General Explanations 

of the 

Administration’s Fiscal Year 2012 

Revenue Proposals 

Department of the Treasury 

February 2011 

 

 

General Explanations 

of the 

Administration’s Fiscal Year 2012 

Revenue Proposals 

Department of the Treasury 

February 2011

This document is available in Adobe Acrobat format on the Internet at: 

http://www.treas.gov/offices/tax-policy/library/greenbk12.pdf

The free Adobe Acrobat Reader is available at: http://get.adobe.com/reader

1

 The Administration’s policy proposals reflect changes from a tax baseline that modifies the Budget Enforcement 

Act baseline by permanently extending alternative minimum tax relief, freezing the estate tax at 2009 levels, and 

making permanent a number of the tax cuts enacted in 2001 and 2003. These baseline changes are described in the 

modified PAYGO baseline section. 

TABLE OF CONTENTS1 

TAX CUTS FOR FAMILIES AND INDIVIDUALS ................................................................................................ 1

Provide $250 Refundable Tax Credit for Federal, State and Local Government Retirees not Eligible for 

Social Security ............................................................................................................................................ 1

Extend the Earned Income Tax Credit (EITC) for Larger Families .................................................................. 2

Expand the Child and Dependent Care Tax Credit ............................................................................................ 4

 Provide for Automatic Enrollment in Individual Retirement Accounts or Annuities (IRAs) and Double the 

Tax Credit for Small Employer Plan Startup Costs ......................................................................................... 5

Extend American Opportunity Tax Credit (AOTC) ............................................................................................ 8

Provide Exclusion from Income for Certain Student Loan Forgiveness .......................................................... 10

Tax Qualified Dividends and Net Long-Term Capital Gains at a 20-Percent Rate for Upper-Income 

Taxpayers .................................................................................................................................................. 11

TAX CUTS FOR BUSINESSES .............................................................................................................................. 12

Eliminate Capital Gains Taxation on Investments in Small Business Stock .................................................... 12

Enhance and Make Permanent the Research and Experimentation (R&E) Tax Credit ................................... 14

Provide Additional Tax Credits for Investment in Qualified Property Used in a Qualifying Advanced 

Energy Manufacturing Project (“48C”) ................................................................................................... 15

Provide Tax Credit for Energy-Efficient Commercial Building Property Expenditures in Place of Existing 

Tax Deduction ........................................................................................................................................... 17

 INCENTIVES TO PROMOTE REGIONAL GROWTH ..................................................................................... 19

Extend and Modify the New Markets Tax Credit (NMTC) ............................................................................... 19

Reform and Extend Build America Bonds ........................................................................................................ 20

Low-Income Housing Tax Credit (LIHTC) Provisions .......................................................................................... 22

Encourage Mixed-Income Occupancy by Allowing LIHTC-Supported Projects to Elect an AverageIncome Criterion ....................................................................................................................................... 22

Provide 30-Percent Basis “Boost” to Properties that Receive Tax-Exempt Bond Financing ......................... 23

Designate Growth Zones .................................................................................................................................. 25

Restructure Assistance to New York City: Provide Tax Incentives for Transportation Infrastructure ............ 30

CONTINUE CERTAIN EXPIRING PROVISIONS THROUGH CALENDAR YEAR 2012 ........................... 32

OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS ......................................................................... 33

Reform Treatment of Financial Institutions and Products ...................................................................................... 33

Impose a Financial Crisis Responsibility Fee .................................................................................................. 33

Require Accrual of Income on Forward Sale of Corporate Stock .................................................................... 35

Require Ordinary Treatment of Income from Day-to-Day Dealer Activities for Certain Dealers of Equity 

Options and Commodities ......................................................................................................................... 36

Modify the Definition of “Control” for Purposes of Section 249 of the Internal Revenue Code ..................... 37

Reinstate Superfund Taxes ..................................................................................................................................... 38

Reinstate Superfund Excise Taxes .................................................................................................................... 38

Reinstate Superfund Environmental Income Tax ............................................................................................. 39

Reform U.S. International Tax System ................................................................................................................... 40

Defer Deduction of Interest Expense Related to Deferred Income .................................................................. 40

Determine the Foreign Tax Credit on a Pooling Basis .................................................................................... 42

Tax Currently Excess Returns Associated with Transfers of Intangibles Offshore .......................................... 43

