COMPARISON OF THE TAX PROVISIONS CONTAINED IN H.R. 3550,

THE “TRANSPORTATION EQUITY ACT: A LEGACY FOR USERS,”

AS PASSED BY THE HOUSE OF REPRESENTATIVES, AND H.R. 3550,

THE “SAFE, ACCOUNTABLE, FLEXIBLE, AND EFFICIENT TRANSPORTATION

EQUITY ACT OF 2004,” AS AMENDED BY THE SENATE

Prepared by the Staff of the

JOINT COMMITTEE ON TAXATION

June 25, 2004

JCX-47-04
ii

Contents

Page

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

I. TRUST FUND REAUTHORIZATION...................................................................................................................................................2

A. Extension of Highway Trust Fund Expenditure Authority and Related Taxes (sec. 9101 of the House bill and

sec. 5001 of the Senate amendment)............................................................................................................................................... 2

B. Prohibition on Use of Highway Account for Certain Rail Projects (sec. 5001(g) of the Senate amendment)............................... 2

C. Interest Credited on Highway Trust Fund Balances (sec. 5002 of the Senate amendment)........................................................... 3

D. Elimination of Highway Trust Fund Reimbursement of Certain Refunds and Credits Paid Out of the General Fund

(sec. 5002 of the Senate amendment)............................................................................................................................................. 3

E. Modification of Adjustments of Apportionments (“Harry Byrd rule”) (sec. 5003 of the Senate amendment).............................. 3

F. Extension and Modification of Aquatic Resources Trust Fund, Expenditure Authority and Related Taxes

(secs. 9101 and 9201 of the House bill and secs. 5001 and 5411 of the Senate amendment)........................................................ 5

II. RESTRUCTURING OF INCENTIVES FOR ALCOHOL FUELS, ETC. ............................................................................................7

A. Restructuring of Alcohol Fuel Excise Tax Incentives, Elimination of the General Fund’s Partial Retention of Alcohol

Fuel Taxes, and Extension of Section 40 Alcohol Fuels Income Tax Credit (sec. 9201 and 9202 of the House bill and

sec. 5102 of the Senate amendment)............................................................................................................................................... 7

B. Incentives for Biodiesel and Biodiesel Fuel Mixtures (sec. 5102, 5103, and 5508 of the Senate amendment)............................. 9

III. FUEL FRAUD PREVENTION...........................................................................................................................................................11

A. Aviation Jet Fuel........................................................................................................................................................................... 11

1. Taxation of Aviation-Grade Kerosene (sec. 9302 of the House bill and sec. 5211 of the Senate amendment)........................11

2. Provide for transfer from Airport and Airway Trust Fund to Highway Trust Fund to adjust for continued highway

 use of aviation fuel (sec. 5212 of the Senate amendment).........................................................................................................14

B. Dyed Fuel...................................................................................................................................................................................... 16

1. Mechanical dye injection equipment and penalties related to dyed fuel (sec. 9303 of the House bill and secs. 5221,

 5222, and 5223 of the Senate amendment)................................................................................................................................16
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2. Terminate dyed diesel use by intercity buses (sec. 5224 of the Senate amendment)................................................................17

C. Modification of Inspection of Records Provisions ....................................................................................................................... 18

1. Authority to inspect on-site records (sec. 9304 of the House bill and sec. 5231 of the Senate amendment)............................18

2. Assessable penalty for refusal of entry (sec. 5232 of the Senate amendment)..........................................................................18

D. Registration and Reporting Requirements.................................................................................................................................... 20

1. Registration of pipeline or vessel operators required for exemption of bulk transfers to registered terminals or refineries

 (sec. 9305 of the House bill and sec. 5241 of the Senate amendment)......................................................................................20

2. Display of registration and penalties for failure to display registration and to register (secs. 9306 and 9307 of the

 House bill and secs. 5242, 5243, 5244 of the Senate amendment)............................................................................................21

3. Modification of information reporting and penalties for failure to report (sec. 9307 of the House bill and secs. 5244

 and 5246 of the Senate amendment)..........................................................................................................................................22

4. Modification of information reporting and penalties for failure to report (sec. 9307 of the House bill and secs. 5244

 and 5246 of the Senate amendment)..........................................................................................................................................23

5. Information reporting for persons claiming alcohol fuel or biodiesel tax benefits (sec. 5245 of the Senate amendment).......24

E. Imports.......................................................................................................................................................................................... 25

1. Liability for tax on fuel imported by unregistered persons (sec. 9308 of the House bill and sec. 5251 of the Senate

 amendment)................................................................................................................................................................................25

2. Reconciliation of on-loaded cargo to entered cargo (sec. 5252 of the Senate amendment)......................................................25

F. Miscellaneous Fuel Provisions ..................................................................................................................................................... 27

1. Tax on sale of diesel fuel whether suitable for use or not in a diesel-powered vehicle or train (sec. 5261 of the

 Senate amendment)...................................................................................................................................................................27

2. Modification of ultimate vendor refund claims with respect to farming (sec. 9310 of the House bill and sec. 5262

 of the Senate amendment)..........................................................................................................................................................27

3. Taxable fuel refunds for certain ultimate vendors (sec. 9401 of the House bill and sec. 5263 of the Senate amendment)......28

4. Two-party exchanges (sec. 9402 of the House bill and sec. 5264 of the Senate amendment)..................................................29

5. Heavy highway vehicle use tax modifications (sec. 9309 of the House bill and sec. 5265 of the Senate amendment)............30

6. Dedication of revenues from certain penalties to the Highway Trust Fund (sec. 9311 of the House bill and

 sec. 5266 of the Senate amendment)..........................................................................................................................................31

7. Nonapplication of export exemption to the delivery of fuel into the fuel tank of motor vehicles removed from

 United States (sec. 5267 of the Senate amendment)..................................................................................................................31

G. Total Accountability (secs. 5271, 5272, and 5273 of the Senate amendment)............................................................................. 33
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IV. DEFINITION OF HIGHWAY VEHICLE..........................................................................................................................................36

A. Exemption from Certain Excise Taxes for Mobile Machinery (sec. 9301 of the House bill and sec. 5301 of the

Senate amendment)....................................................................................................................................................................... 36

B. Modify Definition of Offhighway Vehicle (sec. 5302 of the Senate amendment)....................................................................... 37

V. EXCISE TAX REFORM AND SIMPLIFICATION............................................................................................................................40

A. Highway Excise Taxes.................................................................................................................................................................. 40

1. Dedication of gas guzzler tax to Highway Trust Fund (sec. 5401 of the Senate amendment)..................................................40

2. Simplification of tax on tires (sec. 9403 of the House bill) .......................................................................................................40

3. Repeal of certain excise taxes on railroad diesel fuel and inland waterway fuel (sec. 5402 of the Senate amendment) ..........41

B. Aquatic Excise Taxes.................................................................................................................................................................... 42

1. Exempt LED devices from sonar devices suitable for finding fish (sec. 5412 of the Senate amendment)...............................42

2. Repeal of harbor maintenance tax on exports (sec. 5413 of the Senate amendment and sec. 4461 of the Code).....................42

3. Cap on excise tax on certain fishing equipment (sec. 5414 of the Senate amendment)............................................................43

4. Reduction in rate of tax on portable aerated bait containers (sec. 5415 of the Senate amendment) .........................................43

C. Aerial Excise Taxes...................................................................................................................................................................... 44

1. Exemptions for aerial applicators and fixed-wing aircraft engaged in forestry operations (sec. 5421 of the Senate 

 amendment)................................................................................................................................................................................44

2. Modification of rural airport definition (sec. 5422 of the Senate amendment) .........................................................................45

3. Exemption from ticket taxes for transportation provided by seaplanes (sec. 5423 of the Senate amendment) ........................45

4. Certain sightseeing flights exempt from taxes on air transportation (sec. 5424 of the Senate amendment).............................46

D. Alcoholic Beverage Excise Taxes ................................................................................................................................................ 47

1. Repeal special occupational taxes on producers and marketers of alcoholic beverages (sec. 5431 of the Senate

 amendment)................................................................................................................................................................................48

2. Suspension of limitation on rate of rum excise tax cover over to Puerto Rico and Virgin Islands (sec. 5432 of the

 Senate amendment)....................................................................................................................................................................48

E. Sport Excise Taxes........................................................................................................................................................................ 50

1. Custom gunsmiths (sec. 5441 of the Senate amendment).........................................................................................................50

2. Modified taxation of archery products (sec. 5442 of the Senate amendment) ..........................................................................50

3. Repeal of Chapter 35 Federal wagering and occupational taxes and treatment of Indian tribes for such purposes

 (secs. 1308 and 5443 of the Senate amendment).......................................................................................................................51
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F. Other Excise Tax Reform Provisions ........................................................................................................................................... 53

1. Income tax credit for cost of carrying tax-paid distilled spirits in wholesale inventories and in control state bailment 

 warehouses (sec. 5451 of the Senate amendment).....................................................................................................................53

2. Credit for taxpayers owning commercial power takeoff vehicles (sec. 5452 of the Senate amendment).................................54

3. Credit for auxiliary power units installed on diesel-powered trucks (sec. 5453 of the Senate amendment).............................55

VI. MISCELLANEOUS PROVISIONS ...................................................................................................................................................56

A. Motor Fuel Tax Enforcement Advisory Commission (sec. 5501 of the Senate amendment)...................................................... 56

B. National Surface Transportation Infrastructure Financing Commission (sec. 5502 of the Senate amendment).......................... 57

C. Treasury Study of Fuel Tax Compliance and Interagency Cooperation (sec. 5503 of the Senate amendment) .......................... 57

D. Expand Highway Trust Fund Expenditure Purposes to Include Funding for Studies of Supplemental or Alternative

Financing for the Highway Trust Fund (sec. 5504 of the Senate amendment) ............................................................................ 58

E. Treasury Study of Highway Fuels Used by Trucks for Nontransportation Purposes (sec. 5505 of the Senate amendment) ...... 59

F. Delta Regional Transportation Plan (sec. 5506 of the Senate amendment)................................................................................. 60

G. Treatment of Employer-Provided Transit and Van Pooling Benefits (sec. 5507 of the Senate amendment) .............................. 61

VII. REVENUE OFFSETS........................................................................................................................................................................62

A. Expansion of Limitation on Expensing of Certain Passenger Automobiles (sec. 5601 of the Senate amendment)..................... 62

B. Provisions Designed To Curtail Tax Shelters............................................................................................................................... 62

1. Clarification of economic substance doctrine (sec. 5611 of the Senate amendment)................................................................62

2. Penalty for failing to disclose reportable transaction (sec. 5612 of the Senate amendment) ....................................................63

3. Accuracy-related penalty for listed transactions and other reportable transactions having a significant tax avoidance

 purpose (sec. 5613 of the Senate amendment)...........................................................................................................................64

4. Penalty for understatements attributable to transactions lacking economic substance, etc. (sec. 5614 of the Senate 

 amendment)................................................................................................................................................................................64

5. Modifications of substantial understatement penalty for nonreportable transactions (sec. 5615 of the Senate amendment)...64

6. Tax shelter exception to confidentiality privileges relating to taxpayer communications (sec. 5616 of the Senate

 amendment)................................................................................................................................................................................65

7. Disclosure of reportable transactions (secs. 5617 and 5618 of the Senate amendment)...........................................................65

8. Investor lists and modification of penalty for failure to maintain lists of investors (secs. 5617 and 5619 of the

 Senate amendment)...................................................................................................................................................................66
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9. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions

 (sec. 5620 of the Senate amendment)........................................................................................................................................67

10. Understatement of taxpayer’s liability by income tax return preparer (sec. 5621 of the Senate amendment)........................67

11. Penalty on failure to report foreign financial accounts (sec. 5622 of the Senate amendment)................................................68

12. Frivolous tax submissions (sec. 5623 of the Senate amendment) ...........................................................................................68

13. Regulation of individuals practicing before the Department of the Treasury (sec. 5624 of the Senate amendment) .............69

14. Penalty on promoters of tax shelters (sec. 5625 of the Senate amendment)............................................................................69

15. Statute of limitations for taxable years for which required listed transactions not reported (sec. 5626 of the

 Senate amendment).................................................................................................................................................................70

16. Denial of deduction for interest on underpayments attributable to nondisclosed reportable and noneconomic

 substance transactions (sec. 5627 of the Senate amendment).................................................................................................70

17. Authorization of appropriations for tax law enforcement (sec. 5628 of the Senate amendment) ...........................................71

C. Other Corporate Governance Provisions ...................................................................................................................................... 72

1. Affirmation of consolidated return authority (sec. 5631 of the Senate amendment).................................................................72

2. Declaration by chief executive officer relating to Federal annual corporate income tax return (sec. 5632 of the

 Senate amendment)....................................................................................................................................................................72

3. Denial of deduction for certain fines, penalties, and other amounts (sec. 5633 of the Senate amendment) .............................73

4. Disallowance of deduction for punitive damages (sec. 5634 of the Senate amendment)..........................................................73

5. Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud

 (sec. 5635 of the Senate amendment)........................................................................................................................................74

6. Doubling of certain penalties, fines, and interest on underpayments related to certain offshore financial arrangements

 (sec. 5636 of the Senate amendment)........................................................................................................................................75

D. Enron-Related Tax Shelter Provisions.......................................................................................................................................... 77

1. Limitation on transfer or importation of built-in losses (sec. 5641 of the Senate amendment).................................................77

2. No reduction of basis under section 734 in stock held by partnership in corporate partner (sec. 5642 of the

 Senate amendment)....................................................................................................................................................................78

3. Repeal of special rules for FASITs (sec. 5643 of the Senate amendment)................................................................................78

4. Expanded disallowance of deduction for interest on convertible debt (sec. 5644 of the Senate amendment)..........................79

5. Expanded authority to disallow tax benefits under section 269 (sec. 5645 of the Senate amendment)....................................80

6. Modification of interaction between subpart F and passive foreign investment company rules (sec. 5646 of the

 Senate amendment)....................................................................................................................................................................81

E. Provisions to Discourage Expatriation.......................................................................................................................................... 82

1. Tax treatment of inversion transactions (sec. 5651 of the Senate amendment).........................................................................82
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2. Impose mark-to-market tax on individuals who expatriate (sec. 5652 of the Senate amendment)...........................................84

3. Excise tax on stock compensation of insiders of inverted corporations (sec. 5653 of the Senate amendment)........................85

4. Reinsurance agreements (sec. 5654 of the Senate amendment) ................................................................................................86

VIII. ADDITIONAL REVENUE PROVISIONS......................................................................................................................................87

A. Administrative Provisions............................................................................................................................................................. 87

1. Extension of IRS user fees (sec. 5671 of the Senate amendment).............................................................................................87

2. Clarification of rules for payment of estimated tax for certain deemed asset sales (sec. 5672 of the Senate amendment) ......87

3. Partial payment of tax liability in installment agreements (sec. 5673 of the Senate amendment) ............................................88

B. Financial Instruments.................................................................................................................................................................... 89

1. Treatment of stripped interests in bond and preferred stock funds, etc. (sec. 5675 of the Senate amendment)........................89

2. Application of earnings stripping rules to partnerships and S corporations (sec. 5676 of the Senate amendment)..................89

3. Recognition of cancellation of indebtedness income realized on satisfaction of debt with partnership interest

 (sec. 5677 of the Senate amendment)........................................................................................................................................90

4. Modification of straddle rules (sec. 5678 of the Senate amendment)........................................................................................90

5. Denial of installment sale treatment for all readily tradeable debt (sec. 5679 of the Senate amendment)................................91

C. Corporations and Partnerships...................................................................................................................................................... 92

1. Modification of treatment of transfers to creditors in divisive reorganizations (sec. 5680 of the Senate amendment) ............92

2. Clarification of definition of nonqualified preferred stock (sec. 5681 of the Senate amendment)............................................93

3. Modification of definition of controlled group of corporations (sec. 5682 of the Senate amendment) ....................................93

4. Mandatory basis adjustments in connection with partnership distributions and transfers of partnership interests

 (sec. 5683 of the Senate amendment)........................................................................................................................................94

5. Class lives for utility grading costs (sec. 5684 of the Senate amendment)................................................................................95

D. Consistent Amortization of Periods for Intangibles (sec. 5685 of the Senate amendment) ......................................................... 95

E. Addition of Vaccines Against Hepatitis A to List of Taxable Vaccines (sec. 5692 of the Senate amendment).......................... 96

F. Addition of Vaccines Against Influenza to List of Taxable Vaccines (sec. 5693 of the Senate amendment)............................. 97

G. Extension of Amortization of Intangibles to Sports Franchises (sec. 5694 of the Senate amendment)....................................... 97

IX. TAX-EXEMPT FINANCING OF HIGHWAY PROJECTS AND RAIL-TRUCK TRANSFER FACILITIES...............................98

A. Allow Tax-Exempt Financing for Private Highway Projects and Rail-Truck Transfer Facilities (sec. 5691 of the

Senate amendment)....................................................................................................................................................................... 98
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X. EXTENSION OF SMALL BUSINESS EXPENSING (sec. 9501 of the House bill)........................................................................100

XI. ALTERNATIVE MIMINUM TAX RELIEF....................................................................................................................................100

A. NOL Deduction (sec. 9601(a) of the House bill)........................................................................................................................ 100

B. Foreign Tax Credit (sec. 9601(b) of the House bill)................................................................................................................... 100

C. Small Corporation Exemption (sec. 9602 of the House bill)...................................................................................................... 100

D. Farmer Income Averaging (sec. 9603 of the House bill)............................................................................................................ 101
1

INTRODUCTION

On February 12, 2004, the Senate passed, as amended, S. 1072, the “Safe, Accountable, Flexible, and Efficient Transportation 

Equity Act of 2004”. On April 2, 2004, the House of Representatives passed H.R. 3550, the “Transportation Equity Act: A Legacy 

for Users”. On May 19, 2004, S. 1072 was incorporated into H.R. 3550 as an amendment in the nature of a substitute and passed by 

the Senate.

This document1 prepared by the staff of the Joint Committee on Taxation, presents a side-by-side comparison of the tax 

provisions in the House and Senate bills. The “House bill” provisions refer to those provisions contained in Title IX of H.R. 3550, as 

passed by the House. The “Senate Amendment” provisions refer to those provisions contained in Titles I and V of H.R. 3550, as 

amended by the Senate.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Comparison of the Tax Provisions Contained in H.R. 

3550, the “Transportation Equity Act: A Legacy for Users,” as Passed by the House of Representatives, and H.R. 3550, the “Safe, 

Accountable, Flexible, and Efficient Transportation Equity Act of 2004,” as Amended by the Senate (JCX-47-04), June 25, 2004.
2

Provision Present Law House Bill Senate Amendment

I. TRUST FUND 

REAUTHORIZATION

A. Extension of Highway Trust 

Fund Expenditure Authority and 

Related Taxes (sec. 9101 of the 

House bill and sec. 5001 of the 

Senate amendment)

Six separate excise taxes are 

imposed to finance the Federal 

Highway Trust Fund program. 

Three of these taxes are imposed 

on highway motor fuels. The 

remaining three are a retail sales 

tax on heavy highway vehicles, a 

manufacturers' excise tax on heavy 

vehicle tires, and an annual use tax 

on heavy vehicles. 

Except for 4.3 cents per gallon of 

the Highway Trust Fund fuels tax 

rates, all of these taxes are 

scheduled to expire after 

September 30, 2005. The 4.3-

cents-per-gallon portion of the 

fuels tax rates is permanent. 

Highway Trust Fund expenditure 

authority is scheduled to expire 

after June 30, 2004.

Extends Highway Trust Fund taxes 

through September 30, 2011, and 

expenditure authority through 

September 30, 2009.

Extends both the Highway Trust 

Fund taxes and expenditure 

authority through September 30, 

2009.

For each fiscal year, authorizes the 

expenditure of funds for highway 

use tax evasion projects for the IRS 

($30 million for fuel tax 

compliance, $10 million for 

ExSTARS, and $10 million for 

ExFIRS) and $50 million for the 

Federal Highway Administration to 

allocate $1 million to each State to 

combat fuel tax evasion on the 

State level.

Effective date.–Date of enactment.

B. Prohibition on Use of 

Highway Account for Certain 

Rail Projects (sec. 5001(g) of the 

Senate amendment)

The Highway Trust Fund has a sub 

account for Mass Transit. The 

portion of the Highway Trust Fund 

that is not the Mass Transit 

Account is referred to as the 

No provision. With respect to rail projects 

beginning after the date of 

enactment, prohibits the use of 

Highway Account funds for any 

rail project, except for any rail 
3

Provision Present Law House Bill Senate Amendment

“Highway Account”.

Present law contains no prohibition 

on the use of Highway Account 

money for rail projects.

project involving publicly owned 

rail facilities or any rail project 

yielding a public benefit.

Effective date.–Date of enactment.

C. Interest Credited on Highway 

Trust Fund Balances (sec. 5002 

of the Senate amendment) 

The Highway Trust Fund does not 

receive interest on its unexpended 

balances. 

No provision. The Highway Trust Fund is 

credited with interest on its 

unexpended balances.

