1

Joint Committee on Taxation

June 12, 2002

JCX-61-02

DESCRIPTION OF CHAIRMAN’S MODIFICATIONS TO

THE PROVISIONS OF THE "CARE ACT OF 2002"

SCHEDULED FOR A MARKUP BY THE

SENATE COMMITTEE ON FINANCE ON JUNE 13, 20021

A. Modifications to the CARE Act of 2002

The following modifications would be made to the provisions of the CARE Act of 2002.2

1. Charitable deduction for contributions of food inventory

The Chairman’s modification would delete the proposal to increase the amount of the 

deduction for eligible contributions of food inventory. Therefore, the Chairman’s modification 

would retain the present-law rule relating to the amount of the enhanced deduction for eligible 

contributions of food inventory.

2. Charitable deduction for contributions of book inventory

The Chairman’s modification would provide that the fair market value of a book is any 

bona fide published market price for the book (using the same printing and same edition), 

published within seven years preceding the contribution.

3. Charitable deduction for contributions of bonds

The Chairman’s modification would eliminate the provision relating to charitable 

deduction for contributions of bonds.

4. Tax treatment of inversion transactions

The Chairman’s modification would provide that, in cases in which a U.S. corporate 

group acquires subsidiaries or other assets from an unrelated inverted corporate group, the 

 

1

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

Chairman’s Modifications to the Provisions of the “CARE Act of 2002” Scheduled for a Markup 

By the Senate Committee on Finance on June 13, 2002 (JCX-61-02), June 12, 2002.

2

 A description of the provisions of the “CARE Act of 2002” is contained in Joint 

Committee on Taxation, Description of the “CARE Act of 2002” (JCX-57-02), June 11, 2002.
2

provisions of the “Reversing the Expatriation of Profits Offshore Act” generally would not apply 

to the acquiring U.S. corporate group or its related parties (including the newly acquired 

subsidiaries or assets) by reason of acquiring the subsidiaries or assets that were connected with 

the inversion transaction. The Treasury Secretary would be given authority to issue regulations 

appropriate to carry out the purposes of this provision and to prevent its abuse.

The Chairman’s modification would require inverting entities to provide information to 

shareholders or partners and the IRS with respect to the inversion transaction.

5. Extension of IRS user fees

The Chairman’s modification would adjust the period of extension of the IRS user fees so 

as to make the bill revenue neutral.

6. Extension of Custom user fees

The Chairman’s modification would adjust the period of extension of the authority to 

impose and collect customs user fees for a sufficient period of time so as to make the bill revenue 

neutral.

B. New Provisions

The Chairman’s modification would add the following provisions to the CARE Act of 

2002:

1. Enhanced deduction for charitable contribution of literary, musical, artistic, and 

scholarly compositions

Present Law

In the case of a charitable contribution of inventory or other ordinary-income or shortterm capital gain property, the amount of the deduction generally is limited to the taxpayer’s 

basis in the property.3 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 of tangible personal property to a private foundation (other than certain private 

foundations),4 the amount of the deduction is limited to the taxpayer’s basis in the property.

Under present law, charitable contributions of literary, musical, and artistic compositions 

are considered ordinary income property and a taxpayer’s deduction of such property is limited 

to the taxpayer’s basis (typically, cost) in the property. To be eligible for the deduction, the 

contribution must be of an undivided portion of the donor’s entire interest in the property.5 For 

 

3

 Sec. 170(e)(1).

4

 Sec. 170(e)(1)(B)(ii).

5

 Sec. 170(f)(3).
3

purposes of the charitable income tax deduction, the copyright and the work in which the 

copyright is embodied are not treated as separate property interests. Accordingly, if a donor 

owns a work of art and the copyright to the work of art, a gift of the artwork without the 

copyright or the copyright without the artwork will constitute a gift of a “partial interest” and 

will not qualify for the income tax charitable deduction.

