

income (‘‘SSI’’) benefit recipients; and (9) qualified long-term family 

assistance recipients. 

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. 


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126The 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. 

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 firstyear 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.126 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 secondyear 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 firstyear wages plus 50 percent of the first $10,000 of qualified secondyear 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. 


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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 fifty-percent 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. 

Work Opportunity Tax Credit for Hurricane Katrina Employees 

In general 

The Katrina Emergency Tax Relief Act of 2005 provided that a 

Hurricane Katrina employee is treated as a member of a targeted 

group for purposes of the work opportunity tax credit. A Hurricane 

Katrina employee was: (1) an individual who on August 28, 2005, 

had a principal place of abode in the core disaster area and was 

hired during the two-year period beginning on such date for a position, the principal place of employment of which was located in the 

core disaster area; and (2) an individual who on August 28, 2005, 

had a principal place of abode in the core disaster area, who was 

displaced from such abode by reason of Hurricane Katrina and was 

hired during the period beginning on such date and ending on December 31, 2005 without regard to whether the new principal place 

of employment is in the core disaster area. 

The present-law WOTC certification requirement was waived for 

such individuals. In lieu of the certification requirement, an individual may have provided to the employer reasonable evidence that 

the individual is a Hurricane Katrina employee. 

The present-law rule that denies the credit with respect to wages 

of employees who had been previously employed by the employer 

was waived for the first hire of such employee as a Hurricane 

Katrina employee unless such employee was an employee of the 

employer on August 28, 2005. 

Definitions 

The term ‘‘Hurricane Katrina disaster area’’ means an area with 

respect to which a major disaster has been declared by the President before September 14, 2005 under section 401 of the Robert T. 

Stafford Disaster Relief and Emergency Assistance Act. 

The term ‘‘core disaster area’’ means that portion of the Hurricane Katrina disaster area determined by the President to warrant 

individual or individual and public assistance from the Federal 

Government under the Robert T. Stafford Disaster Relief and 

Emergency Assistance Act. 


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127The prior-law work opportunity tax credit for Katrina employees hired to a new place of 

employment outside of the core disaster area is not extended by this provision. 

REASONS FOR CHANGE

In light of the economic deprivation that continues to be suffered 

as a result of Hurricane Katrina, the Committee believes that the 

work opportunity tax credit should continue to be available as an 

incentive to provide employment opportunities in the core disaster 

area of Hurricane Katrina. 

EXPLANATION OF PROVISION

The provision extends through August 28, 2008, the work opportunity tax credit for certain Hurricane Katrina employees employed 

within the core disaster area. For this purpose, a Hurricane 

Katrina employee employed within the core disaster area is an individual who on August 28, 2005, had a principal place of abode 

in the core disaster area and is hired on or after August 28, 2005 

and before August 29, 2008 for a position, the principal place of 

employment of which was located in the core disaster area.127 The 

other special rules (e.g., certification and previous employment) for 

Hurricane Katrina employees apply. 

EFFECTIVE DATE

The provision is effective for individuals hired after August 28, 

2007, and before August 29, 2008. 

C. OTHER EXTENDERS

1. Disclosure of tax information to facilitate combined employment 

tax reporting (sec. 341 of the bill and sec. 6103 of the Code) 

PRESENT LAW

Traditionally, Federal tax forms are filed with the Federal government and State tax forms are filed with individual States. This 

necessitates duplication of items common to both returns. The Code 

permits the IRS to disclose taxpayer identity information and signatures to any agency, body, or commission of any State for the 

purpose of carrying out with such agency, body or commission a 

combined Federal and State employment tax reporting program approved by the Secretary. The Federal disclosure restrictions, safeguard requirements, and criminal penalties for unauthorized disclosure and unauthorized inspection do not apply with respect to 

disclosures or inspections made pursuant to this authority. 

The authority for this program expires December 31, 2007. 

Under section 6103(c), the IRS may disclose a taxpayer’s return 

or return information to such person or persons as the taxpayer 

may designate in a request for or consent to such disclosure. Pursuant to Treasury regulations, a taxpayer’s participation in a combined return filing program between the IRS and a State agency, 

body or commission constitutes a consent to the disclosure by the 

IRS to the State agency of taxpayer identity information, signature 

and items of common data contained on the return. No disclosures 

may be made under this authority unless there are provisions of 

State law protecting the confidentiality of such items of common 

data. 


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128Sec. 6103(i)(3)(B). 129See, Joint Committee on Taxation, Disclosure Report for Public Inspection Pursuant to Internal Revenue Code Section 6103(p)(3)(C) for Calendar Year 2002 (JCX 29–04) April 6, 2004. 130Sec. 6103(b)(11). For this purpose, ‘‘domestic terrorism’’ is defined in 18 U.S.C. sec. 2331(5) 

and ‘‘international terrorism’’ is defined in 18 U.S.C. sec. 2331(1). 

REASONS FOR CHANGE

Combined filing of Federal and State tax forms simplifies the filing obligations for taxpayers. As a result, the Committee believes 

it is appropriate to further extend the disclosure authority to facilitate combined employment tax reporting programs. 

EXPLANATION OF PROVISION

The provision extends for one year (through December 31, 2008) 

the authority for the combined employment tax reporting program. 

EFFECTIVE DATE

The provision applies to disclosures after December 31, 2007. 

2. Disclosure of tax return information relating to terrorist activity 

(secs. 342 and 343 of the bill and sec. 6103 of the Code) 

PRESENT LAW

In general 

Section 6103 provides that returns and return information may 

not be disclosed by the IRS, other Federal employees, State employees, and certain others having access to the information except as 

provided in the Internal Revenue Code. Section 6103 contains a 

number of exceptions to this general rule of nondisclosure that authorize disclosure in specifically identified circumstances (including 

nontax criminal investigations) when certain conditions are satisfied. 

Disclosure provisions relating to emergency circumstances 

The IRS is authorized to disclose return information to apprise 

Federal law enforcement agencies of danger of death or physical injury to an individual or to apprise Federal law enforcement agencies of imminent flight of an individual from Federal prosecution.128 This authority has been used in connection with the investigation of terrorist activity.129

Disclosure provisions relating specifically to terrorist activity 

Also among the disclosures permitted under the Code is disclosure of returns and return information for purposes of investigating 

terrorist incidents, threats, or activities, and for analyzing intelligence concerning terrorist incidents, threats, or activities. The 

term ‘‘terrorist incident, threat, or activity’’ is statutorily defined to 

mean an incident, threat, or activity involving an act of domestic 

terrorism or international terrorism.130

The term ‘‘international terrorism’’ means activities that involve 

violent acts or acts dangerous to human life that are a violation of 

the criminal laws of the United States or of any State, or that 

would be a criminal violation if committed within the jurisdiction 

of the United States or of any State; appear to be intended to intimidate or coerce a civilian population, to influence the policy of 


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a government by intimidation or coercion, or to affect the conduct 

of a government by mass destruction, assassination, or kidnapping; 

and occur primarily outside the territorial jurisdiction of the 

United States, or transcend national boundaries in terms of the 

means by which they are accomplished, the persons they appear intended to intimidate or coerce, or the locale in which their perpetrators operate or seek asylum. The term ‘‘domestic terrorism’’

means activities that involve acts dangerous to human life that are 

a violation of the criminal laws of the United States or of any 

State; appear to be intended to intimidate or coerce a civilian population, to influence the policy of a government by intimidation or 

coercion or to affect the conduct of a government by mass destruction, assassination, or kidnapping; and occur primarily within the 

territorial jurisdiction of the United States. 

In general, returns and taxpayer return information must be obtained pursuant to an ex parte court order. Return information, 

other than taxpayer return information, generally is available upon 

a written request meeting specific requirements. The IRS also is 

permitted to make limited disclosures of such information on its 

own initiative to the appropriate Federal law enforcement agency. 

No disclosures may be made under these provisions after December 31, 2007. The procedures applicable to these provisions are described in detail below. 

Disclosure of returns and return information—by ex parte court 

order 

Ex parte court orders sought by Federal law enforcement and 

Federal intelligence agencies 

The Code permits, pursuant to an ex parte court order, the disclosure of returns and return information (including taxpayer return information) to certain officers and employees of a Federal law 

enforcement agency or Federal intelligence agency. These officers 

and employees are required to be personally and directly engaged 

in any investigation of, response to, or analysis of intelligence and 

counterintelligence information concerning any terrorist incident, 

threat, or activity. These officers and employees are permitted to 

use this information solely for their use in the investigation, response, or analysis, and in any judicial, administrative, or grand 

jury proceeding, pertaining to any such terrorist incident, threat, or 

activity. 

The Attorney General, Deputy Attorney General, Associate Attorney General, an Assistant Attorney General, or a United States attorney, may authorize the application for the ex parte court order 

to be submitted to a Federal district court judge or magistrate. The 

Federal district court judge or magistrate would grant the order if 

based on the facts submitted he or she determines that: (1) there 

is reasonable cause to believe, based upon information believed to 

be reliable, that the return or return information may be relevant 

to a matter relating to such terrorist incident, threat, or activity; 

and (2) the return or return information is sought exclusively for 

the use in a Federal investigation, analysis, or proceeding concerning any terrorist incident, threat, or activity. 


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Special rule for ex parte court ordered disclosure initiated by 

the IRS 

If the Secretary of the Treasury (or his delegate) possesses returns or return information that may be related to a terrorist incident, threat, or activity, the Secretary may, on his own initiative, 

authorize an application for an ex parte court order to permit disclosure to Federal law enforcement. In order to grant the order, the 

Federal district court judge or magistrate must determine that 

there is reasonable cause to believe, based upon information believed to be reliable, that the return or return information may be 

relevant to a matter relating to such terrorist incident, threat, or 

activity. The information may be disclosed only to the extent necessary to apprise the appropriate Federal law enforcement agency 

responsible for investigating or responding to a terrorist incident, 

threat, or activity and for officers and employees of that agency to 

investigate or respond to such terrorist incident, threat, or activity. 

Further, use of the information is limited to use in a Federal investigation, analysis, or proceeding concerning a terrorist incident, 

threat, or activity. Because the Department of Justice represents 

the Secretary in Federal district court, the Secretary is permitted 

to disclose returns and return information to the Department of 

Justice as necessary and solely for the purpose of obtaining the 

special IRS ex parte court order. 

Disclosure of return information other than by ex parte court order 

Disclosure by the IRS without a request 

The Code permits the IRS to disclose return information, other 

than taxpayer return information, related to a terrorist incident, 

threat, or activity to the extent necessary to apprise the head of the 

appropriate Federal law enforcement agency responsible for investigating or responding to such terrorist incident, threat, or activity. 

The IRS on its own initiative and without a written request may 

make this disclosure. The head of the Federal law enforcement 

agency may disclose information to officers and employees of such 

agency to the extent necessary to investigate or respond to such 

terrorist incident, threat, or activity. A taxpayer’s identity is not 

treated as return information supplied by the taxpayer or his or 

her representative. 

Disclosure upon written request of a Federal law enforcement 

agency 

The Code permits the IRS to disclose return information, other 

than taxpayer return information, to officers and employees of Federal law enforcement upon a written request satisfying certain requirements. The request must: (1) be made by the head of the Federal law enforcement agency (or his delegate) involved in the response to or investigation of terrorist incidents, threats, or activities, and (2) set forth the specific reason or reasons why such disclosure may be relevant to a terrorist incident, threat, or activity. 

The information is to be disclosed to officers and employees of the 

Federal law enforcement agency who would be personally and directly involved in the response to or investigation of terrorist incidents, threats, or activities. The information is to be used by such 

officers and employees solely for such response or investigation. 


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The Code permits the redisclosure by a Federal law enforcement 

agency to officers and employees of State and local law enforcement 

personally and directly engaged in the response to or investigation 

of the terrorist incident, threat, or activity. The State or local law 

enforcement agency must be part of an investigative or response 

team with the Federal law enforcement agency for these disclosures to be made. 

Disclosure upon request from the Departments of Justice or 

the Treasury for intelligence analysis of terrorist activity 

Upon written request satisfying certain requirements discussed 

below, the IRS is to disclose return information (other than taxpayer return information) to officers and employees of the Department of Justice, Department of the Treasury, and other Federal intelligence agencies, who are personally and directly engaged in the 

collection or analysis of intelligence and counterintelligence or investigation concerning terrorist incidents, threats, or activities. Use 

of the information is limited to use by such officers and employees 

in such investigation, collection, or analysis. 

The written request is to set forth the specific reasons why the 

information to be disclosed is relevant to a terrorist incident, 

threat, or activity. The request is to be made by an individual who 

is: (1) an officer or employee of the Department of Justice or the 

Department of the Treasury, (2) appointed by the President with 

the advice and consent of the Senate, and (3) responsible for the 

collection, and analysis of intelligence and counterintelligence information concerning terrorist incidents, threats, or activities. The Director of the United States Secret Service also is an authorized requester. 

REASONS FOR CHANGE

It is important for the IRS to be able to share information with 

other law enforcement and intelligence agencies in the effort to 

combat terrorism. As a result, the Committee believes it is appropriate to extend the disclosure authority relating to terrorist activities for another year. 

EXPLANATION OF PROVISION

The provision extends for one year (through December 31, 2008) 

the disclosure authority relating to terrorist activities. 

EFFECTIVE DATE

The provision is effective for disclosures after December 31, 2007. 

3. Disclosure of return information to carry out income contingent 

repayment of student loans (sec. 344 of the bill and sec. 6103 

of the Code) 

PRESENT LAW

Present law prohibits the disclosure of returns and return information, except to the extent specifically authorized by the Code. An 

exception is provided for disclosure to the Department of Education 

(but not to contractors thereof) of a taxpayer’s filing status, adjusted gross income and identity information (i.e., name, mailing 

address, taxpayer identifying number) to establish an appropriate 


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131Sec. 7608(c). 

repayment amount for an applicable student loan. The disclosure 

authority for the income-contingent loan repayment program is 

scheduled to expire after December 31, 2007. 

The Department of Education utilizes contractors for the incomecontingent loan verification program. The specific disclosure exception for the program does not permit disclosure of return information to contractors. As a result, the Department of Education obtains return information from the Internal Revenue Service by taxpayer consent (under section 6103(c)), rather than under the specific exception for the income-contingent loan verification program 

(sec. 6103(l)(13)). 

REASONS FOR CHANGE

The Committee believes it is appropriate to extend for an additional year the disclosure authority relating to income contingent 

student loans. 

EXPLANATION OF PROVISION

The provision extends for one year (through December 31, 2008) 

the present law authority to disclose return information for purposes of the income-contingent loan repayment program. 

EFFECTIVE DATE

The provision applies to requests made after December 31, 2007. 

4. Extension of IRS authority to fund undercover operations (sec. 

345 of the bill and sec. 7608 of the Code) 

PRESENT LAW

IRS undercover operations are statutorily 131 exempt from the 

generally applicable restrictions controlling the use of Government 

funds (which generally provide that all receipts must be deposited 

in the general fund of the Treasury and all expenses be paid out 

of appropriated funds). In general, the Code permits the IRS to use 

proceeds from an undercover operation to pay additional expenses 

incurred in the undercover operation, through 2007. The IRS is required to conduct a detailed financial audit of large undercover operations in which the IRS is churning funds and to provide an annual audit report to the Congress on all such large undercover operations. 

REASONS FOR CHANGE

The Committee believes it is appropriate to extend the IRS’s authority to use proceeds from undercover operations to pay additional enforcement expenses. This authority provides the IRS with 

an important enforcement tool and it is similar to that provided to 

other law enforcement agencies. 

EXPLANATION OF PROVISION

The provision extends through 2008 the IRS’s authority to use 

proceeds from an undercover operation to pay additional expenses 

incurred in the undercover operation. 


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132 A proof gallon is a liquid gallon consisting of 50 percent alcohol. See sec. 5002(a)(10) and 

(11). 133Sec. 5001(a)(1). 134Secs. 5062(b), 7653(b) and (c). 135Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the amount of excise tax collected from 

imports into the United States of articles produced in the Virgin Islands is retained by the 

United States under section 7652(b)(3). 136Sec. 7652(e)(2). 137Secs. 7652(a)(3), (b)(3), and (e)(1). 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

5. Suspend limitation on rate of rum excise tax cover over to Puerto 

Rico and Virgin Islands (sec. 346 of the bill and sec. 7652(f) of 

the Code) 

PRESENT LAW

A $13.50 per proof gallon 132 excise tax is imposed on distilled 

spirits produced in or imported (or brought) into the United 

States.133 The excise tax does not apply to distilled spirits that are 

exported from the United States, including exports to U.S. possessions (e.g., Puerto Rico and the Virgin Islands).134

The Code provides for cover over (payment) to Puerto Rico and 

the Virgin Islands of the excise tax imposed on rum imported (or 

brought) into the United States, without regard to the country of 

origin.135 The amount of the cover over is limited under Code section 7652(f) to $10.50 per proof gallon ($13.25 per proof gallon during the period July 1, 1999 through December 31, 2007). 

Tax amounts attributable to shipments to the United States of 

rum produced in Puerto Rico are covered over to Puerto Rico. Tax 

amounts attributable to shipments to the United States of rum produced in the Virgin Islands are covered over to the Virgin Islands. 

Tax amounts attributable to shipments to the United States of rum 

produced in neither Puerto Rico nor the Virgin Islands are divided 

and covered over to the two possessions under a formula.136

Amounts covered over to Puerto Rico and the Virgin Islands are deposited into the treasuries of the two possessions for use as those 

possessions determine.137 All of the amounts covered over are subject to the limitation. 

REASONS FOR CHANGE

The Committee believes that, given the current fiscal needs of 

Puerto Rico and the U.S. Virgin Islands, it is appropriate to extend 

the increase in the amount of the rum excise tax covered over to 

these possessions. 

EXPLANATION OF PROVISION

The provision suspends for one year the $10.50 per proof gallon 

limitation on the amount of excise taxes on rum covered over to 

Puerto Rico and the Virgin Islands. Under the provision, the cover 

over amount of $13.25 per proof gallon is extended for rum brought 

into the United States after December 31, 2007 and before January 

1, 2009. After December 31, 2008, the cover over amount reverts 

to $10.50 per proof gallon. 


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EFFECTIVE DATE

The change in the cover over rate is effective for articles brought 

into the United States after December 31, 2007. 

6. Extension of disclosure authority to the Department of Veterans 

Affairs (sec. 347 of the bill and sec. 6103 of the Code) 

PRESENT LAW

The Code prohibits disclosure of returns and return information, 

except to the extent specifically authorized by the Code (sec. 6103). 

Unauthorized disclosure is a felony punishable by a fine not exceeding $5,000 or imprisonment of not more than five years, or 

both (sec. 7213). An action for civil damages also may be brought 

for unauthorized disclosure (sec. 7431). No tax information may be 

furnished by the Internal Revenue Service (‘‘IRS’’) to another agency unless the other agency establishes procedures satisfactory to 

the IRS for safeguarding the tax information it receives (sec. 

6103(p)). 

Among the disclosures permitted under the Code is disclosure of 

certain tax information to the Department of Veterans Affairs. Disclosure is permitted to assist the Department of Veterans Affairs 

in determining eligibility for, and establishing correct benefit 

amounts under, certain of its needs-based pension, health care, and 

other programs (sec. 6103(l)(7)(D)(viii)). The Department of Veterans Affairs disclosure provision was scheduled to expire after 

September 30, 2008. 

REASONS FOR CHANGE

The Committee believes it is appropriate to further extend this 

authority to ensure the correct payment of government benefits. 

EXPLANATION OF PROVISION

The provision extends for three months (through December 31, 

2008) the disclosure authority to the Department of Veteran’s Affairs. 

EFFECTIVE DATE

The provision is effective for requests made after September 30, 

2008. 

TITLE IV—MORTGAGE FORGIVENESS DEBT RELIEF 

A. EXCLUDE DISCHARGES OF ACQUISITION INDEBTEDNESS ON

PRINCIPAL RESIDENCES FROM GROSS INCOME

(Sec. 401 of the bill and sec. 108 of the Code) 

PRESENT LAW

Gross income includes income that is realized by a debtor from 

the discharge of indebtedness, subject to certain exceptions for 

debtors in Title 11 bankruptcy cases, insolvent debtors, certain student loans, certain farm indebtedness, and certain real property 


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138 A debt cancellation which constitutes a gift or bequest is not treated as income to the 

donee debtor (sec. 102). 

business indebtedness (secs. 61(a)(12) and 108).138 In cases involving discharges of indebtedness that are excluded from gross income 

under the exceptions to the general rule, taxpayers generally reduce certain tax attributes, including basis in property, by the 

amount of the discharge of indebtedness. 

The amount of discharge of indebtedness excluded from income 

by an insolvent debtor not in a Title 11 bankruptcy case cannot exceed the amount by which the debtor is insolvent. In the case of 

a discharge in bankruptcy or where the debtor is insolvent, any reduction in basis may not exceed the excess of the aggregate bases 

of properties held by the taxpayer immediately after the discharge 

over the aggregate of the liabilities immediately after the discharge 

(sec. 1017). 

For all taxpayers, the amount of discharge of indebtedness generally is equal to the difference between the adjusted issue price of 

the debt being cancelled and the amount used to satisfy the debt. 

These rules generally apply to the exchange of an old obligation for 

a new obligation, including a modification of indebtedness that is 

treated as an exchange (a debt-for-debt exchange). 

For example, assume a taxpayer who is not in bankruptcy and is not insolvent owns a principal residence subject to a $200,000 

mortgage debt for which the taxpayer has personal liability. If the 

creditor forecloses and the home is sold for $180,000 in satisfaction 

of the debt, the debtor has $20,000 income from the discharge of 

indebtedness which is includible in gross income. Likewise, if the 

creditor restructures the loan and reduces the principal amount to 

$180,000, the debtor has $20,000 includible in gross income. 

REASONS FOR CHANGE

The Committee believes that where taxpayers restructure their 

acquisition debt on a principal residence or lose their principal residence in a foreclosure, that it is inappropriate to treat discharges 

of acquisition indebtedness as income. 

EXPLANATION OF PROVISION

The bill excludes from the gross income of a taxpayer any discharge of indebtedness income by reason of a discharge (in whole 

or in part) of qualified principal residence indebtedness. Qualified 

principal residence indebtedness means acquisition indebtedness 

(within the meaning of section 163(h)(3)(B) except that the dollar 

limit is $2 million ($1 million in the case of a separate return) with 

respect to the taxpayer’s principal residence. Acquisition indebtedness with respect to a principal residence generally means indebtedness which is incurred in the acquisition, construction, or substantial improvement of the principal residence of the individual 

and is secured by the residence. It also includes refinancing of such 

indebtedness to the extent the amount of the refinancing does not 

exceed the amount of the refinanced indebtedness. For these purposes the term ‘‘principal residence’’ has the same meaning as 

under section 121 of the Code. 

If, immediately before the discharge, only a portion of a discharged indebtedness is qualified principal residence indebtedness, 


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the exclusion applies only to so much of the amount discharged as 

exceeds the portion of the debt which is not qualified principal residence indebtedness. Thus, assume that a principal residence is secured by a recourse indebtedness of $1 million, of which $800,000 

is qualified principal residence indebtedness. If the residence is 

sold for $700,000 and $300,000 debt is discharged, then only 

$100,000 of the amount discharged may be excluded from gross income under this provision. 

The basis of the individual’s principal residence is reduced by the 

amount excluded from income under the bill. 

Under the bill, the exclusion does not apply to a taxpayer in a 

Title 11 case; instead the present-law exclusion applies. In the case 

of an insolvent taxpayer not in a Title 11 case, the exclusion under 

the bill applies unless the taxpayer elects to have the present-law 

exclusion apply instead. 

Under the bill, the exclusion does not apply to the discharge of 

a loan if the discharge is on account of services performed for the 

lender. 

EFFECTIVE DATE

The provision is effective for discharges of indebtedness on or 

after January 1, 2007. 

B. EXTEND THE DEDUCTION FOR PRIVATE MORTGAGE INSURANCE

(Sec. 402 of the bill and sec. 163 of the Code) 

PRESENT LAW

In general 

Present law provides that qualified residence interest is deductible notwithstanding the general rule that personal interest is nondeductible (sec. 163(h)). 

Acquisition indebtedness and home equity indebtedness 

Qualified residence interest is interest on acquisition indebtedness and home equity indebtedness with respect to a principal and 

a second residence of the taxpayer. The maximum amount of home 

equity indebtedness is $100,000. The maximum amount of acquisition indebtedness is $1 million. Acquisition indebtedness means 

debt that is incurred in acquiring constructing, or substantially improving a qualified residence of the taxpayer, and that is secured 

by the residence. Home equity indebtedness is debt (other than acquisition indebtedness) that is secured by the taxpayer’s principal 

or second residence, to the extent the aggregate amount of such 

debt does not exceed the difference between the total acquisition indebtedness with respect to the residence, and the fair market value 

of the residence. 

Private mortgage insurance 

Certain premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness on a qualified residence of the taxpayer are 

treated as interest that is qualified residence interest and thus deductible. The amount allowable as a deduction is phased out ratably by 10 percent for each $1,000 by which the taxpayer’s adjusted 


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gross income exceeds $100,000 ($500 and $50,000, respectively, in 

the case of a married individual filing a separate return). Thus, the 

deduction is not allowed if the taxpayer’s adjusted gross income exceeds $110,000 ($55,000 in the case of married individual filing a 

separate return). 