Limit Shifting of Income Through Intangible Property Transfers .................................................................... 45

Disallow the Deduction for Non-Taxed Reinsurance Premiums Paid to Affiliates .......................................... 46

Limit Earnings Stripping by Expatriated Entities ............................................................................................ 47

Modify the Tax Rules for Dual Capacity Taxpayers ........................................................................................ 49

Reform Treatment of Insurance Companies and Products...................................................................................... 51

Modify Rules that Apply to Sales of Life Insurance Contracts ......................................................................... 51

Modify Dividends-Received Deduction (DRD) for Life Insurance Company Separate Accounts .................... 52
ii 

Expand Pro Rata Interest Expense Disallowance for Corporate-Owed Life Insurance ................................. 54

Miscellaneous Changes........................................................................................................................................... 56

Increase the Oil Spill Liability Trust Fund Financing Rate by One Cent ........................................................ 56

Make Unemployment Insurance Surtax Permanent ......................................................................................... 57

Provide Short-Term Tax Relief to Employers and Expand Federal Unemployment Tax Act (FUTA) Base .... 58

Repeal Last-In, First-Out (LIFO) Method of Accounting for Inventories ........................................................ 59

Repeal Gain Limitation for Dividends Received in Reorganization Exchanges .............................................. 60

Tax Carried (Profits) Interests in Investment Partnerships as Ordinary Income ............................................ 61

Deny Deduction for Punitive Damages ............................................................................................................ 63

Repeal Lower-Of-Cost-Or-Market (LCM) Inventory Accounting Method ....................................................... 64

ELIMINATE FOSSIL-FUEL PREFERENCES ..................................................................................................... 65

Eliminate Oil and Gas Preferences ......................................................................................................................... 65

Repeal Enhanced Oil Recovery (EOR) Credit ................................................................................................. 65

Repeal Credit for Oil and Gas Produced from Marginal Wells ....................................................................... 66

Repeal Expensing of Intangible Drilling Costs (IDCs) .................................................................................... 67

Repeal Deduction for Tertiary Injectants ......................................................................................................... 69

Repeal Exception to Passive Loss Limitation for Working Interests in Oil and Natural Gas Properties ........ 70

Repeal Percentage Depletion for Oil and Natural Gas Wells .......................................................................... 71

Repeal Domestic Manufacturing Deduction for Oil and Natural Gas Companies .......................................... 73

Increase Geological and Geophysical Amortization Period for Independent Producers to Seven Years ........ 74

Eliminate Coal Preferences ..................................................................................................................................... 75

Repeal Expensing of Exploration and Development Costs .............................................................................. 75

Repeal Percentage Depletion for Hard Mineral Fossil Fuels.......................................................................... 77

Repeal Capital Gains Treatment for Royalties ................................................................................................ 79

Repeal Domestic Manufacturing Deduction for Coal and Other Hard Mineral Fossil Fuels ......................... 80

SIMPLIFY THE TAX CODE .................................................................................................................................. 81

Allow Vehicle Seller to Claim Qualified Plug-In Electric-Drive Motor Vehicle Credit .................................. 81

Eliminate Minimum Required Distribution (MRD) Rules for Individual Retirement Accounts or Annuity 

(IRA)/PLAN Balances of $50,000 of Less ................................................................................................. 83

Allow all Inherited Plan and Individual Retirement Account or Annuity (IRA) Balances to be Rolled Over 

Within 60 Days .......................................................................................................................................... 85

Clarify Exception to Recapture of Unrecognized Gain on Sale of Stock to an Employee Stock Ownership 

Plan (ESOP) .............................................................................................................................................. 87

Repeal Non-Qualified Preferred Stock (NQPS) Designation ........................................................................... 88

Revise and Simplify the "Fractions Rule" ........................................................................................................ 89

Repeal Preferential Dividend Rule for Publicly Traded Real Estate Investment Trusts (REITS) .................... 91

Reform Excise Tax Based on Investment Income of Private Foundations ....................................................... 92

Simplify Tax-Exempt Bonds .................................................................................................................................. 93

Simplify Arbitrage Investment Restrictions ...................................................................................................... 93

Simplify Single-Family Housing Mortgage Bond Targeting Requirements ..................................................... 95

Streamline Private Business Limits on Governmental Bonds .......................................................................... 96

