DESCRIPTION OF THE CHAIRMAN’S MARK 

OF H.R. 976, 

THE “SMALL BUSINESS TAX RELIEF ACT OF 2007” 

Scheduled for Markup 

by the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on February 12, 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

February 9, 2007 

JCX-7-07 
i 

CONTENTS 

Page

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

A. Extension and Modification of Work Opportunity Tax Credit........................................... 2 

B. Increase and Extension of Expensing for Small Business.................................................. 7 

C. Tax Credit for Social Security Taxes Paid with Respect to Employee Cash Tips ............. 9 

D. Allow Work Opportunity Credit and Credit for Taxes Paid with Respect to 

Employee Cash Tips Against the Alternative Minimum Tax........................................... 10 

E. Family Business Tax Simplification................................................................................. 11 

F. Denial of Lowest Capital Gain Rate for Certain Dependents........................................... 13 

G. Modification of Provision Regarding Suspension of Certain Interest and Penalties........ 15 

H. Modification to Corporate Estimated Tax Payments........................................................ 16 
1 

INTRODUCTION 

The House Committee on Ways and Means has scheduled a markup on February 12, 

2007, of H.R. 976, the “Small Business Tax Relief Act of 2007.” This document,1 prepared by 

the staff of the Joint Committee on Taxation, provides a description of H.R. 976, the Chairman’s 

Mark. 

 1

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

Chairman’s Mark of H.R. 976, the “Small Business Tax Relief Act of 2007” (JCX-7-07) February 9, 

2007. 
2 

A. Extension and Modification of Work Opportunity Tax Credit 

Present Law

In general

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

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

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

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

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

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

category). 

Targeted groups eligible for the credit

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

of a targeted group. 

(1) Families receiving TANF

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

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

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

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

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

for purposes of determining eligibility for the TANF. 

(2) Qualified veteran

A qualified veteran is a veteran who is certified by the designated local agency as a 

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

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

period ending on the hiring date. For these purposes, members of a family are defined to include 

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

program under the Food Stamp Act of 1977. 

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

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

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

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

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

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

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

departed from service within the last 60 days) from receiving the credit. 
3 

(3) Qualified ex-felon

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

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

prison or date of conviction. 

(4) High risk youth

A high-risk youth is an individual certified as being at least age 18 but not yet age 25 on 

the hiring date and as having a principal place of abode within an empowerment zone, enterprise 

community, or renewal community (as defined under Subchapter U of Subtitle A, Chapter 1 of 

the Internal Revenue Code). Qualified wages do not include wages paid or incurred for services 

performed after the individual moves outside an empowerment zone, enterprise community, or 

renewal community. 

(5) Vocational rehabilitation referral

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

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

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

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

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

rehabilitation plan for veterans carried out under Chapter 31 of Title 38, U.S. Code. Certification 

will be provided by the designated local employment agency upon assurances from the 

vocational rehabilitation agency that the employee has met the above conditions. 

(6) Qualified summer youth employee

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

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

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

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

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

community (as defined under Subchapter U of Subtitle A, Chapter 1 of the Internal Revenue 

Code). As with high risk youths, no credit is available on wages paid or incurred for service 

performed after the qualified summer youth moves outside of an empowerment zone, enterprise 

community, or renewal community. If, after the end of the 90-day period, the employer 

continues to employ a youth who was certified during the 90-day period as a member of another 

targeted group, the limit on qualified first year wages will take into account wages paid to the 

youth while a qualified summer youth employee. 

(7) Qualified food stamp recipient

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

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

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

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

6(o) of the Food Stamp Act of 1977, the six-month requirement is replaced with a requirement 
4 

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

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

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

under the Food Stamp Act of 1977. 

(8) Qualified SSI recipient

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

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

month ending within the 60-day period ending on the hiring date. 

(9) Long-term family assistance recipients

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

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

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

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

after August 5, 1997 (the date of enactment of the welfare-to-work tax credit)2

 if the individual is 

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

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

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

family ineligible for family assistance. 

Qualified wages

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

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

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

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

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

Calculation of the credit

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

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

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

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

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

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

$6,000 of qualified first-year wages). 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). Except 

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

 2

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

Relief and Health Care Act of 2006. 
5 

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

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

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

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

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

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

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

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

Certification rules

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

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

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

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

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

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

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

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

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

member of a targeted group. 