For this purpose, qualified mortgage insurance means mortgage 

insurance provided by the Veterans Administration, the Federal 

Housing Administration, or the Rural Housing Administration, and 

private mortgage insurance (defined in section 2 of the Homeowners Protection Act of 1998 as in effect on the date of enactment 

of the provision). 

Amounts paid for qualified mortgage insurance that are properly 

allocable to periods after the close of the taxable year are treated 

as paid in the period to which they are allocated. No deduction is 

allowed for the unamortized balance if the mortgage is paid before 

its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration). 

The provision does not apply with respect to any mortgage insurance contract issued before January 1, 2007. The provision terminates for any amount paid or accrued after December 31, 2007, or 

properly allocable to any period after that date. 

Reporting rules apply under the provision. 

REASONS FOR CHANGE

The Committee believes it is appropriate to extend the presentlaw temporary provision. The Committee understands that the purpose of the provisions permitting deduction of home mortgage interest is to encourage home ownership while limiting significant 

disincentives to saving. The Committee believes that it would be 

consistent with the purpose of the provisions permitting deduction 

of home mortgage interest to permit the deduction of mortgage insurance premiums. While these premiums are not in the nature of 

interest, the Committee notes that purchase of such insurance is 

often demanded by lenders in order for home buyers to obtain financing (depending on the size of the buyer’s down payment). The 

Committee believes that permitting deductibility of premiums for 

this type of insurance connected with home purchases will foster 

home ownership. In the case of higher income taxpayers who may 

not purchase mortgage insurance, however, the Committee believes 

the incentive of deductibility becomes unnecessary, and a phase-out 

is appropriate. It is not intended that prepayments be currently deductible, but rather, that they be deductible only in the period to 

which they relate. Reporting of payments is generally necessary to 

administer the provision. 

EXPLANATION OF PROVISION

The provision extends the deduction for private mortgage insurance to amounts paid or accrued after December 31, 2007, but only 

with respect to contracts entered into after December 31, 2006, and 

prior to January 1, 2015. 


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EFFECTIVE DATE

The provision applies to contracts entered into after December 

31, 2006, and before January 1, 2015, with respect to amounts paid 

or accrued after December 31, 2007. 

C. ALTERNATIVE TESTS FOR QUALIFYING AS COOPERATIVE HOUSING

CORPORATION

(Sec. 403 of the bill and sec. 216 of the Code) 

PRESENT LAW

A tenant-stockholder in a cooperative housing corporation is entitled to deduct amounts paid or accrued to the cooperative to the extent those amounts represent the tenant-stockholder’s proportionate share of (1) real estate taxes allowable as a deduction to the 

cooperative which are paid or incurred by the cooperative on the 

cooperative’s land or buildings and (2) interest allowable as a deduction to the cooperative that is paid or incurred by the cooperative on its indebtedness contracted in the acquisition of the cooperative’s land or in the acquisition, construction, alteration, rehabilitation, or maintenance of the cooperative’s buildings. 

A cooperative housing corporation generally is a corporation (1) 

that has one class of stock, (2) each of the stockholders of which 

is entitled, solely by reason of ownership of stock in the corporation, to occupy a dwelling owned or leased by the cooperative, (3) 

no stockholder of which is entitled to receive any distribution not 

out of earnings and profits of the cooperative, except on complete 

or partial liquidation of the cooperative, and (4) 80 percent or more 

of the gross income of which for the taxable year in which the taxes 

and interest are paid or incurred is derived from tenant-stockholders. 

REASONS FOR CHANGE

Under present law, tenant-stockholders of a cooperative housing 

corporation are allowed to deduct their proportionate shares of the 

cooperative’s deductible real estate taxes and mortgage interest 

only if the cooperative’s nonmember income is no more than 20 percent of its total gross income. To satisfy this rule, some cooperative 

housing corporations have made rentals to commercial tenants at 

below-market rates. The Committee believes that the tax rules 

should not create an incentive to charge below-market-rate rents. 

Accordingly, the Committee’s bill provides two non-income-based 

alternatives to the 80-percent requirement of present law. 

EXPLANATION OF PROVISION

The provision amends the fourth requirement listed above to provide that the requirement is satisfied if, for the taxable year in 

which the taxes and interest are paid or incurred, the corporation 

meets one of the following three requirements: (1) 80 percent or 

more of the corporation’s gross income for that taxable year is derived from tenant-stockholders (the present law requirement); (2) 

at all times during that table year 80 percent or more of the total 

square footage of the corporation’s property is used or available for 

use by the tenant-stockholders for residential purposes or purposes 


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139The provision relating to employees of the intelligence community is effective for sales and 

exchanges before January 1, 2011. 

ancillary to such residential use; or (3) 90 percent or more of the 

expenditures of the corporation paid or incurred during that taxable year are paid or incurred for the acquisition, construction, 

management, maintenance, or care of the corporation’s property for 

the benefit of tenant-stockholders. 

EFFECTIVE DATE

The provision is effective for taxable years ending after the date 

of enactment. 

D. EXCLUSION OF GAIN ON SALE OF A PRINCIPAL RESIDENCE NOT

TO APPLY TO NONQUALIFIED USE

(Sec. 404 of the bill and sec. 121 of the Code) 

PRESENT LAW

In general 

Under present law, an individual taxpayer may exclude up to 

$250,000 ($500,000 if married filing a joint return) of gain realized 

on the sale or exchange of a principal residence. To be eligible for 

the exclusion, the taxpayer must have owned and used the residence as a principal residence for at least two of the five years ending on the sale or exchange. A taxpayer who fails to meet these requirements by reason of a change of place of employment, health, 

or, to the extent provided under regulations, unforeseen circumstances is able to exclude an amount equal to the fraction of 

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

equal to the fraction of the two years that the ownership and use 

requirements are met. 

Present law also contains an election relating to members of the 

uniformed services, the Foreign Service, and certain employees of 

the intelligence community.139 If the election is made, the five-year 

period ending on the date of the sale or exchange of a principal residence does not include any period up to 10 years during which the 

taxpayer or the taxpayer’s spouse is on qualified official extended 

duty. For these purposes, qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 

miles away from the taxpayer’s principal residence or under orders 

compelling residence in government furnished quarters. The election may be made with respect to only one property for a suspension period. 

The exclusion does not apply to gain to the extent the gain is attributable to depreciation allowable with respect to the rental or 

business use of a principal residence for periods after May 6, 1997. 

REASONS FOR CHANGE

The present-law exclusion of gain on principal residences has 

many beneficial effects by encouraging home ownership. The Committee believes that the application of present-law to exclude gain 

attributable to periods of use prior to a home’s use as a principal 

residence is not consistent with the purpose of the present-law exclusion and inappropriate. The Committee believes that the proviVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00103 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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sion limits the application of the exclusion to use as a principal residence without imposing undue computational and record-keeping 

burdens on the taxpayer or the Internal Revenue Service. 

EXPLANATION OF PROVISION

Under the bill, gain from the sale or exchange of a principal residence allocated to periods of nonqualified use is not excluded from 

gross income. The amount of gain allocated to periods of nonqualified use is the amount of gain multiplied by a fraction the numerator of which is the aggregate periods of nonqualified use during the period the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. 

A period of nonqualified use means any period (not including any 

period before January 1, 2008) during which the property is not 

used by the taxpayer or the taxpayer’s spouse or former spouse as 

a principal residence. For purposes of determining periods of nonqualified use, (i) any period after the last date the property is used 

as the principal residence of the taxpayer or spouse (regardless of 

use during that period), and (ii) any period (not to exceed two 

years) that the taxpayer is temporarily absent by reason of a 

change in place of employment, health, or, to the extent provided 

in regulations, unforeseen circumstances, are not taken into account. The present-law election for the uniformed services, Foreign 

Service and employees of the intelligence community is unchanged. 

If any gain is attributable to post-May 6, 1997, depreciation, the 

exclusion does not apply to that amount of gain, as under present 

law, and that gain is not taken into account in determining the 

amount of gain allocated to nonqualified use. 

These provisions may be illustrated by the following examples: 

Example 1.—Assume that an individual buys a property on January 1, 2008, for $400,000, and uses it as rental property for two 

years claiming $20,000 of depreciation deductions. On January 1, 

2010, the taxpayer converts the property to his principal residence. 

On January 1, 2012, the taxpayer moves out, and the taxpayer 

sells the property for $700,000 on January 1, 2013. As under 

present law, $20,000 gain attributable to the depreciation deductions is included in income. Of the remaining $300,000 gain, 40% 

of the gain (2 years divided by 5 years), or $120,000, is allocated 

to nonqualified use and is not eligible for the exclusion. Since the 

remaining gain of $180,000 is less than the maximum gain of 

$250,000 that may be excluded, gain of $180,000 is excluded from 

gross income. 

Example 2.—Assume that an individual buys a principal residence on January 1, 2008, for $400,000, moves out on January 1, 

2018, and on December 1, 2020 (more than two years after it was 

last used as the principal residence) sells the property for $600,000. 

The entire $200,000 gain is excluded from gross income, as under 

present law. 

EFFECTIVE DATE

The provision is effective for sales and exchanges after December 

31, 2007. 


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105 

140 H.R. Rep. No. 43–559, 1st Sess. (1874). 

TITLE V—ADMINISTRATIVE PROVISIONS 

A. REPEAL OF PRIVATE TAX COLLECTION CONTRACTS

(Sec. 501 of the bill and sec. 6306 of the Code) 

PRESENT LAW

The Secretary has general authority to administer and enforce 

the tax laws. Present law also provides specific authority for the 

collection of taxes. Under present law, the IRS may use private 

debt collection companies to locate and contact taxpayers owing 

outstanding tax liabilities of any type and to arrange payment of 

those taxes by the taxpayers. 

Present law provides for payments to private debt collection companies to be made from the amount collected pursuant to a private 

debt collection contract, but not in excess of 25 percent of the 

amount collected. Present law also permits the IRS to retain an 

amount not in excess of 25 percent from the amount collected pursuant to a private debt collection contract for additional enforcement activities. 

REASONS FOR CHANGE

Over 130 years ago, this Committee stated that ‘‘any system of 

farming the collection of any portion of the revenue of the Government is fundamentally wrong * * * No necessity for such laws 

exist * * * the Secretary of the Treasury and the head of the Internal Revenue Bureau are empowered by law to make all collections 

of taxes * * *. The Internal Revenue Bureau is possessed of full 

knowledge of the laws relating to the collection of the revenue 

* * * and has all the machinery necessary for their full and complete enforcement.’’ 140 The Committee believes these words remain 

true today. 

The Committee believes that the collection of federal income 

taxes is an inherently governmental function that should be restricted to IRS employees. The Committee believes that the use of 

private contractors to collect Federal tax debt violates the special 

and confidential relationship between taxpayers and the Federal 

government. The Committee believes that the use of private contractors jeopardizes the privacy of taxpayers and undermines longterm taxpayer compliance. 

The IRS Commissioner has stated on numerous times before the 

Committee that IRS employees can collect Federal taxes more efficiently than private debt collection companies. IRS employees have 

access to a taxpayer’s complete file and history, including the most 

recent information relating to tax filings and compliance data. Access to the taxpayer’s complete file allows IRS employees to collect 

outstanding tax debt more efficiently and in a manner that ensures 

long-term compliance with the tax laws. The Committee believes 

that only IRS employees should be allowed to perform tax collection 

activities. It is the Committee’s view that the IRS take immediate 

and appropriate action to ensure that IRS employees being laid off 

at IRS processing centers be provided training and employment opportunities at IRS Automated Collection System (ACS) sites, inVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00105 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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cluding out-bound call collection activities, and that the IRS expand ACS activities as appropriate to ensure proper levels of collection activities. 

EXPLANATION OF PROVISION

The provision repeals the authority for the IRS to enter into, 

renew, or extend any private debt collection contract. 

EFFECTIVE DATE

The provision generally is effective on the date of enactment, except for any contract which was entered into before July 18, 2007, 

and is not renewed or extended after such date. The provision also 

provides that any private debt collection contract which is entered 

into on or after July 18, 2007, and any extension or renewal on or 

after such date of any private debt collection contract shall be void. 

B. DELAYED IMPLEMENTATION OF GOVERNMENT WITHHOLDING

(Sec. 502 of the bill and sec. 3402(t) of the Code) 

PRESENT LAW

For payments made after December 31, 2010, the Code requires 

withholding at a three-percent rate on certain payments to persons 

providing property or services made by the Government of the 

United States, every State, every political subdivision thereof, and 

every instrumentality of the foregoing (including multi-State agencies). The withholding requirement applies regardless of whether 

the government entity making such payment is the recipient of the 

property or services. Political subdivisions of States (or any instrumentality thereof) with less than $100 million of annual expenditures for property or services that would otherwise be subject to 

withholding under this provision are exempt from the withholding 

requirement. 

Payments subject to the three-percent withholding include any 

payment made in connection with a government voucher or certificate program, which functions as a payment for property or services. For example, payments to a commodity producer under a government commodity support program are subject to the withholding requirement. The provision imposes information reporting 

requirements on payments subject to withholding under the provision. 

The three-percent withholding requirement does not apply to any 

payments made through a Federal, State, or local government public assistance or public welfare program for which eligibility is determined by a needs or income test. The three-percent withholding 

requirement also does not apply to payments of wages or to any 

other payment with respect to which mandatory (e.g., U.S.-source 

income of foreign taxpayers) or voluntary (e.g., unemployment benefits) withholding applies under present law. The provision does 

not exclude payments that are potentially subject to backup withholding under section 3406. If, however, payments are actually 

being withheld under backup withholding, the three-percent withholding requirement does not apply. 

The three-percent withholding requirement also does not apply to 

the following: payments of interest; payments for real property; 


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141Sec. 932(c)(1), (2). 

payments to tax-exempt entities or foreign governments; intra-governmental payments; payments made pursuant to a classified or 

confidential contract (as defined in section 6050M(e)(3)); and payments to a government employee that are not otherwise excludable 

from the new withholding provision with respect to the employee’s 

services as an employee. 

REASONS FOR CHANGE

The Committee understands that the three-percent withholding 

requirement presents a number of challenges for the government 

entities and taxpayers subject to the requirement. The Committee 

believes the Treasury should conduct a study of the issues confronting both businesses and governments in complying with the 

three-percent requirement, as well as the issues confronting Treasury and the IRS in administering such requirement. Thus, the 

Committee believes it is appropriate to delay the effective date of 

the three-percent withholding requirement by one year to allow the 

Secretary further time to study issues associated with the requirement and to provide Congress with time to review and respond to 

the results of such study. 

EXPLANATION OF PROVISION

The provision delays the effective date for the three-percent withholding requirement. Under the provision, the requirement applies 

to payments made after December 31, 2011. 

The provision directs the Secretary to study issues associated 

with the three-percent withholding requirement, including (1) the 

problems, if any, which are anticipated in administering and complying with such requirement, (2) the burdens, if any, that such requirements will place on small businesses (taking into account such 

mechanisms as may be necessary to administer such requirements), and (3) the application of such requirements to small expenditures for services and goods by governments. 

The Secretary is to submit his report to the House Committee on 

Ways and Means and the Senate Committee on Finance no later 

than six months after the date of enactment. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

C. APPLICATION OF STATUTE OF LIMITATIONS RULES TO PERSONS

CLAIMING U.S. VIRGIN ISLANDS RESIDENCY

(Sec. 503 of the bill and sec. 932 of the Code) 

PRESENT LAW

Return filing rules for Virgin Islands residents 

An individual who is a bona fide resident of the U.S. Virgin Islands (‘‘USVI’’) or who files a joint return with a person who is a 

bona fide USVI resident must file an income tax return with the 

USVI.141 For any taxable year ending after October 22, 2004 the 

bona fide residence requirement for application of this return filing 


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142Sec. 932(c)(1)(A). 143Sec. 932(c)(4). 144Sec. 6501(a), (b)(1). 145Field Service Advice Memorandum 199906031 (Feb. 12, 1999). 146 Chief Counsel Advice Memorandum 200624002 (June 16, 2006). 147 Notice 2007–19, 2007–11 I.R.B. 689 (Mar. 12, 2007); Notice 2007–31, 2007–16 I.R.B. 971 

(Apr. 16, 2007). 

rule must be satisfied for the entire taxable year.142 For taxable 

years ending on or before October 22, 2004, section 932(c)(1)(A) provided that bona fide residence was tested at the close of the taxable 

year. 

For an individual (1) who is a bona fide resident of the USVI, (2) 

who, on the income tax return filed with the USVI, reports income 

from all sources and identifies the source of each item shown on 

the return, and (3) who fully pays the tax liability resulting from 

the income shown on the return, for purposes of calculating income 

tax liability to the United States, gross income does not include any 

amount included in gross income on the USVI return, and allocable 

deductions and credits are not taken into account.143 Accordingly, 

an individual who is a bona fide USVI resident generally may satisfy the individual’s U.S. return-filing and income tax payment obligations by filing an income tax return with the USVI and paying 

income tax to the USVI. 

Statute of limitations 

The IRS generally must assess tax within three years after the 

due date for the return to which the assessment relates.144

In certain circumstances, the three-year statute of limitations 

does not apply, and the IRS may assess tax at any time. These circumstances include the filing of a false or fraudulent return with 

the intent to evade tax; a willful attempt to defeat or evade tax; 

and the failure to file a return. 

Statute of limitations for USVI residents 

In guidance published in 1999, the IRS concluded that when a 

U.S. citizen who was a bona fide resident of the USVI timely filed 

a USVI income tax return but failed to report on that return a 

U.S.-source dividend, the three-year statute of limitations period 

began to run with the filing of the USVI return and the IRS was 

precluded from assessing tax after expiration of the three-year period.145 In 2006 guidance, the IRS concluded that when a U.S. citizen who timely files a USVI income tax return fails to satisfy a 

requirement of section 932(c)(4) (because, for example, the individual is not a bona fide USVI resident or does not report all income on the USVI return), the three-year statute of limitations period does not begin to run until the individual also files a return 

with the IRS.146

In 2007 guidance, the IRS provided rules for the application of 

the three-year statute of limitations period and the section 932(c) 

return filing requirements to a U.S. citizen or resident who claims 

status as a bona fide USVI resident.147 As a result of this guidance, 

for taxable years ending on or after December 31, 2006, the threeyear statute of limitations period for every U.S. citizen or resident 

claiming to be a bona fide USVI resident generally begins when the 

individual files an income tax return with the USVI. 


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The rules in the 2007 guidance for an individual who claims bona 

fide USVI residence for a taxable year ending before December 31, 

2006 differ based on whether the individual is a ‘‘covered person’’

or a non-covered person. A covered person is a U.S. citizen or resident alien who takes the position that he or she is a bona fide 

USVI resident, files a USVI income tax return, and has less than 

$75,000 gross income for the taxable year. A covered person generally may claim application of the three-year statute of limitations 

period for a taxable year ending before December 31, 2006 based 

on that person’s filing of a USVI income tax return for that year. 

A non-covered person may start the running of the three-year limitations period for a taxable year ending before December 31, 2006 

by filing an income tax return for that year with the IRS and reporting on that return no gross income and no taxable income. The 

three-year limitations period starts with the filing of the return 

with the IRS. 

REASONS FOR CHANGE

The Committee believes it is unfair to apply different statute of 

limitations rules to U.S. citizens who claim to be bona fide USVI 

residents and who file USVI income tax returns than to other U.S. 

citizens who file income tax returns with the IRS. The 1986 Tax 

Reform Act provided that residents of the USVI are required to file 

income tax returns only with the USVI. The Committee believes 

that the guidance issued by the IRS in 2006 and 2007 represents 

a misapplication of present law. In particular, the Committee objects to the retroactive denial of statute of limitations protections 

caused by the 2006 IRS guidance. The IRS notices issued in 2007 

ameliorate but do not eliminate this retroactive effect because, for 

taxable years ending before December 31, 2006, the notices differentiate among taxpayers based on income. 

EXPLANATION OF PROVISION

The provision provides generally that an income tax return filed 

with the USVI by an individual claiming to be a bona fide USVI 

resident will be treated for purposes of subtitle F of the Code (Procedure and Administration) in the same manner as if the return 

were an income tax return filed with the United States for that 

year. Consequently, under the provision the filing of a USVI income tax return by any individual claiming status as a bona fide 

USVI resident generally starts the three-year limitations period. 

This rule does not, however, apply if the return filed with the USVI 

is false or fraudulent with the intent to evade tax or otherwise is 

a willful attempt in any manner to defeat or evade tax. 

EFFECTIVE DATE

The provision applies to taxable years beginning after 1986. 


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148For this purpose, however, U.S.-source income has a broader scope than it does typically 

in the Code. 

D. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS

(Sec. 504 of the bill and new secs. 877A and 2801 of the Code) 

PRESENT LAW

In general 

Income tax 

U.S. citizens and residents generally are subject to U.S. income 

taxation on their worldwide income. The U.S. tax may be reduced 

or offset by a credit allowed for foreign income taxes paid with respect to foreign source income. Nonresident aliens are taxed at a 

flat rate of 30 percent (or a lower treaty rate) on certain types of 

passive income derived from U.S. sources, and at regular graduated 

rates on net profits derived from a U.S. trade or business. 

Certain special rules (sections 671–679) apply to certain trust interests deemed to be owned by the grantor or other person (a 

‘‘grantor trust’’). In that case, the deemed owner must include in 

income the items of income and deduction (and credits against tax) 

of the portion of such trust deemed to be owned by such person. 

Except to the extent a trust is a grantor trust, a transfer of property by a U.S. person to a foreign estate or trust is treated (under 

section 684) by the transferor as if the property had been sold to 

such estate or trust. The same rule applies if a domestic trust becomes a foreign trust. 

Estate tax 

The estates of U.S. citizens and residents are subject to estate 

tax on all property, wherever located. The estates of nonresident 

aliens generally are subject to estate tax on U.S.-situated property 

(e.g., real estate and tangible property located within the United 

States and stock in a U.S. corporation). 

Gift tax 

U.S. citizens and residents generally are subject to gift tax on 

transfers by gift of any property, wherever situated. Nonresident 

aliens generally are subject to gift tax on transfers by gift of U.S.- 

situated property (e.g., real estate and tangible property located 

within the United States), but excluding intangibles, such as stock, 

regardless of where they are located. 

Income tax rules with respect to expatriates 

For the 10 taxable years after an individual relinquishes his or 

her U.S. citizenship or terminates his or her U.S. long-term residency, unless certain conditions are met, the individual is subject 

to an alternative method of income taxation than that generally applicable to nonresident aliens (the ‘‘alternative tax regime’’). Generally, the individual is subject to income tax for the 10-year period 

at the rates applicable to U.S. citizens, but only on U.S.-source income.148

A ‘‘long-term resident’’ is a noncitizen who is a lawful permanent 

resident of the United States for at least eight taxable years during 

the period of 15 taxable years ending with the taxable year during 


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which the individual either ceases to be a lawful permanent resident of the United States or commences to be treated as a resident 

of a foreign country under a tax treaty between such foreign country and the United States (and does not waive such benefits). 

A former citizen or former long-term resident is subject to the alternative tax regime for a 10-year period following citizenship relinquishment or residency termination, unless the former citizen or 

former long-term resident: (1) establishes that his or her average 

annual net income tax liability for the five preceding years does not 

exceed $124,000 (adjusted for inflation after 2004) and his or her 

net worth is less than $2 million, or alternatively satisfies limited, 

objective exceptions for certain dual citizens and minors who have 

had no substantial contacts with the United States; and (2) certifies under penalties of perjury that he or she has complied with 

all U.S. Federal tax obligations for the preceding five years and 

provides such evidence of compliance as the Secretary may require. 

Anti-abuse rules are provided to prevent the circumvention of the 

alternative tax regime. 

Estate tax rules with respect to expatriates 

Special estate tax rules apply to individuals who die during a 

taxable year in which they are subject to the alternative tax regime. Under these special rules, certain closely-held foreign stock 

owned by the former citizen or former long-term resident is includible in his or her gross estate to the extent that the foreign corporation owns U.S.-situated assets. The special rules apply if, at the 

time of death, the former citizen or former long-term resident: (1) 

owns, directly or indirectly, 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation 

entitled to vote; and (2) is considered to own, directly or indirectly, 

more than 50 percent of (a) the total combined voting power of all 

classes of stock of the foreign corporation entitled to vote, or (b) the 

total value of the stock of such corporation. If this stock ownership 

test is met, then the gross estate of the former citizen or former 

long-term resident includes that proportion of the fair market value 

of the foreign stock owned by the individual at the time of death, 

which the fair market value of any assets owned by such foreign 

corporation and situated in the United States (at the time of death) 

bears to the total fair market value of all assets owned by such foreign corporation (at the time of death). 

Gift tax rules with respect to expatriates 

Special gift tax rules apply to individuals who make gifts during 

a taxable year in which they are subject to the alternative tax regime. The individual is subject to gift tax on gifts of U.S.-situated 

intangibles made during the 10 years following citizenship relinquishment or residency termination. In addition, gifts of stock of 

certain closely-held foreign corporations by a former citizen or 

former long-term resident are subject to gift tax, if the gift is made 

during the time that such person is subject to the alternative tax 

regime. The operative rules with respect to these gifts of closelyheld foreign stock are the same as described above relating to the 

estate tax, except that the relevant testing and valuation date is 

the date of gift rather than the date of death. 


