COMPARISON OF CERTAIN PROVISIONS OF H.R. 4520 AS PASSED BY

THE HOUSE OF REPRESENTATIVES AND AS AMENDED BY THE SENATE:

JOB CREATION TAX INCENTIVES FOR MANUFACTURING,

SMALL BUSINESS, AND FARMING

Prepared by the Staff of the

JOINT COMMITTEE ON TAXATION

September 29, 2004

JCX-62-04
ii

Contents

Page

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

I. SMALL BUSINESS EXPENSING......................................................................................................................................................... 3

A. Treatment of Section 179 Expensing (sec. 201 of the House bill and sec. 309 of the Senate amendment) ................................... 3

II. DEPRECIATION PROVISIONS .......................................................................................................................................................... 4

A. 15-year Straight-Line Cost Recovery for Qualified Leasehold Improvements (sec. 211 of the House bill).................................. 4

B. 15-year Straight-Line Cost Recovery for Qualified Restaurant Improvements (sec. 211 of the House bill)................................. 5

C. Extended Placed in Service Date for Bonus Depreciation for Certain Aircraft (Excluding Aircraft Used in the

Transportation Industry) (sec. 212 of the House bill and sec. 622 of the Senate amendment) ...................................................... 6

D. Special Placed in Service Rule for Bonus Depreciation for Certain Property Subject to Syndication (sec. 213 of the

House bill and sec. 621 of the Senate amendment) ........................................................................................................................ 6

III. S CORPORATION REFORM AND SIMPLIFICATION................................................................................................................... 8

A. Members of Family Treated as One Shareholder (sec. 221 of the House bill)............................................................................... 8

B. Increase Maximum Number of Shareholders (sec. 222 of the House bill)..................................................................................... 8

C. Certain IRAs Holding Bank Stock as Eligible Shareholders (sec. 223 of the House bill)............................................................. 8

D. Disregard Unexercised Powers of Appointment in Determining Potential Current Beneficiary of an Electing Small

Business Trust (sec. 224 of the House bill).................................................................................................................................... 9

E. Transfers of Suspended Losses Incident to Divorce (sec. 225 of the House bill).......................................................................... 9

F. Use of Passive Activity Loss and At-Risk Amounts by Qualified Subchapter S Trust Income Beneficiaries (sec. 226 the

House bill)....................................................................................................................................................................................... 9

G. Exclusion of Investment Securities Income from Passive Income Test for Bank S Corporations (sec. 227 of the House bill) .. 10

H. Treatment of Bank Director Shares (sec. 228 of the House bill).................................................................................................. 10

I. Relief from Inadvertently Invalid Subchapter S Subsidiary Elections and Terminations (sec. 229 of the House bill)................ 10

J. Information Returns for Qualified Subchapter S Subsidiaries (sec. 230 of the House bill)......................................................... 10
Page

iii

K. Repayment of Loan for Qualifying Employer Securities Held by an ESOP (sec. 231 of the House bill and sec. 654

of Senate amendment)................................................................................................................................................................... 11

IV. ALTERNATIVE MIMINUM TAX RELIEF..................................................................................................................................... 12

A. Foreign Tax Credit (sec. 241 of the House bill and sec. 203 of the Senate amendment) ............................................................. 12

B. Small Corporation Exemption (sec. 242 of the House bill).......................................................................................................... 12

C. Farmer Income Averaging (sec. 243 of the House bill)................................................................................................................ 12

V. STATUTORY STOCK OPTIONS ...................................................................................................................................................... 13

A. Exclusion of Incentive Stock Options and Employee Stock Purchase Plan Stock Options from Wages (sec. 261 of the

House bill)..................................................................................................................................................................................... 13

VI. REPATRIATION OF FOREIGN EARNINGS.................................................................................................................................. 14

A. Incentives to Reinvest Foreign Earnings in the United States (sec. 271 of the House bill and sec. 231 of the Senate

amendment)................................................................................................................................................................................... 14

VII. OTHER INCENTIVE PROVISIONS............................................................................................................................................... 17

A. Special Rules for Livestock Sold on Account of Weather-Related Conditions (sec. 281 of the House bill and sec. 649

of the Senate amendment)............................................................................................................................................................. 17

B. Payment of Dividends on Stock of Cooperatives Without Reducing Patronage Dividends (sec. 282 of the House bill and

sec. 648 of the Senate amendment)............................................................................................................................................... 18

C. Expensing of Reforestation Expenditures (sec. 331 of the Senate amendment) .......................................................................... 19

D. Capital Gain for Timber (secs. 102(b) and 283 of the House bill and secs. 332 and 333 of the Senate amendment).................. 19

E. Modification of Safe Harbor Rules for Timber REITs (sec. 334 of the Senate amendment)....................................................... 19

F. Distributions from Publicly Traded Partnerships Treated as Qualifying Income of Regulated Investment Company

(sec. 284 of the House bill and sec. 899 of the Senate amendment)............................................................................................. 20

G. Improvements Related to REITs (sec. 285 of the House bill)...................................................................................................... 20

H. Treatment of Certain Dividends of Regulated Investment Companies (sec. 286 of the House bill)............................................ 23

I. Taxation of Certain Settlement Funds (sec. 287 of the House bill).............................................................................................. 25

J. Expand Human Clinical Trial Expenses Qualifying for the Orphan Drug Tax Credit (sec. 288 of the House bill) .................... 26
Page

iv

K. Modification of Excise Tax on Bows and Arrows (sec. 289 of House Bill and sec. 305 of the Senate amendment).................. 27

L. Repeal Excise Tax on Fishing Tackle Boxes (sec. 290 of the House bill)................................................................................... 27

M. Repeal of Excise Tax on Sonar Devices Suitable for Finding Fish (sec. 291 of the House bill)............................................. 28

N. Income Tax Credit for Cost of Carrying Tax-Paid Distilled Spirits in Wholesale Inventories (sec. 292 of the House bill)........ 29

O. Suspension of Occupational Taxes Relating to Distilled Spirits, Wine, and Beer (sec. 293 of the House bill)........................... 30

P. Modification of Unrelated Business Income Limitation on Investment in Certain Debt-Financed Properties of Small

Business Investment Companies (sec. 294 of the House bill and sec. 642 of the Senate amendment)........................................ 31

Q. Election to Determine Taxable Income from Certain International Shipping Activities Using Per Ton Rate (sec. 295

of the House bill)........................................................................................................................................................................... 31

R. Charitable Contribution Deduction for Certain Expenses in Support of Native Alaskan Subsistence Whaling (sec. 296

of the House bill)........................................................................................................................................................................... 33

VIII. GENERAL PROVISIONS............................................................................................................................................................... 34

A. Modification to Qualified Small Issue Bonds (sec. 301 of the Senate amendment) .................................................................... 34

B. Expensing of Investment in Broadband Equipment (sec. 302 of the Senate amendment) ........................................................... 34

C. Exemption of Natural Aging Process in Determination of Production Period for Distilled Spirits Under Section 263A

(sec. 303 of the Senate amendment) ............................................................................................................................................. 35

D. Modification of Active Business Definition Under Section 355 (sec. 304 of the Senate amendment)........................................ 35

E. Modification to Cooperative Marketing Rules to Include Value Added Processing Involving Animals (sec. 306 of the

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

F. Extension of Declaratory Judgment Procedures to Farmers’ Cooperative Organizations (sec. 307 of the Senate amendment) . 37

G. Temporary Suspension of Personal Holding Company Tax (sec 308 of the Senate amendment) ............................................... 38

H. 5-year NOL Carryback for 2003 NOLs if Taxpayer Elects Out of Bonus Depreciation as Modified; Extend Temporary

Suspension of 90-Percent Limit on Minimum Tax NOLs (sec. 310 of the Senate amendment).................................................. 39

I. Manufacturers’ Jobs Credit for Employing TAA Certified Employees (sec. 313 of the Senate amendment)............................. 39

J. Qualified Green Building and Sustainable Design Project Bonds (sec. 314 of the Senate amendment) ..................................... 40

K. Special Rules for Certain Film and Television Production (sec. 321 of the Senate amendment) ................................................ 41

L. Modification of Application of the Income Forecast Method of Depreciation (sec. 322 of the Senate amendment) .................. 42
1

INTRODUCTION

On June 17, 2004, the House of Representatives passed H.R. 4520, the “American Jobs Creations Act of 2004.” On July 15, 

2004, the Senate amended H.R. 4520 by substituting the text and title of S. 1637, the “Jumpstart Our Business Strength (JOBS) Act,”1

and an additional non-tax amendment.