Effective date.–Date of enactment.

D. Elimination of Highway 

Trust Fund Reimbursement of 

Certain Refunds and Credits 

Paid Out of the General Fund 

(sec. 5002 of the Senate 

amendment)

Under sec. 9503(c)(2), certain 

transfers are made from the 

Highway Trust Fund into the 

General Fund, relating to amounts 

paid in respect of gasoline used on 

farms, amounts paid in respect of 

gasoline used for certain 

nonhighway purposes or by local 

transit systems, amounts relating to 

fuels not used for taxable purposes, 

and income tax credits for certain 

uses of fuels.

No provision. Section 9503(c)(2), relating to 

certain transfers from the Highway 

Trust Fund to the General Fund, is 

repealed.

Effective date.–Applies to amounts 

paid for which no transfer from the 

Highway Trust Fund has been 

made before April 1, 2004.

E. Modification of Adjustments 

of Apportionments (“Harry Byrd 

rule”) (sec. 5003 of the Senate 

amendment)

Highway Trust Fund spending is 

limited by anti-deficit provisions 

internal to the Highway Trust 

Fund, the so-called “Harry Byrd 

rule”. The rule requires the 

Treasury Department to determine, 

on a quarterly basis, the amount (if 

No provision. The “Harry Byrd rule” is changed 

from a 24-month to a 48-month 

receipt rule. Makes the temporary 

rule permanent, so that for 

purposes of the 48-month rule, 

taxes are assumed extended beyond 

their expiration date.
4

Provision Present Law House Bill Senate Amendment

any) by which unfunded highway 

authorizations exceed projected net 

Highway Trust Fund tax receipts 

for the 24-month period beginning 

at the close of each fiscal year (sec. 

9503(d)). Similar rules apply to 

unfunded Mass Transit Account 

authorizations. If unfunded 

authorizations exceed projected 24-

month receipts, apportionments to 

the States for specified programs 

funded by the relevant Trust Fund 

Account are to be reduced 

proportionately. 

Under a temporary rule (through 

June 30, 2004) for purposes of 

determining 24 months of 

projected revenues for the antideficit provisions, the Secretary of 

the Treasury is instructed to treat

each expiring provision relating to 

appropriations and transfers to the 

Highway Trust Fund to have been 

extended through the end of the 24-

month period and to assume that 

the rate of tax during such 24-

month period remains at the same 

rate in effect on the date of 

enactment of the provision.

Effective date.–Date of enactment.
5

Provision Present Law House Bill Senate Amendment

F. Extension and Modification 

of Aquatic Resources Trust 

Fund, Expenditure Authority 

and Related Taxes (secs. 9101 

and 9201 of the House bill and

secs. 5001 and 5411 of the Senate 

amendment)

The Aquatic Resources Trust Fund 

is funded by a portion of the 

receipts from the excise tax 

imposed on motorboat gasoline and 

special motor fuels, as well as a 

portion of the tax imposed on 

gasoline used as a fuel in the 

nonbusiness use of small-engine 

outdoor power equipment (“small 

engines”), that are initially 

deposited into the Highway Trust 

Fund.

4.8 cents per gallon of the total 

18.4 cents per gallon imposed on 

fuel used in motorboats and small 

engines is retained in the General 

Fund. 0.1 cent per gallon is 

transferred to the Leaking 

Underground Storage Trust 

(“LUST”) Fund. The balance of 

13.5 cents per gallon is initially 

transferred to the Highway Trust 

Fund, and then retransferred to the 

Aquatic Resources Trust Fund.

The Aquatic Resources Trust Fund 

is comprised of two accounts, the 

Boat Safety Account and the Sport 

Fish Restoration Account. 

Transfers of motorboat fuel taxes 

from the Highway Trust Fund to 

the Boat Safety Account are 

Extends transfers from Highway 

Trust Fund to Aquatic Resources 

Trust Fund to September 30, 2011 

and expenditure authority through 

September 30, 2009.

No taxes on fuel used in 

motorboats and gasoline used in 

small engines are retained in the 

General Fund. Except for the 

funding of LUST, all these taxes 

are initially transferred to Highway 

Trust Fund. After funding of Boat 

Safety Account and Land and 

Water Conservation Fund as under 

current law, the balance of these 

taxes is transferred to Sport Fish 

Restoration Account.

Effective date.–The provisions 

extending transfers and expenditure 

authority are effective on date of 

Extends both transfers from 

Highway Trust Fund to Aquatic 

Resources Trust Fund and 

expenditure authority through 

September 30, 2009.

No taxes on fuel used in 

motorboats and gasoline used in 

small engines are retained in the 

General Fund. Except for the 

funding of LUST, all these taxes 

are initially transferred to Highway 

Trust Fund.

Eliminates the Aquatics Resources 

Trust Fund and future transfers to 

the Boat Safety Account and 

transforms the Sport Fish 

Restoration Account into the Sport 

Fish Restoration Trust Fund. After 

funding of the LUST and Land and 

Water Conservation Fund as under 

present law, the balance of these 

taxes is transferred from the 

Highway Trust Fund into the Sport 

Fish Restoration Trust Fund. 

Amounts existing in the Boat 

Safety Account are authorized to 

be spent down over five years. 

Effective date.–The provisions 

extending transfers and expenditure 

authority are effective on date of 
6

Provision Present Law House Bill Senate Amendment

limited to amounts not exceeding 

$70 million per year and are 

subject to an overall annual limit 

such that the Account will not have 

an unobligated balance in excess of 

$70 million. To the extent of any 

balance remaining of motorboat 

fuel taxes, $1 million is transferred 

from the Highway Trust Fund to 

the Land and Water Conservation 

Fund.

The Sport Fish Restoration 

Account receives the remainder of 

the motorboat fuel taxes that were 

deposited into the Highway Trust 

Fund, plus 13.5 cents per gallon of 

the taxes on gasoline used in small 

engines. This Account is also 

funded with receipts from an ad 

valorem manufacturer's excise tax 

on sport fishing equipment and 

certain import duties.

Transfers from the Highway Trust 

Fund to the Aquatic Resources 

Trust Fund are scheduled to expire 

after September 30, 2005. 

The expenditure authority for the 

Aquatic Resources Trust Fund 

expires after June 30, 2004.

enactment. The provision 

eliminating retention of the taxes in 

the General Fund is effective for 

taxes imposed after September 30, 

2003.

enactment. The rest is effective 

October 1, 2004.
7

Provision Present Law House Bill Senate Amendment

II. RESTRUCTURING OF 

INCENTIVES FOR ALCOHOL 

FUELS, ETC.

A. Restructuring of Alcohol Fuel 

Excise Tax Incentives, 

Elimination of the General 

Fund’s Partial Retention of 

Alcohol Fuel Taxes, and 

Extension of Section 40 Alcohol 

Fuels Income Tax Credit

(sec. 9201 and 9202 of the House 

bill and sec. 5102 of the Senate 

amendment) 

The excise tax on gasoline is 18.4 

cents per gallon (including .1 cent 

of the Leaking Underground Trust 

Fund tax). The tax on diesel fuel 

and kerosene is 24.4 cents per 

gallon (including .1 cent of the 

Leaking Underground Trust Fund 

tax) Blends of gasoline and alcohol 

are taxed at lower rates and 

gasoline used in the producing 

gasohol are taxed at lower rates 

depending on the type of alcohol 

and its volume in the mixture. A 

reduced rate also applies to diesel 

fuel and kerosene that is combined 

with alcohol. If gasoline, diesel 

fuel, kerosene or aviation fuel on 

which the regular rate of tax was 

imposed is used in producing a 

qualified alcohol fuel mixture sold 

in that person’s trade or business, 

that person is entitled to payment 

equal to the difference between the 

regular rate and the applicable 

reduced rate. In the case of 

gasohol with respect to which a 

reduced excise tax is paid, 2.5 

cents per gallon of the reduced tax 

is retained in the General Fund; 2.8 

Repeals reduced-rate sales of fuel 

for blending with alcohol.

Allows the alcohol fuel mixture 

credit under section 40(a)(1) (with 

certain modifications) to be used as 

a credit against section 4081 tax 

liability by providing a per-gallon 

excise tax credit for each gallon of 

alcohol used to produce a qualified 

alcohol fuel mixture. 

The credit is generally 52 cents per 

gallon of alcohol used by the 

taxpayer to produce a qualified 

mixture. The credit is paid out of 

the General Fund with no Highway 

Trust Fund reimbursement. The 

Highway Trust Fund is credited the 

full amount of tax without regard 

to any excise tax credits taken.

The term alcohol includes an 

alcohol gallon equivalent of ethyl 

tertiary butyl ether or other ethers 

produced from alcohol. 

Provides that refiners can treat 

qualified mixtures as sold upon 

Repeals reduced-rate sales of fuel 

for blending with alcohol.

Provides a per-gallon excise tax 

credit for each gallon of alcohol 

used to produce a qualified alcohol 

fuel mixture to be used against 

section 4081 liability. 

The credit is generally 52 cents per 

gallon of alcohol used by the 

taxpayer to produce a qualified 

mixture. The credit is paid out of 

the General Fund with no Highway 

Trust Fund reimbursement. The 

Highway Trust Fund is credited the 

full amount of tax without regard 

to any excise tax credits taken.

The term alcohol includes an 

alcohol gallon equivalent of ethyl 

tertiary butyl ether or other ethers 

produced from alcohol. 

Provides that a qualified mixture 

includes a mixture of alcohol and a 
8

Provision Present Law House Bill Senate Amendment

cents in the case of fuel to be 

blended with alcohol.

Section 40 provides a per-gallon 

income tax credit for alcohol used 

as a motor fuel (the "alcohol 

credit") or used to produce a 

qualified alcohol fuel mixture (the 

alcohol fuel mixture credit). The 

credit is 52 cents per gallon in 2004 

and declines to 51 cents per gallon 

for 2005-2007. In the case of 

ethanol, section 40 provides a 

separate 10-cents-per-gallon credit 

for small producers for up to 15 

million gallons for any taxable 

year. These section 40 credits 

generally terminate after December 

31, 2007. 

removal from the refinery.

Provides outlay payments to 

producers of alcohol fuel mixtures.

Credit and payment provisions 

related to alcohol fuel mixtures 

terminate after 2010.

Repeals the requirement that the 

2.5/2.8 cents per gallon of the tax 

regarding alcohol fuels be retained 

in the General fund.

Effective date.–Generally for fuel 

sold or used after September 30, 

2004. The provisions which 

provide that the alcohol fuel 

subsides are borne by the General 

Fund are effective for taxes 

received and amounts paid after 

September 30, 2004. The 2.5/2.8 

repeal is effective for taxes 

imposed after September 30, 2003.

taxable fuel that is removed from 

the refinery by a person producing 

such mixture. 

Provides outlay payments to 

producers of alcohol fuel mixtures 

and neat alcohol used as fuel.

Credit and payment provisions 

related to alcohol fuel mixtures 

terminate after 2010.

Repeals the requirement that the 

2.5/2.8 cents per gallon of the tax 

regarding alcohol fuels be retained 

in the General fund.

Extends the section 40 income tax 

credit through 2010.

Importers and producers of alcohol 

must register with the Secretary.

Effective date.– Generally for fuel 

sold or used after September 30, 

2004. The 2.5/2.8 repeal is 

effective for taxes imposed after 

September 30, 2003. The 

extension of section 40 is effective 

on the date of enactment.
9

Provision Present Law House Bill Senate Amendment

B. Incentives for Biodiesel and 

Biodiesel Fuel Mixtures

(secs. 5102, 5103, and 5508 of the 

Senate amendment)

No income or excise tax incentives 

are provided for biodiesel fuels 

under present law.

No provision. Income tax credit

Provides a 50 cents-per-gallon 

income tax credit similar to the 

present-law ethanol benefits for 

each gallon of biodiesel used or 

sold as fuel or used in the 

production of a qualified biodiesel 

mixture that is used or sold as fuel. 

Biodiesel derived from virgin 

sources (agri-biodiesel) receives an 

increased credit of $1.00 per 

gallon. A qualified biodiesel 

mixture is a mixture of biodiesel 

and diesel fuel sold by the producer 

of the mixture to any person for use 

as a fuel or used by the producer as 

a fuel. The fuels do not have to be 

sold or used by the producer in a 

diesel-powered engine to qualify 

for the credit.

Effective date.–Fuel produced and 

sold or used after September 30, 

2004 in taxable years ending after 

such date and before January 1, 

2007.

Excise Tax Credit

Provides per-gallon excise tax 

credits for qualified biodiesel fuel 

mixtures. 
10

Provision Present Law House Bill Senate Amendment

The credit is generally 50 cents and 

$1.00 per gallon of biodiesel and 

agri-biodiesel, respectively.

Provides outlay payments to 

producers of biodiesel fuel 

mixtures and users of neat 

biodiesel.

Credit and payment provisions 

related to biodiesel terminate after 

2006.

Importers and producers of 

biodiesel must be registered with 

the Secretary.

Effective date.–Fuel produced and 

sold, used or removed after 

September 30, 2004. Registration 

requirements are effective April 1, 

2005.

GAO Study

The provision directs the General 

Accounting Office (“GAO”) to 

undertake a study related to 

biodiesel fuels and assessing the 

effects of the tax credits for 

biodiesel fuels.

Effective date.–Date of enactment.
11

Provision Present Law House Bill Senate Amendment

III. FUEL FRAUD 

PREVENTION

A. Aviation Jet Fuel

1. Taxation of aviation-grade 

kerosene (sec. 9302 of the House 

bill and sec. 5211 of the Senate 

amendment)

Aviation fuel is kerosene and any 

liquid (other than any product 

taxable under section 4081) that is 

suitable for use as a fuel in an 

aircraft. Unlike other fuels that 

generally are taxed upon removal 

from a terminal rack, aviation fuel 

is taxed upon sale of the fuel by a 

producer or importer. The rate of 

tax on aviation fuel is 21.9 cents 

per gallon. 

In general, aviation fuel sold for 

use or used in commercial aviation 

is taxed at a reduced rate of 4.4 

cents per gallon. In order to 

qualify for the 4.4 cents per gallon 

rate, the person engaged in 

commercial aviation must be 

registered with the Secretary and 

provide the seller with a written 

exemption certificate. Aviation 

fuel sold by a producer or importer 

for use by the buyer in a 

nontaxable use is exempt from the 

excise tax on sales of aviation fuel. 

A producer that is registered with 

the Secretary may sell aviation fuel 

The bill changes the incidence of 

taxation of aviation fuel from the 

sale of aviation fuel to the removal 

of aviation fuel from a refinery or 

terminal, or the entry into the 

United States of aviation fuel. The 

full rate of tax, 21.9 cents per 

gallon, is imposed upon removal of 

aviation fuel from a refinery or 

terminal (or entry into the United 

States). Aviation fuel may be 

removed at a reduced rate, either 

4.4 or zero cents per gallon, only if 

the aviation fuel is: (1) removed 

directly into the wing of an aircraft 

(i) that is registered with the 

Secretary as a buyer of aviation 

fuel for use in commercial aviation, 

(ii) that is a foreign airline entitled 

to the present law exemption for 

aviation fuel used in foreign trade, 

or (iii) for a tax-exempt use; or (2) 

removed or entered as part of an 

exempt bulk transfer.

Under a special rule, the provision 

treats certain refueler trucks, 

tankers, and tank wagons as a 

Similar to House bill, except that 

refueler trucks, tankers, and tank 

wagons are not subject to special 

rules; there is no provision for 

liability for, and self-assessment of, 

tax by the person receiving fuel 

removed from a refinery or 

terminal directly into the wing of 

an aircraft (whether by refueling 

vehicle or otherwise); and refunds 

by ultimate vendors are paid with 

interest.

Effective date.–The provision is 

effective for aviation fuel removed, 

entered, or sold after September 30, 

2004.
12

Provision Present Law House Bill Senate Amendment

tax-free to another registered 

producer. Producers include 

refiners, blenders, wholesale 

distributors of aviation fuel, dealers 

selling aviation fuel exclusively to 

producers of aviation fuel, the 

actual producer of the aviation fuel, 

and with respect to fuel purchased 

at a reduced rate, the purchaser of 

such fuel. 

A claim for refund of taxed 

aviation fuel held by a registered 

aviation fuel producer is allowed 

(without interest) if: (1) the 

aviation fuel tax was paid by an 

importer or producer (the “first 

producer”) and the tax has not 

otherwise been credited or 

refunded; (2) the aviation fuel was 

acquired by a registered aviation 

fuel producer (the “second 

producer”) after the tax was paid; 

(3) the second producer files a 

timely refund claim with the proper 

information; and (4) the first 

producer and any other person that 

owns the fuel after its sale by the 

first producer and before its 

purchase by the second producer 

have met certain reporting 

requirements. A payment is 

allowable to the ultimate purchaser 

of taxed aviation fuel if the 

terminal if certain requirements are 

met. For the special rule to apply, 

a qualifying truck, tanker, or tank 

wagon must be loaded with 

aviation fuel from a terminal: (1) 

that is located within an airport, 

and (2) from which no vehicle 

licensed for highway use is loaded 

with aviation fuel, except in 

exigent circumstances identified by 

the Secretary in regulations. In 

order to qualify for the special rule, 

a refueler truck, tanker, or tank 

wagon must: (1) deliver the 

aviation fuel directly into the wing 

of the aircraft at the airport where 

the terminal is located; (2) have 

storage tanks, hose, and coupling 

equipment designed and used for 

the purposes of fueling aircraft; (3) 

not be licensed for highway use; 

and (4) be operated by the terminal 

operator (who operates the terminal 

rack from which the fuel is 

unloaded) or by a person that 

makes a daily accounting to such 

terminal operator of each delivery 

of fuel from such truck, tanker, or 

tank wagon.

The provision imposes liability for 

the tax on aviation fuel removed 

from a refinery or terminal directly 

into the wing of an aircraft for use 
13

Provision Present Law House Bill Senate Amendment

aviation fuel is used in a 

nontaxable use. A claim made on 

Form 720, Schedule C, may be 

netted against the claimant’s total 

excise tax liability. Claims for 

payment not so taken may be 

allowable as income tax credits.

in commercial aviation on the 

person receiving the fuel, in which 

case, such person self-assesses the 

tax on a return. 

A refund (without interest) is 

allowable to the ultimate vendor of 

aviation fuel if such ultimate 

vendor purchases fuel tax paid and 

subsequently sells the fuel to a 

person qualified to purchase at a 

reduced rate and who waives the 

right to a refund. In such a case, 

the provision permits an ultimate 

vendor to net refund claims against 

any excise tax liability of the 

ultimate vendor, in a manner 

similar to the present law treatment 

of ultimate purchaser payment 

claims. 

Under the provision, a floor stocks 

tax applies to aviation fuel held by 

a person on October 1, 2004. The 

tax is equal to the amount of tax 

that would have been imposed 

before October 1, 2004, if the 

provision was in effect at all times 

before such date, reduced by the 

tax imposed by section 4091, as in 

effect on the day before the date of 

enactment. The Secretary shall 

determine the time and manner for 

payment of the tax, including the 
14

Provision Present Law House Bill Senate Amendment

nonapplication of the tax on de 

minimis amounts of aviation fuel. 

Under the provision, 0.1 cents per 

gallon of such tax is transferred to 

the LUST Trust Fund. The 

remainder is transferred to the 

Airport and Airway Trust Fund.

Effective date.–The provision is 

effective for aviation fuel removed, 

entered, or sold after September 30, 

2004.

2. Provide for transfer from 

Airport and Airway Trust Fund 

to Highway Trust Fund to adjust 

for continued highway use of 

aviation fuel (sec. 5212 of the 

Senate amendment)

Aviation fuel is kerosene and any 

liquid (other than any product 

taxable under section 4081) that is 

suitable for use as a fuel in an 

aircraft. In general, the rate of tax 

on aviation fuel is 21.9 cents per 

gallon. Aviation fuel sold for use 

or used in commercial aviation is 

taxed at a reduced rate of 4.4 cents 

per gallon. Certain sales of 

aviation fuel are exempt from tax.

Taxes received for aviation fuel, 

except for the LUST Trust Fund 

financing rate, are appropriated to 

the Airport and Airway Trust Fund. 

Such appropriation occurs even if 

aviation fuel is used for non 

aviation purposes.

No provision. Directs the Secretary to pay from 

the Airport and Airway Trust Fund 

to the Highway Trust Fund 

annually an amount as determined 

by the Secretary equivalent to 

amounts received in the Airport 

and Airway Trust Fund that are 

attributable to fuel that is used 

primarily for highway 

transportation purposes.

Eleven percent of such amount 

shall be paid to the Mass Transit 

Account of the Highway Trust 

Fund.

Effective date.–The provision is 

effective on October 1, 2004.
15

Provision Present Law House Bill Senate Amendment

Taxes received on taxable fuel for 

transportation purposes generally 

are appropriated to the Highway 

Trust Fund.
16

Provision Present Law House Bill Senate Amendment

B. Dyed Fuel

1. Mechanical dye injection 

equipment and penalties related 

to dyed fuel (sec. 9303 of the 

House bill and secs. 5221, 5222, 

and 5223 of the Senate 

amendment)

Diesel fuel may be dyed at a 

terminal rack by manual dyeing or 

by mechanical injection. 