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149Secs. 7701(b)(3)(D), 7701(b)(5), and 7701(b)(7)(B)–(D). 150 An individual has such a relationship to a foreign country if (1) the individual becomes 

a citizen or resident of the country in which the individual was born, such individual’s spouse 

was born, or either of the individual’s parents was born, and (2) the individual becomes fully 

liable for income tax in such country. 151 An individual has a minimal prior physical presence in the United States if the individual 

was physically present for no more than 30 days during each year in the ten-year period ending 

on the date of loss of United States citizenship or termination of residency. However, for purposes of this test, an individual is not treated as being present in the United States on a day 

if the individual remained in the United States because of a medical condition that arose while 

the individual was in the United States. Sec. 7701(b)(3)(D)(ii). 

Termination of U.S. citizenship or long-term resident status for U.S. 

Federal income tax purposes 

An individual continues to be treated as a U.S. citizen or longterm resident for U.S. Federal tax purposes, including for purposes 

of section 7701(b)(10), until the individual: (1) gives notice of an expatriating act or termination of residency (with the requisite intent 

to relinquish citizenship or terminate residency) to the Secretary of 

State or the Secretary of Homeland Security, respectively; and (2) 

provides a statement to the Secretary of the Treasury in accordance with section 6039G. 

Sanction for individuals subject to the individual tax regime who 

return to the United States for extended periods 

The alternative tax regime does not apply to any individual for 

any taxable year during the 10-year period following citizenship relinquishment or residency termination if such individual is present 

in the United States for more than 30 days in the calendar year 

ending in such taxable year. Such individual is treated as a U.S. 

citizen or resident for such taxable year and, therefore, is taxed on 

his or her worldwide income. 

Similarly, if an individual subject to the alternative tax regime 

is present in the United States for more than 30 days in any calendar year ending during the 10-year period following citizenship 

relinquishment or residency termination, and the individual dies 

during that year, he or she is treated as a U.S. resident, and the 

individual’s worldwide estate is subject to U.S. estate tax. Likewise, if an individual subject to the alternative tax regime is 

present in the United States for more than 30 days in any year 

during the 10-year period following citizenship relinquishment or 

residency termination, the individual is subject to U.S. gift tax on 

any transfer of his or her worldwide assets by gift during that taxable year. 

For purposes of these rules, an individual is treated as present 

in the United States on any day if such individual is physically 

present in the United States at any time during that day. The 

present-law exceptions to the U.S. presence rules for residency purposes 149 generally do not apply. However, for individuals with certain ties to countries other than the United States 150 and individuals with minimal prior physical presence in the United States,151

a day of physical presence in the United States is disregarded if 

the individual is performing services in the United States on such 

day for an unrelated employer (within the meaning of sections 267 

and 707(b)), that meets such requirements as the Secretary may 

prescribe in regulations. No more than 30 days may be disregarded 

during any calendar year under this rule. 


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113 

Annual return 

Former citizens and former long-term residents are required to 

file an annual return for each year in which they are subject to the 

alternative tax regime. The annual return is required even if no 

U.S. Federal income tax is due. The annual return requires certain 

information, including information on the permanent home of the 

individual, the individual’s country of residence, the number of 

days the individual was present in the United States for the year, 

and detailed information about the individual’s income and assets 

that are subject to the alternative tax regime. This requirement includes information relating to foreign stock potentially subject to 

the special estate and gift tax rules. 

If the individual fails to file the statement in a timely manner 

or fails correctly to include all the required information, the individual is required to pay a penalty of $10,000. The $10,000 penalty 

does not apply if it is shown that the failure is due to reasonable 

cause and not to willful neglect. 

REASONS FOR CHANGE

The Committee is aware that each year some individuals relinquish their U.S. citizenship or terminate their long-term U.S. residency for the purpose of avoiding U.S. income, estate, and gift 

taxes. By so doing, such individuals may reduce their annual U.S. 

income tax liability and may reduce or eliminate their future U.S. 

estate or gift tax liability. 

The Committee recognizes that citizens and long-term residents 

of the United States have a right not only to physically leave the 

United States to live elsewhere, but also to relinquish their citizenship or terminate their residency. The Committee does not believe 

that the Internal Revenue Code should be used to stop U.S. citizens 

and long-term residents from relinquishing citizenship or terminating residency; however, the Committee also does not believe 

that the Code should provide a tax incentive for doing so. In other 

words, to the extent possible, an individual’s decision to relinquish 

citizenship or terminate long-term residency should be tax-neutral. 

The Committee recognizes that the American Jobs Creation Act 

of 2004 altered prior law regarding expatriation in a number of respects, including replacing the subjective ‘‘principal purpose of tax 

avoidance test’’ with objective rules. Notwithstanding these 

changes, the Committee remains concerned that the present-law 

expatriation tax rules (as modified in 2004) could be made more effective. In addition, the Committee is concerned that the alternative method of taxation under section 877 can be avoided by 

postponing the realization of U.S.-source income for 10 years. 

Consequently, the Committee believes that the present-law expatriation tax rules should be augmented by a new tax regime applicable to former citizens and long-term residents. Because U.S. citizens and residents who retain their citizenship or residency generally are subject to income tax on accrued appreciation when they 

dispose of their assets, as well as estate tax on the full value of assets that are held until death, the Committee believes it fair to tax 

individuals on the appreciation in their assets when they relinquish their citizenship or terminate their long-term residency. The 

Committee believes that an exception from such a tax should be 


ccoleman on PROD1PC71 with REPORTS
114 

152 Rev. Proc. 2006–53, sec. 3.29, 2006–48 I.R.B. 996. 

provided for individuals with a relatively modest amount of income 

and net worth, or appreciated assets. The Committee also believes 

that, where U.S. estate or gift taxes are avoided with respect to a 

transfer of property to a U.S. person by reason of the expatriation 

of the donor, it is appropriate for the recipient to be subject to a 

transfer tax similar to the avoided transfer taxes. 

EXPLANATION OF PROVISION

In general 

In general, the provision imposes tax on certain U.S. citizens who 

relinquish their U.S. citizenship and certain long-term U.S. residents who terminate their U.S. residency. Such individuals are 

subject to income tax on the net unrealized gain in their property 

as if the property had been sold for its fair market value on the 

day before the expatriation or residency termination (‘‘mark-tomarket tax’’). Gain from the deemed sale is taken into account at 

that time without regard to other Code provisions. Any loss from 

the deemed sale generally is taken into account to the extent otherwise provided in the Code, except that the wash sale rules of section 1091 do not apply. Any net gain on the deemed sale is recognized to the extent it exceeds $600,000. The $600,000 amount is increased by a cost of living adjustment factor for calendar years 

after 2008. Any gains or losses subsequently realized are to be adjusted for gains and losses taken into account under the deemed 

sale rules, without regard to the $600,000 exemption. 

The mark-to-market tax described above applies to most types of 

property interests held by the individual on the date of relinquishment of citizenship or termination of residency, with certain exceptions. Deferred compensation items, interests in nongrantor trusts, 

and specified tax deferred accounts are excepted from the mark-tomarket tax but are subject to the special rules described below. 

In addition, the provision imposes a transfer tax on certain 

transfers to U.S. persons from certain U.S. citizens who relinquished their U.S. citizenship and certain long-term U.S. residents 

who terminated their U.S. residency, or from their estates. 

Individuals covered 

The provision applies to any U.S. citizen who relinquishes citizenship and any long-term resident who terminates U.S. residency, 

if such individual (‘‘covered expatriate’’) (1) has an average annual 

net income tax liability for the five preceding years ending before 

the date of the loss of U.S. citizenship or residency termination 

that exceeds $124,000 (as adjusted for inflation after 2004— $136,000 in 2007 152); (2) has a net worth of $2 million or more on 

such date; or (3) fails to certify under penalties of perjury that he 

or she has complied with all U.S. Federal tax obligations for the 

preceding five years or fails to submit such evidence of compliance 

as the Secretary may require. 

Exceptions to an individual’s classification as a covered expatriate due to (1) or (2) above (but not (3)) are provided in two situations. The first exception applies to an individual who was born 

with citizenship both in the United States and in another country; 

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tinues to be a citizen of, and is taxed as a resident of, such other 

country, and (2) the individual has been a resident of the United 

States (under the substantial presence test of section 

7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15- 

year taxable year period ending with the taxable year of expatriation. The second exception applies to a U.S. citizen who relinquishes U.S. citizenship before reaching age 181⁄2, provided that 

the individual was a resident of the United States (under the substantial presence test of section 7701(b)(1)(A)(ii)) for no more than 

10 taxable years before such relinquishment. 

The definition of ‘‘long-term resident’’ under the provision is generally the same as that under present law. As under present law, 

an individual is considered to terminate long-term U.S. residency 

when the individual ceases to be a lawful permanent resident of 

the United States (i.e., loses his or her green card status through 

revocation or has been administratively or judicially determined to 

have abandoned such status). Under the provision, however, an individual ceases to be treated as a lawful permanent resident of the 

United States for all tax purposes (including for purposes of section 

877) if such individual commences to be treated as a resident of a 

foreign country under a tax treaty between the United States and 

such foreign country, does not waive the benefits of the treaty applicable to residents of such foreign country, and notifies the Secretary of the commencement of such treatment. 

The provision provides that, for all tax purposes (including for 

purposes of section 877), a U.S. citizen continues to be treated as 

a U.S. citizen for tax purposes until that individual’s citizenship is 

treated as relinquished under the rules of the immediately preceding paragraph. However, under Treasury regulations, relinquishment may occur earlier with respect to an individual who became at birth a citizen of the United States and of another country. 

For purposes of the provision, an individual is treated as having relinquished U.S. citizenship on the earliest of four possible dates: (1) 

the date that the individual renounces U.S. nationality before a 

diplomatic or consular officer of the United States (provided that 

the voluntary relinquishment is later confirmed by the issuance of 

a certificate of loss of nationality); (2) the date that the individual 

furnishes to the State Department a signed statement of voluntary 

relinquishment of U.S. nationality confirming the performance of 

an expatriating act (again, provided that the voluntary relinquishment is later confirmed by the issuance of a certificate of loss of 

nationality); (3) the date that the State Department issues a certificate of loss of nationality; or (4) the date that a U.S. court cancels 

a naturalized citizen’s certificate of naturalization. 

In the case of a long-term resident, the date that long-term residency is terminated is the ‘‘expatriation date.’’ In the case of a citizen, the date that the individual relinquishes citizenship is the 

‘‘expatriation date.’’

The foregoing rules replace the present-law rules that provide 

that an individual continues to be treated as a U.S. citizen or longterm resident for U.S. Federal tax purposes until the individual 

gives notice of an expatriating act or termination of residency. 

If an individual who is a covered expatriate becomes subject to 

tax as a citizen or resident of the United States for any period beginning after the expatriation date, the individual is not treated as 


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a covered expatriate during that period for purposes of applying 

the withholding rules relating to deferred compensation items, the 

rules relating to interests in nongrantor trusts, and the rules relating to gifts and bequests from covered expatriates. If the individual 

again relinquishes citizenship or terminates long-term residency 

(after meeting anew the requirements to become a long-term resident), the mark-to-market tax and other provisions are re-triggered 

with the new expatriation date. 

Deferral of payment of mark-to-market tax 

Under the provision, an individual may elect to defer payment of 

the mark-to-market tax imposed on the deemed sale of property. 

Interest is charged for the period the tax is deferred at the rate 

normally applicable to individual underpayments. The election is 

irrevocable and is made on a property-by-property basis. Under the 

election, the deferred tax attributable to a particular property is 

due when the return is due for the taxable year in which the property is disposed (or, if the property is disposed of in a transaction 

in which gain is not recognized in whole or in part, at such other 

time as the Secretary may prescribe). The deferred tax attributable 

to a particular property is an amount which bears the same ratio 

to the total mark-to-market tax as the gain taken into account with 

respect to such property bears to the total gain taken into account 

for the mark-to-market tax. The deferral of the mark-to-market tax 

may not be extended beyond the due date of the return for the taxable year which includes the individual’s death. 

In order to elect deferral of the mark-to-market tax, the individual is required to furnish a bond to the Secretary. The bond 

must be conditioned upon payment of the amount of tax due, plus 

interest thereon, and must be in accordance with such requirements relating to terms, conditions, form of the bond, and sureties, 

as may be specified by regulations. The bond must be accepted by 

the Secretary. Other security mechanisms, including letters of credit, are permitted provided that they meet such requirements as the 

Secretary may prescribe. In the event that the security provided 

with respect to a particular property subsequently fails to meet the 

requirements of these rules and the individual fails to correct such 

failure, the deferred tax and the interest with respect to such property will become due. As a further condition to making the election, 

the individual is required to consent to the waiver of any treaty 

rights that would preclude the assessment or collection of the tax. 

Deferred compensation items 

The provision contains special rules for interests in deferred compensation items. For purposes of the provision, a ‘‘deferred compensation item’’ means any interest in a plan or arrangement described in section 219(g)(5), any interest in a foreign pension plan 

or similar retirement arrangement or program, any item of deferred compensation, and any property, or right to property, which 

the individual is entitled to receive in connection with the performance of services to the extent not previously taken into account 

under section 83 or in accordance with section 83. 

The plans and arrangements described in section 219(g)(5) are (i) 

a plan described in section 401(a), which includes a trust exempt 

from tax under section 501(a); (ii) an annuity plan described in secVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00116 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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tion 403(a); (iii) a plan established for its employees by the United 

States, by a State or political subdivision thereof, or by an agency 

or instrumentality of any of the foregoing, but excluding an eligible 

deferred compensation plan (within the meaning of section 457(b)); 

(iv) an annuity contract described in section 403(b); (v) a simplified 

employee pension (within the meaning of section 408(k)); (vi) a simplified retirement account (within the meaning of section 408(p)); 

and (vii) a trust described in section 501(c)(18). 

If a deferred compensation item is an eligible deferred compensation item, the payor must deduct and withhold from a ‘‘taxable payment’’ to the covered expatriate a tax equal to 30 percent of such 

taxable payment. This withholding requirement is in lieu of any 

withholding requirement under present law. A taxable payment is 

subject to withholding to the extent it would be included in gross 

income of the covered expatriate if such person were subject to tax 

as a citizen or resident of the United States. A deferred compensation item is taken into account as a payment when such item would 

be so includible. A deferred compensation item that is subject to 

the 30 percent withholding requirement is subject to tax under section 871. 

If a deferred compensation item is not an eligible deferred compensation item, an amount equal to the present value of the covered expatriate’s deferred compensation item is treated as having 

been received on the day before the expatriation date. In the case 

of a deferred compensation item that is subject to section 83, the 

item is treated as becoming transferable and no longer subject to 

a substantial risk of forfeiture on the day before the expatriation 

date. Appropriate adjustments shall be made to subsequent distributions to take into account the foregoing treatment. In addition, 

these deemed distributions are not subject to early distribution tax. 

For this purpose, ‘‘early distribution tax’’ means any increase in tax 

imposed under section 72(t), 220(e)(4), 223(f)(4), 409A(a)(1)(B), 

529(c)(6), or 530(d)(4). 

An ‘‘eligible deferred compensation item’’ means any deferred 

compensation item with respect to which (i) the payor is either a 

U.S. person or a non-U.S. person who elects to be treated as a U.S. 

person for purposes of withholding and who meet the requirements 

prescribed by the Secretary to ensure compliance with the withholding requirements, and (ii) the covered expatriate notifies the 

payor of his status as a covered expatriate and irrevocably waives 

any claim of withholding reduction under any treaty with the 

United States. 

The foregoing taxing rules regarding eligible deferred compensation items and items that are not eligible deferred compensation 

items do not apply to deferred compensation items that are attributable to services performed outside the United States while the 

covered expatriate was not a citizen or resident of the United 

States. 

Specified tax deferred accounts 

There are special rules for interests in specified tax deferred accounts. If a covered expatriate holds any interest in a specified tax 

deferred account on the day before the expatriation date, such covered expatriate is treated as receiving a distribution of his entire 

interest in such account on the day before the expatriation date. 


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Appropriate adjustments are made for subsequent distributions to 

take into account this treatment. As with deferred compensation 

items, these deemed distributions are not subject to early distribution tax. 

The term ‘‘specified tax deferred account’’ means an individual 

retirement plan (as defined in section 7701(a)(37)), a qualified tuition plan (as defined in section 529), a Coverdell education savings 

account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 

220). However, simplified employee pensions (within the meaning 

of section 408(k)) and simplified retirement accounts (within the 

meaning of section 408(p)) of a covered expatriate are treated as 

deferred compensation items and not as specified tax deferred accounts. 

Interests in trusts 

Grantor trusts 

In the case of the portion of any trust for which the covered expatriate is treated as the owner under the grantor trust provisions of 

the Code, as determined immediately before the expatriation date, 

the assets held by that portion of the trust are subject to the markto-market tax. If a trust that is a grantor trust immediately before 

the expatriation date subsequently becomes a nongrantor trust, 

such trust remains a grantor trust for purposes of the provision. 

Nongrantor trusts 

Special rules apply to trusts with respect to which the covered 

expatriate is a beneficiary on the day before the expatriation date. 

The mark-to-market tax does not apply with respect to the portion 

of any such trust not treated (under the grantor trust provisions 

of the Code) as owned by a covered expatriate immediately before 

the expatriation date. Instead, in the case of any direct or indirect 

distribution from such a portion of a trust (‘‘nongrantor trust’’) to 

a covered expatriate, the trustee must deduct and withhold from 

the distribution an amount equal to 30 percent of the portion of the 

distribution which would be includible in the gross income of the 

covered expatriate if the covered expatriate continued to be subject 

to tax as a citizen or resident of the United States. Such portion 

of such distribution (that is subject to the 30 percent withholding 

requirement) is subject to tax under section 871. The covered expatriate is treated as having waived any right to claim any reduction 

in withholding under any treaty with the United States. 

In addition, if the nongrantor trust distributes appreciated property to a covered expatriate, the trust must recognize gain as if the 

property were sold to the covered expatriate at its fair market 

value. 

If a trust that is a nongrantor trust immediately before the expatriation date subsequently becomes a grantor trust of which a covered expatriate is treated as the owner, directly or indirectly, such 

conversion is treated under the provision as a distribution to such 

covered expatriate to the extent of the portion of the trust of which 

the covered expatriate is treated as the owner. 


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Special rules 

Notwithstanding any other provision of the Code, any period for 

acquiring property which results in the reduction of gain recognized with respect to property disposed of by the taxpayer terminates on the day before the expatriation date. This rule applies to 

certain incomplete transactions such as deferred like-kind exchanges and involuntary conversions. In addition, notwithstanding 

any other provision of the Code, any extension of time for payment 

of tax ceases to apply on the day before relinquishment of citizenship or termination of residency, and the unpaid portion of such 

tax becomes due and payable at the time and in the manner prescribed by the Secretary. 

For purposes of determining the tax imposed under the mark-tomarket tax, property that was held by an individual on the date 

that such individual first became a resident of the United States 

(within the meaning of section 7701(b)) is treated as having a basis 

on such date of not less than the fair market value of such property 

on such date. An individual may make an irrevocable election not 

to have this rule apply. 

In the case of a domestic trust that becomes a foreign trust due 

to the expatriation of an individual, the general income tax rules 

pertaining to transfers by U.S. persons to foreign trusts (i.e., section 684) apply before the rules of the provision. 

Regulatory authority 

The provision authorizes the Secretary to prescribe such regulations as may be necessary or appropriate to carry out the purposes 

of the income tax rules of the provision. 

Treatment of gifts and bequests from a former citizen or former 

long-term resident 

Under the provision, a special transfer tax applies to certain ‘‘covered gifts or bequests’’ received by a U.S. citizen or resident. 

A covered gift or bequest is any property acquired (i) by gift directly or indirectly from an individual who is a covered expatriate 

at the time of such acquisition, or (ii) directly or indirectly by reason of the death of an individual who was a covered expatriate. A 

covered gift or bequest, however, does not include (i) any property 

shown as a taxable gift on a timely filed gift tax return by the covered expatriate, and (ii) any property included in the gross estate 

of the covered expatriate for estate tax purposes and shown on a 

timely filed estate tax return of the estate of the covered expatriate. 

The tax is calculated as the product of (i) the highest marginal 

rate of tax specified in the table applicable to estate tax (i.e., section 2001(c)) or, if greater, the highest marginal rate of tax specified in the table applicable to gift tax (i.e., section 2502(a)), both 

as in effect on the date of receipt of the covered gift or bequest; and 

(ii) the value of the covered gift or bequest. 

The tax is imposed upon the recipient of the covered gift or bequest and is imposed on a calendar-year basis. The tax applies to 

a recipient of a covered gift or bequest only to the extent that the 

total value of covered gifts and bequests received by such recipient 

during a calendar year exceeds $10,000. The tax on covered gifts 

and bequests is reduced by the amount of any gift or estate tax 


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paid to a foreign country with respect to such covered gift or bequest. 

Special rules apply to the tax on covered gifts or bequests made 

to domestic or foreign trusts. In the case of a covered gift or bequest made to a domestic trust, the tax applies as if the trust is 

a U.S. citizen, and the trust is required to pay the tax. In the case 

of a covered gift or bequest made to a foreign trust, the tax applies 

to any distribution from such trust (whether from income or corpus) attributable to such covered gift or bequest to a recipient that 

is a U.S. citizen or resident, in the same manner as if such distribution were a covered gift or bequest. Such a recipient is entitled 

to deduct the amount of such tax for income tax purposes to the 

extent such tax is imposed on the portion of such distribution that 

is included in the gross income of the recipient. For purposes of 

these rules, a foreign trust may elect to be treated as a domestic 

trust. The election may not be revoked without the Secretary’s consent. 

Coordination with present-law alternative tax regime 

Under the provision, the present-law expatriation income tax 

rules under section 877 generally continue to apply to a covered expatriate whose expatriation or residency termination occurs before, 

on, or after the date of enactment. 

Information reporting 

Certain information reporting requirements under the law presently applicable to former citizens and former long-term residents 

(sec. 6039G) also apply for purposes of the provision. 

EFFECTIVE DATE

The provision generally is effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after the date of enactment. However, the portion of 

the provision relating to covered gifts and bequests is effective for 

gifts and bequests received from former citizens or former longterm residents (or their estates) on or after the date of enactment, 

regardless of when the transferor expatriated. 

E. REPEAL OF PROVISION REGARDING SUSPENSION OF INTEREST AND

PENALTIES

(Sec. 505 of the bill and sec. 6404(g) of the Code) 

PRESENT LAW

In general, interest and penalties accrue during periods for which 

taxes were unpaid without regard to whether the taxpayer was 

aware that there was tax due. Prior to amendment by the Small 

Business and Work Opportunity Tax Act of 2007, the accrual of 

certain penalties and interest is suspended starting 18 months 

after the filing of the tax return if the IRS has not sent the taxpayer a notice specifically stating the taxpayer’s liability and the 

basis for the liability within the specified period. If a tax return is 

filed before the due date, for purposes of interest suspension it is 

considered to have been filed on the due date. Interest and penalties resume 21 days after the IRS sends the required notice to 


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153Pub. L. No. 110–28, sec. 7542 (2007). 

the taxpayer. The provision is applied separately with respect to 

each item or adjustment. The provision does not apply where a taxpayer has self-assessed the tax. The suspension only applies to individuals who file a timely tax return. The provision does not apply 

to the following: the penalty for failing to pay; any interest, penalty, addition to tax, or additional amount in a case involving 

fraud; any interest, penalty, addition to tax, or additional amount 

with respect to any gross misstatement; and any criminal penalty. 

Generally, the suspension of interest also does not apply to interest 

accruing with respect to underpayments resulting from listed 

transactions or undisclosed reportable transactions. 

For IRS notices issued after November 25, 2007, the Small Business and Work Opportunity Tax Act of 2007 provides that the accrual of penalties and interest is suspended starting 36 months 

after the filing of the tax return.153 Because the general statute of 

limitations on assessment of tax is 36 months after the filing of a 

tax return, the effect of the provision in the Small Business and 

Work Opportunity Tax Act of 2007 is that interest suspension only 

applies to tax liabilities eligible for suspension which may be assessed more than three years after the filing of the tax return to 

which the liability relates. 

REASONS FOR CHANGE

As a result of the provision in the Small Business and Work Opportunity Tax Act of 2007, interest suspension only applies in the 

small number of cases in which the IRS may assess an additional 

tax more than three years after the filing of the tax return to 

which such additional tax liability relates. The Committee believes 

that the rules regarding the accrual of interest on underpayments 

of tax should be applied, to the extent possible, in a consistent 

manner. Thus, the Committee believes the suspension of interest 

and penalties provision should be repealed. The Committee believes 

this change is appropriate for effective administration of the tax 

system. 

EXPLANATION OF PROVISION

The provision repeals the suspension of interest and certain penalties provision. The Small Business and Work Opportunity Tax 

Act of 2007 provides that the accrual of penalties and interest is 

suspended starting 36 months after the filing of a tax return. Thus, 

the effect of the provision is to eliminate interest suspension for liabilities which may be assessed more than three years after the filing of a tax return. 

EFFECTIVE DATE

The provision is effective for IRS notices issued after the date 

which is 6 months after the date of the enactment of the Small 

Business and Work Opportunity Tax Act of 2007 (November 25, 

2007). 