REDUCE THE TAX GAP AND MAKE REFORMS. ........................................................................................... 97

Expand Information Reporting ............................................................................................................................... 97

Repeal and Modify Information Reporting on Payments to Corporations and Payments for Property ........... 97

Require Information Reporting for Private Separate Accounts of Life Insurance Companies ........................ 98

Require a Certified Taxpayer Identification Number (TIN) from Contractors and Allow Certain 

Withholding ............................................................................................................................................... 99

Improve Compliance by Businesses ..................................................................................................................... 100

Require Greater Electronic Filing of Returns ................................................................................................ 100

Authorize the Department of the Treasury to Require Additional Information to be Included in 

Electronically Filed Form 5500 Annual Reports .................................................................................... 102

Implement Standards Clarifying when Employee Leasing Companies Can Be Held Liable for Their 

Clients’ Federal Employment Taxes ....................................................................................................... 103

Increase Certainty with Respect to Worker Classification ............................................................................. 105
iii 

Repeal Special Estimated Tax Payment Provision for Certain Insurance Companies .................................. 108

Eliminate Special Rules Modifying the Amount of Estimated Tax Payments by Corporations ...................... 110

Strengthen Tax Administration ............................................................................................................................. 111

Revise Offer-In-Compromise Application Rules ............................................................................................ 111

Expand Internal Revenue Service (IRS) Access to Information in the National Directory of New Hires for 

Tax Administration Purposes .................................................................................................................. 112

Make Repeated Willful Failure to File a Tax Return a Felony ...................................................................... 113

Facilitate Tax Compliance with Local Jurisdictions ...................................................................................... 114

Extend Statute of Limitations where State Adjustment Affects Federal Tax Liability .................................... 115

Improve Investigative Disclosure Statute ....................................................................................................... 117

Require Taxpayers who Prepare Their Returns Electronically but File Their Returns on Paper to Print 

Their Returns with a 2-D Bar Code ........................................................................................................ 118

Require Prisons Located in the U.S. to Provide Information to the Internal Revenue Service (IRS) ............. 119

Allow the Internal Revenue Service (IRS) to Absorb Credit and Debit Card Processing Fees for Certain 

Tax Payments .......................................................................................................................................... 120

Expand Penalties ................................................................................................................................................... 121

Impose a Penalty on Failure to Comply with Electronic Filing Requirements .............................................. 121

Increase Penalty Imposed on Paid Preparers who Fail to Comply with Earned Income Tax Credit (EITC) 

Due Diligence Requirements ................................................................................................................... 122

Modify Estate and Gift Tax Valuation Discounts and Make Other Reforms ....................................................... 123

Make Permanent the Portability of Unused Exemption Between Spouses ..................................................... 123

Require Consistency in Value for Transfer and Income Tax Purposes .......................................................... 125

Modify Rules on Valuation Discounts ............................................................................................................ 127

Require a Minimum Term for Grantor Retained Annuity Trusts (GRATs) .................................................... 128

Limit Duration of Generation-Skipping Transfer (GST) Tax Exemption ....................................................... 129

UPPER-INCOME TAX PROVISION ................................................................................................................... 131

 Reduce the Value of Certain Tax Expenditures ............................................................................................. 131

USER FEES ............................................................................................................................................................. 133

Reform Inland Waterways Funding ............................................................................................................... 133

OTHER INITIATIVES ........................................................................................................................................... 134

 Allow Offset of Federal Income Tax Refunds to Collect Delinquent State Income Taxes for Out-of-State 

Residents ...................................................................................................................................................... 134

Authorize the Limited Sharing of Business Tax Return Information to Improve the Accuracy of Important 

Measures of our Economy ....................................................................................................................... 135

Eliminate Certain Reviews Conducted by the U.S. Treasury Inspector General for Tax Administration 

(TIGTA) ................................................................................................................................................... 137

Modify Indexing to Prevent Deflationary Adjustments .................................................................................. 138

PROGRAM INTEGRITY INITIATIVES ............................................................................................................ 139

Increase Levy Authority for Payments to Federal Contractors with Delinquent Tax Debt ........................... 139

Increase Levy Authority for Payments to Medicare Providers with Delinquent Tax Debt ............................ 140

MODIFIED PAY-AS-YOU-GO (PAYGO) BASELINE ...................................................................................... 141

TABLES OF REVENUE ESTIMATES ................................................................................................................ 145

1 

TAX CUTS FOR FAMILIES AND INDIVIDUALS

PROVIDE $250 REFUNDABLE TAX CREDIT FOR FEDERAL, STATE AND LOCAL 

GOVERNMENT RETIREES NOT ELIGIBLE FOR SOCIAL SECURITY 

Current Law

The American Recovery and Reinvestment Act of 2009 (ARRA) provided a one-time $250 

payment for certain retirees and a $250 refundable tax credit for recipients of government 

pensions who were not eligible for the $250 payments. 