Minimum employment period

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

in the first year of employment. 

Other rules

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

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

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

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

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

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

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

Expiration

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

employer after December 31, 2007. 
6 

Description of Proposal

Extension

The provision extends the work opportunity tax credit for one year (for qualified 

individuals who begin work for an employer after December 31, 2007, and before January 1, 

2009). 

Qualified veterans targeted group

The provision expands the qualified veterans’ targeted group to include an individual 

who is certified as entitled to compensation for a service-connected disability and having a hiring 

date which is not more than one year after having been discharged or released from active duty 

in the Armed Forces of the United States, or having been unemployed for six months or more 

(whether or not consecutive) during the one-year period ending on the date of hiring. Being 

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

101 of Title 38, which means having a disability rating of 10-percent or higher for service 

connected injuries. 

Qualified first-year wages

The provision expands the definition of qualified first-year wages from $6,000 to $12,000 

in the case of individuals who qualify under either of the new expansions of the qualified veteran 

group, above. The expanded definition of qualified first-year wages does not apply to the 

veterans qualified with reference to the food stamps program, as defined under present law. 

High risk youth targeted group

The provision expands the definition of high risk youths to include otherwise qualifying 

individuals age 18 but not yet age 40 on the hiring date. The provision also changes the name of 

the category to the “designated community residents” targeted group. 

Vocational rehabilitation referral targeted group

The provision expands the definition of vocational rehabilitation referral to include any 

individual who is certified by a designated local agency as an individual who has a physical or 

mental disability that constitutes a substantial handicap to employment and who has been 

referred to the employer while receiving, or after completing, an individual work plan developed 

and implemented by an employment network pursuant to subsection (g) of section 1148 of the 

Social Security Act. 

Effective Date

Generally, the extension of the credit is effective for wages paid or incurred to a qualified 

individual who begins work for an employer after December 31, 2007. The other provisions are 

effective for individuals who begin work for an employer after the date of enactment in taxable 

years ending after such date.
7 

B. Increase and Extension of Expensing for Small Business 

Present Law

In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment 

may elect to deduct (or “expense”) such costs under section 179. Present law provides that the 

maximum amount a taxpayer may expense, for taxable years beginning in 2003 through 2009, is 

$100,000 of the cost of qualifying property placed in service for the taxable year.3

 In general, 

qualifying property is defined as depreciable tangible personal property that is purchased for use 

in the active conduct of a trade or business. Off-the-shelf computer software placed in service in 

taxable years beginning before 2010 is treated as qualifying property. The $100,000 amount is 

reduced (but not below zero) by the amount by which the cost of qualifying property placed in 

service during the taxable year exceeds $400,000. The $100,000 and $400,000 amounts are 

indexed for inflation for taxable years beginning after 2003 and before 2010. For taxable years 

beginning in 2007, the inflation-adjusted amounts are $112,000 and $450,000, respectively.4

The amount eligible to be expensed for a taxable year may not exceed the taxable income 

for a taxable year that is derived from the active conduct of a trade or business (determined 

without regard to this provision). Any amount that is not allowed as a deduction because of the 

taxable income limitation may be carried forward to succeeding taxable years (subject to similar 

limitations). No general business credit under section 38 is allowed with respect to any amount 

for which a deduction is allowed under section 179. An expensing election is made under rules 

prescribed by the Secretary.5

For taxable years beginning in 2010 and thereafter (or before 2003), the following rules 

apply. A taxpayer with a sufficiently small amount of annual investment may elect to deduct up 

to $25,000 of the cost of qualifying property placed in service for the taxable year. The $25,000 

amount is reduced (but not below zero) by the amount by which the cost of qualifying property 

placed in service during the taxable year exceeds $200,000. The $25,000 and $200,000 amounts 

are not indexed. In general, qualifying property is defined as depreciable tangible personal 

property that is purchased for use in the active conduct of a trade or business (not including off-

 3

 Additional section 179 incentives are provided with respect to qualified property meeting 

applicable requirements that is used by a business in an empowerment zone (sec. 1397A), a renewal 

community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)). 

4

 Rev. Proc. 2006-53, sec. 2.19, 2006-48 I.R.B. 996 (Nov. 27, 2006). 