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F. UNUSED MERCHANDISE DRAWBACK

1. Unused Merchandise Drawback (section 506 of the bill) 

PRESENT LAW

Section 313(j) of the Tariff Act of 1930 (19 U.S.C. 1313(j)) currently provides for unused merchandise drawback. Unused drawback is permitted if imported merchandise is exported or destroyed 

within 3 years of import without being used in the United States. 

Pursuant to section 313(j)(2) of the Tariff Act of 1930 (19 U.S.C. 

1313(j)(2)), domestic or imported merchandise that is commercially 

interchangeable with the imported merchandise may be substituted 

for the imported merchandise and drawback granted on the export 

or destruction of the substituted merchandise within the 3-year period beginning on the date of importation. The drawback is limited 

to 99% of the duty, tax and fee imposed under Federal law on the 

imported merchandise upon entry or importation. 

REASONS FOR CHANGE

Section 313(j)(2) of the Tariff Act of 1930 does not contain a definition of ‘‘commercially interchangeable.’’ From late 2001 to May 

2007, Customs and Border Protection (CBP) paid drawback claims 

on wine based on white domestic and imported table wine being 

commercially interchangeable with relatively valued imported 

white table wine. Red domestic and imported table wine was also 

considered to be commercially interchangeable with relatively valued imported red table wine. Relatively valued wine was considered to be wine within a price range of 50%. 

CBP informed wine drawback claimants in May 2007 that, effective immediately, the above standard for commercial interchangeability was no longer applicable. CBP did not provide a definitive 

new standard but stated that the criterion of the varietal wine 

should have been a determining factor in determining commercial 

interchangeability. 

The new provision carries forward the standard used for commercial interchangeability from 2001 to May 2007, and provides certainty for the filing and processing of unused drawback claims for 

imported and exported wine. 

EXPLANATION OF PROVISION

The provision amends section 313(j)(2) of the Tariff Act of 1930, 

to provide a standard for what is considered to be ‘‘commercially 

interchangeable’’ for purposes of unused merchandise drawback for 

wine. 

EFFECTIVE DATE

The provision is effective for claims filed for drawback on or after 

the date of enactment. 


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154See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff’d, per curiam, 194 F.2d 541 (6th 

Cir. 1952); Rev. Rul. 60–31, 1960–1 C.B. 174. 155Treas. Reg. sec. 1.83–3(e). This definition, in part, reflects previous IRS rulings on nonqualified deferred compensation. 

TITLE VI—REVENUE PROVISIONS 

A. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX

INDIFFERENT PARTIES

1. Offshore nonqualified deferred compensation (sec. 601 of the bill 

and new sec. 457A of the Code) 

PRESENT LAW

In general 

Under present law, the determination of when amounts deferred 

under a nonqualified deferred compensation arrangement are includible in the gross income of the person earning the compensation depends on the facts and circumstances of the arrangement. 

A variety of tax principles and Code provisions may be relevant in 

making this determination, including the doctrine of constructive 

receipt, the economic benefit doctrine,154 the provisions of section 

83 relating generally to transfers of property in connection with the 

performance of services, provisions relating specifically to nonexempt employee trusts (sec. 402(b)) and nonqualified annuities 

(sec. 403(c)), and the requirements of section 409A. 

In general, the time for income inclusion of nonqualified deferred 

compensation depends on whether the arrangement is unfunded or 

funded. If the arrangement is unfunded, then the compensation 

generally is includible in income by a cash-basis taxpayer when it 

is actually or constructively received. If the arrangement is funded, 

then income is includible for the year in which the individual’s 

rights are transferable or not subject to a substantial risk of forfeiture. 

An arrangement generally is considered funded if there has been 

a transfer of property under section 83. Under that section, a 

transfer of property occurs when a person acquires a beneficial 

ownership interest in such property. The term ‘‘property’’ is defined 

very broadly for purposes of section 83.155 Property includes real 

and personal property other than money or an unfunded and unsecured promise to pay money in the future. Property also includes 

a beneficial interest in assets (including money) that are transferred or set aside from claims of the creditors of the transferor; for 

example, in a trust or escrow account. Accordingly, if, in connection 

with the performance of services, vested contributions are made to 

a trust on an individual’s behalf and the trust assets may be used 

solely to provide future payments to the individual, the payment of 

the contributions to the trust constitutes a transfer of property to 

the individual that is taxable under section 83. On the other hand, 

deferred amounts generally are not includible in income if nonqualified deferred compensation is payable from general corporate 

funds that are subject to the claims of general creditors, as such 

amounts are treated as unfunded and unsecured promises to pay 

money or property in the future. 

As discussed above, if the arrangement is unfunded, then the 

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156Treas. Reg. secs. 1.451–1 and 1.451–2. 157This conclusion was first provided in a 1980 private ruling issued by the IRS with respect 

to an arrangement covering a rabbi; hence, the popular name ‘‘rabbi trust.’’ Priv. Ltr. Rul. 

8113107 (Dec. 31, 1980). 158Section 409A was added to the Code by sec. 885 of the American Job Creation Act of 2004, 

Pub. L. No. 108–357. 

payer when it is actually or constructively received under section 

451.156 Income is constructively received when it is credited to a 

person’s account, set apart, or otherwise made available so that it 

may be drawn on at any time. Income is not constructively received 

if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. A requirement to relinquish a valuable right 

in order to make withdrawals is generally treated as a substantial 

limitation or restriction. 

Prior to the enactment of section 409A, arrangements had developed in an effort to provide employees with security for nonqualified deferred compensation, while still allowing deferral of income inclusion under the constructive receipt doctrine (which applies to unfunded arrangements). One such arrangement is a ‘‘rabbi 

trust.’’ A rabbi trust is a trust or other fund established by the employer to hold assets from which nonqualified deferred compensation payments will be made. The trust or fund is generally irrevocable and does not permit the employer to use the assets for purposes other than to provide nonqualified deferred compensation, except that the terms of the trust or fund provide that the assets are 

subject to the claims of the employer’s creditors in the case of insolvency or bankruptcy. In the case of a rabbi trust, these terms have 

been the basis for the conclusion that the creation of a rabbi trust 

does not cause the related nonqualified deferred compensation arrangement to be funded for income tax purposes.157 As a result, no 

amount is included in income by reason of the rabbi trust; generally income inclusion occurs as payments are made from the 

trust. 

Section 409A 

Reason for enactment 

The Congress enacted section 409A 158 because it was concerned 

that many nonqualified deferred compensation arrangements had 

developed which allowed improper deferral of income. Executives 

often used arrangements that allowed deferral of income, but also 

provided security of future payment and control over amounts deferred. For example, nonqualified deferred compensation arrangements often contained provisions that allowed participants to receive distributions upon request, subject to forfeiture of a minimal 

amount (i.e., a ‘‘haircut’’ provision). In addition, Congress was 

aware that since the concept of a rabbi trust was developed, techniques had been used that attempted to protect the assets from 

creditors despite the terms of the trust. For example, the trust or 

fund would be located in a foreign jurisdiction, making it difficult 

or impossible for creditors to reach the assets. 

Prior to the enactment of section 409A, while the general tax 

principles governing deferred compensation were well established, 

the determination whether a particular arrangement effectively allowed deferral of income was generally made on a facts and circumstances basis. There was limited specific guidance with respect 


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125 

159 A plan includes an agreement or arrangement, including an agreement or arrangement 

that includes one person. Amounts deferred also include actual or notional earnings. 160The rights of a person to compensation are subject to a substantial risk of forfeiture if the 

person’s rights to such compensation are conditioned upon the performance of substantial services by any individual. 161Treas. Reg. sec. 1.409A–1(f)(1). 162Treas. Reg. sec. 1.409A–1(f)(2). 

to common deferral arrangements. The Congress believed that it 

was appropriate to provide specific rules regarding whether deferral of income inclusion should be permitted and to provide a clear 

set of rules that would apply to these arrangements. The Congress 

believed that certain arrangements that allow participants inappropriate levels of control or access to amounts deferred should not result in deferral of income inclusion. The Congress also believed 

that certain arrangements, such as offshore trusts, which effectively protect assets from creditors of the employer, should be 

treated as funded and not result in deferral of income inclusion to 

the extent the amounts are vested. 

General requirements of section 409A 

In general.—Under section 409A, all amounts deferred by a service provider under a nonqualified deferred compensation plan 159

for all taxable years are currently includible in gross income of the 

service provider to the extent such amounts are not subject to a 

substantial risk of forfeiture 160 and not previously included in 

gross income, unless certain requirements are satisfied. If the requirements of section 409A are not satisfied, in addition to current 

income inclusion, interest at the rate applicable to underpayments 

of tax plus one percentage point is imposed on the underpayments 

that would have occurred had the compensation been includible in 

income when first deferred, or if later, when not subject to a substantial risk of forfeiture. The amount required to be included in 

income is also subject to a 20-percent additional tax. 

Section 409A does not limit the amount that may be deferred 

under a nonqualified deferred compensation plan. The Secretary of 

the Treasury is authorized to prescribe regulations as are necessary or appropriate to carry out the purposes of section 409A. 

The Secretary of the Treasury published final regulations under 

section 409A on April 17, 2007. 

Under these regulations, the term ‘‘service provider’’ includes an 

individual, corporation, subchapter S corporation, partnership, personal service corporation (as defined in section 269A(b)(1)), noncorporate entity that would be a personal service corporation if it were 

a corporation, or qualified personal service corporation (as defined 

in section 448(d)(2)) for any taxable year in which such individual 

or entity accounts for gross income from the performance of services under the cash receipts and disbursements method of accounting.161 Section 409A does not apply to a service provider that provides significant services to at least two service recipients that are 

not related to each other or the service provider. This exclusion 

does not apply to a service provider who is an employee or a director of a corporation (or similar position in the case of an entity that 

is not a corporation).162 In addition, the exclusion does not apply 

to an entity that operates as the manager of a hedge fund or private equity fund. This is because the exclusion does not apply to 

the extent that a service provider provides management services to 


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163Treas. Reg. sec. 1.409A–1(f)(2)(iv). 164Key employees are defined in section 416(i) and generally include officers (limited to 50 

employees) having annual compensation greater than $145,000 (for 2007), five percent owners, 

and one percent owners having annual compensation from the employer greater than $150,000. 165Treas. Reg. sec. 1.409A–3(i)(6). 

a service recipient. Management services for this purpose means 

services that involve the actual or de facto direction or control of 

the financial or operational aspects of a trade or business of the 

service recipient or investment management or advisory services 

provided to a service recipient whose primary trade or business includes the investment of financial assets, such as a hedge fund.163

Permissible distribution events.—Under section 409A, distributions from a nonqualified deferred compensation plan may be allowed only upon separation from service (as determined by the Secretary of the Treasury), death, a specified time (or pursuant to a 

fixed schedule), change in control of a corporation (to the extent 

provided by the Secretary of the Treasury), occurrence of an unforeseeable emergency, or if the service provider becomes disabled. A 

nonqualified deferred compensation plan may not allow distributions other than upon the permissible distribution events and, except as provided in regulations by the Secretary of the Treasury, 

may not permit acceleration of a distribution. In the case of a specified employee who separates from service, distributions may not be 

made earlier than six months after the date of the separation from 

service or upon death. Specified employees are key employees 164 of 

publicly-traded corporations. 

Elections.—Section 409A requires that a plan must provide that 

compensation for services performed during a taxable year may be 

deferred at the service provider’s election only if the election to 

defer is made no later than the close of the preceding taxable year, 

or at such other time as provided in Treasury regulations. In the 

case of any performance-based compensation based on services performed over a period of at least 12 months, such election may be 

made no later than six months before the end of the service period. 

The time and form of distributions must be specified at the time 

of initial deferral. A plan may allow changes in the time and form 

of distributions subject to certain requirements. 

Back-to-back arrangements.—Back-to-back service recipients (i.e., 

situations under which an entity receives services from a service 

provider such as an employee, and the entity in turn provides services to a client) that involve back-to-back nonqualified deferred 

compensation arrangements (i.e., the fees payable by the client are 

deferred at both the entity level and the employee level) are subject 

to special rules under section 409A. For example, the final regulations generally permit the deferral agreement between the entity 

and its client to treat as a permissible distribution event those 

events that are specified as distribution events in the deferral 

agreement between the entity and its employee. Thus, if separation 

from employment is a specified distribution event between the entity and the employee, the employee’s separation generally is a permissible distribution event for the deferral agreement between the 

entity and its client.165

Offshore funding arrangements.—Section 409A requires current 

income inclusion in the case of certain offshore funding of nonqualified deferred compensation. Under section 409A, in the case of 


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166Treas. Reg. sec. 1.409A–1(d)(1). 167Treas. Reg. sec. 1.409A–1(b)(6). 

assets set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary of the Treasury) for purposes of 

paying nonqualified deferred compensation, such assets are treated 

as property transferred in connection with the performance of services under section 83 (whether or not such assets are available to 

satisfy the claims of general creditors) at the time set aside if such 

assets (or trust or other arrangement) are located outside of the 

United States or at the time transferred if such assets (or trust or 

other arrangement) are subsequently transferred outside of the 

United States. Any subsequent increases in the value of, or any 

earnings with respect to, such assets are treated as additional 

transfers of property. 

Interest at the underpayment rate plus one percentage point is 

imposed on the underpayments of tax that would have occurred 

had the amounts set aside been includible in income for the taxable 

year in which first deferred or, if later, the first taxable year not 

subject to a substantial risk of forfeiture. The amount required to 

be included in income also is subject to an additional 20-percent 

tax. 

The special funding rule does not apply to assets located in a foreign jurisdiction if substantially all of the services to which the 

nonqualified deferred compensation relates are performed in such 

foreign jurisdiction. The Secretary of the Treasury has authority to 

exempt arrangements from the provision if the arrangements do 

not result in an improper deferral of U.S. tax and will not result 

in assets being effectively beyond the reach of creditors. 

Definition of substantial risk of forfeiture 

Under the Treasury regulations, compensation is subject to a 

substantial risk of forfeiture if entitlement to the amount is conditioned upon either the performance of substantial future services 

by any person or the occurrence of a condition related to a purpose 

of the compensation, provided that the possibility of forfeiture is 

substantial.166

Definition of nonqualified deferred compensation 

Under section 409A, a nonqualified deferred compensation plan 

generally includes any plan that provides for the deferral of compensation other than a qualified employer plan or any bona fide vacation leave, sick leave, compensatory time, disability pay, or death 

benefit plan. A qualified employer plan means a qualified retirement plan, tax-deferred annuity, simplified employee pension, and 

SIMPLE. A qualified governmental excess benefit arrangement 

(sec. 415(m)) and an eligible deferred compensation plan (sec. 

457(b)) is a qualified employer plan. 

The Treasury regulations also provide that certain other types of 

plans are not considered deferred compensation, and thus are not 

subject to section 409A. For example, if a service recipient transfers 

property to a service provider, there is no deferral of compensation 

merely because the value of the property is not includible in income 

under section 83 by reason of the property being substantially nonvested.167 Another exception applies to amounts that are not deVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00127 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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168Treas. Reg. sec. 1.409A–1(b)(4). 169Treas. Reg. sec. 1.409A–1(b)(5). 170Treas. Reg. sec. 1.409A–1(b)(5)(i)(B). 171Treas. Reg. sec. 1.409A–1(a)(3). 172Secs. 404(a)(5), (b) and (d) and sec. 83(h). 173 In the case of a publicly held corporation, no deduction is allowed for a taxable year for 

remuneration with respect to a covered employee to the extent that the remuneration exceeds 

$1 million. Code sec. 162(m). The Code defines the term ‘‘covered employee’’ in part by reference 

to Federal securities law. In light of changes to Federal securities law, the Internal Revenue 

Service interprets the term covered employee as the principal executive officer of the taxpayer 

as of the close of the taxable year or the 3 most highly compensated employees of the taxpayer 

for the taxable year whose compensation must be disclosed to the taxpayer’s shareholders (other 

than the principal executive officer or the principal financial officer). Notice 2007–49, 2007–25 

ferred beyond a short period of time after the amount is no longer 

subject to a substantial risk of forfeiture.168 Under this exception, 

there generally is no deferral for purposes of section 409A if the 

service provider actually or constructively receives the amount on 

or before the last day of the applicable 21⁄2 month period. The applicable 21⁄2 month period is the period ending on the later of the 

15th day of the third month following the end of: (1) the service 

provider’s first taxable year in which the right to the payment is 

no longer subject to a substantial risk of forfeiture; or (2) the service recipient’s first taxable year in which the right to the payment 

is no longer subject to a substantial risk of forfeiture. 

Special rules apply in the case of stock appreciation rights 

(‘‘SARs’’).169 Under the final Treasury regulations, a SAR is a right 

to compensation based on the appreciation in value of a specified 

number of shares of service recipient stock occurring between the 

date of grant and the date of exercise of such right. The final regulations generally provide that a SAR does not result in a deferral 

of compensation for purposes of section 409A (and thus is not subject to section 409A) if the compensation payable under the SAR 

is not greater than the excess of the fair market value of the underlying stock on the date the SAR is exercised over the fair market 

value of the underlying stock on the date the SAR is granted.170

The Treasury regulations provide exclusions from the definition 

of nonqualified deferred compensation in the case of services performed by individuals who participate in certain foreign plans, including plans covered by an applicable treaty and broad-based foreign retirement plans.171 In the case of a U.S. citizen or lawful permanent alien, nonqualified deferred compensation plan does not include a broad-based foreign retirement plan, but only with respect 

to the portion of the plan that provides for nonelective deferral of 

foreign earned income and subject to limitations on the annual 

amount deferred under the plan or the annual amount payable 

under the plan. In general, foreign earned income refers to 

amounts received by an individual from sources within a foreign 

country that constitutes earned income attributable to services. 

Timing of the service recipient’s deduction 

Special statutory provisions govern the timing of the deduction 

for nonqualified deferred compensation, regardless of whether the 

arrangement covers employees or nonemployees and regardless of 

whether the arrangement is funded or unfunded.172 Under these 

provisions, the amount of nonqualified deferred compensation that 

is includible in the income of the service provider is deductible by 

the service recipient for the taxable year in which the amount is 

includible in the service provider’s income.173 Thus, for example, in 


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I.R.B. 1429. For purposes of the deduction limit, remuneration generally includes all remuneration for which a deduction is otherwise allowable, although commission-based compensation and 

certain performance-based compensation are not subject to the limit. Remuneration does not include compensation for which a deduction is allowable after a covered employee ceases to be 

a covered employee. Thus, the deduction limitation often does not apply to deferred compensation that is otherwise subject to the deduction limitation (e.g., is not performance-based compensation) because the payment of the compensation is deferred until after termination of employment. 

the case of an unfunded nonqualified deferred compensation plan, 

a deduction to the taxable service recipient is deferred until the deferred compensation is actually paid or made available to the service provider. 

Section 457 

Special income recognition rules apply in the case of a participant in a deferred compensation plan that is sponsored by a State 

or local government or an organization that is exempt from Federal 

income tax under section 501(a). Section 457 provides for different 

income inclusion rules for two basic types of deferred compensation 

arrangements: (1) arrangements that limit the amount of compensation that may be deferred (generally, $15,500 in 2007) and 

that meet certain other requirements specified in section 457(b) (referred to as a ‘‘section 457(b) plan’’ or an ‘‘eligible deferred compensation plan’’); and (2) arrangements that do not satisfy the requirements of section 457(b) (referred to as a ‘‘section 457(f) plan’’ or an ‘‘ineligible deferred compensation plan’’). Section 457 does not 

provide a limit on the amount of compensation that may be deferred under a section 457(f) plan. 

A participant in a section 457(b) plan does not recognize income 

with respect to the participant’s interest in such plan until the 

time of actual distribution (or, if earlier, the time the participant’s 

interest is made available to the participant, but only in the case 

of a section 457(b) plan maintained by a tax-exempt sponsor other 

than a State or local government). In contrast, a participant in a 

section 457(f) plan must include amounts deferred under such a 

plan in gross income for the first taxable year in which there is no 

substantial risk of forfeiture of the rights to such compensation. 

REASONS FOR CHANGE

Under present law, there is a tension in the case of a nonqualified deferred compensation agreement between a service provider and a taxable service recipient. This arises because the timing rule under the Code defers the service recipient’s deduction for 

nonqualified deferred compensation until the taxable year in which 

such compensation is includible in the service provider’s gross income. This tension may limit the amount of compensation that a 

service recipient is willing to permit a service provider to defer 

under a nonqualified deferred compensation arrangement. Even 

where this tension does not limit the amount of compensation that 

a service recipient is willing to permit a service provider to defer 

under a nonqualified deferred compensation arrangement, this tension ensures that the cost of allowing this deferral is borne by the 

service recipient. 

Under present law, the ability to defer nonqualified deferred 

compensation is limited in certain cases in which this tension is not 

present. Where this tension is not present, the cost of allowing 


ccoleman on PROD1PC71 with REPORTS
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service providers to defer under a nonqualified deferred compensation arrangement is not borne by the service recipient. Instead, this 

cost is borne by the Treasury. In order to limit the cost to the 

Treasury, Congress passed special rules limiting deferral in certain 

situations. Specifically, section 457 provides special rules that limit 

deferred compensation arrangements sponsored by State and local 

governments and other tax-exempt entities. 

The Committee has become aware of other situations in which 

the present law tension does not exist. Specifically, foreign corporations that are not subject to a comprehensive income tax and partnerships that are comprised of foreign persons and U.S. tax-exempt 

entities are indifferent to the timing of deductions for nonqualified 

deferred compensation. The Committee believes that in such cases 

additional rules should apply that limit the ability to defer service 

provider compensation. 

EXPLANATION OF PROVISION

Under the provision, any compensation that is deferred under a 

nonqualified deferred compensation plan of a nonqualified entity is 

includible in gross income by the service provider when there is no 

substantial risk of forfeiture of the service provider’s rights to such 

compensation. The provision applies in addition to the requirements of section 409A (or any other provision of the Code or general tax law principle) with respect to nonqualified deferred compensation. 

For purposes of the provision, the term nonqualified deferred 

compensation is defined in the same manner as for purposes of section 409A. As under section 409A, the term nonqualified deferred 

compensation includes earnings with respect to previously deferred 

amounts. Under the provision, nonqualified deferred compensation 

includes any arrangement under which compensation is based on 

the increase in value of a specified number of equity units of the 

service recipient. Thus, stock appreciation rights (SARs) are treated as nonqualified deferred compensation under the provision, regardless of the exercise price of the SAR. 

The term nonqualified entity includes certain foreign corporations and certain partnerships (either domestic or foreign). A foreign corporation is a nonqualified entity unless substantially all of 

such income is effectively connected with the conduct of a United 

States trade or business or is subject to a comprehensive foreign 

income tax. A partnership is a nonqualified entity unless substantially all of such income is allocated to persons other than foreign 

persons with respect to whom such income is not subject to a comprehensive income tax and organizations which are exempt from 

U.S. income tax. 

The term comprehensive foreign income tax means with respect 

to a foreign person, the income tax of a foreign country if (1) such 

person is eligible for the benefits of a comprehensive income tax 

treaty between such foreign county and the United States, or (2) 

such person demonstrates to the satisfaction of the Secretary of the 

Treasury that such foreign country has a comprehensive income 

tax. A comprehensive foreign income tax does not include any tax 

unless the tax includes rules for the deductibility of deferred compensation which are similar to the rules under the Code. 


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For purposes of the provision, compensation of a service provider 

is subject to a substantial risk of forfeiture only if such person’s 

right to the compensation is conditioned upon the future performance of substantial services by any person. Thus, compensation is 

subject to a substantial risk of forfeiture only if entitlement to the 

compensation is conditioned on the performance of substantial future services and the possibility of forfeiture is substantial. Substantial risk of forfeiture does not include a condition related to a 

purpose of the compensation (other than future performance of substantial services), regardless of whether the possibility of forfeiture 

is substantial. 

Under the provision, if the amount of any deferred compensation 

is not ascertainable at the time that such compensation is otherwise required to be taken into income under the provision, the 

amount is taken into account when such amount becomes ascertainable. In addition, the income tax with respect to such amount 

is increased by the sum of (1) an interest charge, and (2) an 

amount equal to 20 percent of such compensation. The interest 

charge is equal to the interest at the rate applicable to underpayments of tax plus one percentage point imposed on the underpayments that would have occurred had the compensation been includible in income when first deferred, or if later, when not subject to 

a substantial risk of forfeiture. 

It is intended that the Secretary of the Treasury issue regulations as to when an amount is unascertainable for purposes of the 

provision. It is intended that an amount of deferred compensation 

is unascertainable at the time the amount is no longer subject to 

a substantial risk of forfeiture if the amount varies depending on 

the satisfaction of an objective condition. For example, if a deferred 

amount varies depending on the satisfaction of an objective condition at the time the amount is no longer subject to substantial risk 

of forfeiture (e.g., 20 percent of the amount is paid if a certain 

threshold is achieved, 100 percent is paid if a higher threshold is 

116 achieved, and 200 percent is paid if a still higher threshold is 

achieved), the amount deferred is unascertainable. 

The Secretary of the Treasury is also authorized to issue such 

regulations as may be necessary or appropriate to carry out the 

purposes of the provision, including regulations disregarding a substantial risk of forfeiture as necessary to carry out such purposes. 