Economic Recovery Payments: A $250 Economic Recovery Payment was made in 2009 to each 

adult who was eligible ($500 to a married couple filing jointly where both spouses were eligible) 

for Social Security benefits, Railroad Retirement benefits, veterans benefits, or Supplemental 

Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid 

institution). Only individuals eligible to receive at least one of these benefits in the three-month 

period prior to February 2009 were eligible for an Economic Recovery Payment. Individuals 

received only one Economic Recovery Payment even if they were eligible for more than one 

type of benefit. 

Special Tax Credit for Certain Government Retirees: Federal, State and local government 

retirees who received a pension or annuity from work not covered by Social Security and who 

were not eligible to receive an Economic Recovery Payment were entitled to claim a $250 

refundable income tax credit ($500 for a married couple filing jointly where both spouses were 

eligible) for 2009. 

Reasons for Change

Another Administration proposal would provide a $250 special payment in 2011 to each adult 

who is eligible ($500 to a married couple filing jointly where both spouses are eligible) for 

Social Security benefits, Railroad Retirement benefits, veterans benefits, or Supplemental 

Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid 

institution). The special tax credit is intended to provide similar economic assistance to Federal, 

State and local government workers who are not eligible for Social Security benefits and who are 

not eligible to receive the $250 special payment. 

Proposal

The proposal would provide a $250 refundable tax credit in 2011 to Federal, State, and local 

government retirees who are not eligible for Social Security benefits and who are not eligible to 

receive the $250 special payment ($500 for a married couple filing jointly where both spouses 

would be eligible for the credit). 

The proposal would be effective as of the date of enactment. 
2 

EXTEND THE EARNED INCOME TAX CREDIT (EITC) FOR LARGER FAMILIES 

Current Law

Low and moderate-income workers may be eligible for a refundable EITC. Eligibility for the 

EITC is based on the presence and number of qualifying children in the worker’s household, 

adjusted gross income (AGI), earned income, investment income, filing status, age, and 

immigration and work status in the United States. The amount of the EITC is based on the 

presence and number of qualifying children in the worker’s household, AGI, earned income, and 

filing status. 

The EITC has a phase-in range (where each additional dollar of earned income results in a larger 

credit), a maximum range (where additional dollars of earned income or AGI have no effect on 

the size of the credit), and a phase-out range (where each additional dollar of the larger of earned 

income or AGI results in a smaller total credit). The EITC for childless workers is much smaller 

and phases out at a lower income level than does the EITC for workers with qualifying children. 

The EITC generally phases in at a faster rate for workers with more qualifying children, resulting 

in a larger maximum credit and a longer phase-out range. Prior to the enactment of the 

American Recovery and Reinvestment Act (ARRA), the credit reached its maximum at two or 

more qualifying children. ARRA increased the phase-in rate for families with three or more 

qualifying children through 2010. The Tax Relief, Unemployment Insurance Reauthorization 

and Job Creation Act of 2010 extended this provision through 2012. After 2012, workers with 

three or more qualifying children will receive the same EITC as similarly situated workers with 

two qualifying children. 

The phase-out range for joint filers begins at a higher income level than for an individual with 

the same number of qualifying children who files as a single filer or as a head of household. The 

width of the phase-in range and the beginning of the phase-out range are indexed for inflation. 

Hence, the maximum amount of the credit and the end of the phase-out range are effectively 

indexed. The following chart summarizes the EITC parameters for 2011. 