The House bill and the Senate amendment each repeal the extraterritorial income exclusion provisions of present law, provide 

provisions to reduce the effective income tax imposed on income earned from certain domestic production activities, and make 

numerous other changes to the Internal Revenue Code. This document, 2 prepared by the staff of the Joint Committee on Taxation, 

compares certain provisions relating to tax incentives for manufacturing, small businesses, and agriculture. 

In this publication set,3 (JCX-61-04 to JCX-66-04), the staff of the Joint Committee on Taxation compares provisions of H.R. 

4520 as passed by the House of Representatives and as amended by the Senate relating to the repeal of the extraterritorial income 

exclusions, domestic production, corporate income tax rates applicable to small corporations, tax incentives for manufacturers, small 

 

1

 The Senate originally passed S. 1637 on May 11, 2004.

2

 This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as 

Passed by the House of Representatives and as Amended by the Senate: Job Creation Tax Incentives for Manufacturing, Small 

Business, and Farming (JCX-62-04), September 29, 2004.

3

 Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives 

and as Amended by the Senate: Provisions Relating to the Repeal of the Exclusion for Extraterritorial Income, Domestic Production, 

and the Corporate Income Tax Rates Applicable to Small Corporations (JCX-61-04), September 29, 2004; Joint Committee on 

Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: 

Job Creation Tax Incentives for Manufacturing, Small Business, and Farming (JCX-62-04), September 29, 2004; Joint Committee on 

Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: 

Provisions Relating to International Tax Reform and Simplification for United States Businesses (JCX-63-04), September 29, 2004; 

Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as 

Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain 

Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Alcohol Fuels and Fuel Fraud 

Provisions (JCX-65-04), September 29, 2004; and Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as 

Passed by the House of Representatives and as Amended by the Senate: Expiring Provisions (JCX-66-04), September 29, 2004.
2

businesses and farming, international tax reform and simplification for United States businesses, alcohol fuels and fuel fraud, expiring 

provisions, and certain revenue raising provisions.
3

Provision Present Law House Bill Senate Amendment

I. SMALL BUSINESS 

EXPENSING

A. Treatment of Section 179 

Expensing (sec. 201 of the House 

bill and sec. 309 of the Senate 

amendment)

Under the section 179 expensing 

rules, for taxable years beginning 

in 2003 through 2005, a taxpayer 

may deduct up to $100,000 of the 

cost of qualifying property placed 

in service for the taxable year. The 

$100,000 amount is reduced (but 

not below zero) by the amount by 

which the cost of qualifying 

property placed in service by the 

taxpayer exceeds $400,000. For 

taxable years beginning in 2003-

2005, qualifying property includes 

certain computer software; 

indexing applies (starting in 2004); 

and Commissioner's consent is not 

required to revoke 179 elections. 

For taxable years beginning after 

2005, the $100,000 and $400,000 

amounts are reduced to $25,000 

and $200,000, respectively.

Extends for an additional two years 

(i.e., for taxable years beginning in 

2006 and 2007) the increased 

amount that a taxpayer may deduct 

(applying the $100,000 and 

$400,000 amounts), and the other 

present-law rules that are effective 

for taxable years beginning in 2003 

through 2005.

Effective date.–Date of enactment.

The $100,000 amount ($25,000 for 

taxable years beginning in 2006 

and thereafter) is reduced (but not 

below zero) by only one half of the 

amount by which the cost of 

qualifying property placed in 

service during the taxable year 

exceeds $400,000 ($200,000 for 

taxable years beginning in 2006 

and thereafter).

Effective date.–Taxable years 

beginning after December 31, 

2002.
4

Provisions Present Law House Bill Senate Amendment

II. DEPRECIATION 

PROVISIONS

A. 15-year Straight-Line Cost 

Recovery for Qualified 

Leasehold Improvements

(sec. 211 of the House bill)

The cost of nonresidential real 

property is recovered straight-line 

over 39 years. The cost of 

improvements to leased property is 

recovered over the leased 

property’s recovery period, even if 

such recovery period is longer than 

the term of the lease. Thus, if a 

leasehold improvement constitutes 

an addition or improvement to 

nonresidential real property already 

placed in service, the improvement 

is depreciated straight-line over 39 

years.

Taxpayers are allowed an 

additional first-year depreciation 

deduction equal to either 30 

percent or 50 percent of the 

adjusted basis of qualified 

leasehold improvement property 

placed in service before January 1, 

2005. Qualified leasehold 

improvement property is any 

improvement to an interior portion 

of a building that is nonresidential 

real property, provided certain 

requirements are met. The 

improvement must be made under 

or pursuant to a lease either by the 

Provides a statutory 15-year 

recovery period for qualified 

leasehold improvement property 

placed in service before January 1, 

2006. Requires that qualified 

leasehold improvement property be 

recovered using the straight-line 

method. 

Qualified leasehold improvement 

property is defined as under present 

law for purposes of the additional 

first-year depreciation deduction, 

with the following modification. If 

a lessor makes an improvement 

that qualifies as qualified leasehold 

improveme nt property, such 

improvement shall not qualify as 

qualified leasehold improvement 

property to any subsequent owner 

of such improvement. An 

exception to the rule applies in the 

case of death and certain transfers 

of property that qualify for nonrecognition treatment.

Effective date.–Property placed in 

service after the date of enactment.

No provision.
5

Provisions Present Law House Bill Senate Amendment

lessee (or sublessee), or by the 

lessor, of that portion of the 

building to be occupied exclusively 

by the lessee (or sublessee). The 

improvement must be placed in 

service more than three years after 

the date the building was first 

placed in service.

Qualified leasehold improvement 

property does not include any 

improvement for which the 

expenditure is attributable to the 

enlargement of the building, any 

elevator or escalator, any structural 

component benefiting a common 

area, or the internal structural 

framework of the building.

B. 15-year Straight-Line Cost 

Recovery for Qualified 

Restaurant Improvements

(sec. 211 of the House bill)

The cost of restaurant leasehold 

improvements and nonresidential 

real property is recovered using the 

straight-line method of 

depreciation over a recovery period 

of 39 years.

Reduces to 15 years the recovery 

period for qualified restaurant 

property placed in service before 

January 1, 2006. Qualified 

restaurant property is any 

improvement to a building if such 

improvement is placed in service 

more than three years after the date 

such building was first placed in 

service and more than 50 percent 

of the building’s square footage is 

devoted to the preparation of, and 

seating for, on-premises 

consumption of prepared meals. 

No provision.
6

Provisions Present Law House Bill Senate Amendment

Effective date.–Property placed in 

service after the date of enactment.

C. Extended Placed in Service 

Date for Bonus Depreciation for 

Certain Aircraft (Excluding 

Aircraft Used in the 

Transportation Industry)

(sec. 212 of the House bill and

sec. 622 of the Senate 

amendment)

Generally, bonus depreciation 

applies to property placed in 

service prior to January 1, 2005. 

Certain types of property qualify 

for bonus depreciation if placed in 

service prior to January 1, 2006. 

Provides criteria under which 

certain non-commercial aircraft can 

qualify for the extended placed-inservice date (prior to January 1, 

2006.) 

Effective date.–Property placed in 

service after September 10, 2001.

Same as the House bill except for 

effective date. 

Effective date.–Taxable years 

beginning after the date of 

enactment.

D. Special Placed in Service 

Rule for Bonus Depreciation for 

Certain Property Subject to 

Syndication (sec. 213 of the 

House bill and sec. 621 of the 

Senate amendment)

Generally, bonus depreciation 

applies to property placed in 

service for original use by the 

taxpayer prior to January 1, 2005. 

In the case of any property that is 

originally placed in service by a 

person and that is sold to the 

taxpayer and leased back to such 

person by the taxpayer within three 

months after the date that the 

property was placed in service, the 

property is treated as originally 

placed in service by the taxpayer 

not earlier than the date that the 

property is used under the 

leaseback. The statute does not 

specifically refer to syndication 

transactions, but conference report 

language and temporary 

regulations provide that if property 

is originally placed in service by a 

Provides that if property is 

originally placed in service by a 

lessor, such property is sold within 

three months after the date that the 

property was placed in service, and 

the user of such property does not 

change, then the property is treated 

as originally placed in service by 

the taxpayer not earlier than the 

date of such sale. (Confirms the 

rule in the temporary regulations.)