Under the provision, aggregation rules similar to those that 

apply under section 409A apply for purposes of determining whether a plan sponsor is a nonqualified entity. It is intended, however, 

that such aggregation rules are limited by the Secretary to operate 

in accordance with the purposes of the provision. For example, it 

is intended that the aggregation rules do not result in the application of the provision to employees of a U.S. subsidiary C corporation that is wholly owned by a nonqualified entity when the U.S. 

subsidiary sponsors the nonqualified deferred compensation plan in 

which the employees of the subsidiary participate. This is because 

the subsidiary is subject to the timing rule with respect to its deduction of its employees’ nonqualified deferred compensation. 

EFFECTIVE DATE

The provision is effective with respect to amounts deferred which 

are attributable to services performed after December 31, 2007. In 


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132 

174Only a handful of cases have ruled on this issue. Though one case required the value to 

be included currently, where value was easily determined by a sale of the profits interest soon 

after receipt (Diamond v. Commissioner, 56 T. C. (1971), aff’d 492 F. 2.2d 286 (7th Cir, 1974)), 

a more recent case concluded that partnership profits interests were not includable on receipt, 

because the profits interests were speculative and without fair market value (Campbell v. Commissioner (943 F. 2d. 815 (8th Cir. 1991))). 175 Rev. Proc. 93–27, 1993–2 C.B. 343, citing the Diamond and Campbell cases, supra. 176 Rev. Proc. 2001–43 (2001–2 C.B. 191). 177 A similar result would occur under the ‘‘safe harbor’’ election of proposed regulations regarding the application of section 83 to the compensatory transfer of a partnership interest. 

REG–105346–03, 70 Fed. Reg. 29675 (May 24, 2005). 

the case of an amount deferred which is attributable to services 

performed on or before December 31, 2007, to the extent such 

amount is not includible in gross income in a taxable year beginning before 2017, then such amount is includible in gross income 

in the later of (1) the last taxable year beginning before 2017, or 

(2) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation. 

No later than 60 days after date of enactment, the Secretary 

shall issue guidance providing a limited period of time during 

which a nonqualified deferred compensation arrangement attributable to services performed on or before December 31, 2007, may, 

without violating the requirements of section 409A(a), be amended 

to conform the date of distribution to the date the amounts are required to be included in income. 

B. PROVISIONS RELATED TO CERTAIN INVESTMENT PARTNERSHIPS

1. Income of partners for performing investment management services treated as ordinary income received for performance of 

services (sec. 611 of the bill and new sec. 710 and secs. 856(c), 

6662, and 6664 of the Code) 

PRESENT LAW

Partnership profits interest for services 

A profits interest in a partnership is the right to receive future 

profits in the partnership but does not generally include any right 

to receive money or other property upon the immediate liquidation 

of the partnership. The treatment of the receipt of a profits interest 

in a partnership in exchange for the performance of services has 

been the subject of controversy. In general, a taxpayer receiving a 

profits interest for performing services has not been taxable upon 

the receipt of the partnership interest.174

In 1993, the Internal Revenue Service, referring to the results of 

cases, specifically ruled that the receipt of a partnership profits interests for services generally is not a taxable event for the partnership or the partner.175 Under the ruling, this treatment does not 

apply, however, if: (1) the profits interest relates to a substantially 

certain and predictable stream of income from partnership assets, 

such as income from high-quality debt securities or a high-quality 

net lease; (2) within two years of receipt, the partner disposes of 

the profits interest; or (3) the profits interest is a limited partnership interest in a publicly traded partnership. A more recent ruling 176 clarifies that this result applies provided the service partner 

takes into income his distributive share of partnership income, and 

the partnership does not deduct any amount either on grant or on 

vesting of the profits interest.177


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178Secs. 61 and 83; Treas. Reg. sec. 1.721–1(b)(1); see U.S. v. Frazell, 335 F.2d 487 (5th Cir. 

1964), cert denied, 380 U.S. 961 (1965). 179 Rev. Proc. 93–27, 1993–2 C.B. 343. 180Section 702. 181See Chapter 21 of the Code. 182Sec. 1401. 183Secs. 3101 and 3111. 184S corporation shareholders who are employees of the S corporation are subject to FICA 

taxes. A considerable body of case law has addressed the issue of whether amounts paid to S 

corporation shareholder-employees are reasonable compensation for services and therefore are 

wages subject to FICA tax or are properly characterized as another type of income (typically, 

dividends) and therefore not subject to FICA tax. 

By contrast, a partnership capital interest received for services 

is includable in the partner’s income under generally applicable 

rules relating to the receipt of property for the performance of services.178 A partnership capital interest for this purpose is an interest that would entitle the receiving partner to a share of the proceeds if the partnership’s assets were sold at fair market value and 

the proceeds were distributed in liquidation.179

Passthrough tax treatment of partnerships 

The character of partnership items passes through to the partners, as if the items were realized directly by the partners.180

Thus, for example, long-term capital gain of the partnership is 

treated as long-term capital gain in the hands of the partners. 

A partner holding a partnership interest includes in income its 

distributive share (whether or not actually distributed) of partnership items of income and gain, including capital gain eligible for 

the lower income tax rates. A partner’s basis in the partnership interest is increased by any amount of gain thus included and is decreased by losses. These basis adjustments prevent double taxation 

of partnership income to the partner, preserving the partnership’s 

tax status as a passthrough entity. Amounts distributed to the 

partner by the partnership are taxed to the extent the amount exceeds the partner’s basis in the partnership interest. 

Employment tax treatment of partners 

As part of the financing for Social Security and Medicare benefits, a tax is imposed on the wages of an individual received with 

respect to his or her employment under the Federal Insurance Contributions Act (‘‘FICA’’).181 A similar tax is imposed on the net 

earnings from self-employment of an individual under the Self-Employment Contributions Act (‘‘SECA’’).182

The FICA tax has two components. Under the old-age, survivors, 

and disability insurance component (‘‘OASDI’’), the rate of tax is 

12.40 percent, half of which is imposed on the employer, and the 

other half of which is imposed on the employee.183 The amount of 

wages subject to this component is capped at $97,500 for 2007. 

Under the hospital insurance component (‘‘HI’’), the rate is 2.90 

percent, also split equally between the employer and the employee. 

The amount of wages subject to the HI component of the tax is not 

capped. The wages of individuals employed by a business in any 

form (for example, a C corporation) generally are subject to the 

FICA tax.184

The SECA tax rate is the combined employer and employee rate 

for FICA taxes. Under the OASDI component, the rate of tax is 

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185For purposes of determining net earnings from self-employment, taxpayers are permitted 

a deduction from net earnings from self-employment equal to the product of the taxpayer’s net 

earnings (determined without regard to this deduction) and one-half of the sum of the rates for 

OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee’s wages, which do not include FICA 

taxes paid by the employer, whereas a self-employed individual’s net earnings are economically 

the equivalent of an employee’s wages plus the employer share of FICA taxes. The deduction 

is intended to provide parity between FICA and SECA taxes. In addition, self-employed individuals may deduct one-half of self-employment taxes for income tax purposes (sec. 164(f)). 186Sec. 1402(a)(13). 

nent is capped at $97,500 (for 2007). Under the HI component, the 

rate is 2.90 percent, and the amount of self-employment income 

subject to the HI component is not capped. 

For SECA tax purposes, net earnings from self-employment 

means the gross income derived by an individual from any trade 

or business carried on by the individual, less the deductions attributable to the trade or business that are allowed under the self-employment tax rules.185 Specified types of income or loss are excluded, such as rentals from real estate in certain circumstances, 

dividends and interest, and gains or loss from the sale or exchange 

of a capital asset or from timber, certain minerals, or other property that is neither inventory nor held primarily for sale to customers. 

For an individual who is a partner in a partnership, the net 

earnings from self-employment generally include the partner’s distributive share (whether or not distributed) of income or loss from 

any trade or business carried on by the partnership (excluding 

specified types of income, such as rents and dividends, as described 

above). This rule applies to individuals who are general partners. 

A special rule applies for limited partners of a partnership.186 In 

determining a limited partner’s net earnings from self-employment, 

an exclusion is provided for his or her distributive share of partnership income or loss. The exclusion does not apply with respect to 

guaranteed payments to the limited partner for services actually 

rendered to or on behalf of the partnership to the extent that those 

payments are established to be in the nature of remuneration for 

those services. 

Income tax treatment of publicly traded partnerships 

Under present law, a publicly traded partnership generally is 

treated as a corporation for Federal tax purposes (sec. 7704(a)). For 

this purpose, a publicly traded partnership means any partnership 

if interests in the partnership are traded on an established securities market, or interests in the partnership are readily tradable on 

a secondary market (or the substantial equivalent thereof). 

An exception from corporate treatment is provided for certain 

publicly traded partnerships, 90 percent or more of whose gross income is qualifying income (sec. 7704(c)(2)). However, this exception 

does not apply to any partnership that would be described in section 851(a) if it were a domestic corporation, which includes a corporation registered under the Investment Company Act of 1940 as 

a management company or unit investment trust. 

Qualifying income includes interest, dividends, and gains from 

the disposition of a capital asset (or of property described in section 

1231(b)) that is held for the production of income that is qualifying 

income. Qualifying income also includes rents from real property, 

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187 A REIT is not treated as providing services that produce impermissible tenant services income if such services are provided by an independent contractor from whom the REIT does not 

derive or receive any income. An independent contractor is defined as a person who does not 

own, directly or indirectly, more than 35 percent of the shares of the REIT. Also, no more than 

35 percent of the total shares of stock of an independent contractor (or of the interests in net 

Continued 

come and gains from the exploration, development, mining or production, processing, refining, transportation (including pipelines 

transporting gas, oil, or products thereof), or the marketing of any 

mineral or natural resource (including fertilizer, geothermal energy, and timber). It also includes income and gains from commodities (not described in section 1221(a)(1)) or futures, options, or forward contracts with respect to such commodities (including foreign 

currency transactions of a commodity pool) in the case of partnership, a principal activity of which is the buying and selling of such 

commodities, futures, options or forward contracts. 

The rules generally treating publicly traded partnerships as corporations were enacted in 1987 to address concern about long-term 

erosion of the corporate tax base. At that time, Congress stated, 

‘‘[t]o the extent that activities would otherwise be conducted in corporate form, and earnings would be subject to two levels of tax (at 

the corporate and shareholder levels), the growth of publicly traded 

partnerships engaged in such activities tends to jeopardize the corporate tax base.’’ (H.R. Rep. No. 100–391, 100th Cong., 1st Sess. 

1065.) Referring to recent tax law changes affecting corporations, 

the Congress stated, ‘‘[t]hese changes reflect an intent to preserve 

the corporate level tax. The committee is concerned that the intent 

of these changes is being circumvented by the growth of publicly 

traded partnerships that are taking advantage of an unintended 

opportunity for disincorporation and elective integration of the corporate and shareholder levels of tax.’’ (H.R. Rep. No. 100–391, 

100th Cong., 1st Sess. 1066.) 

Real estate investment trusts (REITs) 

A real estate investment trust (‘‘REIT’’) is an entity that derives 

most of its income from passive real-estate-related investments. A 

REIT must satisfy a number of tests on an annual basis that relate 

to the entity’s organizational structure, the source of its income, 

and the nature of its assets. If an electing entity meets the requirements for REIT status, the portion of its income that is distributed 

to its investors each year generally is treated as a dividend deductible by the REIT and includible in income by its investors. In this 

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

level. A REIT generally is required to distribute 90 percent of its 

income (other than net capital gain) to its investors before the end 

of its taxable year. 

In order for an entity to qualify as a REIT, at least 95 percent 

of its gross income generally must be derived from certain passive 

sources (the ‘‘95-percent income test’’). In addition, at least 75 percent of its income generally must be from certain real estate 

sources (the ‘‘75-percent income test’’), including rents from real 

property (as defined) and gain from the sale or other disposition of 

real property. Amounts received as impermissible ‘‘tenant services 

income’’ are not treated as rents from real property.187 In general, 


ccoleman on PROD1PC71 with REPORTS
136 

assets or net profits, if not a corporation) can be owned directly or indirectly by persons owning 

35 percent or more of the interests in the REIT. 188 A partnership profits interest generally gives the partner a right to receive a percentage 

of a partnership’s profits without an obligation to contribute to partnership capital and without 

a right to partnership assets on liquidation. 189The Ways and Means Committee hearing took place September 6, 2007. See Joint Committee on Taxation, ‘‘Present Law and Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues, Part I,’’ (JCX–62–07), September 4, 2007, and Joint Committee on Taxation, ‘‘Present Law and Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues, Part II,’’ (JCX–63–07), September 4, 2007. 

such amounts are for services rendered to tenants that are not 

‘‘customarily furnished’’ in connection with the rental of real property. In addition, at least 75 percent of the value of its total assets 

must be represented by real estate assets, cash and cash items (including receivables), and Government securities, and maximum 

percentages apply to ownership of other types of securities (the 

‘‘asset test’’). 

REASONS FOR CHANGE

The Committee has become aware that some types of service providers in the asset management business have been paying tax at 

capital gains rates on service income through the use of a partnership profits interest,188 known as a ‘‘carried interest.’’ Because the 

character of a partnership’s income passes through to partners, income from a carried interest may take the form of long-term or 

short-term capital gain realized by the underlying investment fund 

as the fund sells off investment assets. In 2007, for individuals generally, the top rate of tax on longterm capital gain is 15 percent, 

while the top income tax rate on ordinary labor income is 35 percent (plus the applicable employment tax rate). 

The Committee held a hearing 189 covering Federal tax issues 

arising from the use of carried interests in asset management businesses. In these arrangements, the investment fund typically is a 

partnership. The investors are limited partners that contribute capital to acquire fund assets, and the fund manager is the general 

partner of the investment fund partnership. The general partner is 

itself a partnership of individuals with investment management expertise. The fund manager receives management fees along with a 

carried interest. 

The Committee believes that in the case of an investment services partnership interest the carried interest arrangement primarily involves the performance of services by individuals whose 

professional skill generates capital income for investors in the fund. 

While these individuals’ economic interests are aligned with those 

of the fund investors to the extent their compensation is based on 

the positive investment yield of the fund, the individuals are nevertheless performing services. Therefore, the income should be taxed 

as ordinary compensation income for the performance of services. 

The Committee believes this result is needed to protect the neutrality of the tax law with respect to income for different types of 

services, and is necessary to provide fairness in the tax law. The 

tax rules should not permit investment managers to structure their 

compensation so it is subject to preferential capital gains rates of 

15 percent, and to pay no employment tax on these amounts, while 

wage-earners who have no such restructuring opportunities are 

subject to tax on ordinary income up to a top rate of 35 percent, 

plus employment tax. 


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The Committee understands that the Internal Revenue Service 

currently takes the position that the receipt of a partnership profits 

interest is not generally a taxable event to the partner or to the 

partnership unless unusual circumstances indicate the interest is 

easy to value and it is held for a relatively short time. As acknowledged by the Internal Revenue Service in taking this position, however, courts have reasoned that the value of the profits interest for 

services should be included in income on receipt, but valuation of 

these interests is often difficult due to factors such as the speculative nature of future business profits. Therefore, efforts to measure 

the amount of compensation for services by including in income the 

value of a partnership profits interest received for services at the 

time of receipt have not been successful. 

The Committee bill consequently takes a different approach, the 

approach of treating net income and gain from an investment services partnership interest as ordinary income for the performance of 

services except to the extent it is attributable to the partner’s invested capital. Capital gains tax treatment will still be available to 

the extent that gain is attributable to the partner’s invested capital. 

It is intended that the present-law employment tax rules apply 

to this income to the same extent they apply to other compensation 

income. To ensure that the substance of the provision applies regardless of the use of vehicles other than partnerships to seek reduction of tax on compensation income for investment services, the 

provision also recharacterizes as ordinary income for the performance of services the income or gain with respect to certain other interests, including interests in certain entities other than partnerships, that are held by a person who performs, directly or indirectly, investment management services for the entity. In addition, 

to strongly ensure compliance with the provision, a 40-percent 

strict liability penalty applies to underpayments attributable to 

such techniques to seek to avoid ordinary income tax rates under 

the provision. It is expected that in enforcement, in coordinating 

with present-law rules relating to partners and partnerships, and 

in providing other guidance under the provision, the Treasury Department will consistently limit opportunities to avoid ordinary income tax on compensation within the scope of the provision. 

The income recharacterized as ordinary compensation income 

under the provision is not treated as qualifying income of a publicly 

traded partnership, because it is in the nature of compensation 

(rather than the types of income listed as qualifying income). The 

effective date of the provision as it applies with respect to publicly 

traded partnerships is deferred until taxable years beginning after 

December 31, 2009, to permit compliance with the provision. 

EXPLANATION OF PROVISION

Recharacterization as ordinary income for performance of services 

The provision generally treats net income from an investment 

services partnership interest as ordinary income for the performance of services except to the extent it is attributable to the partner’s invested capital. Thus, the provision recharacterizes the partner’s distributive share of income from the partnership, regardless 

of whether such income would otherwise be treated as capital gain, 


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dividend income, or any other type of income in the hands of the 

partner. Such income is taxed at ordinary income rates and is subject to self-employment tax. 

Net income means, with respect to an investment services partnership interest, the excess (if any) of (1) all items of income and 

gain taken into account by the partner with respect to the partnership interest for the partnership taxable year, over (2) all items of 

deduction and loss taken into account by the partner with respect 

to the partnership interest for the partnership taxable year. 

The provision provides that an investment services partnership 

interest is a partnership interest held by any person who provides 

(directly or indirectly) a substantial quantity of certain services to 

the partnership in the conduct of the trade or business of providing 

such services. The services are: (1) advising the partnership as to 

the advisability of investing in, purchasing, or selling any specified 

asset; (2) managing, acquiring, or disposing of any specified asset; 

(3) arranging financing with respect to acquiring specified assets; 

(4) any activity in support of any of the foregoing services. 

For this purpose, specified assets means securities (as defined in 

section 475(c)(2)), real estate, commodities (as defined in section 

475(e)(2)), or options or derivative contracts with respect to such 

securities, real estate, or commodities. A security for this purpose 

means any (1) share of corporate stock, (2) partnership interest or 

beneficial ownership interest in a widely held or publicly traded 

partnership or trust, (3) note, bond, debenture, or other evidence of 

indebtedness, (4) interest rate, currency, or equity notional principal contract, (5) interest in, or derivative financial instrument in, 

any such security or any currency (regardless of whether section 

1256 applies to the contract), and (6) position that is not such a security and is a hedge with respect to such a security and is clearly 

identified. A commodity for this purpose means a (1) commodity 

that is actively traded, (2) notional principal contract with respect 

to such a commodity, (3) interest in, or derivative financial instrument in, such a commodity, or (4) position that is not such a commodity and is a hedge with respect to such a commodity and is 

clearly identified. 

Exception for invested capital 

The provision provides an exception to recharacterization as ordinary income for performance of services in the case of the portion 

of the partner’s distributive share of partnership items with respect 

to the partner’s invested capital. Invested capital means the fair 

market value at the time of contribution of any money or other 

property contributed to the partnership. The exception applies provided that the partnership makes reasonable allocation of partnership items between the portion of the partner’s distributive share 

attributable to invested capital and the remaining portion. An allocation is not treated as reasonable if it would result in the allocation of a greater portion of income to invested capital than any 

other partner not providing services would have been allocated 

with respect to the same amount of invested capital. The exception 

to recharacterization also applies to gain or loss attributable to invested capital on disposition of the partnership interest, which is 

the portion that would have been allocable to invested capital if the 


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partnership had sold all its assets immediately before the disposition. 

For this purpose, an investment services partnership interest is 

not treated as acquired by contribution of invested capital to the 

extent of any loan or other advance made or guaranteed, directly 

or indirectly, by any partner or the partnership. For example, if 

partner A loans partner B funds that partner B contributes to the 

partnership, the loaned amount is not invested capital of partner 

B. 

In addition, for this purpose, any loan or other advance to the 

partnership made or guaranteed, directly or indirectly by a partner 

not providing services to the partnership is treated as invested capital of that partner. Income and loss treated as allocable to invested capital are adjusted accordingly. For example, if investors in 

a private equity fund that is a partnership contribute capital as 

debt rather than as equity, while the manager of the fund contributes only equity so that his invested capital appears to be a large 

percentage of the total equity contributed, the provision treats the 

partnership debt to the investors as the investors’ invested capital. 

The percentage of total invested capital that is attributable to the 

fund manager in this example is determined taking into account 

this debt as well as the equity contributed to the fund, so the manager’s invested capital is a smaller percentage of total invested capital than if only equity contributions were taken into account. 

Losses, dispositions, and partnership distributions 

The provision provides rules for the treatment of losses with respect to an investment services partnership interest, as well as for 

disposition of all or a portion of such a partnership interest, and 

distributions of partnership property with respect to such a partnership interest. 

Consistently with the general rule providing that net income 

with respect to such a partnership interest is ordinary income for 

the performance of services, the provision provides that net loss 

with respect to such a partnership interest (to the extent not disallowed) generally is treated as ordinary loss. For this purpose, net 

loss means, with respect to an investment services partnership interest, the excess (if any) of (1) all items of deduction and loss 

taken into account by the partner with respect to the partnership 

interest for the partnership taxable year, over (2) all items of income and gain taken into account by the partner with respect to 

the partnership interest for the partnership taxable year. The net 

loss is allowed for a partnership taxable year, however, only to the 

extent that the loss does not exceed the excess (if any) of (1) aggregate net income with respect to the partnership interest for prior 

partnership taxable years, over (2) the aggregate net loss with respect to the partnership interest not disallowed for prior partnership years. Any net loss that is not allowed for the partnership taxable year is carried forward to the next partnership taxable year. 

Notwithstanding the present-law rule that the basis of a partnership interest generally is reduced by the partner’s distributive 

share of partnership losses and deductions (sec. 705(a)(2)), the provision provides that no adjustment is made to the basis of a partnership interest on account of a net loss that is not allowed for the 

partnership taxable year. When any such net loss that is carried 


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forward is allowed in a subsequent year, the adjustment is made 

to the basis of the partnership interest. 

Net loss with respect to an investment services partnership interest that was acquired by purchase, however, is not treated as ordinary, to the extent of net loss not exceeding the excess of (1) the 

basis of the interest immediately after the purchase, over (2) the 

aggregate net loss not treated as ordinary under this rule in prior 

taxable years. Such net loss is not taken into account in determining the amount of net income that is treated as ordinary under 

the provision. 

On the disposition of an investment services partnership interest, 

gain is treated as ordinary income for the performance of services, 

notwithstanding the present-law rule that gain or loss from the disposition of a partnership interest generally is considered as capital 

gain or loss (sec. 741; except ordinary treatment applies to the extent attributable to inventory and unrealized receivables, sec. 751). 

Loss on the disposition of an investment services partnership interest is treated as ordinary loss, but only to the extent of the amount 

by which aggregate net income previously treated as ordinary exceeds aggregate net loss previously allowed as ordinary under the 

provision. The amount of net loss that otherwise would have reduced the basis of the investment services partnership interest is 

disregarded for purposes of the provision, in the event of any disposition of the interest. 

On the distribution of appreciated property by a partnership to 

a partner with respect to an investment services partnership interest, the present-law rule providing that no gain or loss generally 

is recognized to a partnership on a distribution to a partner of 

property or money does not apply. Rather, the partnership recognizes gain as if the partnership had sold the property at its fair 

market value at the time of the distribution. For this purpose, appreciated property means property with respect to which gain 

would be realized if sold by the partnership at the time of distribution. 

In applying the present-law rules relating to ordinary income 

treatment of amounts attributable to unrealized receivables and inventory items on sale or exchange of a partnership interest (sec. 

751(a)), an investment services partnership interest is treated as 

an inventory item of the partnership. Thus, for example, upon the 

sale or exchange of an interest in a partnership that in turn holds 

an investment services partnership interest, amounts received by 

the transferor partner that are attributable to the investment services partnership interest are considered as ordinary income. 

Other entities 

The provision also recharacterizes as ordinary income for the 

performance of services the income or gain with respect to certain 

other interests, including interests in certain entities other than 

partnerships, that are held by a person who performs, directly or 

indirectly, investment management services for the entity. 

This rule applies if (1) a person performs (directly or indirectly) 

investment management services for any entity, (2) the person 

holds a disqualified interest with respect to the entity, and (3) the 

value of the interest (or payments thereunder) is substantially related to the amount of realized or unrealized income or gain from 


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the assets with respect to which the investment management services are performed. In this case, any income or gain with respect 

to the interest is treated as ordinary income for the performance 

of services. Rules similar to the exception for a partner’s invested 

capital apply for this purpose. For this purpose, a disqualified interest in an entity means (1) any interest other than debt, (2) convertible or contingent debt, (3) an option or other right to acquire 

either of the foregoing, or (4) a derivative instrument entered into 

(directly or indirectly) with the entity or an investor in the entity. 

A disqualified interest does not include a partnership interest. A 

disqualified interest also does not include stock in a taxable corporation, which for this purpose means either a domestic C corporation or a foreign corporation that is subject to a comprehensive 

foreign income tax. Under this rule, a comprehensive income tax 

has the meaning set forth in section 457A(d)(4): the income tax of 

a foreign country if the foreign corporation is eligible for the benefits of a comprehensive income tax treaty between that country and 

the U.S., or if the corporation demonstrates to the satisfaction of 

the Treasury Secretary that the foreign country has a comprehensive income tax. 