Childless

Taxpayers

Taxpayers with Qualifying Children

One Child Two Children Three or More

Phase-in rate 7.65% 34.00% 40.00% 45.00%

Minimum earnings 

for maximum credit $6,070 $9,100 $12,780 $12,780

Maximum credit $464 $3,094 $5,112 $5,751

Phase-out rate 7.65% 15.98% 21.06% 21.06%

Phase-out begins $7,590

($12,670 joint)

$16,690

($21,770 joint)

$16,690

($21,770 joint)

$16,690

($21,770 joint)

Phase-out ends $13,660

($18,740 joint)

$36,052

($41,132 joint)

$40,964

($46,044 joint)

$43,998

($49,078 joint)

To be eligible for the EITC, workers must have no more than $3,150 of investment income. 

(This amount is indexed for inflation.) 
3 

 

Reasons for Change

Families with more children face larger expenses related to raising their children than families 

with fewer children and as a result tend to have higher poverty rates. The steeper phase-in rate 

and larger maximum credit for workers with three or more qualifying children helps workers 

with larger families meet their expenses while maintaining work incentives. 

Proposal

The proposal would make permanent the expansion of the EITC for workers with three or more 

qualifying children. Specifically, the phase-in rate of the EITC for workers with three or more 

qualifying children would be maintained at 45 percent, resulting in a higher maximum credit 

amount and a longer phase-out range. 

The proposal would be effective for taxable years beginning after December 31, 2012. 
4 

EXPAND THE CHILD AND DEPENDENT CARE TAX CREDIT 

Current Law

In 2011, taxpayers with child or dependent care expenses who are working or looking for work 

are eligible for a nonrefundable tax credit that partially offsets these expenses. Married couples 

are eligible only if they file a joint return and either both spouses are working or looking for 

work, or if one spouse is working or looking for work and the other is attending school full-time. 

To qualify for this benefit, the child and dependent care expenses must be for either (1) a child 

under age thirteen when the care was provided or (2) a disabled dependent of any age with the 

same place of abode as the taxpayer. Any allowable credit is reduced by the aggregate amount 

excluded from income under an employer-provided dependent care assistance program. 

Eligible taxpayers may claim the credit for up to 35 percent of up to $3,000 in eligible expenses 

for one child or dependent and up to $6,000 in eligible expenses for more than one child or 

dependent. The percentage of expenses for which a credit may be taken decreases by 1 

percentage point for every $2,000 (or part thereof) of adjusted gross income (AGI) over $15,000 

until the percentage of expenses reaches 20 percent (at incomes above $43,000). There are no 

further income limits. The phase-down point and the amount of expenses eligible for the credit 

are not indexed for inflation. 

Reasons for Change

Access to affordable child care is a barrier to employment or further schooling for some 

individuals. Assistance to individuals with child and dependent care expenses increases the 

ability of individuals to participate in the labor force or in education programs. 

Proposal

The proposal would permanently increase from $15,000 to $75,000 the AGI level at which the 

credit begins to phase down. The percentage of expenses for which a credit may be taken would 

decrease at a rate of 1 percentage point for every $2,000 (or part thereof) of AGI over $75,000 

until the percentage reached 20 percent (at incomes above $103,000). As under current law, 

there would be no further income limits and the phase-down point and the amount of expenses 

eligible for the credit would not be indexed for inflation. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
5 

PROVIDE FOR AUTOMATIC ENROLLMENT IN INDIVIDUAL RETIREMENT 

ACCOUNTS OR ANNUITIES (IRAS) AND DOUBLE THE TAX CREDIT FOR SMALL 

EMPLOYER PLAN STARTUP COSTS 

Current Law 

A number of tax-preferred, employer-sponsored retirement savings programs exist under current 

law. These include section 401(k) cash or deferred arrangements, section 403(b) programs for 

public schools and charitable organizations, section 457 plans for governments and nonprofit 

organizations, and simplified employee pensions (SEPs) and SIMPLE plans for small employers. 

Small employers (those with no more than 100 employees) that adopt a new qualified retirement, 

SEP or SIMPLE plan are entitled to a temporary business tax credit equal to 50 percent of the 

employer’s plan “startup costs,” which are the expenses of establishing or administering the plan, 

including expenses of retirement-related employee education with respect to the plan. The credit 

is limited to a maximum of $500 per year for three years. 

Individuals who do not have access to an employer-sponsored retirement savings arrangement 

may be eligible to make smaller tax-favored contributions to IRAs. 

In 2011, IRA contributions are limited to $5,000 a year (plus $1,000 for those age 50 or older). 