Also provides a special rule in the 

case of multiple units of property 

subject to the same lease. In such 

cases, property will qualify as 

placed in service on the date of sale 

if it is sold within three months 

after the final unit is placed in 

service, so long as the period 

between the time the first and last 

Same as the House bill except for 

effective date. 
7

Provisions Present Law House Bill Senate Amendment

lessor, such property is sold within 

three months after the date that the 

property was placed in service by 

the lessor, and the user of such 

property remains the same as when 

the property was originally placed 

in service by the lessor, then the 

property is treated as originally 

placed in service by the taxpayer 

not earlier than the date of sale.

units are placed in service does not 

exceed 12 months. 

Effective date.–Generally, for 

property acquired and placed in 

service after September 10, 2001. 

However, the special rule in the 

case of multiple units of property 

subject to the same lease applies to 

property sold after June 4, 2004.

Effective date.–Sales after the date 

of enactment.
8

Provision Present Law House Bill Senate Amendment

III. S CORPORATION 

REFORM AND 

SIMPLIFICATION

A. Members of Family Treated 

as One Shareholder (sec. 221 of 

the House bill)

An S corporation may not have 

more than 75 shareholders. A 

husband and wife are treated as one 

shareholder.

Allows election for members of a 

family to be treated as one 

shareholder for purposes of 

determining the number of 

shareholders. Members of a family 

mean the common ancestor and the 

lineal descendants of the common 

ancestor (and spouses). To qualify 

as common ancestor, the person 

must be no more than 3 generations 

removed (at later of date of S 

election or date of enactment) from 

youngest generation of 

shareholders who otherwise would 

be members of family.

Effective date.–Taxable years 

beginning after 2004.

No provision.

B. Increase Maximum Number 

of Shareholders (sec. 222 of

the House bill)

An S corporation may not have 

more than 75 shareholders.

Increases the maximum number of 

shareholders to 100.

Effective date.–Taxable years 

beginning after 2004.

No provision.

C. Certain IRAs Holding Bank 

Stock as Eligible Shareholders 

(sec. 223 of the House bill)

IRAs may not hold stock in an S 

corporation.

Allows an IRA to hold S 

corporation bank stock that the 

IRA held on date of enactment; all 

the income is subject to UBIT; 

No provision.
9

Provision Present Law House Bill Senate Amendment

allows the stock to be sold to the 

beneficiary for fair market value 

upon the corporation making an S 

election.

Effective date.–Date of enactment.

D. Disregard Unexercised 

Powers of Appointment in 

Determining Potential Current 

Beneficiary of an Electing Small 

Business Trust (sec. 224 of

the House bill)

Each potential current beneficiary 

of an electing small business trust 

is treated as a shareholder of the S 

corporation for purposes of 

determining the number of 

shareholders.

Disregards unexercised powers of 

appointment in determining the 

potential current beneficiaries; 

increases period during which trust 

can dispose of stock after ineligible 

shareholder becomes potential 

current beneficiary from 60 days to 

one year.

Effective date.–Taxable years 

beginning after 2004.

No provision.

E. Transfers of Suspended 

Losses Incident to Divorce

(sec. 225 of the House bill)

Losses in excess of basis are 

carried forward with respect to a 

shareholder.

Allows suspended losses to be 

transferred in the case of transfers 

of stock to a spouse or former 

spouse incident to divorce. 

Effective date.–Taxable years 

beginning after 2004.

No provision.

F. Use of Passive Activity Loss 

and At-Risk Amounts by 

Qualified Subchapter S Trust 

Income Beneficiaries (sec. 226

the House bill)

The income of a qualified 

subchapter S trust is taxed to the 

beneficiary. 

Beneficiary is allowed to deduct 

suspended losses under the at-risk 

and passive loss rules when trust 

disposes of S corporation stock.

No provision.
10

Provision Present Law House Bill Senate Amendment

Effective date.–Transfers after 

2004.

G. Exclusion of Investment 

Securities Income from Passive 

Income Test for Bank S 

Corporations (sec. 227 of

the House bill)

S corporation with accumulated 

earnings and profits are subject to 

tax or disqualification if they have 

excess passive investment income. 

Clarifies that interest income and 

certain dividend income received 

by a bank are not treated as passive 

investment income. 

Effective date.–Taxable years 

beginning after 2004.

No provision.

H. Treatment of Bank Director 

Shares (sec. 228 of the House bill)

An S corporation may not have 

more than 75 shareholders and may 

have only one class of stock. 

In applying subchapter S, certain 

restricted shares held by bank 

directors are not taken into account 

as outstanding stock.

Effective date.–Taxable years 

beginning after 2004.

No provision.

I. Relief from Inadvertently 

Invalid Subchapter S Subsidiary 

Elections and Terminations

(sec. 229 of the House bill)

Relief is provided for inadvertently 

invalid subchapter S elections. 

Provides relief from inadvertently 

invalid subchapter S subsidiary 

elections and terminations. 

Effective date.–Taxable years 

beginning after 2004.

No provision.

J. Information Returns for 

Qualified Subchapter S 

Subsidiaries (sec. 230 of

the House bill)

A qualified subchapter S subsidiary 

is treated as part of the S 

corporation parent. 

Allows information returns of a 

qualified subchapter S subsidiary 

to be filed by the subsidiary. 

Effective date.–Taxable years 

beginning after 2004.

No provision.
11

Provision Present Law House Bill Senate Amendment

K. Repayment of Loan for 

Qualifying Employer Securities 

Held by an ESOP (sec. 231 of

the House bill and sec. 654 of

Senate amendment)

Distributions made with respect to 

S corporation stock allocated to a 

participant under an ESOP may not 

be used to repay a loan that was 

used to purchase the stock held by 

the ESOP.

Allows distributions made with 

respect to S corporation stock 

allocated to a participant under an 

ESOP to be used to repay a loan 

that was used to purchase stock 

held by the ESOP, provided that 

stock of value not less than the 

amount of the distribution is 

allocated to the participant.

Effective date.–Distributions made 

after December 31, 2004.

Same as the House bill except for 

effective date.

Effective date.–January 1, 1998.
12

Provision Present Law House Bill Senate Amendment

IV. ALTERNATIVE 

MIMINUM TAX RELIEF

A. Foreign Tax Credit (sec. 241 

of the House bill and sec. 203 of 

the Senate amendment)

AMT foreign tax credit generally 

is limited to 90 percent of tentative 

minimum tax.

Repeals 90 percent limitation.

Effective date.–Taxable years 

beginning after 2004.

Same as the House bill.

B. Small Corporation 

Exemption (sec. 242 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 ($5 million for its first 

three-year period).

Increases $7.5 million amount to 

$20 million.

Effective date.–Taxable years 

beginning after 2005.

No provision.

C. Farmer Income Averaging 

(sec. 243 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.
13

Provision Present Law House Bill Senate Amendment

V. STATUTORY STOCK 

OPTIONS

A. Exclusion of Incentive Stock 

Options and Employee Stock 

Purchase Plan Stock Options 

from Wages (sec. 261 of the 

House bill)

The Code does not provide an 

exception from FICA and FUTA 

taxes for wages paid to an 

employee arising from the exercise 

of an incentive stock option or an 

option under an employee stock 

purchase plan (collectively referred 

to as “statutory stock options”). 

There has been uncertainty in the 

past as to employer withholding 

obligations upon the exercise of 

statutory stock options. Until 

further guidance is issued, the IRS 

has announced that it will not 

assess FICA or FUTA taxes, or 

impose Federal income tax 

withholding obligations, upon 

either the exercise of a statutory 

stock option or the disposition of 

stock acquired pursuant to the 

exercise of a statutory stock option.

Provides specific exclusions from 

FICA and FUTA wages for 

remuneration on account of the 

transfer of stock pursuant to the 

exercise of an incentive stock 

option or under an employee stock 

purchase plan, or any disposition of 

such stock. Also provides that 

Federal income tax withholding is 

not required on a disqualifying 

disposition or when compensation 

is recognized in connection with an 

employee stock purchase plan 

discount. 

Effective date.–Stock acquired 

pursuant to options exercised after 

the date of enactment. 

No provision.
14

Provision Present Law House Bill Senate Amendment

VI. REPATRIATION OF 

FOREIGN EARNINGS

A. Incentives to Reinvest 

Foreign Earnings in the United 

States (sec. 271 of the House bill 

and sec. 231 of the Senate 

amendment)

Income earned by a domestic 

parent corporation from operations 

conducted by foreign corporate 

subsidiaries generally is subject to 

full U.S. tax when the income is 

distributed as a dividend to the 

domestic corporation, subject to 

available foreign tax credits.