5

 Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in 

taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election 

under section 179 without the consent of the Commissioner on an amended Federal tax return for that 

taxable year. This amended return must be filed within the time prescribed by law for filing an amended 

return for the taxable year. T.D. 9209, July 12, 2005. 
8 

the-shelf computer software). An expensing election may be revoked only with consent of the 

Commissioner.6

Description of Proposal

The provision increases the $100,000 and $400,000 amounts to $125,000 and $500,000, 

respectively, for taxable years beginning in 2007 through 2010. These amounts are indexed for 

inflation in taxable years beginning after 2007 and before 2011. 

In addition, the provision extends for one year the increased amount that a taxpayer may 

deduct and the other section 179 rules applicable in taxable years beginning before 2010. Thus, 

under the provision, these rules continue in effect for taxable years beginning after 2009 and 

before 2011. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2006. 

 6

 Sec. 179(c)(2). 
9 

C. Tax Credit for Social Security Taxes Paid 

with Respect to Employee Cash Tips 

Present Law

The Federal minimum wage under the Fair Labor Standards Act (the “FLSA”) is $5.15 

per hour. In the case of tipped employees, the FLSA provides that the minimum wage may be 

reduced to $2.13 per hour (that is, the employer is only required to pay cash equal to $2.13 per 

hour) if the combination of tips and cash income equals the Federal minimum wage.7 

Under present law, employee tip income is treated as employer-provided wages for 

purposes of the Federal Insurance Contributions Act (“FICA”). Employees are required to report 

the amount of tips received. 

A business tax credit is provided equal to an employer’s FICA taxes paid on tips in 

excess of those treated as wages for purposes of meeting the minimum wage requirements of the 

FLSA. The credit applies only with respect to FICA taxes paid on tips received from customers 

in connection with the providing, delivering, or serving of food or beverages for consumption if 

the tipping of employees delivering or serving food or beverages by customers is customary. 

The credit is available whether or not the employee reports the tips on which the employer FICA 

taxes were paid. Because the amount of the tip credit is tied to the minimum wage under the 

FLSA, if the minimum wage increases above $5.15 per hour, the amount of the FICA tip credit 

will automatically be reduced. 

No deduction is allowed for any amount taken into account in determining the tip credit. 

A taxpayer may elect not to have the credit apply for a taxable year. 

Description of Proposal

The provision provides that the amount of the tip credit is based on the amount of tips in 

excess of those treated as wages for purposes of the FLSA as in effect on January 1, 2007. That 

is, under the provision, the tip credit is determined based on a minimum wage of $5.15 per hour. 

Therefore, if the amount of the minimum wage increases, the amount of the FICA tip credit will 

not be reduced. 

Effective Date

The provision applies with respect to tips received for services performed after December 

31, 2006. 

 7

 Some States require the payment of cash wages to tipped employees in excess of the Federal 

minimum of $2.13 per hour. For a history of the tip provisions under the FLSA and a description of 

relevant State laws, see William G. Whittaker, Congressional Research Service, The Tip Credit 

Provisions of the Fair Labor Standards Act (Order Code RL33348), March 24, 2006. 
10

D. Allow Work Opportunity Credit and Credit for Taxes Paid with Respect 

to Employee Cash Tips Against the Alternative Minimum Tax 

Present Law

Under present law, generally, business tax credits generally may not exceed the excess of 

the taxpayer’s income tax liability over the tentative minimum tax (or, if greater, 25 percent of 

the regular tax liability in excess of $25,000). Credits in excess of the limitation may be carried 

back one year and carried over for up to 20 years. 

The tentative minimum tax is an amount equal to specified rates of tax imposed on the 

excess of the alternative minimum taxable income over an exemption amount. To the extent the 

tentative minimum tax exceeds the regular tax, a taxpayer is subject to the alternative minimum 

tax. 

Thus, business tax credits cannot offset the alternative minimum tax liability. 

Description of Proposal

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

the tax liability limitation with respect to the work opportunity credit and the credit for taxes paid 

with respect to employee cash tips. 

Thus, the credits may offset the alternative minimum tax liability. 