Description of Proposal

The proposal would provide that a deduction for qualified artistic charitable contributions 

generally would be increased from the value under present law (generally, basis) to the fair 

market value of the property contributed, measured at the time of the contribution. However, the 

amount of the increase of the deduction provided by the proposal could not exceed the amount of 

the donor’s adjusted gross income for the taxable year attributable to: (1) income from the sale or 

use of property created by the donor that is of the same type as the donated property; and (2) 

income from teaching, lecturing, performing, or similar activities with respect to such property. 

In addition, the increase to the present-law deduction provided by the proposal could not be 

carried over and deducted in other taxable years.

The proposal would define a qualified artistic charitable contribution to mean a charitable 

contribution of any literary, musical, artistic, or scholarly composition, or similar property, or the 

copyright thereon (or both). The tangible property and the copyright on such property would be 

treated as separate interests in the property for purposes of the “partial interest” rule; thus, a gift 

of artwork without the copyright or a copyright without the artwork would not constitute a gift of 

a partial interest and would be deductible. Contributions of letters, memoranda, or similar 

property that are written, prepared, or produced by or for an individual in his or her capacity as 

an officer or employee of any person (including a government agency or instrumentality) would 

not qualify for a fair market value deduction unless the contributed property was entirely 

personal.

In addition, a contribution would have to meet several requirements in order to qualify 

for the fair market value deduction. First, the contributed property would have to have been 

created by the personal efforts of the donor at least 18 months prior to the date of contribution. 

Second, the donor would have to obtain a qualified appraisal of the contributed property, a copy 

of which would be required to be attached to the donor’s income tax return for the taxable year in 

which such contribution is made. Third, the contribution would have to be made to a public 

charity or to certain limited types of private foundations. Finally, the use of donated property by 

the recipient organization would have to be related to the organization’s charitable purpose or 

function, and the donor must receive a written statement from the organization verifying such 

use.

Effective Date

The deduction for qualified artistic charitable contributions applies to contributions made 

after December 31, 2002.
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2. Modify rules governing tax-exempt bonds for section 501(c)(3) organizations as applied 

to organizations engaged in timber conservation activities

Present Law

Interest on State or local government bonds is tax-exempt when the proceeds of the bonds 

are used to finance activities carried out by or paid for by those governmental units. Interest on 

bonds issued by State or local governments acting as conduit borrowers for private businesses is 

taxable unless a specific exception is included in the Code. One such exception allows taxexempt bonds to be issued to finance activities of non-profit organizations described in Code 

section 501(c)(3) (“qualified 501(c)(3) bonds”).

Qualified 501(c)(3) bonds may be issued only to finance the activities that qualify the 

organization for tax-exemption, as opposed to unrelated business activities of these 

organizations. If the bonds are issued to finance property which is intended to be sold to a 

private business while the bonds are outstanding, bond interest may not qualify for taxexemption. Similarly, if the property is in fact sold, bond interest may become retroactively 

taxable unless remedial actions specified in Treasury Department regulations are taken. An 

example of such a situation would be bonds that are issued as qualified 501(c)(3) bonds issued to 

finance the purchase of land and standing timber when the timber was to be sold.

As is true of governmental activities receiving tax-exempt financing, section 501(c)(3) 

organizations are restricted in the arrangements they may have with private businesses relating to 

control and use of bond-financed property.

Description of Proposal

The proposal would modify the rules governing issuance of qualified 501(c)(3) bonds to 

permit the issuance of long-term bonds for the acquisition of land and timber associated with 

such land subject to a conservation restriction. Under the proposal, the bonds would not fail to 

be qualified 501(c)(3) bonds if the timber was sold, leased, or otherwise used by an unaffiliated 

person to the extent that such sale, leasing, or other use did not constitute an unrelated trade or 

business, and so long as the other requirements of the proposal were met. In addition, these 

bonds may not constitute qualified 501(c)(3) bonds unless the seller of the land and timber 

property that is to be acquired with the bond proceeds irrevocably elects not to exclude from 

income any portion of the gain on the sale of such property made for qualifying conservation 

purposes.

Under the proposal, section 501(c)(3) organizations could enter into certain otherwise 

prohibited timber management arrangements with private businesses without losing taxexemption on bonds used to finance the property and timber. Similarly, the bonds could be 

issued on a tax-exempt basis notwithstanding plans by the section 501(c)(3) organization to 

harvest and sell standing timber on land being acquired.