Provides a temporary 85-percent 

deduction for dividends received 

by a domestic corporation from its 

controlled foreign corporations 

(“CFCs”).

Deduction applies to dividends in 

excess of a base-period average 

(repatriations over three of five 

most recent taxable years ending 

before March 31, 2003, 

disregarding high and low years).

Dividends and certain distributions 

of earnings through a chain of 

CFCs may qualify for the 

deduction. In addition to 

dividends, section 956 inclusions 

and distributions of previously 

taxed earnings are included in the 

base-period average.

Taxpayer must adopt a plan for 

reinvesting the dividends in the 

United States.

A proportional amount of foreign 

tax credits is disallowed; taxpayer 

may designate which dividends 

Provides a temporary 5.25-percent 

tax rate for dividends received by a 

domestic corporation from its 

CFCs. 

Reduced rate applies to dividends 

in excess of a base-period average 

(repatriations over three of five 

most recent taxable years ending 

on or before December 31, 2002, 

disregarding high and low years).

Dividends and section 956 

inclusions may qualify for the 

reduced rate and are included in the 

base-period average.

Taxpayer must adopt a plan for 

reinvesting the dividends in the 

United States.

A proportional amount of foreign 

tax credits is disallowed; taxpayer 

may designate which dividends 
15

Provision Present Law House Bill Senate Amendment

carry foreign tax credits and which 

dividends are deductible.

Income from nondeductible portion 

of dividends cannot be offset by 

NOLs; tax cannot be offset by 

credits other than foreign tax 

credits and AMT credits, and 

cannot reduce AMT otherwise 

owed. Deductions under sections 

243 and 245 are disallowed.

Eligible dividends are limited to 

the greatest of: (1) $500 million; 

(2) amount shown on applicable 

financial statement as permanently 

invested outside the United States; 

and (3) in the case of an applicable 

financial statement showing an 

amount of tax attributable to 

earnings permanently invested 

outside the United States, an 

amount of earnings determined 

under Treasury regulations.

Effective date.–Dividends 

received: (1) during the first six 

months of the taxpayer’s first 

taxable year beginning on or after 

date of enactment; or (2) during 

any six-month or shorter period 

after date of enactment, within the 

taxpayer’s last taxable year ending 

carry foreign tax credits and which 

dividends qualify for reduced rate.

Income from nonqualifying 

dividends cannot be offset by 

expenses, losses, or other 

deductions.

Effective date.–Dividends received 

during the taxpayer’s first taxable 

year ending 120 days or more after 

date of enactment.
16

Provision Present Law House Bill Senate Amendment

after such date, at the taxpayer’s 

election.
17

Provisions Present Law House Bill Senate Amendment

VII. OTHER INCENTIVE 

PROVISIONS

A. Special Rules for Livestock 

Sold on Account of WeatherRelated Conditions (sec. 281 of 

the House bill and sec. 649 of

the Senate amendment)

Generally, gain realized by a 

taxpayer from an involuntary 

conversion of property is deferred 

to the extent the taxpayer purchases 

property similar or related in 

service or use to the converted 

property within the applicable 

period. The applicable period for 

the taxpayer to replace the 

converted property begins with the 

date of the disposition of the 

converted property and ends two 

years after the close of the first 

taxable year in which any part of 

the gain upon conversion is 

realized.

Extends the applicable period for a 

taxpayer to replace livestock sold 

on account of drought, flood, or 

other weather-related conditions 

from two years to four years after 

the close of the first taxable year in 

which any part of the gain on 

conversion is realized. In addition, 

Treasury is granted authority to 

further extend the replacement 

period on a regional basis should 

the weather-related conditions 

continue longer than three years. 

Also, for property eligible for the 

provision’s extended replacement 

period, extends the deadline for 

making an election under section 

451(e) until the period for 

reinvestment of such property 

under section 1033 expires. 

Effective date.– Taxable years with 

respect to which the due date 

(without regard to extensions) for 

the return is after December 31, 

2002. 

Permits the taxpayer to replace 

compulsorily or involuntarily 

converted livestock with other farm 

property if, due to drought, flood, 

or other weather-related conditions, 

it is not feasible for the taxpayer to 

reinvest the proceeds in property 

similar or related in use to the 

livestock so converted. 

Effective date.–Taxable years 

beginning after December 31, 

2001.
18

Provisions Present Law House Bill Senate Amendment

B. Payment of Dividends on 

Stock of Cooperatives Without 

Reducing Patronage Dividends 

(sec. 282 of the House bill and

sec. 648 of the Senate 

amendment)

Cooperatives generally are entitled 

to deduct or exclude amounts 

distributed as patronage dividends. 

Patronage dividends generally are 

comprised of amounts paid to 

patrons: (1) on the basis of the 

quantity or value of business done 

with or for patrons; (2) under a 

valid and enforceable obligation to 

pay such amounts that was in 

existence before the cooperative 

received the amounts paid; and 

(3) which are determined by 

reference to the net earnings of the 

cooperative from business done 

with or for patrons.

Treasury regulations provide that 

net earnings are reduced by 

dividends paid on capital stock or

other proprietary capital interests. 

The regulations have been 

interpreted to require that such 

dividends be allocated between a 

cooperative’s patronage and 

nonpatronage operations, with the 

amount allocated to the patronage 

operations reducing the net 

earnings available for the payment 

of patronage dividends.

Provides a special rule for 

dividends on capital stock of a 

cooperative. To the extent 

provided in organizational 

documents of the cooperative, 

dividends on capital stock do not 

reduce patronage income and do 

not prevent the cooperative from 

being treated as operating on a 

cooperative basis.

Effective date.–Distributions made 

in taxable years ending after the 

date of enactment.

Same as the House bill.
19

Provision Present Law House Bill Senate Amendment

C. Expensing of Reforestation 

Expenditures (sec. 331 of the 

Senate amendment)

Section 194 provides for an 84-

month amortization period for up 

to $10,000 of qualified 

reforestation expenditures.

Section 48(b) provides a 10-

percent credit on up to $10,000 of 

qualified amortizable basis in 

timber property. The amount 

amortized under section 194 is 

reduced by one half of the amount 

of credit claimed under section 

48(b). 

No provision. Permits up to $10,000 of qualified 

reforestation expenditures to be 

deducted in the year paid or 

incurred (i.e., expensed).

Repeals the reforestation tax credit.

Effective date.–Expenditures paid 

or incurred after the date of 

enactment.

D. Capital Gain for Timber

(secs. 102(b) and 283 of the 

House bill and secs. 332 and 333 

of the Senate amendment)

Election to treat cutting of timber 

as a sale or exchange may be 

revoked only with consent on IRS 

(and new election may be made 

only with consent of IRS).

Disposition of timber with retained 

economic interest qualifies for 

capital gain treatment.

Allows a corporation to revoke 

prior election (and make new 

election) without consent of IRS.

Effective date.–Taxable years 

ending after date of enactment.

Allows capital gain treatment for 

outright sales of timber.

Effective date.–Sales after 2004.

Same as the House bill, except 

applies to all taxpayers.

Effective date.–Taxable years 

ending after date of enactment.

Same as the House bill except for 

effective date.

Effective date.–Sales after date of 

enactment.

E. Modification of Safe Harbor 

Rules for Timber REITs

(sec. 334 of the Senate 

amendment)

REITs generally are not taxed at 

the entity level as they may deduct 

dividends paid to investors. REITs 

generally may not engage in an 

active business. REITs have been 

No provision. A safe harbor for the sale of 

timberland is provided under 

which, if requirements are met, a 

sale of such property will not be 

treated as a prohibited transaction 
20

Provision Present Law House Bill Senate Amendment

formed to hold land on which trees 

are grown. The IRS has issued 

private letter rulings stating the 

income from the sale of uncut 

timber that can qualify for capital 

gain treatment can also be qualified 

REIT income. A 100 percent 

penalty tax is imposed on net 

income of a REIT from the sale of 

property held for sale to customers 

in the ordinary course of business 

(a “prohibited transaction”).

for a REIT.

The property must have been held 

for at least four years in the 

business of producing timber. 

Certain limits on the amount of 

sales or the percent of aggregate 

adjusted basis of property sold, as 

well as limits on certain 

expenditures, also must be met. 

Effective date.–Sales after date of 

enactment. 