A person who sells dyed fuel (or 

holds dyed fuel for sale) for any 

use that such person knows (or has 

reason to know) is a taxable use, or 

who willfully alters or attempts to 

alter the dye in any dyed fuel, is 

subject to a penalty. The penalty 

also applies to any person who uses 

dyed fuel for a taxable use (or 

holds dyed fuel for such a use) and 

who knows (or has reason to know) 

that the fuel is dyed. The penalty is 

the greater of $1,000 per act or $10 

per gallon of dyed fuel involved. 

In determining the amount of the 

penalty, the $1,000 is increased by 

the product of $1,000 and the 

number of prior penalties imposed 

upon such person (or a related 

person or predecessor of such 

person or related person). The 

penalty may be imposed jointly and 

severally on any business entity, 

and each officer, employee, or 

agent of such entity who willfully 

participated in any act giving rise 

to such penalty.

Requires mechanical dyeing with 

respect to terminals that offer dyed 

fuel. The Secretary of the Treasury 

is to prescribe regulations 

establishing standards within 180 

days after enactment.

Additional assessable penalties are 

imposed:

• for tampering with the 

mechanical system, equal to the 

greater of $25,000 or $10 per 

gallon per act. The person

tampering is responsible for any 

additional tax. 

• upon the system operator for 

failure to maintain security 

standards, a penalty of $1,000. An 

additional penalty is imposed of 

$1,000 per day for each day a 

violation remains uncorrected.

• Joint and several liability for 

willful participants and affiliated 

business entities.

Effective date.–180 days after the 

regulations are issued.

Similar to House bill, except that 

the Secretary of the Treasury is to 

prescribe regulations establishing 

standards by June 30, 2004, and 

contains the following additional 

provisions:

Denies administrative appeal or 

review for repeat offenders (more 

than two violations) of present law 

after a chemical analysis of the 

fuel, except in the case of a claim 

regarding fraud or mistake in the 

chemical analysis or error in the 

mathematical calculation of the 

amount of penalty.

Extends present law penalties to 

any person who knows that the 

strength or composition of any dye 

or marking in any dyed fuel has 

been altered, chemically or 

otherwise, and who sells (or holds 

for sale) such fuel for any use that 

the person knows or has reason to 

know is a taxable use of such fuel.

Effective date.–Penalties relating to 

mechanical dyeing systems are 

effective 180 days after the 
17

Provision Present Law House Bill Senate Amendment

regulations are issued. The 

prohibition of certain 

administrative review is effective 

for penalties assessed after date of 

enactment. The extension of 

present law penalties is effective on 

date of enactment.

2. Terminate dyed diesel use by 

intercity buses (sec. 5224 of the 

Senate amendment)

A manufacturer’s tax of 24.4 cents 

per gallon applies to diesel fuel. 

Diesel fuel that is to be used for a 

nontaxable purpose will not be 

taxed upon removal from the 

terminal if it is dyed to indicate its 

nontaxable purpose. Use in an 

intercity bus is a nontaxable use for 

purposes of the manufacturers tax 

on diesel fuel. However, diesel 

fuel is subject to a retail backup 

tax. Thus, dyed diesel removed 

from the terminal is exempt from 

the manufacturers tax but a tax of 

7.4 cents per gallon is imposed on 

the delivery of the dyed fuel into 

the fuel supply tank of the intercity 

bus. The operator of the bus is 

liable for the tax. 

Under present law, intercity bus 

operators also may buy fully taxed 

undyed diesel and seek a refund of 

the difference between the 24.4 

cents per gallon rate and the 7.4 

cents per gallon rate.

No provision. Eliminates the ability of intercity 

buses to buy dyed diesel and selfassess the 7.4 cents per gallon. 

Operators of such buses must buy 

clear fuel and seek a refund of the 

difference between 24.4 and 7.4 

cents per gallon of tax on diesel 

fuel. The provision also permits 

ultimate vendors to make refund 

claims if the bus operator assigns 

its right to claim a refund to the 

ultimate vendor. Permits refund

claimants to obtain interest if they 

file their refund claims 

electronically and the Secretary 

does not pay such claims within 20 

days (45 days for paper claims). If 

the purchase of the fuel was made 

by credit card, the person 

extending the credit is treated as 

the ultimate vendor.

Effective date.–Fuel sold after 

September 30, 2004.
18

Provision Present Law House Bill Senate Amendment

C. Modification of Inspection of 

Records Provisions

1. Authority to inspect on-site 

records (sec. 9304 of the House 

bill and sec. 5231 of the Senate 

amendment)

The IRS is authorized to inspect 

any place where taxable fuel is 

produced or stored (or may be 

stored). The inspection is 

authorized to: (1) examine the 

equipment used to determine the 

amount or composition of the 

taxable fuel and the equipment 

used to store the fuel; and (2) take 

and remove samples of taxable 

fuel. The scope of the inspection 

includes the books and records kept 

to determine the excise tax liability 

under section 4081.

The provision expands the scope of 

the inspection to include any 

books, records, or shipping papers 

pertaining to taxable fuel located in 

any authorized inspection location.

Effective date.–Date of enactment.

Same as the House bill.

2. Assessable penalty for refusal 

of entry (sec. 5232 of the Senate 

amendment)

The IRS is authorized to inspect 

any place where taxable fuel is 

produced or stored (or may be 

stored). Any person that refuses to 

allow an inspection is subject to a 

penalty in the amount of $1,000 for 

each refusal. The IRS is not able to 

assess this penalty in the same 

manner as it would a tax. It must 

first seek the assistance of the 

Department of Justice to obtain a 

judgment. Assessable penalties are 

payable upon notice and demand 

No provision. In addition to the $1,000 penalty 

under present law, an assessable 

penalty is imposed with respect to 

the refusal of entry of any person 

with the intent to transport and 

distribute untaxed, adulterated fuel 

mixtures or to transport and 

distribute dyed diesel fuel for 

taxable use. The assessable 

penalty is $1,000 for such refusal. 

The penalty will not apply if it is 

shown that such failure is due to 

reasonable cause. If the penalty is 
19

Provision Present Law House Bill Senate Amendment

by the Secretary and are assessed 

and collected in the same manner 

as taxes.

imposed on a business entity, the 

proposal provides for joint and 

several liability with respect to 

each officer, employee, or agent of 

such entity or other contracting 

party who willfully participated in 

the act giving rise to the penalty. If 

the business entity is part of an 

affiliated group, the parent 

corporation also will be jointly and 

severally liable for the penalty.

Effective date.–October 1, 2004.
20

Provision Present Law House Bill Senate Amendment

D. Registration and Reporting 

Requirements 

1. Registration of pipeline or 

vessel operators required for 

exemption of bulk transfers to 

registered terminals or refineries 

(sec. 9305 of the House bill and 

sec. 5241 of the Senate 

amendment)

In general, gasoline, diesel fuel, 

and kerosene (“taxable fuel”) are 

taxed upon removal from a refinery 

or a terminal. Tax also is imposed 

on the entry into the United States 

of any taxable fuel for 

consumption, use, or warehousing. 

The tax does not apply to any 

removal or entry of a taxable fuel 

transferred in bulk (a “bulk 

transfer”) to a terminal or refinery 

if both the person removing or 

entering the taxable fuel and the 

operator of such terminal or 

refinery are registered with the 

Secretary. Present law does not 

require that the vessel or pipeline 

operator that transfers fuel as part 

of a bulk transfer be registered in 

order for the transfer to be exempt. 

For example, a registered refiner 

may transfer fuel to an unregistered 

vessel or pipeline operator who in 

turn transfers fuel to a registered 

terminal operator. The transfer is 

exempt despite the intermediate 

transfer to an unregistered person.

Requires that for a bulk transfer of 

a taxable fuel to be exempt from 

tax, any pipeline or vessel operator 

that is a party to the bulk transfer 

be registered with the Secretary. 

Transfer to an unregistered party 

will subject the transfer to tax. The 

Secretary is required to publish 

periodically a list of all registered 

persons that are required to 

register.

Effective date.–The provision is 

effective on October 1, 2004, 

except that the Secretary is 

required to publish the list of 

registered persons beginning on 

July 1, 2004.

Similar to the House bill, except 

that with respect to a bulk transfer 

on which no tax is paid, the Senate 

amendment imposes a penalty on 

any person who knowingly 

transfers taxable fuel in bulk to an 

unregistered person. The penalty is 

the greater of $10,000 or $1 per 

gallon and is increased for multiple 

prior violations. No penalty is 

imposed upon a showing by the 

taxpayer of reasonable cause. The 

provision authorizes amounts 

equivalent to the penalties received 

to be appropriated to the Highway 

Trust Fund.

Effective date.–The provision is 

effective on October 1, 2004, 

except that the Secretary is 

required to publish the list of 

persons required to register by June 

30, 2004.
21

Provision Present Law House Bill Senate Amendment

2. Display of registration and 

penalties for failure to display 

registration and to register

(secs. 9306 and 9307 of the House 

bill and secs. 5242, 5243, 5244 of 

the Senate amendment)

Blenders, enterers, pipeline 

operators, position holders, 

refiners, terminal operators, and 

vessel operators are required to 

register with the Secretary with 

respect to fuels taxes imposed by 

sections 4041(a)(1) and 4081. A 

non-assessable penalty for failure 

to register is $50. A criminal 

penalty of $5,000, or imprisonment 

of not more than five years, or 

both, together with the costs of 

prosecution also applies to a failure 

to register and to certain false 

statements made in connection 

with a registration application.

Requires that every operator of a 

vessel who is required to register 

with the Secretary display on each 

vessel used by the operator to 

transport fuel, proof of registration 

through an electronic identification 

device prescribed by the Secretary. 

A failure to display such proof of 

registration results in a penalty of 

$500 per month per vessel. The 

amount of the penalty is increased 

for multiple prior violations. No 

penalty is imposed upon a showing 

by the taxpayer of reasonable 

cause. The provision authorizes 

amounts equivalent to the penalties 

received to be appropriated to the 

Highway Trust Fund.

The provision imposes a new 

assessable penalty for failure to 

register of $10,000 for each initial 

failure, plus $1,000 per day that the 

failure continues. No penalty is 

imposed upon a showing by the 

taxpayer of reasonable cause. In 

addition, the provision increases 

the present-law non-assessable 

penalty for failure to register from 

$50 to $10,000 and the present law 

criminal penalty for failure to 

register from $5,000 to $10,000. 

The provision authorizes amounts 

Similar to House bill, except that: 

the increase in the penalty for 

multiple prior violations for failure 

to display proof of registration is 

determined differently, and the 

Secretary shall require that persons 

that operate a terminal or refinery 

or a customs bonded storage 

facility within a foreign trade zone 

register and report to the Secretary.
22

Provision Present Law House Bill Senate Amendment

equivalent to any of such penalties 

received to be appropriated to the 

Highway Trust Fund.

Effective date.–The provision 

requiring display of registration is 

effective on October 1, 2004. The 

provision relating to penalties is 

effective for penalties imposed 

after September 30, 2004.

Effective date.–The provision is 

effective on October 1, 2004, 

except that the penalty for failure 

to register is effective for failures 

pending or occurring after 

September 30, 2004.

3. Modification of information 

reporting and penalties for 

failure to report (sec. 9307 of the 

House bill and secs. 5244 and 

5246 of the Senate amendment)

A fuel information reporting 

program, the Excise Summary 

Terminal Activity Reporting 

System (“ExSTARS”), requires 

terminal operators and bulk 

transport carriers to report monthly 

on the movement of any liquid 

product into or out of an approved 

terminal. Terminal operators file 

Form 720-TO - Terminal Operator 

Report, which shows the monthly 

receipts and disbursements of all 

liquid products to and from an 

approved terminal. Bulk transport 

carriers (barges, vessels, and 

pipelines) that receive liquid 

product from an approved terminal 

or deliver liquid product to an 

approved terminal file Form 720-

CS - Carrier Summary Report, 

which details such receipts and 

The provision imposes a new 

assessable penalty for failure to file 

a report or to furnish information 

required in a report required by the 

ExSTARS system. The penalty is 

$10,000 per failure with respect to 

each vessel or facility (e.g., a 

terminal or other facility) for which 

information is required to be 

furnished. No penalty is imposed 

upon a showing by the taxpayer of 

reasonable cause. The provision 

authorizes amounts equivalent to 

the penalties received to be 

appropriated to the Highway Trust 

Fund.

Effective date.–The provision is 

effective for penalties imposed 

after September 30, 2004.

Similar to House bill, except that 

electronic filing of ExSTARS 

reports is mandated for persons that 

have 25 or more reportable 

transactions in a month, and 

technical wording differences. 

Effective date.–The provision is 

effective for failures pending or 

occurring after September 30, 

2004. The electronic reporting 
23

Provision Present Law House Bill Senate Amendment

disbursements. In general, the 

penalty for failure to file a report or 

a failure to furnish all of the 

required information in a report is 

$50 per report.

provision is effective on October 1, 

2004.

4. Modification of information 

reporting and penalties for 

failure to report (sec. 9307 of the 

House bill and secs. 5244 and 

5246 of the Senate amendment)

A fuel information reporting 

program, the Excise Summary 

Terminal Activity Reporting 

System (“ExSTARS”), requires 

terminal operators and bulk 

transport carriers to report monthly 

on the movement of any liquid 

product into or out of an approved 

terminal. Terminal operators file 

Form 720-TO - Terminal Operator 

Report, which shows the monthly 

receipts and disbursements of all 

liquid products to and from an 

approved terminal. Bulk transport 

carriers (barges, vessels, and 

pipelines) that receive liquid 

product from an approved terminal 

or deliver liquid product to an 

approved terminal file Form 720-

CS - Carrier Summary Report, 

which details such receipts and 

disbursements. In general, the 

penalty for failure to file a report or 

a failure to furnish all of the 

required information in a report is 

$50 per report.

The provision imposes a new 

assessable penalty for failure to file 

a report or to furnish information 

required in a report required by the 

ExSTARS system. The penalty is 

$10,000 per failure with respect to 

each vessel or facility (e.g., a 

terminal or other facility) for which 

information is required to be 

furnished. No penalty is imposed 

upon a showing by the taxpayer of 

reasonable cause. The provision 

authorizes amounts equivalent to 

the penalties received to be 

appropriated to the Highway Trust 

Fund.

Effective date.–The provision is 

effective for penalties imposed 

after September 30, 2004.

Similar to House bill, except that 

electronic filing of ExSTARS 

reports is mandated for persons that 

have 25 or more reportable 

transactions in a month, and 

technical wording differences. 

Effective date.–The provision is 

effective for failures pending or 

occurring after September 30, 

2004. The electronic reporting 

provision is effective on October 1, 

2004.
24

Provision Present Law House Bill Senate Amendment

5. Information reporting for 

persons claiming alcohol fuel or 

biodiesel tax benefits (sec. 5245 

of the Senate amendment)

The Code provides an income tax 

credit for each gallon of ethanol 

and methanol derived from 

renewable sources (e.g., biomass) 

used or sold as a fuel, or used to 

produce a qualified alcohol fuel 

mixture, such as gasohol. The 

amount of the credit is currently 

equal to 52 cents per gallon 

(ethanol) and 60 cents per gallon 

(methanol). This tax credit is 

provided to blenders of the 

alcohols with other taxable fuels, 

or to the retail sellers of unblended 

alcohol fuels. Part or all of the 

benefits of the income tax credit 

may be claimed through reduced 

excise taxes paid, either in 

reduced-tax sales or by expedited 

blender refunds on fully taxed sales 

of gasoline to obtain the benefit of 

the reduced rates. The amount of 

the income tax credit determined 

with respect to any alcohol is 

reduced to take into account any 

benefit provided by the reduced 

excise tax rates. There is no 

information reporting requirement 

for persons taking advantage of 

these benefits. 

No provision. Requires persons claiming the 

Code benefits related to alcohol 

fuels and biodiesel to provide 

information related to, and for the 

coordination of, such benefits as 

the Secretary may require to ensure 

the proper administration and use 

of such benefits. The Secretary

may deny, revoke or suspend the 

registration of any person to 

enforce this requirement.

Effective date.–October 1, 2004.
25

Provision Present Law House Bill Senate Amendment

E. Imports

1. Liability for tax on fuel 

imported by unregistered 

persons (sec. 9308 of the House 

bill and sec. 5251 of the Senate 

amendment)

Tax is imposed on the entry into 

the United States of any taxable 

fuel for consumption, use, or 

warehousing. The “enterer” is 

liable for the tax. An enterer 

generally means the importer of 

record (under customs law) with 

respect to the taxable fuel. 

However, if the importer of record 

is acting as an agent (a broker for 

example), the person for whom the 

agent is acting is the enterer. If 

there is no importer of record for 

taxable fuel entered into the United 

States, the owner of the taxable 

fuel at the time it is brought into 

the United States is the enterer. An 

importer’s liability for Customs 

duties includes a liability for any 

internal revenue taxes that attach 

upon the importation of 

merchandise unless otherwise 

provided by law or regulation. (19 

CFR 141.3).

The importer of record is jointly 

and severally liable for the tax 

imposed upon entry of fuel into the 

United States if, under regulations, 

any other person that is not 

registered with the Secretary as a 

taxable fuel registrant is liable for 

such tax. If the importer of record 

is liable for the tax and such tax is 

not paid on or before the last date 

prescribed for payment, the 

Secretary may collect such tax 

from the Customs bond posted with 

respect to the importation of the 

taxable fuel to which the tax 

relates.

Effective date.–Fuel entered after 

September 30, 2004.

For fuel entering the United States 

(other than transfers in bulk) for 

consumption, use, or warehousing, 

the proposal provides that the tax is 

immediately due and payable at the 

time of entry, if the enterer is not 

registered with the IRS. Upon the 

failure to pay tax or post bond, the 

Customs Service is authorized 

under the proposal to deny entry of 

the shipment into the United 

States. The Secretary also may 

seize the fuel on which the tax is 

due or detain the vehicle 

transporting such fuel until such 

tax is paid. If no tax has been paid 

or bond filed within five days of 

the seizure, the Secretary may sell 

the fuel. 

Effective date.–Date of enactment.

2. Reconciliation of on-loaded 

cargo to entered cargo

(sec. 5252 of the Senate 

amendment)

Final Custom regulations were 

issued on October 31, 2002 

pertaining to cargo destined for 

importation into the United States 

or exportation from the United 

States. The regulations require the 

No provision. Not later than one year after the 

date of enactment, the Secretary of 

Homeland Security, together with 

the Secretary, is to promulgate 

regulations providing for the 

transmission to the IRS of 
26

Provision Present Law House Bill Senate Amendment

advance and accurate presentation 

of certain manifest information 

prior to lading at the foreign port 

and encourage the presentation of 

this information electronically. 

Customs must receive from the 

carrier the vessel’s Cargo 

Declaration (Customs Form 1302) 

or the electronic equivalent within 

24 hours before such cargo is laden 

aboard the vessel at the foreign 

port. Certain carriers of bulk 

cargo, however, are exempt from 

these filing requirements. Such 

bulk cargo includes that composed 

of free flowing articles such as oil, 

grain, coal, ore and the like, which 

can be pumped or run through a 

chute or handled by dumping. 

Thus, taxable fuels are not covered 

by the Cargo Declaration 

requirement.

information pertaining to cargo of 

taxable fuels destined for 

importation into the United States, 

prior to such importations. 

Effective date.–Date of enactment.
27

Provision Present Law House Bill Senate Amendment

F. Miscellaneous Fuel Provisions

1. Tax on sale of diesel fuel 

whether suitable for use or not in 

a diesel-powered vehicle or train 

(sec. 5261 of the Senate 

amendment)

Upon the occurrence of certain 

events, the Code imposes an excise 

tax on taxable fuel. Under section 

4083(a), “taxable fuel” includes 

diesel fuel. Diesel fuel is defined 

as any liquid, other than gasoline, 

that without further processing or 

blending, is suitable for use as a 

fuel in a diesel-powered highway 

vehicle or train. A liquid is 

suitable for this use if the liquid has 

practical and commercial fitness 

for use in the propulsion engine of 

a diesel-powered highway vehicle 

or diesel-powered train. 

No provision. Modifies the definition of diesel 

fuel to include any liquid sold or 

offered for sale as fuel for use as a 

fuel in a diesel-powered highway 

vehicle or train. The liquid does 

not have to be suitable for use in a 

diesel-powered engine or train.

Effective date.–Date of enactment.

2. Modification of ultimate 

vendor refund claims with 

respect to farming (sec. 9310 of 

the House bill and sec. 5262 of 

the Senate amendment)

If diesel fuel, kerosene, or aviation 

fuel on which tax has been imposed 

is used by any person in a 

nontaxable use, the Secretary is to 

refund (without interest) the 

amount of tax imposed. The 

refund is made to the ultimate 

purchaser of the taxed fuel. 

However, in the case of diesel fuel 

or kerosene used on a farm for 

farming purposes or by a State or 

local government, refund payments 

are paid to the ultimate, registered 

vendors (“ultimate vendors”) of 

such fuels.