The aggregate amount of bonds that could be issued pursuant to this proposal would be 

subject to a national limitation of $2 billion. This volume limitation, for the period October 1, 

2002, to December 31, 2005, would be allocated by the Department of Treasury to qualified 
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section 501(c)(3) organizations based on criteria established by the Treasury (after consultation 

with appropriate Federal, State, and local officials).

Effective Date

The proposal would be effective for bonds issued after September 30, 2002, and before 

January 1, 2006.

3. Modification with respect to Rite Aid case

Present Law

An affiliated group of corporations may elect to file a consolidated return in lieu of 

separate returns. A condition of electing to file a consolidated return is that all corporations that 

are members of the consolidated group must consent to all the consolidated return regulations 

prescribed under section 1502 prior to the last day prescribed by law for filing such return.6

Section 1502 states:

The Secretary shall prescribe such regulations as he may deem necessary in order that the 

tax liability of any affiliated group of corporations making a consolidated return and of 

each corporation in the group, both during and after the period of affiliation, may be 

returned, determined, computed, assessed, collected, and adjusted, in such manner as 

clearly to reflect the income-tax liability and the various factors necessary for the 

determination of such liability, and in order to prevent the avoidance of such tax 

liability.

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Under this authority, the Treasury Department has issued extensive consolidated return 

regulations.8

In the recent case of Rite Aid Corp. v. United States,9 the Federal Circuit Court of 

Appeals addressed the application of a particular provision of certain consolidated return loss 

disallowance regulations, and concluded that the provision was invalid. The particular provision, 

 

6

 Section 1501.

7

 Section 1502. 

8

 Regulations issued under the authority of section 1502 are considered to be “legislative” 

regulations rather than “interpretative” regulations, and as such are usually given greater 

deference by courts in case of a taxpayer challenge to such a regulation. The Supreme Court has 

stated that “. . . legislative regulations are given controlling weight unless they are arbitrary, 

capricious, or manifestly contrary to the statute.” Chevron, U.S.A., Inc. v. Natural Resources 

Defense Council, Inc., 467 U.S. 837, 844 (1984).

9

 255 F.3d 1357 (Fed. Cir. 2001).
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known as the “duplicated loss” provision,10 would have denied a loss on the sale of stock of a 

subsidiary by a parent corporation that had filed a consolidated return with the subsidiary, to the 

extent the subsidiary corporation had assets that had a built-in loss, or had a net operating loss, 

that could be recognized or used later.

The Federal Circuit Court opinion contained language discussing the fact that the 

regulation produced a result different than the result that would have obtained if the corporations 

had filed separate returns rather than consolidated returns.11

The Treasury Department has announced that it will not continue to litigate the validity of 

the duplicated loss provision of the regulations, and has issued interim regulations that permit 

taxpayers for all years not to apply that provision.12

There is a concern that some taxpayers might attempt to take a position that under the 

language and reasoning of the Federal Circuit Court decision in the Rite Aid case, other 

consolidated return regulations not involved in that case (i.e., to the extent they provide a 

different result than if corporations had filed separate returns) might now be considered subject 

to challenge. This might create uncertainty or lead to protracted litigation.

Description of Proposal

The proposal would provide that the regulatory authority provided in section 1502 shall 

be construed without regard to the interpretation of that authority in the decision of the Federal 

Circuit Court in Rite Aid Corp. v. United States. 13 That is, the proposal would overrule the 

 

10 Treas. Reg. Sec. 1.1502-20(c)(1)(iii).

11 For example, the court stated: “The loss realized on the sale of a former subsidiary’s 

assets after the consolidated group sells the subsidiary’s stock is not a problem resulting from the 

filing of consolidated income tax returns. The scenario also arises where a corporate shareholder 

sells the stock of a non-consolidated subsidiary. The corporate shareholder could realize a loss 

under I.R.C. sec. 1001, and deduct the loss under I.R.C. sec. 165. The subsidiary could then 

deduct any losses from a later sale of assets. The duplicated loss factor, therefore, addresses a 

situation that arises from the sale of stock regardless of whether corporations file separate or 

consolidated returns. With I.R.C. secs. 382 and 383, Congress has addressed this situation by 

limiting the subsidiary’s potential future deduction, not the parent’s loss on the sale of stock 

under I.R.C. sec. 165.” 255 F.3d 1357, 1360 (Fed. Cir. 2001).