F. Distributions from Publicly 

Traded Partnerships Treated as 

Qualifying Income of Regulated 

Investment Company (sec. 284 of 

the House bill and sec. 899 of

the Senate amendment)

One of the requirements for a RIC 

to qualify for conduit treatment is 

that at least 90 percent of its gross 

income must be dividends, interest, 

and other specifically listed types 

of income. A “look-through” rule 

applies in determining whether 

income received from a partnership 

meets the 90 percent test.

Modifies the 90-percent test to 

include as qualifying income of a 

RIC the income derived from a 

publicly traded partnership. 

Modifies the look-through rule to 

apply to partnerships other than 

publicly traded partnerships.

Effective date.–Taxable years 

beginning after date of enactment.

Same as the House bill.

G. Improvements Related to 

REITs (sec. 285 of the House bill)

REITs are treated in substance as 

pass-through entities by allowing a 

deduction of dividends paid to 

shareholders. 

(1) A REIT must satisfy numerous 

tests on a continuing basis or will 

(1) A REIT may avoid 

disqualification for certain failures 

of the REIT requirements, provided 

No provision.
21

Provision Present Law House Bill Senate Amendment

become taxable as a regular 

corporation.

(2) A REIT may avoid 

disqualification by paying a 

deficiency dividend following an 

IRS or court determination that the 

REIT has failed to distribute the 

required amount of its income.

(3) A REIT generally cannot own 

securities representing more than 

10 percent of the voting power or 

10 percent of the value of the 

securities of any one issuer. An 

exception is made for certain 

“straight debt” securities.

(4) A REIT is permitted to own 

more than 10 percent of the vote or 

value of the securities of a “taxable 

REIT subsidiary” (TRS) and still 

that: a) the failure was due to 

reasonable cause and not willful 

neglect; b) the failure is corrected; 

and c) except for certain de 

minimis failures, a penalty amount 

is paid. 

Effective date.–Taxable years 

beginning after date of enactment.

(2) A REIT may declare a 

correcting deficiency dividend 

without awaiting an IRS or court 

determination.

Effective date.–Taxable years 

beginning after date of enactment.

(3) Modifies and broadens the 

definition of “straight debt” 

securities.

Effective date.–Taxable years 

beginning after December 31, 

2000, except that certain “look 

through” rules for partnerships are 

effective for taxable years 

beginning after the date of 

enactment. 

(4) Specific safe harbor testing 

dates and rules are provided for 

determining whether 90 percent of 

a REIT property is rented to 

No provision.

No provision.

No provision.
22

Provision Present Law House Bill Senate Amendment

can receive rent from the TRS that 

is treated as qualified REIT rental 

income, provided certain 

requirements are met. One 

requirement for qualified rents 

received from a TRS is that at least 

90 percent of any REIT property 

rented to a TRS is rented to 

unrelated persons and that rents 

paid by any related person are 

substantially comparable to 

unrelated party rents.

(5) A 100-percent excise tax is 

imposed on certain non-arm’s 

length transactions between a REIT 

and a TRS. A special rule allows 

rents from a TRS to a REIT to be 

exempt from the 100-percent

excise tax if rents are for 

customary services performed by 

the TRS

(6) Certain payments to a REIT 

under certain hedging 

arrangements to reduce interest rate 

risks on certain REIT indebtedness 

are treated as qualifying income for 

purposes of a test requiring a REIT 

to receive 95 percent of its gross 

income from certain types of 

income. 

unrelated persons and whether the 

rents paid by unrelated persons are 

substantially comparable to 

unrelated party rents.

Effective date.–Taxable years 

beginning after December 31, 

2000. 

(5) The safe harbor exempting 

rents from a 100-percent excise tax 

if for customary services is 

replaced with a requirement that 

the REIT pay the TRS at least 150 

percent of the cost to the TRS of 

providing any services.

Effective date.–Taxable years 

beginning after date of enactment.

(6) The definition of hedging 

arrangements is generally 

conformed to rules provided 

elsewhere in the Code. Income 

from such hedging transactions is 

excluded from both the numerator 

and the denominator of the 95 

percent of gross income test.

No provision.

No provision.
23

Provision Present Law House Bill Senate Amendment

(7) A REIT is required to distribute 

95 percent of its gross income. A 

tax is applied to the extent the 

REIT fails to distribute 90 percent 

of gross income. 

Effective date.–Taxable years 

beginning after the date of 

enactment. 

(7) The application of the tax on 

inadequate distributions is revised 

to refer to a 95 percent fraction 

rather than a 90 percent fraction. 

Effective date.–Taxable years 

beginning after the date of 

enactment.

No provision.

H. Treatment of Certain 

Dividends of Regulated 

Investment Companies

(sec. 286 of the House bill)

Regulated investment companies

A RIC generally pays no income 

tax because it is permitted to 

deduct dividends paid to its 

shareholders in computing its 

taxable income. A RIC generally 

may pass through to its 

shareholders the character of its 

long-term capital gains.

U.S. source investment income of 

foreign persons

In general.–A flat 30-percent 

withholding tax generally is 

imposed on the gross amount of 

U.S.-source investment income 

payments, such as interest, 

dividends, rents, royalties or 

similar types of income, to 

Interest-related dividends

Provides that a RIC that earns 

certain interest income that would 

not be subject to U.S. tax if earned 

by a foreign person directly may, to 

the extent of such income, 

designate a dividend it pays as 

derived from such interest income. 

A foreign person who is a 

shareholder in the RIC generally 

would treat such a dividend as 

exempt from gross-basis U.S. tax, 

as if the foreign person had earned 

the interest directly.

Short-term capital gains dividends

Also provides that a RIC that earns 

an excess of net short-term capital 

gains over net long-term capital 

No provision.
24

Provision Present Law House Bill Senate Amendment

nonresident alien individuals and 

foreign corporations.

Interest.–Payments of U.S.-source 

interest that is not effectively 

connected with a U.S. trade or 

business generally are subject to 

the 30-percent withholding tax, 

although there are certain 

exceptions to that rule.

Capital gains.–Foreign persons 

generally are not subject to U.S. 

tax on gain realized on the 

disposition of stock or securities 

issued by a U.S. person, unless the 

gain is effectively connected with 

the conduct of a U.S. trade or 

business. A RIC may elect not to 

withhold on a distribution to a 

foreign person representing a 

capital gain dividend.

Gain or loss of a foreign person 

from the disposition of a U.S. real 

property interest (including 

interests in U.S. real property and 

U.S. real property holding 

companies) is subject to net basis 

tax as if the taxpayer were engaged 

in a trade or business within the 

United States and the gain or loss 

were effectively connected with 

such trade or business.

losses, which excess would not be 

subject to U.S. tax if earned by a 

foreign person, generally may, to 

the extent of such excess, designate 

a dividend it pays as derived from 

such excess. A foreign person who 

is a shareholder in the RIC 

generally would treat such a 

dividend as exempt from grossbasis U.S. tax, as if the foreign 

person had realized the excess 

directly.

As under present law for 

distributions from REITs, also 

provides that any distribution by a 

RIC to a foreign person shall, to 

the extent attributable to gains from 

sales or exchanges by the RIC of 

an asset that is considered a U.S. 

real property interest, be treated as 

gain recognized by the foreign 

person from the sale or exchange 

of a U.S. real property interest. 

Also extends the special rules for 

domestically-controlled REITs to 

domestically-controlled RICs.

Estate tax treatment.–Also provides 

that the estate of a foreign decedent 

is exempt from U.S. estate tax on a 

transfer of stock in the RIC in the 

proportion that the assets held by 

the RIC are debt obligations, 
25

Provision Present Law House Bill Senate Amendment

Estate taxation.–Decedents who 

were U.S. citizens or residents 

generally are subject to Federal 

estate tax on all property, wherever 

situated. Nonresident decedents 

who were not U.S. citizens are 

subject to estate tax only on their 

U.S. property. Treaties may reduce 

U.S. taxation on transfers by 

estates of nonresident decedents 

who are not U.S. citizens.

deposits, or other property that 

would generally be treated as 

situated outside the United States if 

held directly by the estate.

Effective date.–In general, 

dividends with respect to taxable 

years of RICs beginning after 

December 31, 2004. With respect 

to the treatment of a RIC for estate 

tax purposes, estates of decedents 

dying after December 31, 2004. 

With respect to the treatment of 

RICs under section 897 (relating to 

U.S. real property interests), after 

December 31, 2004.