In the case of diesel fuel or 

kerosene used on a farm for 

farming purposes, the provision 

limits ultimate vendor claims for 

refund to sales of such fuel in 

amounts less than 250 gallons per 

farmer per claim period.

Effective date.–Fuels sold for 

nontaxable use after the date of 

enactment.

Identical to House bill except that 

limit on ultimate vendor claims for 

refund applies to amounts less than 

500 gallons per farmer per claim 

period.

Effective date.– Same as House 

bill.
28

Provision Present Law House Bill Senate Amendment

3. Taxable fuel refunds for 

certain ultimate vendors

(sec. 9401 of the House bill and 

sec. 5263 of the Senate 

amendment)

In the case of gasoline on which 

tax has been paid and sold to a 

State or local government, to a 

nonprofit educational organization, 

for supplies for vessels or aircraft, 

for export, or for the production of 

special fuels, a wholesale 

distributor that sells the gasoline 

for such exempt purposes is treated 

as the person who paid the tax and 

thereby is the proper claimant for a 

credit or refund of the tax paid. In 

the case of undyed diesel fuel or 

kerosene used on a farm for 

farming purposes or by a State or 

local government, a credit or 

payment is allowable only to the 

ultimate, registered vendors 

(“ultimate vendors”) of such fuels.

 

In general, refunds are paid without 

interest. In the case of 

overpayments of tax on gasoline, 

diesel fuel, or kerosene that is used 

to produce a qualified alcohol 

mixture and for refunds due 

ultimate vendors of diesel fuel or 

kerosene used on a farm for 

farming purposes or by a State or 

local government, the Secretary is 

required to pay interest on refunds 

of $200 or more ($100 or more in 

the case of kerosene) due to the 

For sales of gasoline to a State or 

local government or to a nonprofit 

educational organization for its 

exclusive use on which tax has 

been imposed, the provision 

conforms the payment of refunds to 

that procedure established under 

present law in the case of diesel 

fuel or kerosene. That is, the 

ultimate vendor claims the refund.

The provision modifies the 

payment of interest on refunds. 

For overpayments of tax on 

gasoline, diesel fuel, or kerosene 

that is used to produce a qualified 

alcohol mixture and for refunds 

due ultimate vendors of diesel fuel 

or kerosene used for farming 

purposes or by a State or local 

government, all refunds unpaid 

after 45 days must be paid with 

interest. If the taxpayer has filed 

for refund by electronic means, 

refunds unpaid after 20 days must 

be paid with interest.

For claims for refund of tax paid on 

diesel fuel or kerosene sold to State 

and local governments and for 

claims for refund of tax paid on 

gasoline sold to State and local 

governments or to a nonprofit 

Identical to House bill except 

provision imposes additional 

requirements of ultimate vendors 

who file for 20-day refunds on 

behalf of their customers. To 

qualify for 20-day refunds of 

highway exempt use, the ultimate 

vendor must certify that all of his 

claimants are registered and 

approved for highway exempt use. 

The ultimate vendor must register 

with the Secretary and, as part of 

his registration, the ultimate vendor

must submit for pre-certification 

the highway exempt users on 

whose behalf the ultimate vendor 

will file claims for refunds.
29

Provision Present Law House Bill Senate Amendment

taxpayer arising from sales over 

any period of a week or more, if 

the Secretary does not make 

payment of the refund within 20 

days.

educational organization and for 

which the ultimate purchaser 

utilized a credit card, the provision 

deems the person extending the 

credit to the ultimate purchaser to 

be the ultimate vendor. That is, the 

credit card company administers 

claims for refund and is responsible 

for supplying documentation 

required from ultimate vendors. 

Effective date.–October 1, 2004. Effective date.–Same as House bill.

4. Two-party exchanges

(sec. 9402 of the House bill and 

sec. 5264 of the Senate 

amendment)

Most fuel is taxed when it is 

removed from a registered 

terminal. The party liable for 

payment of this tax is the “position 

holder”. The position holder is the 

person reflected on the records of 

the terminal operator as holding the 

inventory position in the fuel and 

has a contractual agreement with 

the terminal operator to store and 

provide services with respect to the 

fuel. 

It is common industry practice for 

oil companies to serve customers 

of other oil companies under 

exchange agreements, e.g., where 

Company A's terminal is more 

conveniently located for wholesale 

or retail customers of Company B. 

The provision permits two 

registered parties to switch position 

holder status in fuel within a 

registered terminal if all of the 

following occur: 

(1) The transaction includes a 

transfer from the first position 

holder, i.e., the person who holds 

the inventory position for taxable 

fuel in the terminal as reflected in 

the records of the terminal operator 

prior to the transaction.

(2) The exchange transaction 

occurs at the same time as 

completion of removal across the 

rack from the terminal by the 

receiving person or its customer. 

Same as the House bill.
30

Provision Present Law House Bill Senate Amendment

In such cases, the exchange 

agreement party (Company B in 

the example) owns the fuel when 

the motor fuel is removed from the 

terminal and sold to B’s customer.

(3) The terminal operator in its 

books and records treats the 

receiving person as the person that 

removes the product across a 

terminal rack for purposes of 

reporting the transaction to the IRS.

(4) The transaction is the subject 

of a written contract.

Effective date.–Date of enactment.

5. Heavy highway vehicle use tax 

modifications (sec. 9309 of the 

House bill and sec. 5265 of the 

Senate amendment)

For vehicles over 55,000 pounds, 

an annual use tax is imposed at 

specified rates according to weight. 

The annual use tax is imposed for a 

taxable period of July 1 through 

June 30. Generally, the tax is paid 

by the person in whose name the 

vehicle is registered. In certain 

cases, taxpayers are allowed to pay 

the tax in installments. Present law 

permits proration of the tax if the 

vehicle is stolen, destroyed, or 

when the first use of the vehicle 

occurs after the first month of the 

taxable period. Any highway 

motor vehicle that is issued a base 

plate by Canada or Mexico and is 

operated on U.S. highways is 

subject to the use tax whether or 

Eliminates the ability to pay the tax 

in installments. 

Eliminates the reduced rates for 

Canadian and Mexican vehicles.

Requires taxpayers with 25 or more 

vehicles for any taxable period to 

file their returns electronically. 

Permits proration of tax for 

vehicles sold during the taxable 

period.

Includes all of the provisions of the 

House bill.

In addition, requires that every 

person, agency, or instrumentality 

that pays the heavy highway 

vehicle use tax to receive and 

display on the vehicle either a 

decal or an electronic identification 

device prescribed by the Secretary. 

The decal or device is to be 

received and displayed not later 

than October 1 with respect to each 

taxable period. 

Eliminates the present-law ability 

to prorate tax when the first use of 

the vehicle occurs after the first 

month of the taxable period.
31

Provision Present Law House Bill Senate Amendment

not the vehicles are required to be 

registered in the United States. 

The tax rate for Canadian and 

Mexican vehicles is 75 percent of 

the rate that would otherwise be 

imposed.

Effective date.–Taxable periods 

beginning after the date of 

enactment.

Effective date.–Generally effective 

for taxable periods beginning after 

the date of enactment. The decal 

requirements are effective October 

1, 2005.

6. Dedication of revenues from 

certain penalties to the Highway 

Trust Fund (sec. 9311 of the 

House bill and sec. 5266 of the 

Senate amendment) 

Present law does not dedicate to the 

Highway Trust Fund any revenues 

from penalties assessed and 

collected by the Secretary.

The provision dedicates to the 

Highway Trust Fund amounts 

equivalent to the penalties assessed 

under the penalty provisions 

created by the bill as well as the 

existing penalties (as increased by 

the provision) for failing to register 

under section 4101 (dedicates 

penalties from secs. 6715, 6715A, 

6717, 6718, 6725, 7232, and 7272).

Effective date.–Penalties assessed 

after October 1, 2004.

Similar to the House bill. Because 

the Senate amendment creates 

penalties that are not included in 

the House bill, the text of the 

provision is slightly different 

(dedicates penalties from secs. 

6715, 6715A, 6717, 6718, 6719, 

6720, 6725, 7232, and 7272).

Effective date.–Penalties assessed 

after October 1, 2004.

7. Nonapplication of export 

exemption to the delivery of fuel 

into the fuel tank of motor 

vehicles removed from United 

States (sec. 5267 of the Senate 

amendment)

Special provisions under the Code 

provide for a refund of tax to any 

person who sells gasoline to 

another for exportation. It is the 

long-standing administrative 

position of the IRS that the 

exemption from excise tax by 

reason of exportation does not 

apply to the sale of motor fuel 

pumped into a fuel tank of a 

vehicle that is to be driven, or 

shipped, directly out of the United 

No provision. Reaffirms the long-standing IRS 

position taken in Rev. Rul. 69-150 

and restates present law by 

amending the Code definition of 

export to exclude the delivery of a 

taxable fuel into a fuel tank of a 

motor vehicle that is shipped or 

driven out of the United States. 

Imposes a tax on the sale of taxable 

fuel at a duty-free sales enterprise 

unless there was a prior taxable 

removal, or entry of such fuel.
32

Provision Present Law House Bill Senate Amendment

States. See Rev. Rul. 69-150. Effective date.–Sales or deliveries 

made after the date of enactment.
33

Provision Present Law House Bill Senate Amendment

G. Total Accountability

(secs. 5271, 5272, and 5273 of the 

Senate amendment)

An excise tax is imposed upon (1) 

the removal of any taxable fuel 

from a refinery or terminal, (2) the 

entry of any taxable fuel into the 

United States, or (3) the sale of any 

taxable fuel to any person who is 

not registered with the IRS to 

receive untaxed fuel, unless there 

was a prior taxable removal or 

entry. A “taxable fuel” is gasoline, 

diesel fuel (any liquid suitable for 

use other than gasoline suitable for 

use in a diesel-powered engine or 

train), and kerosene. Gasoline 

includes, to the extent provided in 

regulations, gasoline blendstocks 

and products commonly used as 

additives in gasoline. The term 

“gasoline blendstocks” does not 

include any product that cannot be 

blended into gasoline without 

further processing or fractionation 

(“off-spec gasoline”). The term 

taxable fuel also does not include 

any liquid that contains less than 

four percent normal paraffins, or 

any liquid that has a distillation 

range of 125 degrees Fahrenheit or 

less, sulfur content of 10 ppm or 

less and minimum color of +27 

Saybolt (these are known as 

“excluded liquids”) 

No provision. Reportable liquids

Creates a new category of taxable 

liquids, “reportable liquids”. A 

reportable liquid is any petroleumbased liquid other than a taxable 

fuel. For purposes of the 

imposition of tax, the provision 

treats “reportable liquids” in a 

manner similar to taxable fuels. 

Tax is imposed upon the removal, 

entry, or sale of such liquids, 

unless the removal, entry, or sale is 

(1) to a registered person who 

certifies that such liquid will not be 

used as a fuel or in the production 

of a fuel, or (2) the sale is to the 

ultimate purchaser of such liquid.

Authorizes the Secretary to pay 

(without interest) an amount equal 

to the tax imposed, if a person 

establishes that the ultimate use of 

a gasoline blendstock, or additive, 

was not to produce gasoline. 

Similarly, if tax is imposed on a 

reportable liquid and the person 

establishes that the liquid was not 

used to produce a taxable fuel, the 

Secretary is authorized to pay 

(without interest) an amount equal 

to the tax imposed on such person 

with respect to the reportable 
34

Provision Present Law House Bill Senate Amendment

If certain conditions are met, the 

removal, entry, or sale of gasoline 

blendstocks is not taxable. Diesel 

fuel and kerosene that is to be used 

for a nontaxable purpose will not 

be taxed upon removal from the 

terminal if it is dyed to indicate its 

nontaxable purpose. Undyed 

aviation-grade kerosene also is 

exempt from tax at the rack if it 

destined for use as a fuel in an 

aircraft. Feedstock kerosene that a 

registered industrial user receives 

by pipeline or vessel also is exempt 

from the dyeing requirement. 

The IRS collects data under the 

ExSTARS reporting system that 

tracks all removals across the 

terminal rack regardless of whether 

or not the product is technically 

excluded from the definition of 

gasoline, diesel, or blendstocks. 

ExSTARS reporting identifies the 

position holder at the time of 

removal. Below the rack, no 

information is gathered for exempt 

or excluded products or uses.

Taxpayers file quarterly excise tax 

returns showing only net taxable 

gallons. Taxpayers do not account 

for gallons they claim to be exempt 

on such returns. Although the 

liquid.

Provides that dyed diesel (a taxable 

fuel) also is taxable unless removed 

by a person registered with the 

Secretary under section 4101. 

The Secretary is to require that all 

persons removing refined product, 

whether a taxable product or an 

untaxed product, over the terminal 

rack to report such products on a 

monthly excise tax return. 

Effective date.–Reportable liquids 

and fuel sold or used after 

September 30, 2004.

Information reporting

Requires information reporting 

with respect to taxable fuels 

removed, entered, or transferred 

from any refinery, pipeline or 

vessel which is registered with the 

Secretary.

Effective date.–October 1, 2004.
35

Provision Present Law House Bill Senate Amendment

return is a quarterly return, the 

excise taxes are paid in 

semimonthly deposits. If deposits 

are not made as required, a 

taxpayer may be required to file 

returns on a monthly or 

semimonthly basis instead of 

quarterly.
36

Provision Present Law House Bill Senate Amendment

IV. DEFINITION OF 

HIGHWAY VEHICLE

A. Exemption from Certain 

Excise Taxes for Mobile 

Machinery (sec. 9301 of the 

House bill and sec. 5301 of the 

Senate amendment)

Under present law, the definition of 

a “highway vehicle” affects the 

application of the retail tax on 

heavy vehicles, the heavy vehicle 

use tax, the tax on tires, and fuel 

taxes. The Code does not define a 

“highway vehicle.” For purposes 

of these taxes, among the vehicles 

excluded under Treasury 

regulations are certain specially 

designed mobile machinery 

vehicles for nontransportation 

functions (the “mobile machinery 

exception”). 

The mobile machinery exception 

applies if three tests are met: (1) 

the vehicle consists of a chassis to 

which jobsite machinery (unrelated 

to transportation) has been 

permanently mounted; (2) the 

chassis has been specially designed 

to serve only as a mobile carriage 

and mount for the particular 

machinery and (3) by reason of 

such special design, the chassis 

could not, without substantial 

structural modification, be used to 

transport a load other than the 

The provision codifies the presentlaw mobile machinery exemption 

for purposes of three taxes: the 

retail tax on heavy vehicles, the 

heavy vehicle use tax, and the tax 

on tires. Thus, if a vehicle can 

satisfy the three-part test, it will not 

be treated as a highway vehicle and 

will be exempt from these taxes. 

Fuel taxes for mobile machinery 

vehicles must be paid and then a 

refund sought if a mileage 

requirement is met. Specifically, in 

addition to the three-part design 

test, the vehicle must not have 

traveled more than 7,500 miles on 

public highways during the 

owner’s taxable year. Refunds of 

fuel taxes are permitted on an 

annual basis only. For purposes of 

this rule, a person’s taxable year is 

his taxable year for income tax 

purposes. 

Effective date.–Generally effective 

after the date of enactment. As to 

the fuel taxes, the provision is 

effective for taxable years 

beginning after the date of 

Similar to the House bill, except 

vehicles owned by an organization 

described in section 501(c), and 

exempt from tax under section 

501(a), need only satisfy the threepart design test for purposes of the 

fuel taxes and the mileage test is 

5,000 miles.

Effective date.–Same as the House 

bill. 
37

Provision Present Law House Bill Senate Amendment

particular machinery. 

On June 6, 2002, the Treasury 

Department put forth proposed 

regulations that would eliminate 

the mobile machinery exception.

enactment.

B. Modify Definition of 

Offhighway Vehicle

(sec. 5302 of the Senate 

amendment)

Under present law, the definition of 

a “highway vehicle” affects the 

application of the retail tax on 

heavy vehicles, the heavy vehicle 

use tax, the tax on tires, and fuel 

taxes. The Code does not define a 

“highway vehicle.” For purposes 

of these taxes, Treasury regulations 

define a highway vehicle as any 

self-propelled vehicle or trailer or 

semitrailer designed to perform a 

function of transporting a load over 

the public highway, whether or not 

also designed to perform other 

functions. Excluded from the 

definition of highway vehicle are 

certain vehicles specially designed 

for off-highway transportation for 

which the special design 

substantially limits or impairs the 

use of such vehicle to transport 

loads over the highway (the “offhighway transportation vehicle” 

exception), and certain trailers and 

semi-trailers specially designed to 

function only as an enclosed 

No provision. Adopts the definition of an 

offhighway transportation vehicle 

and a nontransportation trailer and 

semitrailer described in the 

Proposed Treasury Regulations. 

For example, a vehicle that has 

considerable physical 

characteristics for transporting its 

load other than over the public 

highway, when compared with its 

physical characteristics for 

transporting its load over the public 

highway, may establish that it is 

specially designed for the primary 

function of transporting its load 

other than over the public highway. 

If the physical characteristics for 

transporting such vehicle’s load 

other than over the public highway 

substantially limit its capability to 

transport a load over the public 

highway, then the vehicle is not 

treated as a highway vehicle.

Effective date.–The provision 

generally is effective after the date 
38

Provision Present Law House Bill Senate Amendment

stationary shelter for the 

performance of non-transportation 

functions off the public highways.

On June 6, 2002, the Treasury 

Department put forth proposed 

regulations that would modify the 

off-highway transportation vehicle 

exception. Under the proposed 

regulations, a vehicle is not treated 

as a highway vehicle if it is 

specially designed for the primary 

function of transporting a particular 

type of load other than over the 

public highway and because of this special design its capability to 

transport a load over the public 

highway is substantially limited or 

impaired. A vehicle’s design is 

determined solely on the basis of 

its physical characteristics. In 

determining whether substantial 

limitation or impairment exists, 

account may be taken of factors 

such as the size of the vehicle, 

whether it is subject to the 

licensing, safety, and other 

requirements applicable to highway 

vehicles, and whether it can 

transport a load at a sustained 

speed of at least 25 miles per hour. 

Under the proposed regulation, it is 

not material that a vehicle can 

transport a greater load off the 

of enactment. As to the fuel taxes, 

the provision is effective for 

taxable periods beginning after the 

date of enactment.
39

Provision Present Law House Bill Senate Amendment

public highway than it is permitted 

to transport over the public 

highway.

The proposed regulation provides 

an exception to the definition of a

highway vehicle for 

nontransportation trailers and 

semitrailers. Under the proposed 

regulation, a trailer or semitrailer is 

not treated as a highway vehicle if 

it is specially designed to function 

only as an enclosed stationary 

shelter for the carrying on of an 

offhighway function at an 

offhighway site. For example, a 

trailer that is capable only of 

functioning as an office for an 

offhighway construction operation 

is not a highway vehicle.
40

Provision Present Law House Bill Senate Amendment

V. EXCISE TAX REFORM 

AND SIMPLIFICATION

A. Highway Excise Taxes

1. Dedication of gas guzzler tax 

to Highway Trust Fund

(sec. 5401 of the Senate 

amendment)

The Code imposes a tax on the sale 

by the manufacturer of each 

automobile of a model type with a 

fuel economy of 22.5 miles per 

gallon or less. Automobiles subject 

to tax are those rated at 6,000 

pounds unloaded gross vehicle 

weight or less. While certain 

vehicles are exempt, the tax applies 

to limousines without regard to the 

weight requirement. 

No provision. Requires that amounts equivalent to 

the gas guzzler taxes received in the 

Treasury be transferred to the 

Highway Trust Fund. 

Repeals the tax as it applies to 

limousines rated at greater than 

6,000 pounds unloaded gross 

vehicle weight.

Effective date.–Date of enactment.

2. Simplification of tax on tires 

(sec. 9403 of the House bill)

A graduated excise tax is imposed 

on the sale by a manufacturer (or 

importer) of tires designed for use 

on highway vehicles. There is no 

tax on tires weighing 40 pounds or 

less. For tires weighing greater 

than 40 pounds the tax rate 

increases from 15 to 50 cents per 

pound depending upon the weight 

of the tire. The tax expires after 

September 30, 2005.

The provision replaces the presentlaw tax rates with a tax rate based 

on the load capacity of the tire. In 

general, the tax is 9.4 cents for 

each 10 pounds of tire load 

capacity in excess of 3,500 pounds. 

In the case of a biasply tire, the tax 

rate is 4.7 cents for each 10 pounds 

of tire load capacity in excess of 

3,500 pounds. A biasply tire is any 

tire manufactured primarily for use 

on piggyback trailers.

Provision modifies the definition of 

a tire to conform to certain 

No provision.
41

Provision Present Law House Bill Senate Amendment

regulations of the Department of 

Transportation. The provision also 

exempts from tax any tire sold for 

the exclusive use of the 

Department of Defense or the 

Coast Guard.

Effective date.–Sales in calendar 

years beginning more than 30 days 

after the date of enactment.