12 The Treasury Department has also indicated its intention to continue to study all the 

issues that the original loss disallowance regulations addressed (including issues of furthering 

single entity principles) and possibly issue different regulations (not including the particular 

approach of Treas. Reg. Sec. 1.1502-20(c)(1)(iii)) on the issues in the future. See Notice 2002-

11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 11034 (March 12, 2002); REG102740-02, 67 F.R. 11070 (March 12, 2002); see also, Notice 2002-18, 2002-12 I.R.B. 644 

(March 25, 2002).

13 255 F.3d 1357 (2001).
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court’s reasoning that there was not a problem resulting from the filing of consolidated returns 

because a corporate taxpayer could deduct a loss on the sale of stock of a nonconsolidated 

subsidiary. The proposal would thus deny the case any precedential effect with respect to other 

consolidated return regulations.

The proposal would nevertheless allow the result of the case to stand, with respect to the 

specific regulatory provision that was invalidated in the case (Treas. Reg. Sec. 1.1502-

20(c)(1)(iii)). 

The proposal would confirm that consolidated return regulations may provide rules 

treating corporations filing consolidated returns differently from corporations filing separate 

returns.

The proposal would thus confirm that Treasury is authorized to issue consolidated return 

regulations utilizing either a single entity or separate entity approach or a combination of the two 

approaches, as Treasury deems necessary, in order that the tax liability of any affiliated group of 

corporations making a consolidated return, and of each corporation in the group, both during and 

after the period of affiliation, may be determined and adjusted in such manner as clearly to 

reflect the income-tax liability and the various factors necessary for the determination of such 

liability, and in order to prevent avoidance of such liability. 

Effective Date

The proposal would be effective for all taxable years, whether beginning before, with, or 

after the date of enactment of the proposal.

No inference is intended that the results following from this proposal are not the same as 

the results under present law.

4. Provide tax exemption for organizations created by a State to provide property and 

casualty insurance coverage for property for which such coverage is otherwise unavailable

Present Law

A life insurance company is subject to tax on its life insurance company taxable income, 

which is its life insurance income reduced by life insurance deductions (sec. 801). Similarly, a 

property and casualty insurance company is subject to tax on its taxable income, which is 

determined as the sum of its underwriting income and investment income (as well as gains and 

other income items) (sec. 831). Present law provides that the term “corporation” includes an 

insurance company (sec. 7701(a)(3)).

In general, the Internal Revenue Service (“IRS”) takes the position that organizations that 

provide insurance for their members or other individuals are not considered to be engaged in a 

tax-exempt activity. The IRS maintains that such insurance activity is either (1) a regular 

business of a kind ordinarily carried on for profit, or (2) an economy or convenience in the 

conduct of members' businesses because it relieves the members from obtaining insurance on an 

individual basis.
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Certain insurance risk pools have qualified for tax exemption under Code section 

501(c)(6). In general, these organizations (1) assign any insurance policies and administrative 

functions to their member organizations (although they may reimburse their members for 

amounts paid and expenses); (2) serve an important common business interest of their members; 

and (3) must be membership organizations financed, at least in part, by membership dues.

State insurance risk pools may also qualify for tax-exempt status under section 501(c)(4) 

as a social welfare organization or under section 115 as serving an essential governmental 

function of a State. In seeking qualification under section 501(c)(4), insurance organizations 

generally are constrained by the restrictions on the provision of “commercial-type insurance” 

contained in section 501(m). Section 115 generally provides that gross income does not include 

income derived from the exercise of any essential governmental function and accruing to a State 

or any political subdivision thereof.

Certain specific provisions provide tax-exempt status to organizations meeting statutory 

requirements.