I. Taxation of Certain 

Settlement Funds (sec. 287 of the 

House bill)

The cleanup of hazardous waste 

sites is sometimes funded by 

environmental “settlement funds” 

or escrow accounts established in 

consent decrees between the 

Environmental Protection Agency 

and the settling parties under the 

jurisdiction of a Federal district 

court. In general, a payment to a 

designated settlement fund that 

extinguishes a tort liability of the 

taxpayer will result in a deduction 

to the taxpayer. A designated 

settlement fund means a fund 

which is established pursuant to a 

court order, extinguishes the 

Establishes that certain settlement 

funds are not subject to Federal 

income tax. 

To qualify, the settlement fund 

must be: (1) established pursuant to 

a consent decree entered by a judge 

of a Federal district court; (2) 

created for the receipt of settlement 

payments for the sole purpose of 

resolving claims under 

Comprehensive Environmental 

Response, Compensation and 

Liability Act of 1980; and (3) 

controlled (in terms of 

expenditures of contributions and 

No provision.
26

Provision Present Law House Bill Senate Amendment

taxpayer’s tort liability, is managed 

and controlled by persons unrelated 

to the taxpayer, and in which the 

taxpayer does not have a beneficial 

interest.

Present law provides that nothing 

in any provision of law is to be 

construed as providing that an 

escrow account, settlement fund, or 

similar fund is not subject to 

current income tax.

earnings thereon) by the 

government or an agency or 

instrumentality thereof. Also, upon 

termination, any remaining funds 

must be disbursed to such

government entity and used in 

accordance with applicable law.

Effective date.–Taxable years 

beginning after December 31, 

2004.

J. Expand Human Clinical Trial 

Expenses Qualifying for the 

Orphan Drug Tax Credit

(sec. 288 of the House bill)

Taxpayers may claim a 50-percent 

credit for expenses related to 

human clinical testing of drugs for 

the treatment of certain rare 

diseases and conditions. 

Qualifying expenses are those paid 

or incurred by the taxpayer after 

the date on which the drug is 

designated as a potential treatment 

for a rare disease or disorder by the 

Food and Drug Administration 

(“FDA”). 

Expands qualifying expenses to 

include those expenses related to 

human clinical testing paid or 

incurred after the date on which the 

taxpayer files an application with 

the FDA for designation of the 

drug as a potential treatment for a 

rare disease or disorder, if the drug 

receives FDA designation before 

the due date (including extensions) 

for filing the tax return for the 

taxable year in which the 

application was filed with the 

FDA. 

Effective date.–Expenditures paid 

or incurred after the date of 

enactment.

No provision.
27

Provision Present Law House Bill Senate Amendment

K. Modification of Excise Tax on 

Bows and Arrows (sec. 289 of 

House Bill and sec. 305 of the

Senate amendment)

An excise tax of 11 percent is 

imposed 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 which 

after its assembly is: (1) over 18 

inches long; or (2) 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).

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.

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.

Effective date.–Articles sold by the 

manufacturer, producer, or 

importer after December 31, 2004.

Same as the House bill except for 

effective date.

Effective date.−Articles sold by the 

manufacturer, producer, or 

importer after the date which is 30 

days after the date of enactment.

L. Repeal Excise Tax on Fishing 

Tackle Boxes (sec. 290 of the 

House bill)

A 10-percent manufacturer’s excise 

tax is imposed on specified sport 

fishing equipment. Examples of 

taxable equipment include fishing 

rods and poles, fishing reels, 

artificial bait, fishing lures, line and 

hooks, and fishing tackle boxes. 

Revenues from the excise tax on 

sport fishing equipment are 

deposited in the Sport Fishing 

Repeals the excise tax on fishing 

tackle boxes.

Effective date.–Articles sold by the 

manufacturer, producer, or 

importer after December 31, 2004.

No provision.
28

Provision Present Law House Bill Senate Amendment

Account of the Aquatic Resources 

Trust Fund. Monies in the fund are 

spent, subject to an existing 

permanent appropriation, to 

support Federal-State sport fish 

enhancement and safety programs.

M. Repeal of Excise Tax on 

Sonar Devices Suitable for 

Finding Fish (sec. 291 of the

House bill)

A 10-percent manufacturer’s excise 

tax generally is imposed on the sale 

of specified sport fishing 

equipment. However, a 3-percent 

rate applies to the sale of electric 

outboard motors and sonar devices 

suitable for finding fish. Further, 

the tax imposed on the sale of 

sonar devices suitable for finding 

fish 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.

Revenues from the excise tax on 

sport fishing equipment are 

deposited in the Sport Fishing 

Account of the Aquatic Resources 

Trust Fund. Monies in the fund are 

spent, subject to an existing 

permanent appropriation, to 

Repeals the excise tax on all sonar 

devices suitable for finding fish.

Effective date.–Articles sold by the 

manufacturer, producer, or 

importer after December 31, 2004.

No provision.
29

Provision Present Law House Bill Senate Amendment

support Federal-State sport fish 

enhancement and safety programs.

N. Income Tax Credit for Cost 

of Carrying Tax-Paid Distilled 

Spirits in Wholesale Inventories 

(sec. 292 of the House bill)

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 provided 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).

Creates a new income tax credit for 

eligible wholesale distributors of 

distilled spirits. An eligible 

wholesaler is any person who holds 

a permit under the Federal Alcohol 

Administration Act as a wholesaler 

of distilled spirits. 

The credit is calculated by 

multiplying the number of cases of 

bottled distilled spirits by the 

average tax-financing cost per case 

for the most recent calendar year 

ending before the beginning of the 

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 $22.83 per case of 12 750-

milliliter bottles. 

The credit only applies to 

domestically bottled distilled spirits 

purchased directly from the bottler 

of such spirits. The credit is in 

addition to present-law rules 

allowing tax included in inventory 

No provision.
30

Provision Present Law House Bill Senate Amendment

costs to be deducted as a cost of 

goods sold.

The credit cannot be carried back 

to a taxable year beginning before 

January 1, 2005.

Effective date.–Taxable years 

beginning after December 31, 

2004.

O. Suspension of Occupational 

Taxes Relating to Distilled 

Spirits, Wine, and Beer

(sec. 293 of the House bill)

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.

All wholesale or retail dealers in 

liquors, wine or beer are required 

to keep records of their 

transactions. There are penalties 

for failing to comply with the 

recordkeeping requirements.

The special occupational taxes on 

producers and marketers of 

alcoholic beverages are suspended 

for a three-year period, July 1, 

2004 through June 30, 2007. 

Present-law recordkeeping and 

registration requirements will 

continue to apply, notwithstanding 

the suspension of the special 

occupation taxes. In addition, 

during the suspension period, it 

shall be unlawful for any dealer to 

purchase distilled spirits for resale 

from any person other than a 

wholesale dealer in liquors who is 

subject to the recordkeeping 

requirements, except that a limited 

retail dealer may purchase distilled 

spirits for resale from a retail 

dealer in liquors, as permitted 

under present law. 

No provision.
31

Provision Present Law House Bill Senate Amendment

Effective date.–July 1, 2004.

P. Modification of Unrelated 

Business Income Limitation on 

Investment in Certain DebtFinanced Properties of Small 

Business Investment Companies 

(sec. 294 of the House bill and

sec. 642 of the Senate 

amendment)

Tax-exempt organizations that 

invest in small business investment 

companies (SBICs) that (1) are 

treated as partnerships, and (2) 

incur debt that is held or 

guaranteed by the Small Business 

Administration, may be subject to 

unrelated business income tax on 

their distributive shares of income 

from the small business investment 

company because of the debtfinanced property rules. 

Excludes from the debt-financed 

property rules indebtedness 

incurred by an SBIC that is 

evidenced by a debenture issued by 

the SBIC under section 303(a) of 

the Small Business Investment Act 

of 1958 and that is held or 

guaranteed by the Small Business 

Administration. The exclusion 

does not apply during any period 

that any exempt organization (other 

than a government) owns more 

than 25 percent of the SBIC, or 

exempt organizations (including 

governments other than the Federal 

government) own in the aggregate 

50 percent or more of the SBIC.

Effective date.–SBICs formed after 

the date of enactment.

Same as the House bill except: (1) 

does not provide limitations on 

SBIC ownership percentages held 

by exempt organizations; and (2) 

effective date.

Effective date.–Acquisitions of 

property made on or after the date 

of enactment.

Q. Election to Determine 

Taxable Income from Certain 

International Shipping Activities 

Using Per Ton Rate (sec. 295 of 

the House bill)

Generally, foreign corporations are 

taxed only on income, including 

income from shipping operations, 

which is “effectively connected” 

with the conduct of a U.S. trade or 

business. Such income generally is 

taxed in the same manner and at 

the same rates as the income of a 

U.S. corporation.