3. Repeal of certain excise taxes 

on railroad diesel fuel and inland 

waterway fuel (sec. 5402 of the 

Senate amendment)

Diesel fuel used in trains and fuels 

used in barges operating on the 

designated inland waterways 

system are subject to a 4.3-centsper-gallon General Fund excise tax. 

In both cases, the 4.3-cents-pergallon excise tax rates are 

permanent.

No provision. The 4.3-cents-per-gallon General 

Fund excise tax on diesel fuel used 

in trains and fuels used in barges 

operating on the designated inland 

waterways system is repealed. 

Effective date.–October 1, 2004.
42

Provision Present Law House Bill Senate Amendment

B. Aquatic Excise Taxes

1. Exempt LED devices from 

sonar devices suitable for finding 

fish (sec. 5412 of the Senate 

amendment)

In general, the Code imposes a 10-

percent manufacturer’s excise tax 

on the sale of specified sport 

fishing equipment. A threepercent rate, however, applies to 

the sale of electric outboard motors 

and sonar devices suitable for 

finding fish. The tax imposed on 

the sale of sonar devices is limited 

to $30. A sonar device suitable for 

finding fish does not include any 

device that is a graph recorder, a 

digital type, a meter readout, a 

combination graph recorder or 

combination meter readout.

No provision. Provides that a sonar device suitable 

for finding fish does not include a 

sonar device with an LED (light 

emitting diode) display.

Effective date.–Articles sold on and 

after October 1, 2004.

2. Repeal of harbor maintenance 

tax on exports (sec. 5413 of the 

Senate amendment) 

The Code contains provisions 

imposing a 0.125-percent excise 

tax on the value of most 

commercial cargo loaded or 

unloaded at U.S. ports. The tax 

also applies to amounts paid for 

passenger transportation. Receipts 

from this tax are deposited in the 

Harbor Maintenance Trust Fund.

The U.S. Supreme Court has held 

that the harbor maintenance excise 

tax, as applied to exported cargo, 

violates the “Export Clause” of the 

U.S. Constitution. The tax remains 

No provision. Conforms the Code to the Supreme 

Court decision and exempts exported 

commercial cargo from the Harbor 

Maintenance tax.

Effective date.–Effective before, on, 

and after the date of enactment.
43

Provision Present Law House Bill Senate Amendment

in effect for imported cargo. 

Imposition of the tax on passenger 

transportation has been upheld.

3. Cap on excise tax on certain 

fishing equipment (sec. 5414 of 

the Senate amendment)

In general, the Code imposes a 10-

percent manufacturer’s excise tax 

on the sale of specified sport 

fishing equipment. Sport fishing 

equipment subject to tax includes, 

among other equipment, fishing 

rods and poles.

No provision. Provides that the tax applicable to a 

fishing rod or fishing pole is the 

lesser of 10 percent or $10.00.

Effective date.–Articles sold on and 

after October 1, 2004.

4. Reduction in rate of tax on 

portable aerated bait containers 

(sec. 5415 of the Senate 

amendment)

A ten percent excise tax is imposed 

on the sale by the manufacturer, 

producer, or importer of specified 

sport fishing equipment, including 

portable bait containers. Parts or 

accessories that are sold on or in 

connection with taxable articles are 

also treated as taxable. The 

Internal Revenue Service has ruled 

that aeration systems designed to 

keep fish and marine life alive are 

taxable parts or accessories when 

sold on or in connection with 

portable bait containers. Fish tank 

aerators, however, are not taxable.

No provision. Reduces the excise tax on portable 

aerated bait containers to three 

percent.

Effective date.–Applies to articles 

sold on or after October 1, 2004.
44

Provision Present Law House Bill Senate Amendment

C. Aerial Excise Taxes

1. Exemptions for aerial 

applicators and fixed-wing 

aircraft engaged in forestry 

operations (sec. 5421 of the 

Senate amendment)

Fuel used on a farm for farming 

purposes is a nontaxable use. 

Aerial applicators (crop dusters) 

are allowed to claim a refund 

instead of farm owners and 

operators in the case of aviation 

gasoline if the owners or operators 

give written consent to the aerial 

applicators. This provision applies 

only to fuel consumed in the 

airplane while operating over the 

farm, i.e., fuel consumed traveling 

to and from the farm is not exempt.

Most air passenger transportation is 

subject to an excise tax equal to 7.5 

percent of the amount paid plus 

$3.00 per domestic flight segment. 

The tax on transportation by air 

does not apply to air transportation 

by helicopter if the helicopter is 

used for (1) the exploration, or the 

development or removal of oil, gas, 

or hard minerals exploration, or (2) 

certain timber operations (planting, 

cultivating, cutting, transporting, or 

caring for trees, including logging 

operations). The exemption 

applies only when the helicopters 

are not using the Federally funded 

airport and airway services.

No provision. With regard to the exemption for 

aerial applicators, written consent 

from the farm owner or operator is 

no longer needed for the aerial 

applicator to claim exemption for 

aviation gasoline. The exemption 

also is expanded to include fuels 

consumed when flying between the 

farms where chemicals are applied 

and the airport where the airplane 

takes off and lands. The present 

exemption for helicopters engaged 

in timber operations is expanded to 

include fixed-wing aircraft if such 

aircraft are not using the Federally 

funded airport and airway services.

Effective date.–Fuel use or air 

transportation after the date of 

enactment.
45

Provision Present Law House Bill Senate Amendment

2. Modification of rural airport 

definition (sec. 5422 of the Senate 

amendment)

Most air passenger transportation is 

subject to an excise tax equal to 7.5 

percent of the amount paid plus 

$3.00 per domestic flight segment. 

The flight segment component of 

the tax does not apply to segments 

to or from qualified "rural 

airports." A rural airport is defined 

as an airport that (1) in the second 

preceding calendar year had fewer 

than 100,000 commercial 

passenger departures, and (2) either 

(a) is not located within 75 miles of 

another airport that had more than 

100,000 such departures in that 

year, or (b) is eligible for payments 

under the Federal "essential air 

service" program.

No provision. Expands the definition of qualified 

rural airport to include an airport 

that (1) is not connected by paved 

roads to another airport and (2) had 

fewer than 100,000 commercial 

passengers departing by air on 

flight segments of at least 100 

miles during the second preceding 

calendar year.

Effective date.–April 1, 2004.

3. Exemption from ticket taxes 

for transportation provided by 

seaplanes (sec. 5423 of the Senate 

amendment)

Air passenger transportation is 

subject to an excise tax equal to 7.5 

percent of the amount paid plus 

$3.00 per domestic flight segment 

(“air passenger tax”). A 6.25-

percent tax is imposed on amounts 

paid for transportation of property 

by air (“air cargo tax”). The air 

cargo tax applies only to amounts 

paid to persons engaged in the 

business of transporting property 

by air for hire. The air passenger 

tax and air cargo tax do not apply 

No provision. Provides that the air passenger tax 

and the air cargo tax do not apply 

to transportation by a seaplane with 

respect to any segment consisting 

of a takeoff from, and a landing on, 

water, but only if the places at 

which such takeoff and landing 

occur have not received and are not 

receiving financial assistance from 

the Airport and Airway Trust Fund.

Effective date.–Transportation 

beginning after March 31, 2004.
46

Provision Present Law House Bill Senate Amendment

to amounts paid for the 

transportation if furnished on an 

aircraft having a maximum 

certificated takeoff weight of 6,000 

pounds or less unless the aircraft is 

operated on an established line.

4. Certain sightseeing flights 

exempt from taxes on air 

transportation (sec. 5424 of the 

Senate amendment)

Air passenger transportation is 

subject to an excise tax equal to 7.5 

percent of the amount paid plus 

$3.00 per domestic flight segment 

(“air passenger tax”). The air 

passenger tax does not apply to 

amounts paid for the transportation 

if furnished on an aircraft having a 

maximum certificated takeoff 

weight of 6,000 pounds or less 

unless the aircraft is operated on an 

established line. Under the 

Treasury regulations to be 

“operated on an established line” 

means to be operated with “some 

degree of regularity between 

definite points. The term implies 

that the air carrier maintains 

control over the direction, routes, 

time, number of passengers carried, 

etc.” Treasury regulations provide 

that transportation need not be 

between two definite points to be 

taxable: a payment for continuous 

transportation beginning and 

No provision. For purposes of the exemption for 

small aircraft operated on 

nonestablished lines, an aircraft 

operated on a flight, the sole 

purpose of which is sightseeing, 

will not be considered as operated 

on an established line.

Effective date.–Transportation 

beginning on or after the date of 

enactment but does not apply to 

any amount paid before the date of 

enactment for such transportation.
47

Provision Present Law House Bill Senate Amendment

ending at the same point is subject 

to the tax.
48

Provision Present Law House Bill Senate Amendment

D. Alcoholic Beverage Excise 

Taxes

1. Repeal special occupational 

taxes on producers and 

marketers of alcoholic beverages 

(sec. 5431 of the Senate 

amendment)

As part of a broader Federal tax 

and regulatory structure governing 

the production and marketing of 

alcoholic beverages, special 

occupational taxes are imposed on 

producers and others engaged in 

the marketing of distilled spirits, 

wine, and beer. The special 

occupational taxes are payable 

annually, on July 1 of each year, 

and range from $250 per year for 

retail dealers to $1,000 per year per 

premise for producers.

Every wholesale or retail dealer in 

liquors, wine or beer is required to 

keep records of their transactions. 

There are penalties for failing to 

comply with the recordkeeping 

requirements.

No provision. Repeals the special occupational 

taxes on producers and marketers 

of alcoholic beverages. The 

recordkeeping and inspection rules 

applicable to wholesalers and 

retailers are retained. Existing 

criminal penalties relating to 

records and reports apply to 

wholesalers and retailers who fail 

to comply with these requirements. 

Effective date.–July 1, 2004, but 

does not affect liability for taxes 

imposed with respect to periods 

before July 1, 2004.

2. Suspension of limitation on 

rate of rum excise tax cover over 

to Puerto Rico and Virgin 

Islands (sec. 5432 of the Senate 

amendment)

The amount of excise tax imposed 

on rum imported (or brought) into 

the United States, without regard to 

the country of origin, is covered 

over (paid) to Puerto Rico and the 

Virgin Islands. The amount of the 

cover over is limited under Code 

section 7652(f) to $10.50 per proof 

No provision. The cover over amount of $13.25 

per proof gallon is extended for 

rum brought into the United States 

after December 31, 2003 and 

before October 1, 2004. The 

amount of $13.50 per proof gallon 

will be covered over with respect 

to rum brought into the United 
49

Provision Present Law House Bill Senate Amendment

gallon ($13.25 per proof gallon 

during the period July 1, 1999 

through December 31, 2003).

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.

States after September 30, 2004 

and before January 1, 2006. After 

December 31, 2005, the cover over 

amount reverts to $10.50 per proof 

gallon. 

Puerto Rico is required to transfer 

50 cents per proof gallon of the 

amount covered over to Puerto 

Rico, and attributable to rum 

imported into the United States that 

was produced neither in Puerto 

Rico nor the Virgin Islands, to the 

Puerto Rico Conservation Trust 

Fund (the “Fund”). The amounts 

are to be treated as principal for an 

endowment for Fund purposes.

Effective date.–Cover over rate 

changes are effective for articles 

brought into the United States after 

December 31, 2003. The Fund 

provisions are effective October 1, 

2004.
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Provision Present Law House Bill Senate Amendment

E. Sport Excise Taxes

1. Custom gunsmiths (sec. 5441 

of the Senate amendment)

The Code imposes an excise tax 

upon the sale by the manufacturer, 

producer or importer of certain 

firearms and ammunition. Pistols 

and revolvers are taxable at 10 

percent. Firearms (other than 

pistols and revolvers), shells, and 

cartridges are taxable at 11 percent. 

The excise tax for firearms 

imposed on manufacturers, 

producers, and importers does not 

apply to machine guns and short 

barreled firearms. Sales to the 

Defense Department of firearms, 

pistols, revolvers, shells and 

cartridges also are exempt from the 

tax.

No provision. Exempts from the firearms excise 

tax articles manufactured, 

produced, or imported by a person 

who manufactures, produces, and 

imports less than 50 of such 

articles during the calendar year. 

Controlled groups are treated as a 

single person for determining the 

50-article limit.

Effective date.–Articles sold by the 

manufacturer, producer, or 

importer on or before the date the 

first day of the month beginning at 

least two weeks after the date of 

enactment. No inference is 

intended from the prospective 

effective date of this provision as 

to the proper treatment of preeffective date sales.

2. Modified taxation of archery 

products (sec. 5442 of the Senate 

amendment)

The Code imposes an excise tax of 

11 percent on the sale by a 

manufacturer, producer or importer 

of any bow with a draw weight of 

10 pounds or more. An excise tax 

of 12.4 percent is imposed on the 

sale by a manufacturer or importer 

of any shaft, point, nock, or vane 

designed for use as part of an arrow 

No provision. Increases the draw weight for a 

taxable bow from 10 pounds or 

more to a peak draw weight of 30 

pounds or more.

Imposes an excise tax of 12 percent 

on arrows generally.
51

Provision Present Law House Bill Senate Amendment

which after its assembly (1) is over 

18 inches long, or (2) is designed 

for use with a taxable bow (if 

shorter than 18 inches). No tax is 

imposed on finished arrows. An 

11-percent excise tax also is 

imposed on any part of an 

accessory for taxable bows and on 

quivers for use with arrows (1) 

over 18 inches long or (2) designed 

for use with a taxable bow (if 

shorter than 18 inches).

Subjects certain broadheads (a type 

of arrow point) to an excise tax 

equal to 11 percent of the sales 

price instead of 12.4 percent. 

The present law 12.4-percent 

excise tax on certain arrow 

components (excluding 

broadheads) is unchanged by the 

bill.

Effective date.–Articles sold by the 

manufacturer, producer, or 

importer after the date of 

enactment.

3. Repeal of Chapter 35 Federal 

wagering and occupational taxes 

and treatment of Indian tribes 

for such purposes (secs. 1308 and 

5443 of the Senate amendment)

In Chapter 35 of the Code, two 

excise taxes generally apply to 

wagering activities: a wagering tax 

and an occupational tax. Certain 

wagering activities licensed or 

conducted by States are exempt 

from these excise taxes. 

The Indian Regulatory Gaming Act 

(Gaming Act) provides, in relevant 

part:

“The provisions of [the Internal 

Revenue Code of 1986] (including 

sections 1441, 3402(q), 6041, and 

6050I, and chapter 35 of such 

Code) concerning the reporting and 

withholding of taxes with respect 

No provision. Section 1308 repeals Chapter 35 of 

the Code in its entirety and makes 

conforming amendments. 

Section 5443 treats Indian tribal 

governments as States for purposes 

of Chapter 35 of the Code (relating 

to the taxes on wagering, including 

the tax on wagers and the 

occupational tax).

Effective dates.–Section 1308 is 

effective for wagers placed after 

the date of enactment and for 

special occupational taxes is 

effective on July 1, 2004. 
52

Provision Present Law House Bill Senate Amendment

to the winnings from gaming or 

wagering operations shall apply to 

Indian gaming operations 

conducted pursuant to this chapter, 

or under a Tribal-State compact 

entered into under section 

2710(d)(3) of this title that is in 

effect, in the same manner as such 

provisions apply to State gaming 

and wagering operations.”

The Supreme Court has held that 

the Indian Gaming Regulatory Act 

does not exempt tribes from these 

taxes. The Court noted that Chapter 

35 imposes taxes from which it 

exempts certain State-controlled 

gambling activities, but says 

nothing about tax “reporting” or 

“withholding”. The Court 

concluded that the mention of 

Chapter 35 in the parenthetical was 

a drafting error.

Section 5443 is effective July 1, 

2004, but the provision does not 

apply to taxes imposed for periods 

before such date.
53

Provision Present Law House Bill Senate Amendment

F. Other Excise Tax Reform 

Provisions

1. Income tax credit for cost of 

carrying tax-paid distilled spirits 

in wholesale inventories and in 

control state bailment 

warehouses (sec. 5451 of the 

Senate amendment)

Excise taxes on distilled spirits are 

imposed at a point in the chain of 

distribution before the product 

reaches the retail (consumer) level. 

No tax credits are allowed under 

present law for business costs 

associated with having tax-paid 

products in inventory. Rather, 

excise tax that is included in the 

purchase price of a product is 

treated the same as the other 

components of the product cost, 

i.e., deductible as a cost of goods 

sold. 

No provision. Creates a new general business 

income tax credit for eligible 

wholesalers, distillers and 

importers of distilled spirits. The 

credit is calculated by multiplying 

the number of cases of bottled 

distilled spirits by the average taxfinancing cost per case for the most 

recent calendar year ending before 

the beginning of such taxable year. 

A case is 12 80-proof 750-milliliter 

bottles. The average tax-financing 

cost per case is the amount of 

interest that would accrue at 

corporate overpayment rates during 

an assumed 60-day holding period 

on an assumed tax rate of $25.68 

per case of 12 80-proof 750-

milliliter bottles. 

The wholesaler credit only applies 

to domestically bottled distilled 

spirits purchased directly from the 

bottler of such spirits. An eligible 

wholesaler is any person that holds 

a permit under the Federal Alcohol 

Administration Act as a wholesaler 

of distilled spirits that is not a 

State, or agency or political 

subdivision thereof.
54

Provision Present Law House Bill Senate Amendment

For distillers and importers that are 

not eligible wholesalers, the credit 

is limited to bottled inventory in a 

warehouse owned and operated by, 

or on behalf of, a State when title 

to such inventory has not passed 

unconditionally. The credit for 

distillers and importers applies to 

distilled spirits bottled both 

domestically and abroad.

The credit is in addition to presentlaw rules allowing tax included in 

inventory costs to be deducted as a 

cost of goods sold.

Effective date.–Taxable years 

beginning after the date of 

enactment, but the credit cannot be 

carried back to a taxable year 

beginning before the date of 

enactment.

2. Credit for taxpayers owning 

commercial power takeoff 

vehicles (sec. 5452 of the Senate 

amendment)

Fuel used in vehicles carrying 

equipment that is unrelated to the 

transportation function is subject to 

the Highway Trust Fund excise 

taxes without regard to whether the 

fuel is used for transportation or 

the unrelated equipment. An 

exception excepts fuel used by 

non-transportation equipment if the 

fuel is used by a separate motor, if 

No provision. Provides a $250 income tax credit 

per qualifying vehicle to business 

owners of qualifying highway 

vehicles that consume fuel for both 

transportation and in nontransportation-related equipment, 

using a single motor. Qualifying 

vehicles are: vehicles for the daily 

collection of refuse or recyclables; 

and vehicles that deliver ready-
55

Provision Present Law House Bill Senate Amendment

the vehicle owner can allocate fuel 

used in a manner acceptable to the 

IRS.

mixed concrete. The credit expires 

after 2006.

Effective date.–Taxable years 

beginning after date of enactment.

3. Credit for auxiliary power 

units installed on diesel-powered 

trucks (sec. 5453 of the Senate 

amendment)

A 12-percent excise tax is imposed 

on the first retail sale of heavy 

highway vehicles, tractors, and 

trailers (generally, trucks having a 

gross vehicle weight in excess of 

33,000 pounds and trailers having 

such a weight in excess of 26,000 

pounds).

No provision. Creates a $250 income tax credit 

for the purchase of certain auxiliary 

power units and installation on a 

heavy-duty highway vehicle. A 

heavy-duty highway vehicle is any 

highway vehicle weighing more 

than 12,500 pounds powered by a 

diesel engine. The credit expires 

after 2006.

Effective date.–Auxiliary power 

units purchased and installed for 

taxable years beginning after the 

date of enactment.
56

Provision Present Law House Bill Senate Amendment

VI. MISCELLANEOUS 

PROVISIONS

A. Motor Fuel Tax Enforcement 

Advisory Commission (sec. 5501 

of the Senate amendment)

Present law does not require that 

there be an advisory commission 

on motor tax fuel enforcement.

No provision. Creates an advisory commission 

for motor fuel tax enforcement 

consisting of both Government and 

private sector members. The 

purpose of the Commission is to 

(1) review motor fuel revenue 

collections, historical and current, 

(2) review the progress of 

investigations (3) develop and 

review legislative proposals with 

respect to motor fuel taxes, (4) 

monitor the progress of 

administrative regulation projects 

relating to fuel taxes, (5) review the 

results Federal and State agency 

cooperative efforts regarding motor 

fuel taxes, and (6) review the 

results of Federal interagency 

cooperative efforts regarding motor 

fuel taxes. The Commission also is 

to evaluate and make

recommendations regarding (1) the 

effectiveness of existing Federal 

enforcement programs regarding 

motor fuel taxes, (2) enforcement 

personnel allocation, and (3) 

proposals for regulatory projects, 

legislation, and funding.
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Provision Present Law House Bill Senate Amendment

Effective date.–Date of enactment.

B. National Surface 

Transportation Infrastructure 

Financing Commission

(sec. 5502 of the Senate 

amendment)

Present law does not provide for 

any advisory commissions related 

Federal highway or mass transit 

funding.