Section 401(k) plans permit contributions (employee plus employer contributions) of up to 

$49,000 a year (of which $16,500 can be pre-tax employee contributions) plus $5,500 of 

additional pre-tax employee contributions for those age 50 or older. 

Reasons for Change

For many years, until the recent economic downturn, the personal saving rate in the United 

States has been exceedingly low, and tens of millions of U.S. households have not placed 

themselves on a path to become financially prepared for retirement. In addition, the proportion 

of U.S. workers participating in employer-sponsored plans has remained stagnant for decades at 

no more than about half the total work force, notwithstanding repeated private- and public-sector 

efforts to expand coverage. Among employees eligible to participate in an employer-sponsored 

retirement savings plan such as a 401(k) plan, participation rates typically have ranged from twothirds to three-quarters of eligible employees, but making saving easier by making it automatic 

has been shown to be remarkably effective at boosting participation. 

Beginning in 1998, Treasury and the Internal Revenue Service (IRS) issued a series of rulings 

and other guidance (most recently in September 2009) defining, permitting, and encouraging 

automatic enrollment in 401(k) and other plans (i.e., enrolling employees by default unless they 

opt out). Automatic enrollment was further facilitated by the Pension Protection Act of 2006. In 

401(k) plans, automatic enrollment has tended to increase participation rates to more than nine 

out of ten eligible employees. In contrast, for workers who lack access to a retirement plan at 

their workplace and are eligible to engage in tax-favored retirement saving by taking the 

initiative and making the decisions required to establish and contribute to an IRA, the IRA 

participation rate tends to be less than one out of ten. 

 
6 

Numerous employers, especially those with smaller or lower-wage work forces, have been 

reluctant to adopt a retirement plan for their employees, in part out of concern about their ability 

to afford the cost of making employer contributions or the per-capita cost of complying with taxqualification and ERISA (Employee Retirement Income Security Act) requirements. These 

employers could help their employees save -- without employer contributions or plan 

qualification or ERISA compliance -- simply by making their payroll systems available as a 

conduit for regularly transmitting employee contributions to an employee’s IRA. Such “payroll 

deduction IRAs” could build on the success of workplace-based payroll-deduction saving by 

using the capacity to promote saving that is inherent in employer payroll systems, and the effort 

to help employees save would be especially effective if automatic enrollment were used. 

However, despite efforts more than a decade ago by the Department of the Treasury, the IRS, 

and the Department of Labor to approve and promote the option of payroll deduction IRAs, few 

employers have adopted them or even are aware that this option exists. 

Accordingly, requiring employers that do not sponsor any retirement plan (and meet other 

criteria such as being above a certain size) to make their payroll systems available to employees 

and automatically enroll them in IRAs could achieve a major breakthrough in retirement savings 

coverage. In addition, requiring automatic IRAs may lead many employers to take the next step 

and adopt an employer plan, thereby permitting much greater tax-favored employee 

contributions than an IRA, plus the option of employer contributions. The potential for the use 

of automatic IRAs to lead to the adoption of 401(k) s, SIMPLEs, and other employer plans 

would be enhanced by raising the existing small employer tax credit for the startup costs of 

adopting a new retirement plan to an amount significantly higher than both its current level and 

the level of the proposed new automatic IRA tax credit for employers. 

In addition, the process of saving and choosing investments in automatic IRAs could be 

simplified for employees, and costs minimized, through a standard default investment as well as 

electronic information and fund transfers. Workplace retirement savings arrangements made 

accessible to most workers also could be used as a platform to provide and promote retirement 

distributions over the worker’s lifetime. 

Proposal

The proposal would require employers in business for at least two years that have more than ten 

employees to offer an automatic IRA option to employees, under which regular contributions 

would be made to an IRA on a payroll-deduction basis. If the employer sponsored a qualified 

retirement plan, SEP, or SIMPLE for its employees, it would not be required to provide an 

automatic IRA option for its employees. Thus, for example, a qualified plan sponsor would not 

have to offer automatic IRAs to employees it excludes from qualified plan eligibility because 

they are covered by a collective bargaining agreement, under age eighteen, nonresident aliens, or 

have not completed the plan’s eligibility waiting period. However, if the qualified plan excluded 

from eligibility a portion of the employer’s work force or a class of employees such as all 

employees of a subsidiary or division, the employer would be required to offer the automatic 

IRA option to those excluded employees. 