Effective Date

The provision is effective for credits determined in taxable years beginning after 

December 31, 2006, 
11 

E. Family Business Tax Simplification 

Present Law

Under present law, a partnership is defined to include a syndicate, group, pool, joint 

venture, or other unincorporated organization through or by means of which any business, 

financial operation or venture is carried on, and which is not a trust or estate or a corporation 

(sec. 7701(a)(2)). A partnership is treated as a pass-through entity, and income earned by the 

partnership, whether distributed or not, is taxed to the partners. The income of a partnership and 

its partners is determined under subchapter K of the Code. An election not to be subject to the 

rules of subchapter K is provided for certain partnerships that meet specified criteria (i.e., the 

partnership is for investment purposes only, is for the joint production, extraction or use of 

property but not for selling services or property produced or extracted, or is used by securities 

dealers for short periods to underwrite, sell or distribute securities). Otherwise, the rules of 

subchapter K apply to a venture that is treated as a partnership for Federal tax purposes. 

In the case of an individual with self-employment income, the income subject to selfemployment tax is the net earnings from self-employment (sec. 1402(a)). Net earnings from 

self-employment is 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. If the individual is a partner in a partnership, the net 

earnings from self-employment generally include his or her distributive share (whether or not 

distributed) of income or loss from any trade or business carried on by the partnership. 

Description of Proposal

The provision generally permits a qualified joint venture whose only members are a 

husband and wife filing a joint return not to be treated as a partnership. A qualified joint venture 

is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint 

venture are a husband and wife, (2) both spouses materially participate in the trade or business, 

and (3) both spouses elect to have the provision apply. 

Under the provision, a qualified joint venture conducted by a husband and wife who file a 

joint return is not treated as a partnership for Federal income tax purposes. All items of income, 

gain, loss, deduction and credit are divided between the spouses in accordance with their 

respective interests in the venture. Each spouse takes into account his or her respective share of 

these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or 

her respective share on the appropriate form, such as Schedule C. The provision is not intended 

to change the determination under present law of whether an entity is a partnership for Federal 

income tax purposes (without regard to the election provided by the provision). 

For purposes of determining net earnings from self-employment, each spouse's share of 

income or loss from a qualified joint venture is taken into account just as it is for Federal income 

tax purposes under the provision (i.e., in accordance with their respective interests in the 

venture). A corresponding change is made to the definition of net earnings from selfemployment under the Social Security Act. The provision is not intended to prevent allocations 

or reallocations, to the extent permitted under present law, by courts or by the Social Security 
12 

Administration of net earnings from self-employment for purposes of determining Social 

Security benefits of an individual. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2006.
13 

F. Denial of Lowest Capital Gain Rate for Certain Dependents 

Present Law

In general

In general, gain or loss reflected in the value of an asset is not recognized for income tax 

purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any 

gain generally is included in income. Any net capital gain of an individual generally is taxed at 

maximum rates lower than the rates applicable to ordinary income. Net capital gain is the excess 

of the net long-term capital gain for the taxable year over the net short-term capital loss for the 

year. Gain or loss is treated as long-term if the asset is held for more than one year. 

In the case of a gift of an appreciated capital asset, when the asset is sold by the donee, 

the gain is taxed to the donee and not the donor. The tax rate of the donee (and not the donor) 

applies. The holding period of the donee includes the period the asset is held by the donor. 

Tax rates before 2011

Under present law, for taxable years beginning before January 1, 2011, the maximum rate 

of tax on the adjusted net capital gain of an individual is 15 percent. Any adjusted net capital 

gain which otherwise would be taxed at a 10- or 15-percent rate is taxed at a five-percent rate 

(zero for taxable years beginning after 2007). These rates apply for purposes of both the regular 

tax and the alternative minimum tax. 

Under present law, the “adjusted net capital gain” of an individual generally is the net 

capital gain reduced (but not below zero) by the sum of the 28-percent rate gain and the 

unrecaptured section 1250 gain. 

In addition, for taxable years beginning before January 1, 2011, dividend income 

generally is treated as adjusted net capital gain for purposes of applying the maximum tax rates. 

The term “28-percent rate gain” means the excess of the sum of the amount of net gain 

attributable to long-term capital gains and losses from the sale or exchange of collectibles (as 

defined in section 408(m) without regard to paragraph (3) thereof) and the amount of gain equal 

to the additional amount of gain that would be excluded from gross income under section 1202 

(relating to certain small business stock) if the percentage limitations of section 1202(a) did not 

apply, over the sum of the net short-term capital loss for the taxable year and any long-term 

capital loss carryover to the taxable year. 