No provision. Establishes a National Surface 

Transportation Infrastructure 

Financing Commission. The 

Commission will investigate and 

study revenues flowing into the 

Highway Trust Fund under present 

law and report to Congress within 

two years of its first meeting. The 

Commission will consider 

alternative approaches to 

generating revenues for the 

Highway Trust Fund. The 

Commission will consider the 

nation’s highway and transit needs. 

The study will address the period 

from the present through 2015.

Effective date.–Date of enactment.

C. Treasury Study of Fuel Tax 

Compliance and Interagency 

Cooperation (sec. 5503 of the 

Senate amendment)

Present law requires no specific 

studies related to fuels tax 

compliance.

No provision. Requires the Department of 

Treasury to submit to the Senate 

Committee on Finance and the 

House Committee on Ways and 

Means a report regarding fuel tax 

enforcement, including statistics 

and other information relating to 

audits, enforcement activities, an 

assessment of the effectiveness of 

joint action and cooperation 

between Federal and State agencies 
58

Provision Present Law House Bill Senate Amendment

for both civil and criminal Federal 

tax enforcement and enforcement 

of State laws or Federal laws 

relating to fuels. 

Effective date.–Date of enactment.

D. Expand Highway Trust Fund 

Expenditure Purposes to Include 

Funding for Studies of 

Supplemental or Alternative 

Financing for the Highway Trust 

Fund (sec. 5504 of the Senate 

amendment)

Dedication of excise tax revenues 

to the Highway Trust Fund and 

expenditures from the Highway 

Trust Fund are governed by 

provisions of the Code. The 

Highway Trust Fund and its Mass 

Transit subaccount are funding 

sources for specific programs. No 

Highway Trust Fund monies may 

be spent for a purpose not 

approved by the tax-writing 

committees of Congress. 

No provision. Expands the expenditure purposes 

of the Highway Trust Fund to 

permit funding of two 

comprehensive studies of 

supplemental or alternative funding 

sources for the Highway Trust 

Fund. 

One study, permitted to receive $1 

million in funding, will examine 

and review highway funding 

mechanisms of other industrialized 

nations. The Western 

Transportation Institute of the 

College of Engineering at Montana 

State University will conduct the 

study, which is due no later than 

December 31, 2006. 

The other study, permitted to 

receive $16.5 million in funding, 

would report on a long-term field 

test of a new approach to assessing 

highway use taxes in which 

highway use taxes would be 

assessed based upon actual mileage 
59

Provision Present Law House Bill Senate Amendment

driven by a specific vehicle and the 

amount of tax liability may vary by 

the type of road on which the 

vehicle is driven. The Public Policy 

Center of the University of Iowa 

will direct this field test and 

analyze the test results, which are 

due no later than December 31, 

2011. 

Effective date.–Date of enactment.

E. Treasury Study of Highway 

Fuels Used by Trucks for 

Nontransportation Purposes

(sec. 5505 of the Senate 

amendment)

Fuel used in vehicles carrying 

equipment that is unrelated to the 

transportation function of the 

vehicle is subject to the Highway 

Trust Fund excise taxes without 

regard to whether the fuel is used 

for transportation or the unrelated 

equipment. An exception exempts 

from tax fuel used by nontransportation equipment if the fuel 

is used by a separate motor, if the 

vehicle owner can allocate fuel 

used in a manner acceptable to the 

IRS.

No provision. Directs the Secretary to study the 

use of highway motor fuel by 

trucks that is not used for the 

propulsion of the vehicle, both in 

the case of vehicles carrying 

equipment that is unrelated to the 

transportation function of the 

vehicle and in the case where nontransportation equipment is run by 

a separate motor. 

In addition, the Secretary is to 

estimate the amount of fuel 

consumed and pollutants emitted 

by trucks due to the long-term 

idling of diesel engines, and report 

on the cost of reducing long-term 

idling through various 

technologies. 
60

Provision Present Law House Bill Senate Amendment

The study is due not later than 

January 1, 2006.

Effective date.–Date of enactment.

F. Delta Regional 

Transportation Plan (sec. 5506 of 

the Senate amendment)

The Delta Regional Authority is a 

Federal-State partnership, serving a 

240-county/parish area in an eightState region (Alabama, Arkansas, 

Illinois, Kentucky, Louisiana, 

Mississippi, Missouri, and 

Tennessee). The duties of the 

authority are to: (1) produce a 

regional development plan; (2) set 

priorities for approval of grants in 

the region; (3) assess the region’s 

needs and assets; (4) inform 

participating States about interstate 

cooperation; (5) work with States 

and local agencies to develop 

model legislation; (6) enhance the 

capacity of and support Local 

Development Districts, as well as 

the creation of Local Development 

Districts where none currently 

exist; (7) encourage private 

investment in economic 

development projects in the region; 

and (8) assist State governments 

with the States’ economic 

development program.

No provision. Directs the Delta Regional 

Authority to conduct a 

comprehensive study of 

transportation assets and needs in 

the eight states comprising the 

Delta region. Upon completion of 

the study, the Delta Regional 

Authority is to create a regional 

strategic plan to achieve efficient 

transportation systems in the Delta 

region. 

Authorizes the Delta Regional 

Authority to receive $1,000,000 to 

conduct a comprehensive study and 

plan. These funds are to remain 

available until spent.

Effective date.–Date of enactment.
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Provision Present Law House Bill Senate Amendment

G. Treatment of EmployerProvided Transit and Van 

Pooling Benefits (sec. 5507 of the 

Senate amendment)

Qualified transportation benefits 

are excludable from gross income 

and wages for employment tax

purposes. Qualified transportation 

benefits are: (1) transportation in a 

commuter highway vehicle if such 

transportation is in connection with 

travel between the employee’s 

residence and place of employment 

(“van pooling”); (2) transit passes; 

and (3) qualified parking. The 

maximum amount of transit passes 

and van pooling benefits that are 

excludable from income and wages 

per month is $100 (for 2004). 

These dollar amounts are indexed 

for inflation.

No provision. Increases the maximum dollar 

amount of excludable van pooling 

and transit benefits to $120 per 

month in 2004, with indexing 

thereafter.

Effective date.–Taxable years 

beginning after December 31, 

2004.
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Provision Present Law House Bill Senate Amendment

VII. REVENUE OFFSETS

A. Expansion of Limitation on 

Expensing of Certain Passenger 

Automobiles (sec. 5601 of the 

Senate amendment)

In lieu of depreciation, a taxpayer 

may expense the cost of qualifying 

property. For taxable years 

beginning in 2003 through 2005, 

the amount expensed is limited to 

$100,000. For taxable years 

beginning prior to 2003 and after 

2005, the limit is $25,000.

Present law limits the annual 

depreciation deduction for certain 

passenger automobiles. However, 

vehicles rated at higher than 6,000 

pounds unloaded gross vehicle 

weight are not subject to this 

limitation. 

No provision. Limits the allowable qualifying 

property deduction to $25,000 for 

certain sport utility vehicles which 

are not subject to the present-law 

limitation for passenger vehicles 

and which are rated at 14,000 

pounds gross vehicle weight or 

less. Certain vehicles with features 

generally inconsistent with sport 

utility vehicles are excluded from 

the provision.

Effective date.–Property placed in 

service after February 2, 2004.

B. Provisions Designed To 

Curtail Tax Shelters

1. Clarification of economic 

substance doctrine (sec. 5611 of 

the Senate amendment)

Courts have developed several 

common law doctrines that can be 

applied to deny the tax benefits of 

tax-motivated transactions, 

notwithstanding that the transaction 

may satisfy the literal requirements 

of a specific statutory tax 

provision. A common law doctrine 

applied with increasing frequency 

is the “economic substance” 

No provision. Codifies the economic substance 

doctrine. Provides that, in a case in 

which a court determines that the 

economic substance doctrine is 

relevant to a transaction, such 

transaction satisfies the economic 

substance doctrine only if the 

taxpayer establishes that (1) the 

transaction changes in a 

meaningful way (apart from 
63

Provision Present Law House Bill Senate Amendment

doctrine. In general, this doctrine 

denies tax benefits arising from 

tax-motivated transactions that do 

not result in a meaningful change 

to the taxpayer’s economic position 

other than a purported reduction in 

Federal income tax.

Federal income tax consequences) 

the taxpayer’s economic position, 

and (2) the taxpayer has a 

substantial non-tax purpose for 

entering into such transaction and 

the transaction is a reasonable 

means of accomplishing such 

purpose.

Effective date.–Transactions 

entered into after February 2, 2004.

2. Penalty for failing to disclose 

reportable transaction (sec. 5612 

of the Senate amendment)

Although Treasury regulations 

require a taxpayer to disclose with 

its tax return certain information 

with respect to each “reportable 

transaction” in which the taxpayer 

participates, there is no specific 

penalty for failing to disclose a 

reportable transaction.

No provision. Creates a new $50,000 penalty for 

any person who fails to disclose a 

reportable transaction. The amount 

is increased to $100,000 if the 

failure is with respect to a listed 

transaction. For large entities and 

high net worth individuals, the 

penalty amount is doubled. The 

penalty cannot be waived with 

respect to a listed transaction. 

A publicly traded entity that is 

required to pay a penalty for failing 

to disclose a listed transaction must 

disclose the imposition of the 

penalty in reports to the SEC. 

Effective date.–Returns and 

statements the due date for which 

is after the date of enactment.
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Provision Present Law House Bill Senate Amendment

3. Accuracy-related penalty for 

listed transactions and other 

reportable transactions having a 

significant tax avoidance purpose 

(sec. 5613 of the Senate 

amendment)

In general, a 20-percent accuracyrelated penalty applies to the 

portion of any underpayment that is 

attributable to (1) negligence, (2) 

any substantial understatement of 

income tax, (3) any substantial 

valuation misstatement, (4) any 

substantial overstatement of 

pension liabilities, or (5) any 

substantial estate or gift tax 

valuation understatement.

No provision. Modifies the present-law accuracy 

related penalty by replacing the 

rules applicable to tax shelters with 

a new accuracy-related penalty that 

applies to listed transactions and 

reportable transactions with a 

significant tax avoidance purpose 

(“reportable avoidance 

transactions”). The penalty rate 

and defenses available to avoid the 

penalty vary depending on whether 

the transaction was adequately 

disclosed.

Effective date.–Taxable years 

ending after the date of enactment.

4. Penalty for understatements 

attributable to transactions 

lacking economic substance, etc. 

(sec. 5614 of the Senate 

amendment)

No penalties are specifically 

applicable to transactions solely by 

virtue of lacking economic 

substance. 

No provision. Imposes a penalty for an 

understatement attributable to any 

transaction that lacks economic 

substance.

Effective date.–Transactions 

entered into after February 2, 2004.

5. Modifications of substantial 

understatement penalty for 

nonreportable transactions

(sec. 5615 of the Senate 

amendment)

An accuracy-related penalty equal 

to 20 percent applies to any 

substantial understatement of tax.

No provision. Modifies the definition of 

“substantial” for corporate 

taxpayers so that a corporate 

taxpayer has a substantial 

understatement if the amount of the 

understatement for the taxable year 
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Provision Present Law House Bill Senate Amendment

exceeds the lesser of (1) 10 percent 

of the tax required to be shown on 

the return for the taxable year (or, 

if greater, $10,000), or (2) $10 

million.

Effective date.–Taxable years 

beginning after date of enactment.

6. Tax shelter exception to 

confidentiality privileges relating 

to taxpayer communications (sec. 

5616 of the Senate amendment)

With respect to tax advice, the 

same common law protections of 

confidentiality that apply to a 

communication between a taxpayer 

and an attorney also apply to a 

communication between a taxpayer 

and a Federally authorized tax 

practitioner, except for 

communications regarding 

corporate tax shelters.

No provision. Expands the exception for 

corporate tax shelters to all tax 

shelters, whether entered into by 

corporations, individuals, 

partnerships, tax-exempt entities, 

or any other entity.

Effective date.–Communications 

made on or after the date of 

enactment.

7. Disclosure of reportable 

transactions (secs. 5617 and 5618 

of the Senate amendment)

An organizer of a tax shelter is 

required to register the shelter with 

the Treasury Secretary not later 

than the day on which the shelter is 

first offered for sale.

The penalty for failing to timely 

register a tax shelter generally is 

the greater of one percent of the 

aggregate amount invested in the 

shelter or $500. However, if the 

tax shelter involves an arrangement 

offered to a corporation under 

conditions of confidentiality, the 

No provision. Repeals the rules with respect to 

registration of tax shelters and, 

instead, requires each material 

advisor with respect to any 

reportable transaction to timely file 

an information return with the 

Secretary. Also repeals the penalty 

for failure to register tax shelters 

and, instead, imposes a penalty on 

any material advisor who fails to 

file an information return with 

respect to a reportable transaction.
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Provision Present Law House Bill Senate Amendment

penalty generally is the greater of 

$10,000 or 50 percent of the fees 

payable to any promoter with 

respect to offerings prior to the 

date of late registration.

Effective date.–The provision 

requiring disclosure of reportable 

transactions by material advisors 

applies to transactions with respect 

to which material aid, assistance or 

advice is provided after the date of 

enactment.

The provision imposing a penalty 

for failing to disclose reportable 

transactions applies to returns the 

due date for which is after the date 

of enactment.

8. Investor lists and modification 

of penalty for failure to maintain 

lists of investors (secs. 5617 and 

5619 of the Senate amendment)

Any organizer or seller of a 

potentially abusive tax shelter must 

maintain a list identifying each 

person who was sold an interest in 

any such tax shelter with respect to 

which registration was required. 

The penalty for failing to maintain 

a required list is $50 for each name 

omitted from the list (with a 

maximum penalty of $100,000 per 

year). 

No provision. Modifies the penalty for failing to 

maintain the required list by 

making it a time-sensitive penalty. 

Thus, a material advisor who is 

required to maintain an investor list 

and who fails to make the list 

available upon written request by 

the Secretary within 20 business 

days after the request will be 

subject to a $10,000 per day 

penalty.

Clarifies that the identity of any 

person on an investor list is not 

privileged.

Effective date.–With respect to the 

penalty for failing to maintain and 

make available an investor list, 
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Provision Present Law House Bill Senate Amendment

requests made after the date of 

enactment.

With respect to the clarification 

that the identity of persons on 

investor lists are not privileged, as 

if included in the Deficit Reduction 

Act of 1984.

9. Modification of actions to 

enjoin certain conduct related to 

tax shelters and reportable 

transactions (sec. 5620 of the 

Senate amendment)

The Treasury Secretary may 

commence civil actions to enjoin 

any person from promoting abusive 

tax shelters or aiding or abetting 

the understatement of tax liability.

No provision. Expands present-law authority so 

that injunctions also may be sought 

with respect to the requirements 

relating to the reporting of 

reportable transactions and the 

keeping of lists of investors by 

material advisors.

Effective date.–Day after the date 

of enactment.

10. Understatement of taxpayer’s 

liability by income tax return 

preparer (sec. 5621 of the Senate 

amendment)

An income tax return preparer who 

prepares a return with respect to 

which there is an understatement of 

tax that is due to an undisclosed 

position for which there was not a 

realistic possibility of being 

sustained on its merits or a 

frivolous position is liable for a 

penalty of $250, provided the 

preparer knew or reasonably 

should have known of the position. 

An income tax return preparer who 

prepares a return and engages in 

No provision. Alters the standards of conduct that 

must be met to avoid imposition of 

the first penalty by replacing the 

realistic possibility standard with a 

requirement that there be a 

reasonable belief that the tax 

treatment of the position was more 

likely than not the proper 

treatment. Also replaces the not 

frivolous standard with the 

requirement that there be a 

reasonable basis for the tax 

treatment of the position. Also 
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Provision Present Law House Bill Senate Amendment

specified willful or reckless 

conduct with respect to preparing 

such a return is liable for a penalty 

of $1,000.

increases the amount of these 

penalties.

Effective date.–Documents 

prepared after the date of 

enactment.

11. Penalty on failure to report 

foreign financial accounts

(sec. 5622 of the Senate 

amendment)

There is a civil penalty for persons 

who willfully fail to keep records 

and file reports when that person 

makes a transaction or maintains an 

account with a foreign financial 

entity. In addition, any person who 

willfully violates this reporting 

requirement is subject to a criminal 

penalty.

No provision. Adds an additional civil penalty 

that may be imposed on any person 

who violates this reporting 

requirement (without regard to 

willfulness).

Effective date.–Failures to report 

occurring after the date of 

enactment.

12. Frivolous tax submissions 

(sec. 5623 of the Senate 

amendment)

An individual who files a frivolous 

income tax return is subject to a 

penalty of $500. The Tax Court 

also may impose a penalty of up to 

$25,000 if a taxpayer has instituted 

or maintained proceedings 

primarily for delay or if the 

taxpayer’s position in the 

proceeding is frivolous or 

groundless.

No provision. Modifies the penalty by increasing 

the amount of the penalty and 

applying it to all taxpayers and to 

all types of Federal taxes. Also 

modifies present law with respect 

to certain submissions that raise 

frivolous arguments or that are 

intended to delay or impede tax 

administration.

Effective date.–Submissions made 

and issues raised after the date on 

which the Secretary first prescribes 

the required list of frivolous 

positions.
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Provision Present Law House Bill Senate Amendment

13. Regulation of individuals 

practicing before the Department 

of the Treasury (sec. 5624 of the 

Senate amendment)

The Treasury Secretary is 

authorized to regulate the practice 

of representatives of persons before 

the Treasury Department. The 

Secretary also is authorized to 

suspend or disbar from practice 

before the Department a

representative who is incompetent, 

disreputable, violates the rules 

regulating practice before the 

Department, or willfully and 

knowingly misleads or threatens 

the person being represented.

No provision. Makes two modifications to 

expand the sanctions that the 

Treasury Secretary may impose 

pursuant to these statutory 

provisions. First, expressly permits 

censure as a sanction. Second, 

permits the imposition of a 

monetary penalty as a sanction.

Effective date.–Actions taken after 

the date of enactment.

14. Penalty on promoters of tax 

shelters (sec. 5625 of the Senate 

amendment)

In general, a $1,000 penalty is 

imposed on any person who 

organizes, assists in the 

organization of, or participates in 

the sale of an interest in any entity 

or plan or arrangement, if in 

connection with such activity the 

person knowingly makes or 

furnishes a false or fraudulent 

statement or a gross valuation 

overstatement regarding the 

securing of any tax benefit by 

reason of holding an interest in the 

entity or participating in the plan or 

arrangement. 

No provision. Modifies the penalty amount to 

equal 50 percent of the gross 

income derived by the person from 

the activity for which the penalty is 

imposed. The enhanced penalty 

does not apply to a gross valuation 

overstatement.

Effective date.–Activities after the 

date of enactment.
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Provision Present Law House Bill Senate Amendment

15. Statute of limitations for 

taxable years for which required 

listed transactions not reported 

(sec. 5626 of the Senate 

amendment)

In general, the Code requires that 

taxes be assessed within three years 

after the date a return is filed. If 

there has been a substantial 

omission of items of gross income 

that totals more than 25 percent of 

the amount of gross income shown 

on the return, the period during 

which an assessment must be made 

is extended to six years. Tax may 

be assessed at any time if the 

taxpayer files a false or fraudulent 

return with the intent to evade tax 

or if the taxpayer does not file a tax 

return at all.

No provision. Extends the statute of limitations 

with respect to a listed transaction

if a taxpayer fails to include any 

information with respect to a listed 

transaction which is required to be 

included with a tax return. The 

statute of limitations with respect 

to such a transaction will not expire 

before the date which is one year 

after the earlier of (1) the date on 

which the Secretary is furnished 

the information so required, or (2) 

the date that a material advisor 

satisfies the list maintenance 

requirements with respect to a 

request by the Secretary. 

Effective date.–Taxable years with 

respect to which the period for 

assessing a deficiency did not 

expire before the date of 

enactment.

16. Denial of deduction for 

interest on underpayments 

attributable to nondisclosed 

reportable and noneconomic 

substance transactions (sec. 5627 

of the Senate amendment)

In general, corporations may 

deduct interest paid or accrued 

within a taxable year on 

indebtedness. Interest on 

indebtedness to the Federal 

government attributable to an 

underpayment of tax generally may 

be deducted pursuant to this 

No provision. Disallows any deduction for 

interest paid or accrued within a 

taxable year on any portion of an 

underpayment of tax that is 

attributable to an understatement 

arising from (1) an undisclosed 

reportable avoidance transaction, 

(2) an undisclosed listed
71

Provision Present Law House Bill Senate Amendment

provision. transaction, or (3) a transaction that 

lacks economic substance.

Effective date.–Underpayments 

attributable to transactions entered 

into in taxable years beginning 

after the date of enactment.

17. Authorization of 

appropriations for tax law 

enforcement (sec. 5628 of the 

Senate amendment)

There is no explicit authorization 

of appropriations to the Internal 

Revenue Service to be used to 

combat abusive tax avoidance 

transactions.

No provision. Includes an authorization of an 

additional $300 million to the 

Internal Revenue Service to be 

used to combat abusive tax 

avoidance transactions.