Health coverage for high-risk individuals

Section 501(c)(26) provides tax-exempt status to any membership organization that is 

established by a State exclusively to provide coverage for medical care on a nonprofit basis to 

certain high-risk individuals, provided certain criteria are satisfied. The organization may 

provide coverage for medical care either by issuing insurance itself or by entering into an 

arrangement with a health maintenance organization ("HMO").

High-risk individuals eligible to receive medical care coverage from the organization 

must be residents of the State who, due to a pre-existing medical condition, are unable to obtain 

health coverage for such condition through insurance or an HMO, or are able to acquire such 

coverage only at a rate that is substantially higher than the rate charged for such coverage by the 

organization. The State must determine the composition of membership in the organization. For 

example, a State could mandate that all organizations that are subject to insurance regulation by 

the State must be members of the organization.

The provision further requires the State or members of the organization to fund the 

liabilities of the organization to the extent that premiums charged to eligible individuals are 

insufficient to cover such liabilities. Finally, no part of the net earnings of the organization can 

inure to the benefit of any private shareholder or individual.

Workers' compensation reinsurance organizations

Section 501(c)(27)(A) provides tax-exempt status to any membership organization that is 

established by a State before June 1, 1996, exclusively to reimburse its members for workers' 

compensation insurance losses, and that satisfies certain other conditions. A State must require 

that the membership of the organization consist of all persons who issue insurance covering 

workers' compensation losses in such State, and all persons and governmental entities who selfinsure against such losses. In addition, the organization must operate as a nonprofit organization 

by returning surplus income to members or to workers' compensation policyholders on a periodic 

basis and by reducing initial premiums in anticipation of investment income.
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State workmen’s compensation act companies

Section 501(c)(27)(B) provides tax-exempt status for any organization that is created by 

State law, and organized and operated exclusively to provide workmen's compensation insurance 

and related coverage that is incidental to workmen's compensation insurance, and that meets 

certain additional requirements. The workmen's compensation insurance must be required by 

State law, or be insurance with respect to which State law provides significant disincentives if it 

is not purchased by an employer (such as loss of exclusive remedy or forfeiture of affirmative 

defenses such as contributory negligence). The organization must provide workmen's 

compensation to any employer in the State (for employees in the State or temporarily assigned 

out-of-State) seeking such insurance and meeting other reasonable requirements. The State must 

either extend its full faith and credit to the initial debt of the organization or provide the initial 

operating capital of such organization. For this purpose, the initial operating capital can be 

provided by providing the proceeds of bonds issued by a State authority; the bonds may be 

repaid through exercise of the State's taxing authority, for example. For periods after the date of 

enactment, either the assets of the organization must revert to the State upon dissolution, or State 

law must not permit the dissolution of the organization absent an act of the State legislature. 

Should dissolution of the organization become permissible under applicable State law, then the 

requirement that the assets of the organization revert to the State upon dissolution applies. 

Finally, the majority of the board of directors (or comparable oversight body) of the organization 

must be appointed by an official of the executive branch of the State or by the State legislature, 

or by both.

Description of Proposal

The proposal would provide tax-exempt status for any association created before January 

1, 1999, by State law and organized and operated exclusively to provide property and casualty 

insurance coverage for wind storm, hail and fire damage to property located within the State for 

which the State has determined that coverage in the authorized insurance market is limited or 

unavailable at reasonable rates, provided certain requirements are met.

Under the proposal, no part of the net earnings of the association may inure to the benefit 

of any private shareholder or individual. Except as provided in the case of dissolution, no part of 

the assets of the association may be used for, or diverted to, any purpose other than: (1) to 

satisfy, in whole or in part, the liability of the association for, or with respect to, claims made on 

policies written by the association; (2) to invest in investments authorized by applicable law; (3) 

to pay reasonable and necessary administration expenses in connection with the establishment 

and operation of the association and the processing of claims against the association; or (4) to 

make remittances pursuant to State law to be used by the State to provide for the payment of 

claims on policies written by the association, purchase reinsurance covering losses under such 

policies, or to support governmental programs to prepare for or mitigate the effects of natural 

catastrophic events. Under the proposal, it would be required that the State law governing the 

association permit the association to levy assessments on insurance companies authorized to sell 

property and casualty insurance in the State, or on property and casualty insurance policyholders 

with insurable interests in property located in the State to fund deficits of the association, 

including the creation of reserves. Under the proposal, it would be required that the plan of 

operation of the association be subject to approval by the chief executive officer or other official 
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of the State, by the State legislature, or both. In addition, it would be required that the assets of 

the association revert upon dissolution to the State, the State’s designee, or an entity designated 

by the State law governing the association, or that State law not permit the dissolution of the 

association.