“Unrecaptured section 1250 gain” generally means any long-term capital gain from the 

sale or exchange of section 1250 property (i.e., depreciable real estate) held more than one year 

to the extent of the gain that would have been treated as ordinary income if section 1250 applied 

to all depreciation, reduced by the net loss (if any) attributable to the items taken into account in 

computing 28-percent rate gain. 

An individual’s unrecaptured section 1250 gain is taxed at a maximum rate of 25 percent, 

and the 28-percent rate gain is taxed at a maximum rate of 28 percent. Any amount of 
14 

unrecaptured section 1250 gain or 28-percent rate gain otherwise taxed at a 10- or 15-percent 

rate is taxed at the otherwise applicable rate. 

Tax rates after 2010

For taxable years beginning after December 31, 2010, the maximum rate of tax on the 

adjusted net capital gain of an individual is 20 percent. Any adjusted net capital gain which 

otherwise would be taxed at a 10- or 15-percent rate is taxed at a 10-percent rate. 

In addition, any gain from the sale or exchange of property held more than five years that 

would otherwise have been taxed at the 10-percent rate is taxed at an 8-percent rate. Any gain 

from the sale or exchange of property held more than five years and the holding period for which 

began after December 31, 2000, that would otherwise have been taxed at a 20-percent rate is 

taxed at an 18-percent rate. 

The tax rates on 28-percent gain and unrecaptured section 1250 gain are the same as for 

taxable years beginning before 2011. 

Taxation of certain minor children

Certain dependents under the age of 19 are taxed on their net unearned income in excess 

of specified amounts as if the income was their parent’s income. Thus their parent’s tax rates 

apply. 

Description of Proposal

The provision denies the lowest maximum tax rate on adjusted net capital gain (5 percent 

in 2007, zero percent in 2008, 2009, and 2010, and 8 percent or 10 percent thereafter) to any 

individual (i) who meets the age requirements of section 152(c)(3) (i.e. is under the age of 19 

(age of 24, in the case of a student)), and (ii) whose earned income (as defined in section 

911(d)(2)) does not exceed one-half of the amount of the individual’s support (within the 

meaning of section 152). In the case of a joint return, the provision applies if both spouses meet 

the age requirement and their combined earned income does not exceed one-half of their 

combined support. 

An individual subject to this provision computes his or her tax on adjusted net capital 

gain using a tax rate of 15 percent before 2011 and 18 percent or 20 percent thereafter. This 

applies both to the regular tax and the alternative minimum tax. To the extent the adjusted net 

capital gain would otherwise be taxed at the 10-percent rate under the regular tax rate schedule, 

the 10-percent rate applies in computing the maximum rate on adjusted net capital gain for 

purposes of the regular tax. 

Effective Date

The provision applies to taxable years beginning after December 31, 2006.
15 

G. Modification of Provision Regarding Suspension 

of Certain Interest and Penalties 

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. The Code suspends the 

accrual of certain penalties and interest 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 the return is filed before the due date, for this purpose 

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 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 taxpayers who file a timely tax return. The 

provision applies only to individuals and does not apply to the failure to pay penalty, in the case 

of fraud, or with respect to criminal penalties. Generally, the suspension of interest also does not 

apply to interest accruing with respect to underpayments resulting from listed transactions or 

undisclosed reportable transactions. 

Description of Proposal

The provision amends the suspension of interest and penalties provision. Under the 

provision, the accrual of certain penalties and interest is suspended starting 22 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. 

Effective Date

The provision is effective for IRS notices issued after the date that is six months after the 

date of enactment.
16 

H. Modification to Corporate Estimated Tax Payments 

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. Fiscal year 

taxpayers make quarterly payments on corresponding dates. 

The Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) provided that in 

the case of a corporation with assets of at least $1 billion, the payments due in July, August, and 

September, 2012, (for fiscal and calendar year taxpayers, respectively) shall be increased to 

106.25 percent of the payment otherwise due and the next required payment shall be reduced 

accordingly. 

Explanation of Provision

The provision increases the 106.25 percent enacted in TIPRA to 112.75 percent. 

Effective Date

The provision is effective on the date of enactment.