Generally allows corporations to 

elect a “tonnage tax” on their 

taxable income from certain 

shipping activities in lieu of the 

U.S. corporate income tax. Electing 

entities are only subject to tax at 

the maximum corporate income tax 

rate on a notional amount based on 

No provision.
32

Provision Present Law House Bill Senate Amendment

A four-percent tax is imposed on 

the amount of a foreign 

corporation’s U.S. gross 

transportation income, which 

includes income from the use (or 

hiring or leasing for use) of a 

vessel and income from services 

directly related to the use of a 

vessel. The tax does not apply, 

however, to U.S. gross 

transportation income that is 

treated as income effectively 

connected with the conduct of a 

U.S. trade or business. 

The taxes imposed on income from 

shipping operations may be limited 

by an applicable U.S. income tax 

treaty or by an exemption of a 

foreign corporation’s international 

shipping operations income in 

instances where a foreign country 

grants an equivalent exemption.

the net tonnage of a corporation’s 

qualifying vessels. 

No deductions are allowed against 

the taxable income of an electing 

corporation from qualifying 

shipping activities, and no credit is 

allowed against the tax imposed 

under the tonnage tax regime. No 

deduction is allowed for any net 

operating loss attributable to the 

qualifying shipping activities of a 

corporation.

No gain is generally recognized 

upon the disposition of qualifying 

shipping assets, except to the 

extent that the amount realized 

upon such sale or disposition 

exceeds the cost of the replacement 

qualifying shipping assets. 

Effective date.–Taxable years 

beginning after the date of 

enactment. 
33

Provision Present Law House Bill Senate Amendment

R. Charitable Contribution 

Deduction for Certain Expenses 

in Support of Native Alaskan 

Subsistence Whaling (sec. 296 of 

the House bill) 

In computing taxable income, a 

charitable contribution deduction 

generally is available for 

contributions made to a qualified 

charitable organization or a 

governmental entity. No charitable 

contribution deduction is allowed 

for traveling expenses incurred 

while away from home, whether 

paid directly or by reimbursement, 

unless there is no significant 

element of personal pleasure, 

recreation, or vacation in such 

travel, or for a contribution of 

services.

Provides a charitable contribution 

deduction for certain reasonable 

and necessary sanctioned whaling 

expenses incurred by an individual 

designated by the Alaska Whaling 

Commission as a whaling captain. 

Imposes certain substantiation 

requirements. Deduction is limited 

to $10,000 per year.

Effective date.–Contributions made 

after December 31, 2004.

No provision.
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Provision Present Law House Bill Senate Amendment

VIII. GENERAL PROVISIONS 

A. Modification to Qualified 

Small Issue Bonds (sec. 301 of the

Senate amendment)

Qualified small-issue bonds are 

used to finance private business 

manufacturing facilities or the 

acquisition of land and equipment 

by certain farmers. In general, no 

more than $1 million of small-issue 

bond financing may be outstanding 

at any time for property of a 

business in the same municipality 

or county. Generally, this $1 

million limit may be increased to 

$10 million if all other capital 

expenditures of the business in the 

same municipality or county over a 

six-year period are counted toward 

the limit. Other rules apply.

No provision. Increases the maximum allowable 

amount of total capital 

expenditures by an eligible 

business in the same municipality 

or county during the six-year 

period from $10 million to $20 

million. As under present law, no 

more than $10 million of bond 

financing may be outstanding at 

any time for property of an eligible 

business (including related parties) 

located in the same municipality or 

county. Other present-law limits 

continue to apply.

Effective date.–Bonds issued after 

the date of enactment.

B. Expensing of Investment in 

Broadband Equipment (sec. 302 

of the Senate amendment)

A taxpayer generally must 

capitalize the cost of property used 

in a trade or business and recover 

such cost over time through annual 

deductions for depreciation or 

amortization. Tangible property 

generally is depreciated under the 

Modified Accelerated Cost 

Recovery System (MACRS), 

which determines depreciation by 

applying specific recovery periods, 

placed-in-service conventions, and 

depreciation methods to the cost of 

No provision. Provides that expenses incurred by 

the taxpayer for qualified 

broadband expenditures during the 

twelve-month period following the 

date of enactment with respect to 

qualified equipment may be 

deducted in full in the year in 

which the equipment is placed in 

service.

Effective date.–Expenditures 

incurred after the date of enactment 
35

Provision Present Law House Bill Senate Amendment

various types of depreciable 

property. 

and before the date which is 12 

months after the date of enactment.

C. Exemption of Natural Aging 

Process in Determination of 

Production Period for Distilled 

Spirits Under Section 263A

(sec. 303 of the Senate 

amendment)

Taxpayers are required to 

capitalize direct costs and an 

allocable portion of indirect costs 

of production of real or tangible 

personal property. Interest paid or 

incurred during the production 

period of certain types of property 

that is allocable to the production 

of the property must be capitalized. 

For this purpose, the production 

period begins when production is 

commenced and ends when the 

property is ready to be placed in 

service or is ready to be held for 

sale. For example, in the case of 

property such as tobacco, wine, or 

whiskey that is aged before it is 

sold, the production period 

includes the aging period.

No provision. Provides that, in calculating 

interest capitalization under section 

263A(f), the production period for 

distilled spirits shall be determined 

without regard to any period 

allocated during the natural aging 

process. 

Effective date.–Production periods 

beginning after the date of 

enactment.

D. Modification of Active 

Business Definition Under 

Section 355 (sec. 304 of the 

Senate amendment)

One requirement for a corporation 

to distribute stock of a subsidiary 

to its shareholders without the 

recognition of any gain is that both 

the distributing and distributed 

corporation must meet a five-year 

“active business” test immediately 

after the distribution. For this 

purpose, a corporation that is not 

itself directly engaged in an active 

No provision. Provides that the active business 

test is applied, for each of the 

distributing and distributed 

corporations, by including the 

activities of the entire affiliated 

group (as defined) of which that 

corporation is the common parent 

immediately after the distribution. 
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Provision Present Law House Bill Senate Amendment

business will meet the test only if 

substantially all of its assets consist 

of stock and securities of a 

corporation it controls that is so 

engaged. 

Effective date.–Distributions after 

date of enactment with three 

exceptions. Unless the taxpayer 

elects otherwise, the provision does 

not apply to distributions: (1) made 

pursuant to an agreement that is 

binding on the date of enactment 

and at all times thereafter; (2) 

described in a ruling request 

submitted to the IRS on or before 

such date; or (3) described on or 

before such date in a public 

announcement of in a filing with 

the SEC.

Also applies to distributions prior 

to the date of enactment, solely for 

purposes of determining whether, 

after such date, the taxpayer 

continues to satisfy the active 

business requirement (e.g., in the 

case of a restructuring). 

E. Modification to Cooperative 

Marketing Rules to Include 

Value Added Processing 

Involving Animals (sec. 306 of 

the Senate amendment)

Cooperatives generally are treated 

similarly to pass-through entities in 

that the cooperative is not subject 

to corporate income tax to the 

extent the cooperative timely pays 

patronage dividends. Farmers’ 

cooperatives are tax-exempt and 

include cooperatives of farmers, 

fruit growers, and like 

organizations that are organized 

No provision. Provides that marketing products 

of members or other producers 

includes feeding products of 

members or other producers to 

cattle, hogs, fish, chickens, or other 

animals and selling the resulting 

animals or animal products.
37

Provision Present Law House Bill Senate Amendment

and operated on a cooperative basis 

for the purpose of marketing the 

products of members or other 

producers and remitting the 

proceeds of sales, less necessary 

marketing expenses, on the basis of 

either the quantity or the value of 

products furnished by them.

In determining whether a 

cooperative qualifies as a taxexempt farmers’ cooperative, the 

IRS apparently has taken the 

position that a cooperative is not 

marketing certain products of 

members or other producers if the 

cooperative adds value through the 

use of animals (e.g., farmers sell 

corn to a cooperative which is fed 

to chickens that produce eggs sold 

by the cooperative).

Effective date.–Taxable years 

beginning after the date of 

enactment.

F. Extension of Declaratory 

Judgment Procedures to 

Farmers’ Cooperative 

Organizations (sec. 307 of the 

Senate amendment)

In limited circumstances, 

declaratory judgment procedures 

generally permit a taxpayer to seek 

judicial review of an IRS 

determination prior to the issuance 

of a notice of deficiency and prior 

to payment of tax. Examples of 

available declaratory judgment 

procedures include disputes 

involving the initial or continuing 

classification of a tax-exempt 

organization, a private foundation, 

or a private operating foundation, 

No provision. Extends the declaratory judgment 

procedures to cooperatives. Such a 

case may be commenced in the 

U.S. Tax Court, a U.S. district 

court, or the U.S. Court of Federal 

Claims, and such court would have 

jurisdiction to determine a 

cooperative’s initial or continuing 

qualification as a farmers’ 

cooperative.