The proposal would provide a special rule in the case of any entity or fund created before 

January 1, 1999, pursuant to State law and organized and operated exclusively to receive, hold, 

and invest remittances from an association exempt from tax under the proposal, to make 

disbursements to pay claims on insurance contracts issued by the association, and to make 

disbursements to support governmental programs to prepare for or mitigate the effects of natural 

catastrophic events. The special rule would provide that the entity or fund may elect to be 

disregarded as a separate entity and be treated as part of the association exempt from tax under 

the proposal, from which it receives such remittances. The election would be required to be 

made no later than 30 days following the date on which the association is determined to be 

exempt from tax under the proposal, and would be effective as of the effective date of that 

determination.

An organization described in the proposal would be treated as having unrelated business 

taxable income (“UBIT”) in the amount of its taxable income (computed as if the organization 

were not exempt from tax under the proposal), if at the end of the immediately preceding taxable 

year, the organization’s net equity exceeded 15 percent of the total coverage in force under 

insurance contracts issued by the organization and outstanding at the end of that preceding year.

Under the proposal, no income or gain would be recognized solely as a result of the 

change in status to that of an association exempt from tax under the proposal.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 2002.

5. Conform provisions relating to arbitrage treatment of certain university fund to State 

constitutional amendments

Present Law

In general, present-law tax-exempt arbitrage restrictions provide that interest on a State or 

local government bond is not eligible for tax-exemption if the proceeds are invested, directly or 

indirectly, in materially higher yielding investments or if the debt service on the bond is secured 

by or paid from (directly or indirectly) such investments. An exception, enacted in 1984, 

provides that the pledge of income from investments in a Fund established under a provision of a 

State constitution adopted in 1876 as security for a limited amount of tax-exempt bonds will not 

cause interest on those bonds to be taxable. The terms of this exception are limited to State 

constitutional or statutory restrictions in effect as of October 9, 1969.

The Fund consists of certain State lands that were set aside for the benefit of higher 

education, the income from mineral rights to these lands, and certain other earnings on Fund 

assets. The State constitution directs that monies held in the Fund are to be invested in interestbearing obligations and other securities. The constitution does not permit the expenditure or 
11

mortgage of the Fund for any purpose. Income from the Fund is apportioned between two 

university systems operated by the State. Tax-exempt bonds issued by the two university 

systems are secured by and payable from the income of the Fund. These bonds are used to 

finance buildings and other permanent improvements for the universities.

The State constitutional rules governing the Fund have been modified with regard to the 

manner in which amounts in the Fund are paid for the benefit of the two university systems.

Description of Proposal

The 1984 exception would be conformed to the present State constitutional provisions 

governing the Fund’s ability to make annual distributions in a manner similar to standard 

university endowment funds. Limitations on the aggregate amount of bonds that may benefit 

from the exception would not be modified.

Effective Date

The proposal would be effective on the date of enactment.

6. Matching grants to low-income taxpayer clinics for return preparation

Present Law

The Code14 provides that the Secretary is authorized to provide up to $6 million per year 

in matching grants to certain low-income taxpayer clinics that represent low-income taxpayers in 

controversies with the IRS or that operate programs to inform individuals for whom English is a 

second language about their tax-related rights and responsibilities.

Description of Proposal

The proposal would authorize the Secretary to create a separate grant program to provide 

up to $10 million per year in matching grants to not for profit organizations that assist lowincome taxpayers in the preparation of their Federal tax returns.

Effective Date

The proposal would be effective on the date of enactment.

 

14 Sec. 7526.