Effective date.–Date of enactment.
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Provision Present Law House Bill Senate Amendment

C. Other Corporate Governance 

Provisions

1. Affirmation of consolidated 

return authority (sec. 5631 of the 

Senate amendment)

The Federal Circuit Court, in the 

case of Rite Aid Corp. v. United 

States, 255 F.3d 1357 (Fed. Cir. 

2001), held that a provision of the 

Treasury Department’s 

consolidated return regulations was 

invalid. The court’s language 

suggested in part that the Treasury 

Department may not have the 

authority to issue regulations that 

produced a result different than the 

result that would have obtained if 

the corporations had filed separate 

returns rather than consolidated 

returns.

No provision. Confirms that in exercising its 

authority under section 1502 to 

issue consolidated return 

regulations, the Treasury 

Department may provide rules 

treating corporations filing 

consolidated returns differently 

from corporations filing separate 

returns. Nevertheless, the result in 

Rite-Aid Corp. v. United States is 

allowed to stand with respect to the 

type of factual situation presented 

in the case.

Effective date.−Taxable years 

beginning before, on, or after the 

date of enactment.

2. Declaration by chief executive 

officer relating to Federal annual 

corporate income tax return (sec. 

5632 of the Senate amendment)

The income tax return of a 

corporation must be signed by 

either the president, the vicepresident, the treasurer, the 

assistant treasurer, the chief 

accounting officer, or any other 

officer of the corporation 

authorized by the corporation to 

sign the return. A criminal penalty 

is imposed on any person who 

willfully signs any tax return under 

penalties of perjury that that person

No provision. Requires the income tax return of a 

corporation (other than that of a 

regulated investment company) to 

also include a declaration signed, 

under penalties of perjury, by the 

chief executive officer of the 

corporation that the chief executive 

officer has established processes 

and procedures that ensure the 

return is compliant and that the 

chief executive officer was 

provided reasonable assurance of 
73

Provision Present Law House Bill Senate Amendment

does not believe to be true and 

correct with respect to every 

material matter at the time of filing. 

the accuracy of all material aspects 

of the return.

Effective date.–Federal tax returns 

filed after the date of enactment.

3. Denial of deduction for certain 

fines, penalties, and other 

amounts (sec. 5633 of the Senate 

amendment)

No deduction is allowed as a trade 

or business expense under section 

162(a) for the payment of a fine or 

similar penalty to a government for 

the violation of any law. 

There is a lack of clarity or 

consistency regarding when 

taxpayers may deduct payments in 

settlements and in cases where 

there has been a final determination 

of wrongdoing. 

No provision. Amounts paid or incurred, to or at 

the direction of a government in 

relation to the violation of any law 

or the governmental investigation 

or inquiry into the potential 

violation of any law are 

nondeductible under any income 

tax provision. An exception 

applies to payments that are for 

restitution or for remediation of 

property

Effective date.–Amounts paid or 

incurred on or after April 28, 2003, 

unless paid under a binding order 

or agreement entered before that 

date. If court approval is required, 

an order or agreement is not be 

considered binding until such court 

approval is obtained. 

4. Disallowance of deduction for 

punitive damages (sec. 5634 of 

the Senate amendment)

A deduction generally is allowed 

for all ordinary and necessary 

expenses that are paid or incurred 

by the taxpayer during the taxable 

year in carrying on any trade or 

business, including the payment of 

punitive damages.

No provision. Denies any deduction for punitive 

damages that are paid or incurred 

by the taxpayer as a result of a 

judgment or in settlement of a 

claim. If the liability for punitive 

damages is covered by insurance, 

any such punitive damages paid by 
74

Provision Present Law House Bill Senate Amendment

In general, gross income does not 

include amounts received on 

account of personal physical 

injuries and physical sickness. 

However, this exclusion does not 

apply to punitive damages.

the insurer are included in gross 

income of the insured person and 

the insurer is required to report 

such amounts to both the insured 

person and the IRS.

Effective date.–Punitive damages 

paid or incurred on or after the date 

of enactment.

5. Increase in criminal monetary 

penalty limitation for the 

underpayment or overpayment 

of tax due to fraud (sec. 5635 of 

the Senate amendment)

Attempt to evade or defeat tax.–A 

criminal penalty generally is 

imposed on persons who willfully 

attempt to evade or defeat any tax 

imposed by the Code. Upon 

conviction, the Code provides that 

the penalty is up to $100,000 or 

imprisonment of not more than five 

years (or both). In the case of a 

corporation, the Code increases the 

monetary penalty to a maximum of 

$500,000.

Willful failure to file return, supply 

information, or pay tax.–A criminal 

penalty generally is imposed on 

persons required to make estimated 

tax payments, pay taxes, keep 

records, or supply information 

under the Code who willfully fails 

to do so. Upon conviction, the 

Code provides that the penalty is 

up to $25,000 or imprisonment of 

not more than one year (or both). 

No provision. Attempt to evade or defeat tax.–

Increases the criminal penalty 

under section 7201 of the Code for 

individuals to $250,000 and for 

corporations to $1,000,000. The 

provision increases the maximum 

prison sentence to ten years.

Willful failure to file return, supply 

information, or pay tax.–Increases 

the criminal penalty under section 

7203 of the Code from a 

misdemeanor to a felony and 

increases the maximum prison 

sentence to ten years.
75

Provision Present Law House Bill Senate Amendment

In the case of a corporation, the 

Code increases the monetary 

penalty to a maximum of $100,000.

Fraud and false statements.–A 

criminal penalty generally is 

imposed on persons who make 

fraudulent or false statements 

under the Code. Upon conviction, 

the Code provides that the penalty 

is up to $100,000 or imprisonment 

of not more than three years (or 

both). In the case of a corporation, 

the Code increases the monetary 

penalty to a maximum of $500,000.

Uniform sentencing guidelines.–

The uniform sentencing guidelines 

can provide for substantial 

increases in the levels of monetary 

penalties and are applicable to all 

criminal provisions in the United 

States Code, including those in the 

Code. 

Fraud and false statements.–

Increases the criminal penalty 

under section 7206 of the Code for 

individuals to $250,000 and for 

corporations to $1,000,000. 

Increases the maximum prison 

sentence to five years. Provides 

that in no event shall the amount of 

the monetary penalty under this 

provision be less than the amount 

of the underpayment or 

overpayment attributable to fraud.

Effective date.–Underpayments 

and overpayments attributable to 

actions occurring after the date of 

enactment.

6. Doubling of certain penalties, 

fines, and interest on 

underpayments related to certain 

offshore financial arrangements 

(sec. 5636 of the Senate 

amendment)

The Code contains numerous civil 

penalties, such as the delinquency, 

accuracy-related and fraud 

penalties. These civil penalties are 

in addition to any interest that may 

be due. 

No provision. Increases by a factor of two the 

total amount of civil penalties, 

interest and fines applicable for 

taxpayers who would have been 

eligible to participate in either the 

OVCI or the Treasury 

Department’s voluntary disclosure 

initiative but did not participate in 
76

Provision Present Law House Bill Senate Amendment

In January 2003, Treasury 

announced the Offshore Voluntary 

Compliance Initiative (“OVCI”) 

running through April 15, 2003, to 

encourage the voluntary disclosure 

of previously unreported income 

placed by taxpayers in offshore 

accounts and accessed through 

credit card or other financial 

arrangements. The taxpayer will

pay back taxes, interest and certain 

accuracy-related and delinquency 

penalties.

A taxpayer's timely, voluntary 

disclosure of a substantial 

unreported tax liability has long 

been an important factor in 

deciding whether the taxpayer's 

case should ultimately be referred 

for criminal prosecution. The 

voluntary disclosure must be 

truthful, timely, and complete. A 

voluntary disclosure does not 

guarantee immunity from 

prosecution. 

either program.

Effective date.–Taxpayers’ open 

tax years on or after date of 

enactment.
77

Provision Present Law House Bill Senate Amendment

D. Enron-Related Tax Shelter 

Provisions

1. Limitation on transfer or 

importation of built-in losses 

(sec. 5641 of the Senate 

amendment)

Generally, no gain or loss is 

recognized when one or more 

persons transfer property to a 

corporation in exchange for stock 

and immediately after the exchange 

such person or persons control the 

corporation. The transferor’s basis 

in the stock of the controlled 

corporation is the same as the basis 

of the property contributed to the 

controlled corporation, increased 

by the amount of any gain (or 

dividend) recognized by the 

transferor on the exchange, and 

reduced by the amount of any 

money or property received, and by 

the amount of any loss recognized 

by the transferor.

The basis of property received by a 

corporation, whether from 

domestic or foreign transferors, in 

a tax-free incorporation, 

reorganization, or liquidation of a 

subsidiary corporation is the same 

as the adjusted basis in the hands of 

the transferor, adjusted for gain or 

loss recognized by the transferor.

No provision. Importation of built-in losses.–

Provides that if a net built-in loss is 

imported into the U.S in a tax-free 

organization, reorganization or 

liquidation from persons not 

subject to U.S. tax, the basis of 

each property so transferred is its 

fair market value.

Limitation on transfer of built-inlosses in section 351 transactions.–

Provides that if the aggregate 

adjusted bases of property 

contributed by a transferor (or by a 

control group of which the 

transferor is a member) to a 

corporation exceed the aggregate 

fair market value of the property 

transferred in a tax-free 

incorporation, the transferee’s 

aggregate bases of the property is 

limited to the aggregate fair market 

value of the transferred property. 

In the case of a transfer after which 

the transferor owns at least 80 

percent of the vote and value of the 

stock of the transferee corporation, 

any required basis reduction is 

made to the stock received by the 

transferor and not to the assets 
78

Provision Present Law House Bill Senate Amendment

transferred.

Effective date.–Transactions after 

February 13, 2003.

2. No reduction of basis under 

section 734 in stock held by 

partnership in corporate partner 

(sec. 5642 of the Senate 

amendment)

When a partnership distributes 

partnership property, the basis of 

partnership property generally is 

not adjusted to reflect the effects of 

the distribution or transfer. 

However, the partnership is 

permitted to make an election 

(referred to as a 754 election) to 

adjust the basis of partnership 

property in the case of a 

distribution of partnership 

property. The effect of the 754 

election is that the partnership 

adjusts the basis of its remaining 

property to reflect any change in 

basis of the distributed property in 

the hands of the distributee partner 

resulting from the distribution 

transaction.

No provision. Provides that in applying the basis 

allocation rules to a distribution in 

liquidation of a partner’s interest, a 

partnership is precluded from 

decreasing the basis of corporate 

stock of a partner or a related 

person. Any decrease in basis that, 

absent the provision, would have 

been allocated to the stock is 

allocated to other partnership 

assets. If the decrease in basis 

exceeds the basis of the other 

partnership assets, then gain is 

recognized by the partnership in 

the amount of the excess.

Effective date.–Distributions after 

February 13, 2003.

3. Repeal of special rules for 

FASITs (sec. 5643 of the Senate 

amendment)

Financial asset securitization 

investment trusts (FASITs).–A 

FASIT is a non-taxable entity 

intended to facilitate the 

securitization of debt obligations 

such as credit card receivables, 

home equity loans, and auto loans.

No provision. FASITs.–Repeals the special rules 

for FASITs, with a transition 

period for existing FASITs.

REMICs.–Modifies the definitions 

of REMIC regular interests, 

qualified mortgages, and permitted 

investments so that reverse 

mortgage loans and government-
79

Provision Present Law House Bill Senate Amendment

Real estate mortgage investment 

conduits (REMICs).–A REMIC is 

a self-liquidating, non-taxable 

entity that holds a fixed pool of 

mortgages and issues multiple 

classes of investor interests. In 

order to qualify as a REMIC, 

substantially all of the assets of the 

entity must consist of qualified 

mortgages and permitted 

investments as of the close of the 

third month beginning after the 

startup day of the entity.

originated loan pools can be 

transferred to, or purchased by, a 

REMIC.

Effective date.–After February 13, 

2003, except as provided by the 

transition period for existing 

FASITs.

4. Expanded disallowance of 

deduction for interest on 

convertible debt (sec. 5644 of the 

Senate amendment)

No deduction is allowed for 

interest or OID on a debt 

instrument issued by a corporation 

(or issued by a partnership to the 

extent of its corporate partners) that 

is payable in equity of the issuer or 

a related party, including a debt 

instrument a substantial portion of 

which is mandatorily convertible or 

convertible at the issuer's option 

into equity of the issuer or a related 

party. In addition, a debt 

instrument is treated as payable in 

equity if a substantial portion of the 

principal or interest is required to 

be determined, or may be 

determined at the option of the 

issuer or related party, by reference

No provision. Generally expands the present-law 

disallowance of interest deductions 

to include interest on corporate 

debt that is payable in, or by 

reference to the value of, any 

equity held by the issuer (or any 

related party) in any other person, 

without regard to whether such 

equity represents more than a 50-

percent ownership interest in such 

person. The basis of such equity is 

increased by the amount of interest 

deductions that is disallowed by the 

provision.

Effective date.–Debt instruments 

issued after February 13, 2003.
80

Provision Present Law House Bill Senate Amendment

 to the value of equity of the issuer 

or related party.

5. Expanded authority to 

disallow tax benefits under 

section 269 (sec. 5645 of the 

Senate amendment)

If a taxpayer acquires, directly or 

indirectly, control (defined as at 

least 50 percent of vote or value) of 

a corporation, and the principal 

purpose of the acquisition is the 

evasion or avoidance of Federal 

income tax by securing the benefit 

of a deduction, credit, or other 

allowance that would not otherwise 

have been available, such tax 

benefits may be disallowed. 

Similarly, if a corporation acquires, 

directly or indirectly, property of 

another corporation (not controlled, 

directly or indirectly, by the 

acquiring corporation or its 

stockholders immediately before 

the acquisition), the basis of such 

property is determined by reference 

to the basis in the hands of the 

transferor corporation, and the 

principal purpose of the acquisition 

is the evasion or avoidance of 

Federal income tax by securing a 

tax benefit that would not 

otherwise have been available, 

such tax benefits may be 

disallowed.

No provision. Repeals the requirement that the 

acquisition of property be from a 

corporation not controlled by the 

acquirer. Thus, disallows the tax 

benefits of (1) any acquisition of 

stock sufficient to obtain control of 

a corporation (as under present

law), and (2) any acquisition by a 

corporation of property from a 

corporation in which the basis of 

such property is determined by 

reference to the basis in the hands 

of the transferor corporation, if the 

principal purpose of such 

acquisition is the evasion or 

avoidance of Federal income tax.

Effective date.–Stock and property 

acquired after February 13, 2003.
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Provision Present Law House Bill Senate Amendment

6. Modification of interaction 

between subpart F and passive 

foreign investment company 

rules (sec. 5646 of the Senate 

amendment)

Under an anti-overlap rule, a 

controlled foreign corporation 

generally is not also treated as a 

passive foreign investment 

company with respect to a U.S. 

shareholder of the corporation, 

regardless of the likelihood that the 

U.S. shareholder would actually be 

taxed under subpart F in the event 

that the controlled foreign 

corporation earns subpart F 

income.

No provision. Adds an exception to the antioverlap rule for U.S. shareholders 

that face only a remote likelihood 

of incurring a subpart F inclusion 

in the event that a controlled 

foreign corporation earns subpart F 

income, thus preserving the 

potential application of the passive 

foreign investment company rules 

in such cases.

Effective date.–Taxable years of 

controlled foreign corporations 

beginning after February 13, 2003, 

and taxable years of U.S. 

shareholders in which or with 

which such taxable years of 

controlled foreign corporations 

end.
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Provision Present Law House Bill Senate Amendment

E. Provisions to Discourage 

Expatriation

1. Tax treatment of inversion 

transactions (sec. 5651 of the 

Senate amendment) 

U.S. corporations may 

reincorporate in low-tax foreign 

jurisdictions and thereby replace 

the U.S. parent corporation of a 

multinational corporate group with 

a foreign parent corporation. This 

allows the corporate group to 

remove foreign operations from the 

U.S. taxing jurisdiction. The 

corporate group may derive further 

tax benefits from the inverted 

structure by reducing U.S. tax on 

U.S.-source income through 

various earnings stripping or other 

transactions. (See, e.g., secs. 163(j) 

and 482).

No provision. Defines two different types of 

corporate inversion transactions 

and establishes a different set of 

consequences for each type.

The first type of inversion is a 

transaction in which: 

(1) a U.S. corporation becomes a 

subsidiary of a foreignincorporated entity; 

(2) the former shareholders of the 

U.S. corporation hold 80 percent or 

more of the stock of the foreignincorporated entity after the 

transaction; and 

(3) the foreign-incorporated entity, 

considered together with certain 

affiliates, does not have substantial 

business activities in the entity’s 

country of incorporation, compared 

to the total worldwide business 

activities of the expanded affiliated 

group. 

The provision deems the top-tier 

foreign corporation to be a 

domestic corporation for all 
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Provision Present Law House Bill Senate Amendment

purposes of the Code. 

The second type of inversion is a 

transaction that would meet the 

definition of an inversion 

transaction described above, except 

that the 80-percent ownership 

threshold is not met. In such a case, the inversion 

transaction is respected (i.e., the 

foreign corporation is treated as 

foreign), but:

(1) any applicable corporate-level 

“toll charges” for establishing the 

inverted structure may not be offset 

by tax attributes such as net 

operating losses or foreign tax 

credits; 

(2) the accuracy-related penalty is 

increased; and

(3) section 163(j), relating to 

“earnings stripping” through 

related-party debt, is strengthened. 

These measures generally apply for 

a 10-year period following the

inversion transaction. 

Effective date.–Regime applicable 

to transactions involving at least 80 

percent identity of ownership 
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Provision Present Law House Bill Senate Amendment

applies to inversion transactions 

completed after March 20, 2002. 

Rules for inversion transactions 

involving greater-than-50-percent 

identity of ownership apply to 

inversion transactions completed 

after 1996 that meet the 50-percent 

test and to inversion transactions 

completed after 1996 that would 

have met the 80-percent test but for 

the March 20, 2002, date.

2. Impose mark-to-market tax on 

individuals who expatriate

(sec. 5652 of the Senate 

amendment)

In general, an individual who 

relinquishes U.S. citizenship or 

terminates U.S. residency with a 

principal purpose of avoiding U.S. 

taxes is subject to an alternative tax 

regime for income tax purposes for 

the 10 taxable years ending after 

expatriation or residency 

termination. Special rules apply to 

such individuals for estate and gift 

tax purposes. A special 

immigration rule denies certain 

former citizens re-entry into the 

United States if the Attorney 

General determines that their 

expatriation was tax-motivated.

No provision. The provision replaces the presentlaw income tax rules of the 

alternative tax regime with rules 

that generally:

(1) subject certain U.S. citizens 

who relinquish their U.S. 

citizenship and certain long-term 

U.S. residents who terminate their 

U.S. residence to a mark-to-market 

regime with respect to all their 

property interests;

(2) limit the net gain recognized 

on the deemed sale to the gain that 

exceeds $600,000 or $1.2 million 

(indexed) for a joint return; and

(3) coordinate the present-law 

alternative tax regime and the 

mark-to-market regime such that 
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Provision Present Law House Bill Senate Amendment

the alternative tax regime generally 

does not apply to a former citizen 

or former long-term resident whose 

expatriation or residency 

termination occurs on or after 

February 2, 2004.

A U.S. taxpayer who receives a gift 

or inheritance from an expatriate 

generally is required to include the 

value of such gift or inheritance in 

gross income and is subject to U.S. 

income tax on such amount. 

The provision denies former 

citizens reentry into the United 

States if the individual is 

determined not to be in compliance 

with his or her tax obligations 

under the provision (regardless of 

the subjective motive for 

expatriating). 

Effective date.–Applies to 

individuals who relinquish 

citizenship or terminate long-term 

residency after February 2, 2004.

3. Excise tax on stock 

compensation of insiders of 

inverted corporations (sec. 5653 

of the Senate amendment)

While shareholders are generally 

required to recognize gain upon 

stock inversion transactions, an 

inversion transaction is generally 

not a taxable event for holders of 

No provision. Upon certain inversion 

transactions, imposes an excise tax 

on specified holders of stock 

options and other stock-based 

compensation equal to 20 percent 
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Provision Present Law House Bill Senate Amendment

stock options and other stock-based 

compensation.

of the value of specified stock 

compensation.

Effective date.–Generally effective 

July 11, 2002. 

4. Reinsurance agreements

(sec. 5654 of the Senate 

amendment)

In the case of a reinsurance 

agreement between two or more 

related persons, present law 

provides the Treasury Secretary 

with authority to allocate among 

the parties or recharacterize income 

(whether investment income, 

premium or otherwise), deductions, 

assets, reserves, credits and any 

other items related to the 

reinsurance agreement, or make 

any other adjustment, in order to 

reflect the proper source and 

character of the items for each 

party. 

No provision. Clarifies the rules giving Treasury 

the authority to allocate items 

among the parties to a reinsurance 

agreement, recharacterize items, or 

make any other adjustment, in 

order to reflect the proper source 

and character of the items for each 

party.