For example, if a hedge fund manager holds stock of a Cayman 

Islands corporation that in turn is a partner in a hedge fund partnership, the manager performs investment management services 

for the hedge fund, and the value of the stock (or dividends) is substantially related to the growth and income in hedge fund assets 

for which the manager provides investment management services, 

then gain in the value of the stock, and dividends, are treated as 

ordinary income for the performance of services. The fact that the 

services are performed for the hedge fund, rather than directly for 

the Cayman Islands corporation in which the manager has a disqualified interest, does not change this result under the provision. 

Thus, the gain is not eligible for the capital gain tax rate, the dividend is not eligible for the special rate on qualified dividends, but 

rather, are subject to tax at ordinary rates as income from the performance of services. The income is treated as net earnings from 

self-employment for purposes of the self-employment tax of the individual who performs the services. Though the amounts received 

may exceed the cap (imposed by reason of section 1402(b)) on the 

old-age, survivors, and disability insurance portion of the self-employment tax, the hospital insurance portion of the self-employment tax is not capped, and applies to the income. 

Underpayment penalty 

The provision provides that the accuracy-related penalty under 

section 6662 on underpayments applies to underpayments attributable the failure to comply with section 710(d) (relating to the 

treatment of income in connection with investment management 

services unrelated to partnership interests) or the regulations 

under section 710 preventing the avoidance of the purposes of section 710. The penalty rate is 40 percent. The present-law reasonable cause exception of section 6664 does not apply with respect to 

these underpayments, resulting in an automatic penalty. 


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Self-employment tax treatment 

Under the provision, net income from an investment services 

partnership interest is subject to self-employment tax. Net income 

from an investment services partnership interest is derived from 

the performance by a person of a substantial quantity of services 

to the partnership in the course of the active conduct of a trade or 

business. This income falls within the definition of net earnings 

from self-employment, which generally includes a partner’s distributive share (whether or not distributed) of income or loss from 

any trade or business carried on by the partnership (sec. 1402(a)), 

with certain exclusions. Because net income from an investment 

services partnership is treated as ordinary income for the performance of services, the present-law exception for gain or loss from the 

sale or exchange of a capital asset does not apply, even though the 

net income from the investment service partnership interest might 

otherwise be characterized as capital gain. The provision also provides that, in the case of a limited partner, the present-law exclusion for limited partners does not apply to any income treated as 

ordinary income from an investment services partnership interest 

that is received by an individual who provides a substantial quantity of the specified services. 

Rules relating to REITs and publicly traded partnerships 

In the case of a REIT to which income and asset limitations 

apply under present law (sec. 856(c)(2), (3), and (4)), these income 

and asset tests are applied without regard to the provision. Thus, 

a REIT may continue to satisfy the income and asset limitations 

without regard to the provision. 

Under the provision, a publicly traded partnership, more than 10 

percent of whose gross income consists of net income from an investment services partnership interest, generally is treated as a 

corporation for Federal tax purposes under section 7704. The 

present-law exception to corporate treatment for a publicly traded 

partnership, 90 percent or more of whose gross income is qualifying 

income within the meaning of section 7704(c)(2), does not apply, because net income from an investment services partnership interest 

is not qualifying income within the meaning of section 7704(c)(2). 

The provision provides a special rule for certain partnerships 

that are owned by publicly traded REITs and that meet specific requirements, however. Under the special rule, the recharacterization 

of partnership income as ordinary income for the performance of 

services does not apply, provided the following requirements are 

met. The requirements are: (1) the partnership is treated as publicly traded (under section 7704) solely because interests in the 

partnership are convertible into interests in a publicly traded 

REIT; (2) 50 percent or more of the capital and profits interests of 

the partnership are owned, directly or indirectly, at all times during the taxable year, by the REIT (taking into account attribution 

rules under section 267(c)); and (3) the partnership itself satisfies 

the REIT income and asset limitations (secs. 856(c)(2), (3), and (4), 

applied without regard to this provision). Thus, for example, this 

special rule provides that a partnership is not treated as a corporation under section 7704, in an ‘‘upreit’’ structure in which a publicly traded REIT owns more than 50 percent of the capital and 

profits interests of the partnership, partnership interests held by 


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persons other than the REIT are convertible into publicly traded 

REIT stock, and the partnership itself meets the income and asset 

limitations of the REIT rules (secs. 856(c)(2), (3), and (4)). For this 

purpose, if the partnership interest may be put to the REIT or the 

partnership for REIT stock, it is considered convertible into interests of the publicly traded REIT. It is not intended that convertibility of partnership interests into a class of publicly traded REIT 

stock that tracks the performance of particular partnership assets 

(such as assets of a type that, if held in excess, would cause the 

REIT asset or income limitations not to be satisfied), or performance of the partnership assets generally, satisfies this special rule; 

rather, it is intended that such a partnership does not meet the requirements of this special rule. 

Regulatory authority 

The Treasury department shall prescribe such regulations as are 

necessary or appropriate to carry out the purpose of the provision, 

including regulations to prevent the avoidance of the purposes of 

the provision and regulations to coordinate the provision with other 

rules of subchapter K of the Code (relating to partnerships). 

EFFECTIVE DATE

The provision is effective generally for taxable years ending after 

November 1, 2007. 

In the case of a partnership taxable year that includes that date, 

the amount of net income of a partner that is recharacterized as 

ordinary income for the performance of services under the provision 

is limited to the lesser of (1) net income for the entire partnership 

taxable year, or (2) net income determined by taking into account 

only items attributable to the part of the taxable year after that 

date. 

The provision is effective for dispositions of partnership interests, 

and partnership distributions, after that date. 

The provision relating to income or gain with respect to interests 

in certain entities other than partnerships that are held by a person who performs, directly or indirectly, investment management 

services for the entity takes effect on November 1, 2007. 

For purposes of applying the rules relating to publicly traded 

partnerships (section 7704), the provision applies to taxable years 

beginning after December 31, 2009. 

2. Provide that certain indebtedness incurred by a partnership in 

acquiring qualified securities or commodities is not treated as 

acquisition indebtedness for purposes of the unrelated debt-financed income rules (sec. 612 of the bill and sec. 514 of the 

Code) 

PRESENT LAW

Unrelated business income tax 

In general, an organization that otherwise is exempt from Federal income tax is taxed on income from a trade or business regularly carried on that is not substantially related to the organizaVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00143 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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190Secs. 511–514. 191Organizations subject to the unrelated business income tax include all organizations described in section 501(c) (except for U.S. instrumentalities and certain charitable trusts), qualified pension, profit-sharing, and stock bonus plans described in section 401(a), and certain State 

colleges and universities. Sec. 511(a)(2). 192Sec. 512(b). 193Sec. 512(c). 194Sec. 512(c). 195Sec. 514(c)(1). 196Sec. 514(c). 

tion’s exempt purposes.190 Most exempt organizations are subject 

to the unrelated business income tax.191

Certain types of income are specifically exempt from the unrelated business income tax. These items include, among others, dividends, interest, royalties, and certain rents, unless derived from 

debt-financed property or from certain 50-percent controlled subsidiaries.192 Organizations liable for tax on unrelated business taxable income (‘‘UBTI’’) may be liable for alternative minimum tax 

determined after taking into account adjustments and tax preference items. 

Special rules apply in the case of an exempt organization that 

owns a partnership interest in a partnership that holds UBTI-producing property. An exempt organization’s share of partnership income that is derived from the property generally is taxed as UBTI 

unless an exception provides otherwise.193

Debt-financed property 

In general 

In general, income of a tax-exempt organization that is produced 

by debt-financed property is treated as unrelated business income 

in proportion to the acquisition indebtedness on the income-producing property. Special rules apply in the case of an exempt organization that owns an interest in a partnership (or a pass-through 

entity taxed as a partnership) that holds debt-financed property.194

In general, in such cases, if the partnership incurs acquisition indebtedness with respect to property that, if held directly by the exempt organization, would not qualify for an exception from the 

debt-financed property rules, the receipt of income by the exempt 

organization with respect to such property may result in recognition of unrelated debt-finance income. 

Acquisition indebtedness generally means the amount of unpaid 

indebtedness incurred by an organization to acquire or improve the 

property and indebtedness that would not have been incurred but 

for the acquisition or improvement of the property.195 Acquisition 

indebtedness does not include, however, (1) certain indebtedness 

incurred in the performance or exercise of a purpose or function 

constituting the basis of the organization’s exemption, (2) obligations to pay certain types of annuities, (3) an obligation, to the extent it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, or construction of housing for 

low and moderate income persons, or (4) indebtedness incurred by 

a qualified organization to acquire or improve real property (the 

‘‘real property exception’’).196


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197This Code section generally describes an educational organization that operates as a school 

(i.e., ‘‘an educational organization which normally maintains a regular faculty and curriculum 

and normally has a regularly enrolled body of pupils or students in attendance at the place 

where its educational activities are regularly carried on’’). 198Sec. 514(c)(9)(C) & (F). 199Sec. 514(c)(9)(C). 200Sec. 514(c)(9)(B)(i)–(v). 201Sec. 514(c)(9)(B)(vi) & (E). 202Sec. 514(c)(9)(E)(i). 203Sec. 514(c)(9)(E)(i)(I). 204Treas. Reg. sec. 1.514(c)-2(b)(2)(i). 

Exception for debt-financed real property investments by 

qualified organizations 

For purposes of the real property exception, a qualified organization is: (1) an educational organization described in section 

170(b)(1)(A)(ii) 197 and its affiliated supporting organizations; (2) a 

qualified trust described in section 401(a) (hereinafter ‘‘pension 

funds’’); (3) a title holding company described in section 501(c)(25) 

(insofar as it holds shares of organizations described in (1) or 

(2) 198); or (4) a retirement income account described in section 

403(b)(9).199 To qualify for the real property exception, an acquisition or improvement by the qualified organization must meet several requirements. These include: (1) a requirement generally that 

the price of the property is a fixed amount determined as of the 

date of the acquisition or completion of the improvement; (2) restrictions against payment of the indebtedness of the arrangement 

being dependent upon the revenue, income, or profits derived from 

the property; (3) restrictions concerning sale-leaseback arrangements; and (4) in general, a prohibition against seller financing.200

Additional requirements must be met for the real property exception to apply where the real property is held by a partnership in 

which a qualified organization is a partner. To qualify for the real 

property exception, the partnership must meet all of the above-described general requirements and must meet one of the following 

three requirements: (1) all of the partners of the partnership are 

qualified organizations; (2) each allocation to a partner of the partnership which is a qualified organization is a qualified allocation 

(within the meaning of section 168(h)(6)); or (3) the partnership 

satisfies a rule prohibiting disproportionate allocations.201

The disproportionate allocation rule requires two things: first, 

that the organization satisfy what commonly is referred to as the 

‘‘fractions rule,’’ and second, that each allocation with respect to the 

partnership have substantial economic effect within the meaning of 

section 704(b)(2).202 Under the fractions rule, the allocation of 

items to any partner that is a qualified organization cannot result 

in such partner having a share of the overall partnership income 

for any taxable year greater than such partner’s share of overall 

partnership loss for the taxable year for which such partner’s loss 

share will be the smallest.203 A partnership generally must satisfy 

the fractions rule on an actual basis and on a prospective basis for 

each taxable year of the partnership in which it holds debt-financed property and has at least one partner that is a qualified organization.204 The fractions rule generally is intended to prevent 

the shifting of disproportionate income or gains to tax-exempt partners of the partnership or the shifting of disproportionate deductions, losses, or credits to taxable partners. 


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205This generally includes any (1) share of stock in a corporation; (2) partnership or beneficial 

ownership interest in a widely held or publicly traded partnership or trust; (3) note, bond, debenture, or other evidence of indebtedness; (4) interest rate, currency, or equity notional principal contract; (5) evidence of an interest in, or a derivative financial instrument in any security 

described in (1), (2), (3) or (4), or any currency, including any option, forward contract, short 

position, and any similar financial instrument in such security or currency; or (6) certain hedges 

with respect to a security. 206This generally includes (1) any commodity which is actively traded; (2) any notional principal contract with respect to a commodity described in (1); (3) any evidence of an interest in, 

or a derivative instrument in, any commodity described in (1) or (2), including any option, forward contract, futures contract, short position, and any similar instrument in such a commodity; 

and (4) certain hedges with respect to a commodity. 

REASONS FOR CHANGE

The Committee believes the present-law debt-financed property 

rules create an incentive for universities, pension funds, and other 

tax-exempt organizations to invest in investment partnerships that 

hold debt-financed securities and commodities indirectly through 

‘‘blocker’’ corporations established in foreign tax-haven jurisdictions. Such use of offshore blocker corporations may allow exempt 

organizations to avoid attribution of debt incurred by the investment partnership to the exempt organization and thereby to avoid 

application of the debt-financed property rules. By eliminating the 

incentive to invest through blocker corporations established in tax 

haven jurisdictions where an exempt organization is a partner with 

limited liability in an investment partnership, the Committee believes that such organizations will be more likely to invest directly 

in investment partnerships and in many cases will eliminate the 

use of offshore blocker corporations. In addition, the Committee believes that allowing pension funds, universities, and other exempt 

organizations to invest directly in certain investment partnerships 

domestically would reduce transaction costs and increase investment returns. 

DESCRIPTION OF PROVISION

In the case of an organization that is a partner with limited liability with respect to a partnership, the provision provides that indebtedness incurred or continued by such partnership in purchasing or carrying any qualified security or commodity is not 

treated as acquisition indebtedness for purposes of the debt-financed property rules. The term qualified security or commodity 

means: (1) any security (as defined in section 475(c)(2), with the exception of certain contracts to which section 1256 applies); 205 (2) 

any commodity (as defined in section 475(e)(2)); 206 or (3) any option or derivative contract with respect to a security or commodity 

described in (1) or (2). Similar rules apply in the case of tiered 

partnerships and other flow-through entities. It is intended that, 

for purposes of the provision, an organization is treated as a partner with limited liability if its share of the liabilities of the partnership is no greater than the amount of its capital in the partnership. 

The provision authorizes the Secretary to prescribe such regulations as may be necessary or appropriate to carry out the purposes 

of the provision, including regulations to prevent abuse of the provision. 


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207Sec. 1239. 208Sec. 197(f)(7). 209Sec. 1239(b). 210Property described in section 1231 is, generally, property used in the trade or business subject to the allowance for depreciation and held for more than one year. Sec. 1231(b). Certain 

other property is also included. 211Sec. 64. 212See, e.g., McKee, Nelson, and Whitmire, Federal Taxation of Partnerships and Partners, 

(Fourth Ed. 2007) at par. 17.04[2] (see n. 138) and at par. 18.02[4] (see n. 36). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after the 

date of enactment. 

3. Application of section 1239 to partnership interests and tax-sharing agreements (Sec. 613 of the bill and Sec. 1239 of the Code) 

PRESENT LAW

If property is sold or exchanged between related persons, directly 

or indirectly, the transferor’s gain is treated as ordinary income if 

the property is, in the hands of the transferee, of a character which 

is subject to the allowance for depreciation.207 Such property includes property subject to the allowance for amortization of intangibles under section 197.208

The definition of related persons for this purpose includes persons that are related under a 50-percent value test, using specified 

constructive ownership attribution rules.209

In some situations, taxpayers have transferred amortizable intangibles or other depreciable property to a transferee that may not 

be within the definition of a related party under section 1239, but 

in connection with the transfer the parties have contractually 

agreed, under a tax-sharing arrangement, that the transferor is entitled to a percentage of the tax benefits of depreciation or amortization in the hands of the transferee. 

If a partner transfers an interest in a partnership, the amount 

of money, or the fair market value of property, received by the 

transferor partner in exchange for all or a part of his interest in 

the partnership attributable to unrealized receivables or inventory 

items of the partnership is considered an amount realized from the 

sale or exchange of property other than a capital asset. Section 

751(d) defines inventory items for this purpose to include any property which, on sale or exchange by the partnership, would be considered property other than a capital asset (and other than property described in section 1231),210 and also any other property held 

by the partnership which, if held by the selling partner would be 

considered property other than such property. Section 64 provides 

that any gain from the sale or exchange of property which is ‘treated or considered as ordinary income’ is treated as ‘‘gain from the 

sale or exchange of property which is neither a capital asset nor 

property described in section 1231(b).’’ 211 If a partner transfers a 

partnership interest to a related party within the meaning of section 1239 and the partnership owns depreciable property, taxpayers might take the position that the application of section 64 

and section 1239 to section 751 is unclear, or that the depreciable 

property was not transferred ‘‘directly or indirectly’’ to the related 

party within the meaning of section 1239.212


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213 The provision is not intended to apply to an outright sale of assets between otherwise unrelated parties in which the fixed sales price is negotiated to be higher because of the anticipated tax benefits that will be enjoyed by the transferee. However, in such a situation, if there 

is also a tax sharing agreement that returns to the transferor any portion of the benefits of deprecation or amortization realized by the transferee, notwithstanding the basic form of the transaction as a transfer of all the benefits to the transferee, then the parties will be treated as related for purposes of the provision. 

REASONS FOR CHANGE

The Committee believes that taxpayers should not obtain capital 

gain treatment for the transfer of depreciable property (including 

intangibles amortizable under section 197) while retaining an interest in the tax benefits of the depreciation, which may be measured by reference to a higher, ordinary income tax rate of the 

transferee. 

The Committee also believes that the rules of section 1239 

should apply where depreciable property (including intangibles amortizable under section 197) is indirectly transferred to a related 

party through the transfer of a partnership interest. 

EXPLANATION OF PROVISION

Under the provision, regardless of whether any other relationship exists between the transferor and transferee, a transferor is 

related to a transferee for purposes of section 1239 if there is a tax 

sharing agreement with respect to any sale or exchange. A tax 

sharing agreement for this purpose means any agreement that provides for the payment to the transferor of any amount that is determined by reference to any portion of the tax benefit realized by 

the transferee with respect to the depreciation (or amortization) of 

the property directly or indirectly transferred.213

Under the provision, gain recognized by the transferor of a partnership interest to a related party under section 1239 is treated as 

ordinary income to the extent attributable to unrealized appreciation in property which is of a character subject to depreciation. As 

under present law, such property includes intangible property 

which is of a character subject to amortization under section 197. 

In the case of a transfer of a partnership interest, the provision 

applies with respect to any agreement with respect to depreciation 

or amortization realized with respect to property transferred directly or indirectly in connection with the transfer of the partnership interest. As one example, if a transferor transfers an interest 

in a partnership, and is entitled to receive the benefits of any tax 

sharing agreement with respect to property held directly or indirectly by that partnership, then the transferor’s gain on transfer of 

the partnership interest is ordinary income to the extent attributable to such property. 

No inference is intended as to the treatment under present law 

of any transfer subject to the provision. 

EFFECTIVE DATE

The provision is effective with respect to sales or exchanges after 

the date of enactment. However, the provision shall not apply to 

any sale or exchange pursuant to a written binding contract which 

includes a tax sharing agreement and which is in effect on November 1, 2007 and not modified thereafter in any material respect. 


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

which are described below. 215One such exception is that the affiliated group for interest allocation purposes includes section 936 corporations that are excluded from the consolidated group. 

C. OTHER PROVISIONS

1. Delay Implementation of Worldwide Interest Allocation (sec. 621 

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

PRESENT LAW

In general 

In order to compute the foreign tax credit limitation, a taxpayer 

must determine the amount of its taxable income from foreign 

sources. Thus, the taxpayer must allocate and apportion deductions 

between items of U.S.-source gross income, on the one hand, and 

items of foreign-source gross income, on the other. 

In the case of interest expense, the rules generally are based on 

the approach that money is fungible and that interest expense is 

properly attributable to all business activities and property of a 

taxpayer, regardless of any specific purpose for incurring an obligation on which interest is paid.214 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 that 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.215 For example, both definitions generally exclude all foreign 

corporations from the affiliated group. Thus, while debt generally 

is considered fungible among the assets of a group of domestic affiliated corporations, the same rules do not apply as between the 

domestic and foreign members of a group with the same degree of 

common control as the domestic affiliated group. 


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216Pub. L. No. 108–357, sec. 401 (2004). 217For 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. 218 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. 

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 that 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’’) 216 modified 

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,217 over 

(2) the third-party interest expense incurred by foreign members of 

the group to the extent such interest would be allocated to foreign 

sources if the principles of worldwide interest allocation were applied separately to the foreign members of the group.218


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219 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. 220See Treas. Reg. sec. 1.904–4(e)(2). 

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,219 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.220 For these purposes, items of income or gain from a transaction or series of transactions are disregarded if a principal purpose for the transaction or 

transactions is to qualify any corporation as a financial corporation. 

The common parent of the pre-election worldwide affiliated group 

must make the election for the first taxable year beginning after 

December 31, 2008, in which a worldwide affiliated group includes 

a financial corporation. Once made, the election applies to the financial institution group for the taxable year and all subsequent 

taxable years. In addition, anti-abuse rules are provided under 

which certain transfers from one member of a financial institution 


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221Sec. 1001. 

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 are effective for taxable 

years beginning after December 31, 2008. 

REASONS FOR CHANGE

The committee acknowledges that the worldwide interest allocation rules of AJCA were added to the Code in 2004, on a delayed 

effective date basis, as one of a number of changes to the Code’s 

treatment of international investment and cross-border activity of 

U.S. taxpayers. The committee also recognizes that the Code’s rules 

governing cross-border activity of U.S. taxpayers are exceedingly 

complex, and the Committee is concerned that certain such international-related provisions of the Code, particularly in their interaction with other such provisions, can produce unintended consequences and may create unintended incentives for economically 

inefficient behavior by taxpayers seeking to minimize their overall 

global tax liability. Accordingly, the committee believes that it is 

desirable to delay implementation of the worldwide interest allocation rules of AJCA to provide further time to comprehensively review the Code’s current approach to the taxation of cross-border activity of U.S. taxpayers. 

EXPLANATION OF PROVISION

The proposal delays by nine years the implementation of the 

worldwide interest allocation rules added by AJCA. Thus, the 

worldwide interest allocation rules are effective for taxable years 

beginning after December 31, 2017. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

2. Broker reporting of customer’s basis in securities transactions 

(sec. 622 of the bill and sec. 6045 of the Code) 

PRESENT LAW

In general 

Gain or loss generally is recognized for Federal income tax purposes on realization of that gain or loss (for example, through the 

sale of property giving rise to the gain or loss). The taxpayer’s gain 

or loss on a disposition of property is the difference between the 

amount realized and the adjusted basis.221


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222Sec. 1016. 223Treas. Reg. sec. 1.1012–1(c)(1). 224Treas. Reg. sec. 1.1012–1(c). 225Tres. Reg. sec. 1.1012–1(e). 226Sec. 6041(a). 227Sec. 6045(a). 228Sec. 6045(b). 229 Id. 

To compute adjusted basis, a taxpayer must first determine the 

property’s unadjusted or original basis and then make adjustments 

prescribed by the Code.222 The original basis of property is its cost, 

except as otherwise prescribed by the Code (for example, in the 

case of property acquired by gift or bequest or in a tax-free exchange). Once determined, the taxpayer’s original basis generally is 

adjusted downward to take account of depreciation or amortization, 

and generally is adjusted upward to reflect income and gain inclusions or capital outlays with respect to the property. 

Basis computation rules 

If a taxpayer has acquired stock in a corporation on different 

dates or at different prices and sells or transfers some of the shares 

of that stock, and the lot from which the stock is sold or transferred is not adequately identified, the shares deemed sold are the 

earliest acquired shares (the ‘‘first-in-first-out rule’’).223 If a taxpayer makes an adequate identification of shares of stock that it 

sells, the shares of stock treated as sold are the shares that have 

been identified.224 A taxpayer who owns shares in a regulated investment company (‘‘RIC’’) generally is permitted to elect, in lieu 

of the specific identification or first-in-first-out methods, to determine the basis of RIC shares sold under one of two average-costbasis methods described in Treasury regulations.225

Information reporting 

Present law imposes information reporting requirements on participants in certain transactions. Under these requirements, information is generally reported to the IRS and furnished to taxpayers. 

These requirements are intended to assist taxpayers in preparing 

their income tax returns and to help the IRS determine whether 

taxpayers’ tax returns are correct and complete. For example, every 

person engaged in a trade or business generally is required to file 

information returns for each calendar year for payments of $600 or 

more made in the course of the payor’s trade or business.226

Section 6045(a) requires brokers to file with the IRS annual information returns showing the gross proceeds realized by customers from various sale transactions. The Secretary is authorized 

to require brokers to report additional information related to customers.227 Brokers are required to furnish to every customer information statements with the same gross proceeds information that 

is included in the returns filed with the IRS for that customer.228

These information statements are required to be furnished by January 31 of the year following the calendar year for which the return under section 6045(a) is required to be filed.229

A person who is required to file information returns but who fails 

to do so by the due date for the returns, includes on the returns 

incorrect information, or files incomplete returns generally is subject to a penalty of $50 for each return with respect to which such 


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230Sec. 6721. 231Sec. 6722. 232Sec. 6001. 233Treas. Reg. sec. 1.6001–1(a). 234Treas. Reg. sec. 1.1015–1(g). 

a failure occurs, up to a maximum of $250,000 in any calendar 

year.230 Similar penalties, with a $100,000 calendar year maximum, apply to failures to furnish correct information statements 

to recipients of payments for which information reporting is required.231

Present law does not require information reporting with respect 

to a taxpayer’s basis in property but does impose an obligation to 

keep records, as described below. 