Effective date.–Pleadings filed 

after the date of enactment.
38

Provision Present Law House Bill Senate Amendment

the qualification of retirement 

plans, the value of gifts, the status 

of certain governmental 

obligations, or eligibility of an 

estate to pay tax in installments. In 

such cases, taxpayers may 

challenge adverse determinations 

by commencing a declaratory 

judgment action.

Declaratory judgment procedures 

are not available to a cooperative 

with respect to an IRS 

determination regarding its status 

as a farmers’ cooperative under 

section 521.

G. Temporary Suspension of 

Personal Holding Company Tax 

(sec 308 of the Senate 

amendment)

In addition to the regular corporate 

level tax, a tax at the maximum 

individual tax rate is imposed on 

undistributed “personal holding 

company” income. A corporation is 

subject to this tax if it meets 

specified ownership (generally, 

closely held) and income 

(generally, passive income) 

requirements. 

No provision. Temporarily repeals the personal 

holding company tax.

Effective date.–Taxable years 

beginning after December 31, 

2003, and before January 1, 2009.
39

Provision Present Law House Bill Senate Amendment

H. 5-year NOL Carryback for 

2003 NOLs if Taxpayer Elects 

Out of Bonus Depreciation as 

Modified; Extend Temporary 

Suspension of 90-Percent Limit 

on Minimum Tax NOLs (sec. 310 

of the Senate amendment)

In general, an NOL may be carried 

back two years and carried forward 

20 years to offset taxable income in 

such years. The Job Creation and 

Worker Assistance Act of 2002 

(“JCWAA”) provided a temporary 

extension of the general NOL 

carryback period to five years 

(from two years) for NOLs arising

in taxable years ending in 2001 and 

2002. 

The AMT rules provide that a 

taxpayer’s NOL deduction cannot 

reduce the taxpayer’s alternative 

minimum taxable income 

(“AMTI”) by more than 90 percent 

of the AMTI (determined without 

regard to the NOL deduction). 

JCWAA also provided that an 

NOL deduction attributable to 

NOL carrybacks arising in taxable 

years ending in 2001 and 2002, as 

well as NOL carryforwards to these 

taxable years, may offset 100 

percent of a taxpayer’s AMTI.

No provision. Extends the five-year carryback of 

NOLs to NOLs arising in taxable 

years ending in 2003, provided that 

the taxpayer elects out of bonus 

depreciation. 

Taxpayers with taxable years 

ending during January are 

permitted to apply the provision to 

tax years ending during January 

2004 rather than tax years ending 

during January 2003. 

Also allows an NOL deduction 

attributable to NOL carrybacks 

arising in taxable years ending in 

2003, as well as NOL 

carryforwards to these taxable 

years, to offset 100 percent of a 

taxpayer’s AMTI.

Includes technical corrections to 

the NOL provisions of JCWAA.

Effective date.–Net operating 

losses for taxable years ending 

after December 31, 2002.

I. Manufacturers’ Jobs Credit 

for Employing TAA Certified 

Employees (sec. 313 of the Senate 

amendment)

There is no specific tax credit to 

businesses for employing TAAcertified employees.

No provision. Provides a tax credit to businesses 

for a portion of the wages they pay 

to an eligible TAA recipient.
40

Provision Present Law House Bill Senate Amendment

Effective date.–Taxable years 

beginning after December 31, 2003 

and prior to January 1, 2006.

J. Qualified Green Building and 

Sustainable Design Project 

Bonds (sec. 314 of the Senate 

amendment)

In certain circumstances, States or 

local governments are permitted to 

act as conduits providing taxexempt financing for private 

activities. In most cases, annual 

volume caps restrict the aggregate 

volume of tax-exempt private 

activity bonds that may be issued 

in a State. States or local 

governments may issue tax-exempt 

“exempt-facility bonds” to finance 

property for certain private 

businesses.

No provision. Authorizes the issuance of 

“qualified green building and 

sustainable design project bonds” 

between December 31, 2004 and 

October 1, 2009. Property eligible 

for financing with these bonds 

includes any project designated by 

Treasury, after consultation with 

the Environmental Protection 

Agency (“EPA”), as a green 

building and sustainable design 

project that meets certain 

requirements relating to project 

size, design, location, and State 

and/or local government financial 

contribution. Of the projects 

designated, at least one of the 

projects must be located in, or 

within a 10-mile radius of, an 

empowerment zone and at least one 

of the projects must be located in a 

“rural State.”

Qualified green building and 

sustainable design project bonds 

are not subject to the State taxexempt private activity bond 

volume cap. Instead, Treasury may 

allocate authority to issue qualified 
41

Provision Present Law House Bill Senate Amendment

green building and sustainable 

design project bonds up to an 

aggregate total of $2 billion for all

projects for the period between 

December 31, 2004 and October 1, 

2009.

Effective date.−Bonds issued after 

December 31, 2004.

K. Special Rules for Certain 

Film and Television Production

(sec. 321 of the Senate 

amendment)

The cost of a film, videotape, or 

similar property that is produced by 

a taxpayer may not be recovered 

under either the MACRS 

depreciation provisions or the 

section 197 amortization 

provisions. Instead, the cost 

recovery of such property is 

determined using the straight-line 

method. In addition, the cost of 

motion picture films, sound 

recordings, copyrights, books, and 

patents is eligible to be recovered 

using the income forecast method 

of depreciation.

No provision. Provides an election to deduct up 

to $15 million per production of 

qualifying film and television 

production expenditures in the year 

the expenditure is incurred. The 

limit is increased to $20 million if a 

significant amount of the 

expenditures are incurred in certain 

distressed areas. Expenditures in 

excess of the limit must be 

recovered over a three-year period 

using the straight-line method 

beginning in the month such 

property is placed in service.

A qualified film or television 

production is defined as any 

production of a motion picture, 

miniseries, scripted dramatic 

television episode, or movie of the 

week, provided at least 75 percent 

of the total compensation expended 

on the production are for services 
42

Provision Present Law House Bill Senate Amendment

performed in the United States. 

With respect to property that is one 

or more episodes in a television 

series, only the first 44 episodes 

qualify for the election.

Effective date.–Qualifying 

productions started after the date of 

enactment, with a sunset for 

productions commencing after 

December 31, 2008.

L. Modification of Application 

of the Income Forecast Method 

of Depreciation (sec. 322 of the

Senate amendment)

The cost of motion picture films, 

sound recordings, copyrights, 

books, and patents is eligible to be 

recovered using the income 

forecast method of depreciation. 

Under the income forecast method, 

a property’s depreciation deduction 

for a taxable year is determined by 

multiplying the adjusted basis of 

the property by a fraction, the 

numerator of which is the income 

generated by the property during 

the year and the denominator of 

which is the total forecasted or 

estimated income expected to be 

generated prior to the close of the 

tenth taxable year after the year the 

property was placed in service. 

Any costs that are not recovered by 

the end of the tenth taxable year 

after the property was placed in 

No provision. Clarifies that, for purposes of the 

income forecast method, 

participations and residuals may be 

included in the adjusted basis of 

the property beginning in the year 

such property is placed in service, 

but only if such participations and 

residuals relate to income to be 

derived from the property before 

the close of the tenth taxable year 

following the year the property is 

placed in service. Participations 

and residuals are defined as costs 

the amount of which, by contract, 

varies with the amount of income 

earned in connection with such 

property.

Also clarifies that the income from 

the property to be taken into 

account is the gross income from 
43

Provision Present Law House Bill Senate Amendment

service may be taken into account 

as depreciation in such year. 

The adjusted basis of property that 

may be taken into account under 

the income forecast method only 

includes amounts that satisfy the 

economic performance standard of 

section 461(h).

such property, not reduced by 

distribution costs.

Grants authority to Treasury to 

prescribe appropriate adjustments 

to the basis of property to reflect 

the treatment of participations and 

residuals under the provision. 

Clarifies that, rather than 

accounting for participations and 

residuals as a cost of the property 

under the income forecast method 

of depreciation, the taxpayer may 

choose to deduct those payments as 

they are paid. 

Effective date.–Property placed in 

service after the date of enactment.