Effective date.–Any risk reinsured 

after April 11, 2002.
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Provision Present Law House Bill Senate Amendment

VIII. ADDITIONAL REVENUE 

PROVISIONS

A. Administrative Provisions

1. Extension of IRS user fees

(sec. 5671 of the Senate 

amendment)

 The IRS generally charges a fee 

for requests for a letter ruling, 

determination letter, opinion letter, 

or other similar ruling or 

determination. These user fees are 

authorized by statute through 

December 31, 2004.

No provision. Extends the statutory authorization 

for these user fees through 

September 30, 2013.

Effective date.–Requests made 

after the date of enactment.

2. Clarification of rules for 

payment of estimated tax for 

certain deemed asset sales

(sec. 5672 of the Senate 

amendment)

In certain circumstances, taxpayers 

can make an election under section 

338(h)(10) to treat a qualifying 

purchase of 80 percent of the stock 

of a target corporation by a 

corporation from a corporation that 

is a member of an affiliated group 

as a sale of the assets of the target 

corporation, rather than as a stock 

sale. The election must be made 

jointly by the buyer and seller of 

the stock .

No provision. Clarifies that the exception for 

estimated tax purposes with respect 

to tax attributable to a deemed 

asset sale does not apply with 

respect to a qualified stock 

purchase for which an election is 

made under section 338(h)(10). 

If at the time of the sale there is an 

agreement of the parties to make an 

election, then estimated tax is 

computed based on an asset sale, 

computed from the date of the sale.

If the agreement to make an 

election is concluded after the 

stock sale, such that the original 

computation was based on the 

stock sale, estimated tax is 

recomputed based on the asset sale 
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Provision Present Law House Bill Senate Amendment

election.

Effective date.–Qualified stock 

purchase transactions that occur

after the date of enactment.

3. Partial payment of tax liability 

in installment agreements

(sec. 5673 of the Senate 

amendment)

The IRS is authorized to enter into 

installment agreements with any 

taxpayer if the IRS determines that 

doing so will facilitate collection of 

the amounts owed. An installment 

agreement does not reduce the 

amount of taxes, interest, or 

penalties owed. 

No provision. Clarifies that the IRS is authorized 

to enter into installment 

agreements with taxpayers which 

do not provide for full payment of 

the taxpayer’s liability over the life 

of the agreement. Also requires the 

IRS to review partial payment 

installment agreements at least 

every two years.

Effective date.–Installment 

agreements entered into on or after 

the date of enactment.
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Provision Present Law House Bill Senate Amendment

B. Financial Instruments

1. Treatment of stripped interests 

in bond and preferred stock 

funds, etc. (sec. 5675 of the 

Senate amendment)

Special rules are provided with 

respect to debt instruments in 

which there has been a separation 

in ownership between the 

underlying debt instrument and any 

interest coupon that has not yet 

become payable. Similar rules 

apply to preferred stock in which 

there has been a separation in 

ownership between such stock and 

any dividend on such stock that has 

not become payable.

No provision. Authorizes the Treasury 

Department to promulgate 

regulations that, in appropriate 

cases, apply rules that are similar to 

the present-law rules for stripped 

bonds and stripped preferred stock 

to direct or indirect interests in an 

entity or account substantially all 

of the assets of which consist of 

bonds, preferred stock, or any 

combination thereof.

Effective date.–Purchases and 

dispositions occurring after the 

date of enactment.

2. Application of earnings 

stripping rules to partnerships 

and S corporations (sec. 5676 of 

the Senate amendment)

Special rules limit the ability of 

U.S. taxable subchapter C 

corporations to engage in earnings 

stripping transactions involving 

interest payments. The 

deductibility of interest paid to 

certain related parties is limited if 

the payor’s debt-equity ratio 

exceeds 1.5 to 1 and the payor’s 

net interest expense exceeds 50 

percent of its adjusted taxable 

income. The present-law earnings 

stripping rules do not apply to 

partnerships or S corporations.

No provision. Provides that the deduction for 

interest paid or accrued by 

partnerships and S corporations is 

subject to disallowance under the 

earnings stripping rules as if the 

partnership or S corporation was a 

C corporation. In addition, 

attributes partnership debt to a 

corporate partner for purposes of 

applying the earnings stripping 

rules to the corporation.

Effective date.–Taxable years 

beginning on or after the date of 

enactment.
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Provision Present Law House Bill Senate Amendment

3. Recognition of cancellation of 

indebtedness income realized on 

satisfaction of debt with 

partnership interest (sec. 5677 of 

the Senate amendment)

A corporation that transfers shares 

of its stock in satisfaction of its 

debt must recognize cancellation of 

indebtedness income in the amount 

that would be realized if the debt 

were satisfied with money equal to 

the fair market value of the stock.

In the case of a partnership that 

transfers to a creditor an interest in 

the partnership in satisfaction of its 

debt, it is unclear whether the 

partnership is required to recognize 

cancellation of indebtedness 

income. It also is unclear whether 

any requirement to recognize 

cancellation of indebtedness 

income is affected if the cancelled 

debt is nonrecourse indebtedness.

No provision. Provides that when a partnership 

transfers an interest in the 

partnership to a creditor in 

satisfaction of partnership debt, the 

partnership generally recognizes 

cancellation of indebtedness 

income in the amount that would 

be recognized if the debt were 

satisfied with money equal to the 

fair market value of the partnership 

interest. The provision applies 

without regard to whether the 

cancelled debt is recourse or 

nonrecourse indebtedness. 

Effective date.–Cancellations of 

indebtedness occurring on or after 

the date of enactment.

4. Modification of straddle rules 

(sec. 5678 of the Senate 

amendment)

When a taxpayer realizes a loss 

with respect to a position in a 

straddle (i.e., offsetting positions 

with respect to actively traded 

personal property), the taxpayer 

may recognize that loss for any 

taxable year only to the extent that 

the loss exceeds any unrecognized 

gain with respect to offsetting 

positions in the straddle. Deferred 

losses are carried forward to the 

succeeding taxable year and are 

subject to the same limitation with 

No provision. Modifies the straddle rules in three 

respects: (1) permits taxpayers to 

identify offsetting positions of a 

straddle (including an unbalanced 

straddle) and provides for 

capitalization (rather than deferral) 

of losses attributable to such 

straddles; (2) clarifies the presentlaw treatment of certain physically 

settled positions of a straddle; and 

(3) repeals the stock and qualified 

covered call exceptions from the 

straddle rules.
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Provision Present Law House Bill Senate Amendment

respect to unrecognized gain in 

offsetting positions.

In limited cases, the straddle rules 

do not apply to positions in stock. 

Also, the straddle rules do not 

apply to offsetting positions that 

consist of stock and an option if the 

option is a “qualified covered call 

option” written by the taxpayer.

The Treasury Secretary is directed 

to provide regulations concerning 

straddles in which one position 

offsets only a portion of one or 

more other positions (“unbalanced 

straddles”). To date, no such 

regulations have been promulgated.

Effective date.–Positions 

established on or after the date of 

enactment.

5. Denial of installment sale 

treatment for all readily 

tradeable debt (sec. 5679 of the 

Senate amendment)

The installment method of 

accounting for gain recognition on 

certain deferred payment sales of 

property is not available if the 

taxpayer sells property in exchange 

for readily tradeable corporate or 

governmental debt. No similar 

provision prohibits the use of the 

installment sale method where the 

taxpayer sells property in exchange 

for readily tradable debt issued by 

a partnership or an individual.

No provision. Denies installment sale treatment 

with respect to all sales in which 

the taxpayer receives indebtedness 

that is readily tradeable, regardless 

of the nature of the issuer. Thus, 

for example, if the taxpayer 

receives readily tradeable debt of a 

partnership in a sale, the 

partnership debt is treated as 

payment on the installment note, 

and the installment sale method is 

unavailable to the taxpayer.

Effective date.–Sales occurring on 

or after date of enactment.
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Provision Present Law House Bill Senate Amendment

C. Corporations and 

Partnerships

1. Modification of treatment of 

transfers to creditors in divisive 

reorganizations (sec. 5680 of the 

Senate amendment)

In a tax free spin off under section 

355 of the Code in which the 

distributing corporation contributes 

property to the distributed 

corporation, no gain or loss is 

recognized if the property is 

contributed solely in exchange for 

stock or securities of the transferee 

corporation which are distributed 

to the transferor’s shareholders. 

The transferor corporation also will 

not recognize gain if it receives 

money or other property that is 

distributed to its shareholders or 

creditors. The amount that may be 

distributed to creditors is unlimited. 

In addition, for divisive 

transactions under section 355, and 

for certain acquisitive 

reorganizations, the transferor 

corporation recognizes gain to the 

extent the liabilities assumed by the 

transferee exceed the basis of 

assets transferred. 

No provision. Limits the amount of money plus 

the fair market value of property 

that a distributing corporation can 

distribute to creditors without gain 

recognition to the amount of the 

basis of assets contributed to the 

distributed corporation. 

Acquisitive reorganizations are 

exempted from the rule that gain is 

recognized if the amount of 

liabilities assumed exceeds the 

basis of assets transferred. 

Effective date.–Transactions on or 

after the date of enactment. 
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Provision Present Law House Bill Senate Amendment

2. Clarification of definition of 

nonqualified preferred stock 

(sec. 5681 of the Senate 

amendment)

Stock that is “nonqualified 

preferred stock” is treated as 

taxable boot in transactions that 

otherwise allow nontaxable receipt 

of stock. For this purpose, 

preferred stock is stock that is 

“limited and preferred as to 

dividends and does not participate 

in corporate growth to any 

significant extent.” 

No provision. Clarifies that stock for which there 

is not a real and meaningful 

likelihood of actually participating 

in the earnings and profits of the 

corporation is treated as preferred 

for purposes of the provision. 

Effective date.–Transactions after 

May 14, 2003.

3. Modification of definition of 

controlled group of corporations 

(sec. 5682 of the Senate 

amendment)

The members of a controlled group 

of corporations are limited to the 

benefits of one corporation for 

purposes of the graduated 

corporate rate brackets, the 

alternative minimum tax 

exemption, and the accumulated 

earnings credit.

For this purpose, a brother-sister 

controlled group is defined as two 

or more corporations if five or 

fewer persons who are individuals, 

estates or trusts own (after 

application of attribution rules) (1) 

at least 80 percent of the combined 

voting power and value of all 

classes of stock, and (2) more than 

50 percent of the total voting 

power or value of all stock, taking 

into account the stock ownership of 

each person only to the extent the 

No provision. Eliminates the 80-percent test from 

the brother-sister controlled group 

definition for purposes of 

determining the specified benefits. 

80-percent test continues to apply 

to other Code provisions using the 

controlled group definition by 

reference.

Effective date.–Taxable years 

beginning after date of enactment. 
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Provision Present Law House Bill Senate Amendment

stock ownership is identical with 

respect to each corporation. 

4. Mandatory basis adjustments 

in connection with partnership 

distributions and transfers of 

partnership interests (sec. 5683 

of the Senate amendment)

A partnership does not adjust the 

basis of partnership property 

following the transfer of a 

partnership interest unless the 

partnership has elected to do so 

under section 754. The basis 

adjustments account for the 

difference between the transferee 

partner's share of the basis of 

partnership property and its basis in 

its partnership interest. Similarly, 

after a distribution, adjustments to 

the basis of the partnership's 

undistributed property are not 

required unless the partnership has 

made the section 754 election. The 

adjustments increase or decrease 

the basis of the remaining 

partnership assets to reflect any 

increase or decrease in the basis of 

the distributed property in the 

hands of the distributee partner.

No provision. Adjustments to the basis of 

partnership property in the event of 

a partnership distribution or the 

transfer of a partnership interest are 

required, not elective as under 

present law, except in the case of a 

transfer of a partnership interest by 

reason of the partner's death. The 

provision repeals the special rule 

for determining a transferee's basis 

in partnership property that is later 

distributed if no section 754 

election was in effect.

Effective date.–Transfers and 

distributions after the date of 

enactment. The repeal of the 

special rule for subsequent 

distributions is effective generally 

for transfers after the date of 

enactment, except in the case of a 

transfer before the date of 

enactment it is effective for 

distributions made later than two 

years after the date of enactment. 
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Provision Present Law House Bill Senate Amendment

5. Class lives for utility grading 

costs (sec. 5684 of the Senate 

amendment)

In general, the amount of the 

depreciation deduction is 

determined under the modified 

accelerated cost recovery system. 

The recovery period of an asset is 

determined by reference to its class 

life. If no class life is provided, the 

asset is allowed a 7-year recovery 

period.

Assets used in the transmission and 

distribution of electricity for sale 

are provided a class life of 30 years 

and a recovery period of 20 years. 

The cost of initially clearing and 

grading land improvements are 

specifically excluded and no 

separate asset class is provided for 

such costs. 

A similar situation exists with 

regard to clearing and grading cost 

associated with gas utility trunk 

pipelines and related storage 

facilities. 

No provision. The provision assigns a class life to 

depreciable electric and gas utility 

clearing and grading costs incurred 

to locate transmission and 

distribution lines and pipelines. 

The provision includes these assets 

in the asset classes of the property 

to which the clearing and grading 

costs relate (giving these assets a 

recovery period of 20 years and 15 

years, respectively).

Effective date.–Electric and gas 

utility clearing and grading costs 

incurred after the date of 

enactment.

D. Consistent Amortization of 

Periods for Intangibles

(sec. 5685 of the Senate 

amendment)

At the election of the taxpayer, 

start-up expenditures and 

organizational expenditures may be 

amortized over a period of not less 

than 60 months. 

Section 197 requires most acquired 

intangible assets (such as goodwill, 

No provision. The provision modifies the 

treatment of start-up and 

organizational expenditures. A 

taxpayer would be allowed to elect 

to deduct up to $5,000 each of 

start-up and organizational 

expenditures in the taxable year in 
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Provision Present Law House Bill Senate Amendment

trademarks, franchises, and 

patents) that are held in connection 

with the conduct of a trade or 

business or an activity for the 

production of income to be 

amortized over 15 years.

which the trade or business begins. 

However, each $5,000 amount is 

reduced (but not below zero) by the 

amount by which the cumulative 

cost of start-up or organizational 

expenditures exceeds $50,000, 

respectively. Start-up and 

organizational expenditures that are 

not deductible in the year in which 

the trade or business begins would 

be amortized over a 15-year period 

consistent with the amortization 

period for section 197 intangibles.

Effective date.–The provision is 

effective for start-up and 

organizational expenditures 

incurred after the date of 

enactment. 

E. Addition of Vaccines Against 

Hepatitis A to List of Taxable 

Vaccines (sec. 5692 of the Senate 

amendment)

A manufacturer’s excise tax is 

imposed at the rate of 75 cents per 

dose on the following vaccines 

routinely recommended for 

administration to children: 

diphtheria, pertussis, tetanus, 

measles, mumps, rubella, polio, 

HIB, hepatitis B, varicella, 

rotavirus gastroenteritis, and 

streptococcus pneumoniae. 

No provision. Provides that any vaccine against 

hepatitis A is treated as a taxable 

vaccine.

Effective date.–Sales and uses on 

or after the first day of the first 

month which begins more than four 

weeks after the date of enactment. 
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Provision Present Law House Bill Senate Amendment

F. Addition of Vaccines Against 

Influenza to List of Taxable 

Vaccines (sec. 5693 of the Senate 

amendment)

A manufacturer’s excise tax is 

imposed at the rate of 75 cents per 

dose on the following vaccines 

routinely recommended for 

administration to children: 

diphtheria, pertussis, tetanus, 

measles, mumps, rubella, polio, 

HIB, hepatitis B, varicella, 

rotavirus gastroenteritis, and 

streptococcus pneumoniae. 

No provision. Provides that any trivalent vaccine 

against influenza is treated as a 

taxable vaccine.

Effective date.–Sales and uses on 

or after the later of the first day of 

the first month which begins more 

than four weeks after the date of 

enactment or the date on which the 

Secretary of HHS lists any vaccine 

against influenza for compensation 

for any vaccine-related injury or 

death. 

G. Extension of Amortization of 

Intangibles to Sports Franchises

(sec. 5694 of the Senate 

amendment)

Intangible assets acquired in 

connection with the acquisition of a 

trade or business generally are 

recovered over 15 years. An 

exception exists for intangibles 

acquired in connection with a pro 

sports franchise. With respect to a 

sports franchise acquisition, basis 

allocated to assets with 

determinable useful lives (such as 

player contracts) is recovered over 

the assets’ respective useful lives. 

Basis allocated to the franchise or 

to other intangible assets acquired 

with the franchise may not be 

amortizable if these assets lack a 

determinable useful life.

No provision. Extends the 15-year recovery 

period for intangible assets to 

sports franchises and any 

intangible asset acquired in 

connection with the acquisition of 

such a franchise (including player 

contracts). Thus, the same rules 

for amortization of intangibles that 

apply to other acquisitions under 

present law will apply to 

acquisitions of sports franchises. 

Effective date.–Property acquired 

after the date of enactment. 
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Provision Present Law House Bill Senate Amendment

IX. TAX-EXEMPT 

FINANCING OF HIGHWAY 

PROJECTS AND RAILTRUCK TRANSFER 

FACILITIES

A. Allow Tax-Exempt Financing 

for Private Highway Projects

and Rail-Truck Transfer 

Facilities (sec. 5691 of the Senate 

amendment)

Interest on bonds issued by States 

or local governments to finance 

activities of those governmental 

units is excluded from tax (sec. 

103). In addition, interest on 

certain bonds (“private activity 

bonds”) issued by States or local 

governments acting as conduits to 

provide financing for private 

businesses or individuals is 

excluded from income if the 

purpose of the borrowing is 

specifically approved in the Code 

(sec. 141). The Code permits taxexempt financing with respect to 

thirteen categories of “exempt 

facilities”, including mass 

commuting facilities and highspeed intercity rail facilities.

No provision. Creates new categories of exempt 

facility bonds: (1) qualified 

highway facilities; and (2) 

qualified surface freight transfer 

facilities. Also provides that 

issuance of these bonds are not 

subject to the general private 

activity bond volume cap. Rather 

such bonds will be subject to a 

separate volume limitation of $15 

billion in the aggregate. The 

Secretary of Transportation will 

allocate the $15 billion of authority 

among eligible projects. 

Highway facilities eligible for 

financing under the program will 

consist of any surface 

transportation project that receives 

Federal assistance under title 23 of 

the United States Code (as in effect 

on the date of enactment), or any 

project for an international bridge 

or tunnel for which an international 

entity authorized under Federal or 

State law is responsible that 

receives Federal assistance under 
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Provision Present Law House Bill Senate Amendment

title 23 of the United States Code 

(as in effect on the date of 

enactment). Surface freight 

transfer facilities will consist of 

facilities for the transfer of freight 

from truck to rail or rail to truck, 

including any temporary storage 

facilities directly related to those 

transfers that receives Federal 

assistance under either title 23 of 

the United States Code (as in effect 

on the date of enactment) or title 49 

of the United States Code (as in 

effect on the date of enactment). 

Effective date.–Bonds issued after 

the date of enactment.
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Provision Present Law House Bill Senate Amendment

X. EXTENSION OF SMALL 

BUSINESS EXPENSING

(sec. 9501 of the House bill)

In lieu of depreciation, a taxpayer 

may expense the cost of qualifying 

property. For taxable years 

beginning prior to 2003 and after 

2005, the amount expensed is 

limited to $25,000. For taxable 

years beginning in 2003 through 

2005, the limit is $100,000. 

Extends the applicability of the 

$100,000 limit and $400,000 

threshold to tax years beginning in 

2006 and 2007.

Effective date.–Date of enactment.

No provision.

XI. ALTERNATIVE MIMINUM 

TAX RELIEF

A. NOL Deduction (sec. 9601(a) 

of the House bill)

AMT net operating loss (NOL) 

deduction may not exceed 90 

percent of alternative minimum 

taxable income. 90-percent limit 

does not apply to NOLs carried 

back from, and carried forward to, 

2001 and 2002.

Increases 90 percent limitation to 

92 percent for 2006, 2007, and 

2008; 94 percent for 2009 and 

2010; 96 percent for 2011; 98 

percent for 2012; and 100 percent 

thereafter.

Effective date.–Taxable years 

beginning after 2005.

No provision.

B. Foreign Tax Credit

(sec. 9601(b) of the House bill)

AMT foreign tax credit generally is 

limited to 90 percent of tentative 

minimum tax.

Repeals 90 percent limitation.

Effective date.–Taxable years 

beginning after 2005.

No provision.

C. Small Corporation 

Exemption (sec. 9602 of the 

House bill)

AMT does not apply to a 

corporation with average annual 

gross receipts for the prior three 

years of not more than $7.5 million 

Increases $7.5 million amount to 

$20 million.

Effective date.–Taxable years 

beginning after 2005.

No provision.
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Provision Present Law House Bill Senate Amendment

($5 million for its first three-year 

period).

D. Farmer Income Averaging 

(sec. 9603 of the House bill)

Tax benefits of farmer income 

averaging do not apply in 

computing AMT.

Allows tax benefits of farmer 

income averaging in computing 

AMT.

Effective date.–Taxable years 

beginning after 2003.

No provision.