Basis recordkeeping requirements 

Taxpayers are required to ‘‘keep such records . . . as the Secretary may from time to time prescribe.’’ 232 Treasury regulations 

impose recordkeeping requirements on any person required to file 

information returns.233

Treasury regulations provide that donors and donees should keep 

records that are relevant in determining a donee’s basis in property.234 IRS Publication 552 states that a taxpayer should keep 

basis records for property until the period of limitations expires for 

the year in which the taxpayer disposes of the property. 

REASONS FOR CHANGE

The Committee believes that there may be significant underreporting of capital gain income as a result of misreporting of basis. 

Requiring brokers to report basis to the IRS and taxpayers may reduce capital gain underreporting: When coupled with the presentlaw requirement to report gross proceeds, mandatory basis reporting will give both taxpayers and the IRS information needed to 

compute gain (or loss) from securities sales. The Committee, however, understands that imposing basis reporting requirements in 

all circumstances in which gross proceeds reporting is mandatory 

under present law would create significant costs and other difficulties for brokers. Consequently, the provision’s reporting requirements include certain significant limitations, and the Secretary has 

broad discretion to provide rules to implement (and, if it deems it 

appropriate, to broaden) those requirements. The provision also includes rules—such as mandatory broker-to-broker reporting and 

issuer reporting of certain organizational actions—intended to facilitate accurate reporting of tax basis. 

EXPLANATION OF PROVISION

In general 

Under the provision, every broker that is required to file a return 

under section 6045(a) reporting the gross proceeds from the sale of 

a covered security must include in the return the (1) customer’s adjusted basis in the security and (2) whether any gain or loss with 

respect to the security is long-term or short-term (within the meaning of section 1222). 


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Covered securities 

A covered security is any specified security acquired on or after 

an applicable date if the security was (1) acquired through a transaction in the account in which the security is held or (2) was transferred to that account from an account in which the security was 

a covered security, but only if the transferee broker received a 

statement under section 6045A (described below) with respect to 

the transfer. Under this rule, securities acquired by gift or inheritance are not covered securities. 

A specified security is any share of stock in a corporation (including stock of a regulated investment company); any note, bond, debenture, or other evidence of indebtedness; any commodity or a 

contract or a derivative with respect to the commodity if the Secretary determines that adjusted basis reporting is appropriate; and 

any other financial instrument with respect to which the Secretary 

determines that adjusted basis reporting is appropriate. 

For stock in a corporation (including in a regulated investment 

company), the applicable date generally is January 1, 2009. Openend funds are permitted to elect to treat as a covered security any 

stock in the fund acquired before January 1, 2009. This election is 

described below. 

For any specified security other than stock in a corporation, the 

applicable date is January 1, 2011 or a later date determined by 

the Secretary. 

Computation of adjusted basis 

The customer’s adjusted basis required to be reported to the IRS 

is determined under the following rules. The adjusted basis of stock 

in a corporation other than an open-end fund is determined under 

the first-in-first-out method (described in Treasury regulations 

under section 1012) unless the customer notifies the broker by 

means of making an adequate identification (under the rules of section 1012 for specific identification) of the stock sold or transferred. 

The adjusted basis of stock in an open-end fund acquired before 

January 1, 2011 is determined in accordance with any permitted 

method under section 1012 (that is, the first-in-first-out method, 

the average-cost method, or the specific identification method). A 

broker’s basis computation method used for open-end stock held in 

one account with that broker may differ from the basis computation method used for open-end stock held in another account with 

that broker. The adjusted basis of stock in an open-end fund acquired on or after January 1, 2011 is determined in accordance 

with the broker’s default method (under section 1012) unless the 

customer notifies the broker that the customer elects another method permitted by section 1012. This notification is made separately 

for each account in which open-end stock is held and, once made, 

applies to all open-end stock held in the account. The adjusted 

basis of any covered security other than stock is determined under 

the applicable rules provided in section 1012. 

An open-end fund is a regulated investment company that offers 

for sale or has outstanding any redeemable security of which it is 

the issuer and the shares of which are not traded on an established 

securities exchange. A mutual fund the stock of which is priced 

daily and is acquired from the fund is an open-end fund. So-called 

exchange traded funds, funds in which there is intra-day pricing 


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and in which shares may be purchased on an exchange (rather 

than from the funds directly) are not open-end funds. 

For any sale, exchange, or other disposition of a specified security after the applicable date (defined previously), the provision 

modifies section 1012 so that the conventions prescribed by regulations under that section for determining adjusted basis (the firstin-first-out, specific identification, and average cost conventions) 

apply on an account-by-account basis. Under this rule, for example, 

if a customer holds shares of the same specified security in accounts with different brokers, each broker makes its adjusted basis 

determinations by reference only to the shares held in the account 

with that broker. Unless the election described next applies, stock 

in an open-end fund acquired before January 1, 2009 is treated as 

a separate account. A consequence of this rule is that if adjusted 

basis is being determined using the average cost convention, average cost is computed without regard to any open-end stock acquired 

before January 1, 2009. An open-end fund, however, may elect (at 

the time and in the form and manner prescribed by the Secretary), 

on a stockholder-by-stockholder basis, to treat as covered securities 

all stock in the fund held by the stockholder without regard to 

when the stock was acquired. When this election applies, the average cost of a customer’s open-end stock is determined by taking 

into account shares of stock acquired before, on, and after January 

1, 2009. 

Exception for wash sales 

Unless the Secretary provides otherwise, customer’s adjusted 

basis in a covered security generally is determined without taking 

into account the effect on basis of the wash sale rules of section 

1091. If, however, the acquisition and sale transactions resulting in 

a wash sale under section 1091 occur in the same account and are 

in identical securities, adjusted basis is determined by taking into 

account the effect of the wash sale rules. Securities are identical 

for this purpose only if they have the same Committee on Uniform 

Security Identification Procedures (CUSIP) number. 

Reporting requirements for options 

The provision generally eliminates the present-law regulatory exception from section 6045(a) reporting for certain options. If a covered security is acquired by the exercise of an option and the option 

was acquired in the same account as the covered security, the 

amount of the premium received or paid for the option is treated 

as an adjustment to the gross proceeds from the subsequent sale 

of the covered security or as an adjustment to the customer’s adjusted basis in that security. Gross proceeds and basis reporting 

also generally is required when there is a lapse of, or a closing 

transaction with respect to, an option on a covered security. These 

reporting rules related to options transactions apply only to options 

granted or acquired on or after January 1, 2011. 

Time for providing statements to customers 

The provision changes to February 15 the present-law January 

31 deadline for furnishing certain information statements to customers. The statements to which the new February 15 deadline applies are (1) statements showing gross proceeds (under section 


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6045(b)) or substitute payments (under section 6045(d)) and (2) 

consolidated reporting statements (as defined in regulations) for reporting gross proceeds, dividends (under section 6042(c)), interest 

(under section 6049(c)(2)(A)), or royalties (under section 6050N(b)). 

The term ‘‘consolidated reporting statement’’ is intended to refer to 

annual tax information statements that brokerage firms customarily provide to their customers. 

Broker-to-broker and issuer reporting 

Every broker (as defined in section 6045(c)(1)), and any other 

person specified in Treasury regulations, that transfers to a broker 

(as defined in section 6045(c)(1)) a security that is a covered security when held by that broker or other person must, under new section 6045A, furnish to the transferee broker a written statement 

that allows the transferee broker to satisfy the provision’s basis 

and holding period reporting requirements. The Secretary may provide regulations that prescribe the content of this statement and 

the manner in which it must be furnished. It is contemplated that 

the Secretary will permit statements to be provided electronically. 

The statement required by this rule must be furnished within 45 

days after the transfer of the covered security or, if earlier, by January 15 of the year in which the transfer occurred. 

Present law penalties for failure to furnish correct payee statements apply to failures to furnish correct statements in connection 

with the transfer of covered securities. 

New section 6045B requires, according to forms or regulations 

prescribed by the Secretary, any issuer of a specified security to file 

a return setting forth a description of any organizational action 

(such as a stock split or a merger or acquisition) that affects the 

basis of the specified security, the quantitative effect on the basis 

of that specified security, and any other information required by 

the Secretary. This return must be filed within 45 days after the 

date of the organizational action or, if earlier, by January 31 of the 

year following the calendar year during which the action occurred. 

Every person required to file this return for a specified security 

also must furnish, according to forms or regulations prescribed by 

the Secretary, to the nominee with respect to that security (or to 

a certificate holder if there is no nominee) a written statement 

showing the name, address, and phone number of the information 

contact of the person required to file the return, the information required to be included on the return with respect to the security, 

and any other information required by the Secretary. This statement must be furnished to the nominee or certificate holder on or 

before January 31 of the year following the calendar year in which 

the organizational action took place. No return or information 

statement is required to be provided under new section 6045B for 

any action with respect to a specified security if the action occurs 

before the applicable date (as defined previously) for that security. 

The Secretary may waive the return filing and information statement requirements if the person to which the requirements apply 

makes publicly available, in the form and manner determined by 

the Secretary, the name, address, phone number, and email address of the information contact of that person, and the information 

about the organizational action and its effect on basis otherwise required to be included in the return. 


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235Treasury Inspector General for Tax Administration, Stronger Sanctions Are Needed to Encourage Timely Filing of Pass-Through Returns and Ensure Fairness in the Tax System the Informants’ Rewards Program Needs More Centralized Management Oversight, 2005–30–048 

(March 2005). 

The present-law penalties for failure to file correct information 

returns apply to failures to file correct returns in connection with 

organizational actions. Similarly, the present-law penalties for failure to furnish correct payee statements apply to a failure under 

new section 6045B to furnish correct statements to nominees or 

holders or to provide required publicly-available information in lieu 

of returns and written statements. 

EFFECTIVE DATE

The provision takes effect on January 1, 2009. 

3. Increase in penalty for failure to file partnership returns (sec. 

623 of the bill and sec. 6698 of the Code) 

PRESENT LAW

A partnership generally is treated as a pass-through entity. Income earned by a partnership, whether distributed or not, is taxed 

to the partners. Distributions from the partnership generally are 

tax-free. The items of income, gain, loss, deduction or credit of a 

partnership generally are taken into account by a partner as allocated under the terms of the partnership agreement. If the agreement does not provide for an allocation, or the agreed allocation 

does not have substantial economic effect, then the items are to be 

allocated in accordance with the partners’ interests in the partnership. To prevent double taxation of these items, a partner’s basis 

in its interest is increased by its share of partnership income (including tax-exempt income), and is decreased by its share of any 

losses (including nondeductible losses). 

Under present law, a partnership is required to file a tax return 

for each taxable year. The partnership’s tax return is required to 

include the names and addresses of the individuals who would be 

entitled to share in the taxable income if distributed and the 

amount of the distributive share of each individual. In addition to 

applicable criminal penalties, present law imposes a civil penalty 

for the failure to timely file a partnership return. The penalty is 

$50 per partner for each month (or fraction of a month) that the 

failure continues, up to a maximum of five months. 

REASONS FOR CHANGE

A recent report by the Treasury Inspector General for Tax Compliance (TIGTA) indicated that the incidence of late-filed returns, 

measured as a percentage of total returns filed, is nearly 2 to 4 

times higher among partnerships and S corporations, respectively, 

than it is among individual taxpayers.235 The TIGTA report indicated that the present-law penalty for partnerships fails to address 

the most egregious late filers. 

The Committee is concerned that the level of filing noncompliance by partnerships adversely affects the compliance of the individual partners. The Committee believes that the present law penalty should be increased to a level that effectively discourages nonVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00158 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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236Treasury Inspector General for Tax Administration, Stronger Sanctions Are Needed to Encourage Timely Filing of Pass-Through Returns and Ensure Fairness in the Tax System the Informants’ Rewards Program Needs More Centralized Management Oversight, 2005–30–048 

(March 2005). 

compliance. The Committee believes this will improve overall tax 

administration. 

EXPLANATION OF PROVISION

The provision increases the present-law failure to file penalty for 

partnership returns by $25 per partner times the number of shareholders in the partnership during any part of the taxable year for 

which the return was required, for each month (or a fraction of a 

month) during which the failure continues, up to a maximum of 12 

months. 

EFFECTIVE DATE

The provision applies to returns required to be filed after the 

date of enactment. 

4. Penalty for failure to file S corporation returns (sec. 624 of the 

bill and new sec. 6699 of the Code) 

PRESENT LAW

In general, an S corporation is not subject to corporate-level income tax on its items of income and loss. Instead, an S corporation 

passes through its items of income and loss to its shareholders. The 

shareholders take into account separately their shares of these 

items on their individual income tax returns. 

Under present law, S corporations are required to file a tax return for each taxable year. The S corporation’s tax return is required to include the following: the names and addresses of all persons owning stock in the corporation at any time during the taxable year; the number of shares of stock owned by each shareholder 

at all times during the taxable year; the amount of money and 

other property distributed by the corporation during the taxable 

year to each shareholder and the date of such distribution; each 

shareholder’s pro rata share of each item of the corporation for the 

taxable year; and such other information as the Secretary may require. 

REASONS FOR CHANGE

A recent report by the Treasury Inspector General for Tax Compliance (‘‘TIGTA’’) indicated that the incidence of late-filed returns, 

measured as a percentage of total returns filed, is nearly 2 to 4 

times higher among partnerships and S corporations, respectively, 

than it is among individual taxpayers.236 The TIGTA report attributed the high rate of late-filed S corporation returns to the lack of 

an effective penalty regime. 

The Committee believes the level of filing noncompliance by S 

corporations is unacceptably high. Late-filed S corporation returns 

can have an adverse effect on the filing and reporting compliance 

of the individual shareholders. Thus, the Committee believes that 

establishing an effective penalty for failing to timely file an S corporation return will improve overall tax administration. 


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EXPLANATION OF PROVISION

The provision imposes a monthly penalty for any failure to timely file an S corporation return or any failure to provide the information required to be shown on such a return. The penalty is $25 

times the number of shareholders in the S corporation during any 

part of the taxable year for which the return was required, for each 

month (or a fraction of a month) during which the failure continues, up to a maximum of 12 months. 

EFFECTIVE DATE

The provision applies to returns required to be filed after the 

date of enactment. 

5. Modifications to corporate estimated tax payments (sec. 625 of 

the bill) 

PRESENT LAW

In general, corporations are required to make quarterly estimated tax payments of their income tax liability. For a corporation 

whose taxable year is a calendar year, these estimated tax payments must be made by April 15, June 15, September 15, and December 15. 

Under present law, in the case of a corporation with assets of at 

least $1 billion, the payments due in July, August, and September, 

2012, shall be increased to 115 percent of the payment otherwise 

due and the next required payment shall be reduced accordingly. 

REASONS FOR CHANGE

The Committee believes it is appropriate to adjust the corporate 

estimated tax payments. 

EXPLANATION OF PROVISION

The provision increases the percentage from 115 percent to 181 

percent. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statement is made concerning the votes of the Committee on Ways and Means in its consideration of the bill, H.R. 3996, the ‘‘Temporary Tax Relief Act of 

2007.’’

The bill, H.R. 3996, was ordered favorably reported, as amended, 

by a rollcall vote of 22 yeas to 13 nays (with a quorum being 

present). The vote was as follows: 

MOTION TO REPORT RECOMMENDATIONS

The Chairman’s Amendment in the Nature of a Substitute, as 

amended, was ordered favorably reported by a rollcall vote of 22 

yeas to 13 nays (with a quorum being present). The vote was as 

follows: 


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. RANGEL ........................... X ........... ............. Mr. McCRERY ....................... ........... X .............

Mr. STARK ............................. X ........... ............. Mr. HERGER ......................... ........... X .............

Mr. LEVIN .............................. X ........... ............. Mr. CAMP ............................. ........... ........... .............

Mr. McDERMOTT .................... X ........... ............. Mr. RAMSTAD ....................... ........... X .............

Mr. LEWIS (GA) ..................... ........... ........... ............. Mr. JOHNSON ........................ ........... X .............

Mr. NEAL ............................... X ........... ............. Mr. ENGLISH ......................... ........... X .............

Mr. McNULTY ......................... ........... ........... ............. Mr. WELLER .......................... ........... ........... .............

Mr. TANNER ........................... X ........... ............. Mr. HULSHOF ........................ ........... X .............

Mr. BECERRA ........................ X ........... ............. Mr. LEWIS (KY) ..................... ........... X .............

Mr. DOGGETT ......................... X ........... ............. Mr. BRADY ............................ ........... X .............

Mr. POMEROY ........................ X ........... ............. Mr. REYNOLDS ...................... ........... X .............

Mrs. TUBBS JONES ................ X ........... ............. Mr. RYAN .............................. ........... X .............

Mr. THOMPSON ...................... X ........... ............. Mr. CANTOR .......................... ........... X .............

Mr. LARSON ........................... X ........... ............. Mr. LINDER ........................... ........... ........... .............

Mr. EMANUEL ........................ X ........... ............. Mr. NUNES ............................ ........... ........... .............

Mr. BLUMENAUER ................. X ........... ............. Mr. TIBERI ............................ ........... X .............

Mr. KIND ................................ X ........... ............. Mr. PORTER .......................... ........... X .............

Mr. PASCRELL ....................... X ........... .............

Ms. BERKLEY ........................ X ........... .............

Mr. CROWLEY ........................ X ........... .............

Mr. VAN HOLLEN ................... X ........... .............

Mr. MEEK .............................. X ........... .............

Ms. SCHWARTZ ..................... X ........... .............

Mr. DAVIS .............................. X ........... .............

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendments to the 

Chairman’s Amendment in the Nature of a Substitute. 

An amendment by Mr. McCrery, which would strike all the offsets included in the Chairman’s Amendment in the Nature of a 

Substitute, was defeated by a rollcall vote of 13 yeas to 23 nays. 

The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. RANGEL ........................... ........... X ............. Mr. McCRERY ....................... X ........... .............

Mr. STARK ............................. ........... X ............. Mr. HERGER ......................... X ........... .............

Mr. LEVIN .............................. ........... X ............. Mr. CAMP ............................. ........... ........... .............

Mr. McDERMOTT .................... ........... X ............. Mr. RAMSTAD ....................... X ........... .............

Mr. LEWIS (GA) ..................... ........... X ............. Mr. JOHNSON ........................ X ........... .............

Mr. NEAL ............................... ........... X ............. Mr. ENGLISH ......................... X ........... .............

Mr. McNULTY ......................... ........... ........... ............. Mr. WELLER .......................... ........... ........... .............

Mr. TANNER ........................... ........... X ............. Mr. HULSHOF ........................ X ........... .............

Mr. BECERRA ........................ ........... X ............. Mr. LEWIS (KY) ..................... X ........... .............

Mr. DOGGETT ......................... ........... X ............. Mr. BRADY ............................ X ........... .............

Mr. POMEROY ........................ ........... X ............. Mr. REYNOLDS ...................... X ........... .............

Mrs. TUBBS JONES ................ ........... X ............. Mr. RYAN .............................. X ........... .............

Mr. THOMPSON ...................... ........... X ............. Mr. CANTOR .......................... X ........... .............

Mr. LARSON ........................... ........... X ............. Mr. LINDER ........................... ........... ........... .............

Mr. EMANUEL ........................ ........... X ............. Mr. NUNES ............................ ........... ........... .............

Mr. BLUMENAUER ................. ........... X ............. Mr. TIBERI ............................ X ........... .............

Mr. KIND ................................ ........... X ............. Mr. PORTER .......................... X ........... .............

Mr. PASCRELL ....................... ........... X .............

Ms. BERKLEY ........................ ........... X .............

Mr. CROWLEY ........................ ........... X .............

Mr. VAN HOLLEN ................... ........... X .............

Mr. MEEK .............................. ........... X .............

Ms. SCHWARTZ ..................... ........... X .............

Mr. DAVIS .............................. ........... X .............

An amendment by Mr. English, which would repeal the individual Alternative Minimum Tax for tax years beginning after January 1, 2018, was defeated by a rollcall vote of 13 yeas to 23 nays. 

The vote was as follows: 


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. RANGEL ........................... ........... X ............. Mr. McCRERY ....................... X ........... .............

Mr. STARK ............................. ........... X ............. Mr. HERGER ......................... X ........... .............

Mr. LEVIN .............................. ........... X ............. Mr. CAMP ............................. ........... ........... .............

Mr. McDERMOTT .................... ........... X ............. Mr. RAMSTAD ....................... X ........... .............

Mr. LEWIS (GA) ..................... ........... X ............. Mr. JOHNSON ........................ X ........... .............

Mr. NEAL ............................... ........... X ............. Mr. ENGLISH ......................... X ........... .............

Mr. McNULTY ......................... ........... ........... ............. Mr. WELLER .......................... ...........

Mr. TANNER ........................... ........... X ............. Mr. HULSHOF ........................ X ........... .............

Mr. BECERRA ........................ ........... X ............. Mr. LEWIS (KY) ..................... X ........... .............

Mr. DOGGETT ......................... ........... X ............. Mr. BRADY ............................ X ........... .............

Mr. POMEROY ........................ ........... X ............. Mr. REYNOLDS ...................... X ........... .............

Mrs. TUBBS JONES ................ ........... X ............. Mr. RYAN .............................. X ........... .............

Mr. THOMPSON ...................... ........... X ............. Mr. CANTOR .......................... X ........... .............

Mr. LARSON ........................... ........... X ............. Mr. LINDER ........................... ........... ........... .............

Mr. EMANUEL ........................ ........... X ............. Mr. NUNES ............................ ........... ........... .............

Mr. BLUMENAUER ................. ........... X ............. Mr. TIBERI ............................ X ........... .............

Mr. KIND ................................ ........... X ............. Mr. PORTER .......................... X ........... .............

Mr. PASCRELL ....................... ........... X .............

Ms. BERKLEY ........................ ........... X .............

Mr. CROWLEY ........................ ........... X .............

Mr. VAN HOLLEN ................... ........... X .............

Mr. MEEK .............................. ........... X .............

Ms. SCHWARTZ ..................... ........... X .............

Mr. DAVIS .............................. ........... X .............

An amendment by Mr. Hulshof, which would strike Section 313, 

which clarifies that the deduction for State Legislators’ travel expenses away from home includes Pro Forma session days, was defeated by a roll call vote of 13 yeas to 19 nays. The vote was as 

follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. RANGEL ........................... ........... X ............. Mr. McCRERY ....................... X ........... .............

Mr. STARK ............................. ........... X ............. Mr. HERGER ......................... X ........... .............

Mr. LEVIN .............................. ........... X ............. Mr. CAMP ............................. ........... ........... .............

Mr. McDERMOTT .................... ........... X ............. Mr. RAMSTAD ....................... X ........... .............

Mr. LEWIS (GA) ..................... ........... ........... ............. Mr. JOHNSON ........................ X ........... .............

Mr. NEAL ............................... ........... X ............. Mr. ENGLISH ......................... X ........... .............

Mr. McNULTY ......................... ........... ........... ............. Mr. WELLER .......................... ........... ........... .............

Mr. TANNER ........................... ........... X ............. Mr. HULSHOF ........................ X ........... .............

Mr. BECERRA ........................ ........... ........... ............. Mr. LEWIS (KY) ..................... X ........... .............

Mr. DOGGETT ......................... X ........... ............. Mr. BRADY ............................ X ........... .............

Mr. POMEROY ........................ ........... X ............. Mr. REYNOLDS ...................... ........... X .............

Mrs. TUBBS JONES ................ ........... X ............. Mr. RYAN .............................. X ........... .............

Mr. THOMPSON ...................... ........... X ............. Mr. CANTOR .......................... X ........... .............

Mr. LARSON ........................... ........... X ............. Mr. LINDER ........................... ........... ........... .............

Mr. EMANUEL ........................ ........... X ............. Mr. NUNES ............................ ........... ........... .............

Mr. BLUMENAUER ................. X ........... ............. Mr. TIBERI ............................ X ........... .............

Mr. KIND ................................ ........... X ............. Mr. PORTER .......................... ........... X .............

Mr. PASCRELL ....................... ........... X .............

Ms. BERKLEY ........................ ........... X .............

Mr. CROWLEY ........................ ........... X .............

Mr. VAN HOLLEN ................... ........... X .............

Mr. MEEK .............................. ........... X .............

Ms. SCHWARTZ ..................... ........... ........... .............

Mr. DAVIS .............................. ........... X .............

An amendment by Mr. Brady, which would strike real estate 

from the list of specified assets in Section 611, was defeated by a 

rollcall vote of 13 yeas to 22 nays. The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. RANGEL ........................... ........... X ............. Mr. McCRERY ....................... X ........... .............

Mr. STARK ............................. ........... X ............. Mr. HERGER ......................... X ........... .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. LEVIN .............................. ........... X ............. Mr. CAMP ............................. ........... ........... .............

Mr. McDERMOTT .................... ........... X ............. Mr. RAMSTAD ....................... X ........... .............

Mr. LEWIS (GA) ..................... ........... ........... ............. Mr. JOHNSON ........................ X ........... .............

Mr. NEAL ............................... ........... X ............. Mr. ENGLISH ......................... X ........... .............

Mr. McNULTY ......................... ........... ........... ............. Mr. WELLER .......................... ........... ........... .............

Mr. TANNER ........................... ........... X ............. Mr. HULSHOF ........................ X ........... .............

Mr. BECERRA ........................ ........... X ............. Mr. LEWIS (KY) ..................... X ........... .............

Mr. DOGGETT ......................... ........... X ............. Mr. BRADY ............................ X ........... .............

Mr. POMEROY ........................ ........... X ............. Mr. REYNOLDS ...................... X ........... .............

Mrs. TUBBS JONES ................ ........... X ............. Mr. RYAN .............................. X ........... .............

Mr. THOMPSON ...................... ........... X ............. Mr. CANTOR .......................... X ........... .............

Mr. LARSON ........................... ........... X ............. Mr. LINDER ........................... ........... ........... .............

Mr. EMANUEL ........................ ........... X ............. Mr. NUNES ............................ ........... ........... .............

Mr. BLUMENAUER ................. ........... X ............. Mr. TIBERI ............................ X ........... .............

Mr. KIND ................................ ........... X ............. Mr. PORTER .......................... X ........... .............

Mr. PASCRELL ....................... ........... X ............. .............................................. ........... ........... .............

Ms. BERKLEY ........................ ........... X ............. .............................................. ........... ........... .............

Mr. CROWLEY ........................ ........... X ............. .............................................. ........... ........... .............

Mr. VAN HOLLEN ................... ........... X ............. .............................................. ........... ........... .............

Mr. MEEK .............................. ........... X ............. .............................................. ........... ........... .............

Ms. SCHWARTZ ..................... ........... X ............. .............................................. ........... ........... .............

Mr. DAVIS .............................. ........... X ............. .............................................. ........... ........... .............

An amendment by Mr. Brady, which would strike Section 404 

and include a new provision allowing participants in governmental 

457(b) to treat elected deferrals as Roth contributions, was defeated 

by a rollcall vote of 13 yeas to 22 nays. The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. RANGEL ........................... ........... X ............. Mr. McCrery .......................... X ........... .............

Mr. STARK ............................. ........... X ............. Mr. HERGER ......................... X ........... .............

Mr. LEVIN .............................. ........... X ............. Mr. CAMP ............................. ........... ........... .............

Mr. McDERMOTT .................... ........... X ............. Mr. RAMSTAD ....................... X ........... .............

Mr. LEWIS (GA) ..................... ........... ........... ............. Mr. JOHNSON ........................ X ........... .............

Mr. NEAL ............................... ........... X ............. Mr. ENGLISH ......................... X ........... .............

Mr. McNULTY ......................... ........... ........... ............. Mr. WELLER .......................... ........... ........... .............

Mr. TANNER ........................... ........... X ............. Mr. HULSHOF ........................ X ........... .............

Mr. BECERRA ........................ ........... X ............. Mr. LEWIS (KY) ..................... X ........... .............

Mr. DOGGETT ......................... ........... X ............. Mr. BRADY ............................ X ........... .............

Mr. POMEROY ........................ ........... X ............. Mr. REYNOLDS ...................... X ........... .............

Mrs. TUBBS JONES ................ ........... X ............. Mr. RYAN .............................. X ........... .............

Mr. THOMPSON ...................... ........... X ............. Mr. CANTOR .......................... X ........... .............

Mr. LARSON ........................... ........... X ............. Mr. LINDER ........................... ........... ........... .............

Mr. EMANUEL ........................ ........... X ............. Mr. NUNES ............................ ........... ........... .............

Mr. BLUMENAUER ................. ........... X ............. Mr. TIBERI ............................ X ........... .............

Mr. KIND ................................ ........... X ............. Mr. PORTER .......................... X ........... .............

Mr. PASCRELL ....................... ........... X .............

Ms. BERKLEY ........................ ........... X .............

Mr. CROWLEY ........................ ........... X .............

Mr. VAN HOLLEN ................... ........... X .............

Mr. MEEK .............................. ........... X .............

Ms. SCHWARTZ ..................... ........... X .............

Mr. DAVIS .............................. ........... X .............


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IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the 

bill, H.R. 3996, as reported. 

The bill is estimated to have the following effects on Federal 

budget receipts for fiscal years 2008–2017: 


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ccoleman on PROD1PC71 with REPORTSInsert offset folio 191 here HR431.005
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ccoleman on PROD1PC71 with REPORTSInsert offset folio 192 here HR431.006
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ccoleman on PROD1PC71 with REPORTSInsert offset folio 193 here HR431.007
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B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue-reducing tax provisions involve increased tax expenditures. (See amounts in table in Part IV.A., 

above.) 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE

Washington, DC, November 6, 2007. 

Hon. CHARLES B. RANGEL, 

Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office and the 

Joint Committee on Taxation (JCT) have reviewed the provisions 

of H.R. 3996, the Temporary Tax Relief Act of 2007, as ordered reported by the Committee on Ways and Means on November 1, 

2007. Among its provisions, the legislation would provide relief 

from the alternative minimum tax (AMT), extend various expiring 

provisions for one year, make changes to certain tax administration 

methods (including repealing the authority to contract with private 

debt collectors), and raise revenue related to the taxation of income 

from carried interest and deferred compensation. It also would shift 

some corporate income tax receipts from 2013 into 2012. 

CBO and JCT estimate that the bill would increase revenues by 

$3.1 billion over the 2008–2012 period and by $2.7 billion over the 

2008–2017 period. (Those estimates include reductions in off-budget revenues of $8 million over the 2008–2009 period.) CBO and JCT 

estimate that, under the bill, direct spending would increase by 

$2.7 billion over the 2008–2012 period and by $2.3 billion over the 

2008–2017 period. The estimated budgetary impact of H.R. 3996 is 

shown in the attached table. 

The provision with the largest effect on revenues would raise the 

exemption amounts for the AMT and extend the use of nonrefundable credits for one year, through 2007, which JCT estimates would 

reduce revenues by $50.6 billion in 2008. Also, a set of one-year extensions of expiring provisions, such as the research and experimentation tax credit, would reduce revenues by about $21.0 billion 

over the 2008–2017 period, JCT estimates. In addition, JCT estimates that reducing an income threshold for the refundable child 

credit would increase direct spending by $2.8 billion in 2009. 

Three provisions account for the bulk of increases in revenues estimated for ER 3996. First, the bill would delay until 2018 the application of rules enacted in 2004 that pertain to the worldwide allocation of interest expenses, which JCT estimates would increase 

revenues by $26.2 billion over the 2008–2017 period. In addition, 


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the bill would treat certain income of partners from performing investment management services (called ‘‘carried interest’’) as ordinary income for tax purposes, rather than as capital gains, which 

JCT estimates would increase revenues by $25.6 billion over the 

2008–2017 period. Also, H.R. 3996 would require that certain deferred compensation from nontaxable entities be included in current taxable income, which JCT estimates would increase revenues 

by $23.9 billion over the 10-year period. 

CBO and JCT have determined that the bill contains no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA). CBO has determined that the nontax provision 

of the bill (section 506) contains no private-sector mandates. JCT 

has determined that the tax provisions of the bill contain four private-sector mandates: (1) limitations on the applicability of the exclusion of gains on the sale of a principal residence; (2) the requirement that income of partners for performing investment management services be treated as ordinary income; (3) the delay in implementation of worldwide allocation of interest expense until 2018; 

and (4) the requirement that brokers report customers’ basis in securities transactions. Based on information provided by JCT, CBO) 

estimates that the aggregate cost of mandates in the bill would exceed the annual threshold established in UMRA for private-sector 

mandates ($131 million in 2007, adjusted annually for inflation). 

Because section 611(d)(4) of the bill relates to the Old-Age, Survivors, and Disability Insurance program (OASDI) under title II of 

the Social Security Act, it is excluded from review under UMRA. 

Therefore, CBO has not reviewed it for intergovernmental or private-sector mandates. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact for this estimate is Zachary 

Epstein. 

Sincerely, 

ROBERT A. SUNSHINE, 

(For Peter R. Orszag, Director). 

Enclosure. 

D. MACROECONOMIC IMPACT ANALYSIS

In compliance with clause 3(h)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made by the 

Joint Committee on Taxation with respect to the provisions of the 

bill amending the Internal Revenue Code of 1986: the effects of the 

bill on economic activity are so small as to be incalculable within 

the context of a model of the aggregate economy. 

E. PAY–GO RULE

In compliance with clause 10 of rule XXI of the Rules of the 

House of Representatives, the following statement is made concerning the effects on the budget of title X of the bill, H.R. 3996, 

as reported: the provisions of the bill affecting revenues have the 

net effect of not increasing the deficit or reducing the surplus for 

either: (1) the period comprising the current fiscal year and the five 

fiscal years beginning with the fiscal year that ends in the following calendar year; and (2) the period comprising the current fisVerDate Aug 31 2005 00:14 Nov 08, 2007 Jkt 069006 PO 00000 Frm 00173 Fmt 6659 Sfmt 6602 E:\HR\OC\HR431.XXX HR431

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cal year and the ten fiscal years beginning with the fiscal year that 

ends in the following calendar year. 


ccoleman on PROD1PC71 with REPORTS
ESTIMATED CHANGES IN DIRECT SPENDING AND REVENUES UNDER H.R. 3996, THE TEMPORARY TAX RELIEF ACT OF 2007 

By fiscal year, in millions of dollars— 

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008–2012 

CHANGES IN REVENUES 

Title I: Individual AMT Relief ............................................................... ¥52,000 ¥559 ¥169 ¥18 ¥8 ¥67 ¥13 8 15 22 ¥52,754 

Title III: One-Year Extenders ................................................................ ¥4,724 ¥7,481 ¥2,121 ¥1,624 ¥1,592 ¥1,216 ¥719 ¥599 ¥511 ¥442 ¥17,540 

Title VI: Revenue Provisions ................................................................. 4.731 6,978 8,396 8,260 47,447 ¥32,365 6,758 6,415 12¥569 9,128 75,810 

Titles II, IV, and V: Other Provisions ................................................... ¥368 ¥1,440 ¥290 ¥6,280 5,941 ¥55 7 81 270 357 ¥2,438 

Total Changes in Revenus ................................................................... ¥52,362 ¥2,502 5,816 338 51,788 ¥33,694 6,033 5,905 12,343 9,065 3,079 

On-budget .................................................................................... ¥52,359 ¥2,497 5,816 338 51,788 ¥33,694 6,033 5,905 12,343 9,065 3,087 

Off-budget ................................................................................... ¥3 ¥5 0 0 0 0 0 0 0 0 ¥8 

CHANGES IN DIRECT SPENDING 

Refundable Tax Credits: 

Estimated Budget Authority ........................................................ 65 2,843 0 0 0 0 0 0 0 0 2,908 Estimated Outlays ....................................................................... 65 2,843 0 0 0 0 0 0 0 0 2,908 

IRS Contracting for Debt Collection: 

Estimated Budget Authority ........................................................ ¥12 ¥65 ¥68 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 ¥293 

Estimated Outlays ....................................................................... ¥12 ¥65 ¥68 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 ¥293 

Payment of Tax Receipts on Distilled Spirits: 

Estimated Budget Authority ........................................................ 74 19 0 0 0 0 0 0 0 0 93 Estimated Budget Outlays .......................................................... 74 19 0 0 0 0 0 0 0 0 93 

Tax Return Information for the Department of Veterans Affairs: 

Estimated Budget Authority ........................................................ 0 ¥1 0 0 0 0 0 0 0 0 ¥1 

Estimated Budget Outlays .......................................................... 0 ¥1 0 0 0 0 0 0 0 0 ¥1 

Total Changes in Direct Spending: 

Estimated Budget Authority ........................................................ 127 2,796 ¥68 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 2,707 

Estimated Outlays: ...................................................................... 127 2,796 ¥68 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 ¥74 2,707 

NET CHANGE IN THE BUDGET DEFICIT OR SURPLUS 

Net Change in the Deficit or Surplus 1 ................................................ 52,489 5,298 ¥5,884 ¥412 ¥51,862 33,620 ¥6,107 ¥5,979 ¥12,417 ¥9,139 ¥372 

On-budget .................................................................................... 52,486 5,293 ¥5,884 ¥412 ¥51,862 33,620 ¥6,107 ¥5,979 ¥12,417 ¥9,139 ¥380 

Off-budget ................................................................................... 3 5 0 0 0 0 0 0 0 0 8 

1 Negative numbers indicate decreases in deficits (or increases in surpluses); positive numbers indicate increases in deficits (or decreases in surpluses). 

Notes.—Components may not add to totals because of rounding AMT—Alternative Minimum Tax. IRS—Internal Revenue Service. Sources: Congressional Budget Office and Joint Committee on Taxation. 


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V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives (relating to oversight findings), the Committee advises that it is appropriate and timely to enact the provisions of the bill as reported. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of rule XIII of the Rules of the 

House of Representatives (relating to Constitutional Authority), the 

Committee states that the Committee’s action in reporting this bill 

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts 

and Excises . . . ’’), and from the 16th Amendment to the Constitution. 

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the following tax provisions 

of the reported bill contain Federal private sector mandates within 

the meaning of Public Law No. 104–4, the Unfunded Mandates Reform Act of 1995: (1) denial of the exclusion of gain on sale of principal residence related to nonqualified use (sec. 404 of the bill); (2) 

income of partners for performing investment management services 

treated as ordinary income received for the performance of services 

(sec. 611 of the bill); (3) delay in application of worldwide allocation 

of interest expense (sec. 621 of the bill); and (4) broker reporting 

of customer’s basis in securities transactions (sec. 622 of the bill). 

The costs required to comply with each Federal private sector mandate generally are no greater than the aggregate estimated budget 

effects of the provision. 

The Committee has determined that the revenue provisions of 

the bill do not impose a Federal intergovernmental mandate on 

State, local, or tribal governments. 

E. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Clause 5 of rule XXI of the Rules of the House of Representatives 

provides, in part, that ‘‘A bill or joint resolution, amendment, or 

conference report carrying a Federal income tax rate increase may 

not be considered as passed or agreed to unless so determined by 

a vote of not less than three-fifths of the Members voting, a 

quorum being present.’’ The Committee has carefully reviewed the 

provisions of the bill, and states that the provisions of the bill do 


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not involve any Federal income tax rate increases within the meaning of the rule. 

F. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint 

Committee on Taxation (in consultation with the Internal Revenue 

Service and the Department of the Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code and has widespread applicability to individuals or small businesses. 

The staff of the Joint Committee on Taxation has determined 

that a complexity analysis is not required under section 4022(b) of 

the IRS Reform Act because the bill contains no provisions that 

amend the Code and that have ‘‘widespread applicability’’ to individuals or small businesses. 

G. LIMITED TAX BENEFITS

Pursuant to clause 9 of rule XXI of the Rules of the House of 

Representatives, the Ways and Means Committee has determined 

that the bill as reported contains no congressional earmarks, limited tax benefits, or limited tariff benefits within the meaning of 

that rule. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

Due to the complexity of the legislation, compliance with clause 

3(e) of rule XIII of the Rules of the House of Representatives was 

not practical. 


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DISSENTING VIEWS 

Although we cannot support this bill, we wish to be clear upfront. We strongly support extension of the AMT patch and the provisions of current law extended in this bill. This Committee should 

protect the 19 million Americans who are at risk of paying the 

AMT this year. This Committee should extend business tax incentives important to this nation’s economy. 

Unfortunately, at its core, this bill is not about the extenders. 

This bill is about the sad triumph of form over substance, as 

Paygo’s full reach, warts and all, has been fully revealed for all to 

see. 

DISTORTS THE AIMS OF PAYGO

While there are valid reasons to apply the principles of Paygo to 

spending changes, we think the calculus is far different in the case 

of tax policy. 

As was amply documented during the mark-up, by assuming that 

federal revenues must continue to equal what the Congressional 

Budget Office shows to be the current law baseline, the Paygo system effectively locks-in tax increases. The Majority’s budget assumes that the federal government will generate revenue from allowing the AMT to continue to plague taxpayers and from allowing 

the 2001 and 2003 tax cuts to sunset. These budget assumptions 

will have the effect of raising taxes on Americans by $3.5 trillion 

over the next decade. Paygo posits that the only question for Congress is whether we will let those tax increases take place or replace them with other tax hikes. 

It is true that under the current iteration of Paygo, tax cuts 

could be ‘‘paid for’’ by spending cuts, but we have seen no appetite 

of the current Majority for such a sensible approach. From small 

bills—like one providing a vote in Congress for the District of Columbia—to large ones—like the Farm bill—the Ways and Means 

Committee has become an ATM for other Committees, spitting out 

tax increases of whatever shape or size is deemed necessary to 

meet the new Majority’s appetite for additional spending. 

That was bad enough, but at least those changes can be said to 

be consistent with the underlying rationale of Paygo—that new 

spending is being ‘‘offset.’’ What Paygo has become, as embodied in this bill, would be comical were it not so tragic. Here, it is being invoked as a reason for 

Congress to raise taxes in order to prevent a tax increase. 

If Congress does not enact this legislation, Americans will pay 

about $70 billion more in taxes over the next decade than if we just 

extend current law—with respect to both the AMT and other expiring tax provisions—for another year. So to prevent that set of 

Americans from facing these higher taxes, this bill proposes to find 

some other set of Americans to shoulder the burden. 


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And let us keep in mind that this bill imposes permanent tax increases to pay for temporary tax cuts. We expect to be back here 

again next year—one would hope before November 1—struggling again to find another $70–plus billion dollars to ‘‘rent’’ one more 

year of preventing tax increases while permanently increasing another set of taxes. 

Unfortunately, this is just a baby step. Under the next President, 

we could face tax increases in order to ‘‘prevent’’ a tax increase on 

families with children, tax increases on marriage, marginal tax 

rate increases, or tax increases on death. And that’s before we are 

asked to enact other tax increases to pay for new tax incentives or 

new spending programs. 

Raising taxes to prevent a tax increase is circular reasoning at 

its worst and shows the danger of turning a campaign slogan into 

a procedural strait-jacket. 

The irony of all this is that the very basis of Paygo, the assumption that the stream of revenue bureaucrats predict will come in to 

the federal government should be maintained, is divorced from reality. 

According to estimates by the Congressional Budget Office and 

the Joint Tax Committee, federal revenues in fiscal year 2007 totaled about 18.6% of our economy, well above the historical average 

of 18.2%. 

In dollar figures, the Joint Tax Committee estimates that over 

the next decade, revenues will exceed 18.2% of GDP every single 

year and will reach 20.1% in 2017, a level seen only once since at 

least 1962. 

We could have adopted the Ranking Members’ amendment to 

strike the offsets in the extenders section of the bill and still been 

assured that the bill would represent little more than a speed 

bump to federal revenues on their rapid climb to what Mr. Ryan 

pointed out would be never-before-seen levels by the middle of this 

century. 

But, having elevated legislative process over substance, the Majority rejected that approach. 

It is likely the House will soon pass this bill, but what happens 

next is anyone’s guess. As the Chairman knows, the Senate has 

given us strong signals that they intend to reject offsets to pay for 

an extenders bill. Nine of the ten Republicans on the Finance Committee sent a letter to Chairman Baucus expressing their support 

for passing a bill patching the AMT and extending other provisions 

that expire this year without offsets. The Chairman of the Finance 

Committee has given signals that he does not believe he can get 

the votes needed to pass a fully offset extenders package. 

But even if the Senate were going to pass the bill we are marking up today, the Administration has indicated the President 

doesn’t support it. That suggests we will spend more days debating 

this issue, even as the continued delay in passing an AMT patch 

will increase the havoc of the 2007 tax filing season. 

Two days before the mark-up, the Chairman and the Ranking 

Member, joined by their counterparts on the Senate Finance Committee, signed a letter to the Acting Commissioner of the IRS 

pledging to pass an AMT patch ‘‘in a form mutually agreeable to 

the Congress and the President before the end of the year.’’


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We would be thrilled if such a simple solution actually addressed 

the problem, but the letter back the following day from the Acting 

Commissioner of the IRS, Linda Stiff, made clear it would not. In 

her letter, she indicated that ‘‘key systems can only accommodate 

one programming option without introducing excessive risk. . . . Therefore, until the legislation is passed and signed into law, our 

systems cannot be fully programmed for the proposed AMT 

patch. . . . Even with the planning and design that your letter facilitates, we still estimate a timeframe of approximately 10 weeks 

after enactment before we can process affected tax returns ....’’ Given the opposition of the Administration to this proposal; the 

clear indication from the IRS that they cannot address this without 

legislation; and the strong signals the Senate is sending about its 

unwillingness to take this up, we wish the Majority would heed the 

advice of the letter the Chairman signed last Tuesday and work toward passing a product that we know has a chance to get to the 

White House and be signed by the President as soon as possible. 

We have few legislative days left this year and are playing an 

expensive game of chicken with the American taxpayers who are 

facing the prospect of a massive tax increase from our inaction on 

the AMT. 

As the Secretary of the Treasury warned us last week, ‘‘enactment of a patch in mid-to-late December could delay issuance of approximately $75 billion in refunds to taxpayers who are likely to 

file their returns before March 31, 2008.’’ That would be on top of 

the confusion it will cause taxpayers and the added costs the federal government will pay to print new forms and provide assistance 

to perplexed taxpayers. 

Simply put, we should stop this charade and recognize that we 

need to promptly pass a patch and extenders package that the Senate can pass and that the President can sign. Sadly, such a measure was rejected, and the cost of delay and inaction on the AMT 

patch will continue to mount. 

FAILED TO ACCOMMODATE OTHER REASONABLE AMENDMENTS

We are also disappointed that the majority chose to reject a number of reasonable amendments that we believe would have significantly improved the bill. 

An amendment offered by Mr. Hulshof would have struck the expansion of the provision which allows state legislators a per diem 

deduction that, we were informed, might allow some state legislators to claim tens of thousands of dollars in deductions for long 

stretches of time, including weekends, that their Chamber is largely dormant, meeting only in pro forma session a couple of times a 

week. 

This provision blocks the way for the Treasury Department to 

complete its regulatory guidance on this issue, and we were disappointed by rejection of the amendment. 

Another amendment offered by Mr. English would have repealed 

the AMT in 2018. Despite all the Congressional blather about the 

inequity of the AMT, this too was voted down. We are aware that 

the Chairman intends to repeal the AMT before 2018 and we would 

support efforts to do so that aren’t predicated on massive tax hikes. 

Yet that endeavor faces a number of significant challenges and it 


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is far from certain that it will ultimately succeed. The aims of the 

Chairman and the English amendment are not mutually exclusive; 

rather they are complementary. 

Some suggested this amendment was simply an accounting gimmick, exploiting the scoring rules Congress has imposed upon itself. 

To this, we suggest that one need look no further than Paygo itself 

to see the greatest manipulation of self-imposed accounting rules to 

achieve a predetermined outcome. Indeed, this Amendment is far 

more sensible than the tortured logic of raising taxes to prevent a 

tax increase. 

Finally, Mr. Brady offered an amendment that would have allowed real estate transactions to continue to receive capital gains 

treatment on ‘‘carried interest’’ arrangements. Much has been said 

and written about the unfairness of hedge funds and private equity 

firms receiving capital gains treatment on their carried interest arrangements. We disagree with that assertion but the Brady 

Amendment was not an attempt to litigate that issue. 

Instead, it was an attempt to prevent this far-reaching change in 

partnership law from having such a broad reach that it interfered 

with transactions that are much more Main Street than Wall 

Street. Over the years we have learned that as goes real estate, so 

goes the rest of the economy. We should not compound the current 

struggles of the real estate sector with a tax hike that strikes many 

as more about class warfare than tax reform. 

Mr. Brady also sought to prevent another tax increase that could 

further weaken the real estate sector. To offset the cost of a provision giving relief for homeowners facing a tax burden from having 

all or part of the mortgage on their primary home forgiven, the bill 

reduces the amount of capital gains a homeowner could exclude 

from the sale of a second home. We are concerned this may discourage such investments. Mr. Brady’s amendment offered a better way 

to pay for the mortgage relief without weakening the real estate investment market and would have improved the bill. We were disappointed by its defeat. 

RELITIGATES PRIVATE COLLECTION AGENCY ISSUE

This bill also relitigates the private collection agency (PCAs) 

issue. By using PCAs, the IRS is collecting tax liabilities that 

would otherwise go uncollected. This would be true even if the IRS 

had a greater enforcement budget. This program actually contributes to closing the tax gap. But the Democrats wish to end this program and ignore the revenue it produces by allowing tax liabilities 

to go unpaid. 

These are tax liabilities which are not in dispute. The taxpayer 

simply chose not to pay, even after the IRS sent multiple notices 

reminding the affected taxpayers of their unpaid obligation. The 

Majority is willing to raise taxes to pay for killing this tax gap closing program. We think there is a better way to cut taxes for hardworking Americans than to let tax deadbeats off the hook for their 

legitimate and legal tax obligations. 


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CONCLUSION

As we have noted, this bill seems doomed to hit a brick wall, 

likely in the Senate, sending it back here for a new start. We wish 

the Majority would recognize that reality and begin the process 

now rather than waiting for the inevitable, which will only put the 

IRS further behind schedule in administering the 2007 tax filing 

season. 

The confusion and anger that inaction will cause will be easy to 

measure but difficult to solve. 

JIM MCCRERY. WALLY HERGER. DAVE CAMP. JIM RAMSTAD. SAM JOHNSON. PHIL ENGLISH. JERRY WELLER. KENNY HULSHOF. RON LEWIS. KEVIN BRADY. PAUL RYAN. ERIC CANTOR. JOHN LINDER. DEVIN NUNES. PAT TIBERI. JON PORTER. 

Æ 


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