The employer offering automatic IRAs would give employees a standard notice and election 

form informing them of the automatic IRA option and allowing them to elect to participate or opt 
7 

out. Any employee who did not provide a written participation election would be enrolled at a 

default rate of three percent of the employee’s compensation in an IRA. Employees could opt 

out or opt for a lower or higher contribution rate up to the IRA dollar limits. Employees could 

choose either a traditional IRA or a Roth IRA, with Roth being the default. For most employees, 

the payroll deductions would be made by direct deposit similar to the direct deposit of 

employees’ paychecks to their accounts at financial institutions. 

Payroll-deduction contributions from all participating employees could be transferred, at the 

employer’s option, to a single private-sector IRA trustee or custodian designated by the 

employer. Alternatively, the employer, if it preferred, could allow each participating employee 

to designate the IRA provider for that employee’s contributions or could designate that all 

contributions would be forwarded to a savings vehicle specified by statute or regulation. 

 

Employers making payroll deduction IRAs available would not have to choose or arrange default 

investments. Instead, a low-cost, standard type of default investment and a handful of standard, 

low-cost investment alternatives would be prescribed by statute or regulation. In addition, this 

approach would involve no employer contributions, no employer compliance with qualified plan 

requirements, and no employer liability or responsibility for determining employee eligibility to 

make tax-favored IRA contributions or for opening IRAs for employees. A national web site 

would provide information and basic educational material regarding saving and investing for 

retirement, including IRA eligibility, but, as under current law, individuals (not employers) 

would bear ultimate responsibility for determining their IRA eligibility. 

Contributions by employees to automatic IRAs would qualify for the saver’s credit to the extent 

the contributor and the contributions otherwise qualified. 

Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs 

available to employees. The amount of the credit for a year would be $25 per enrolled employee 

up to $250, and the credit would be available for two years. The credit would be available both 

to employers required to offer automatic IRAs and employers not required to do so (for example, 

because they have ten or fewer employees). 

In conjunction with the automatic IRA proposal, to encourage employers not currently 

sponsoring a qualified retirement plan, SEP, or SIMPLE to do so, the “startup costs” tax credit 

for a small employer that adopts a new qualified retirement, SEP, or SIMPLE plan would be 

doubled from the current maximum of $500 per year for three years to a maximum of $1,000 per 

year for three years. This expanded “startup costs” credit for small employers, like the current 

“startup costs” credit, would not apply to automatic or other payroll deduction IRAs. The 

expanded credit would encourage small employers that would otherwise adopt an automatic IRA 

to adopt a new 401(k), SIMPLE, or other employer plan instead, while also encouraging other 

small employers to adopt a new employer plan. 

The proposal would become effective after December 31, 2012. 
8 

EXTEND THE AMERICAN OPPORTUNITY TAX CREDIT (AOTC) 

Current Law

Prior to enactment of the American Recovery and Reinvestment Act of 2009 (ARRA) an 

individual taxpayer could claim a nonrefundable Hope Scholarship credit for 100 percent of the 

first $1,200 and 50 percent of the next $1,200 in qualified tuition and related expenses (for a 

maximum credit of $1,800) per student. The Hope Scholarship credit was available only for the 

first two years of postsecondary education. 

Alternatively, a taxpayer could claim a nonrefundable Lifetime Learning Credit (LLC) for 20 

percent of up to $10,000 in qualified tuition and related expenses (for a maximum credit of 

$2,000) per taxpayer. Both the Hope Scholarship credit and LLC were phased out in 2009 

between $50,000 and $60,000 of adjusted gross income ($100,000 and $120,000 if married filing 

jointly). In addition, through 2009, a taxpayer could claim an above-the-line deduction for 

qualified tuition and related expenses. The maximum amount of the deduction was $4,000. 

ARRA created the AOTC to replace the Hope Scholarship credit for taxable years 2009 and 

2010. The Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010 extended 

the AOTC to taxable years 2011 and 2012. The AOTC is partially refundable, has a higher 

maximum credit amount, is available for the first four years of postsecondary education, and has 

higher income phase-out limits. 

The AOTC equals 100 percent of the first $2,000, plus 25 percent of the next $2,000, of qualified 

tuition and related expenses (for a maximum credit of $2,500). For the AOTC, the definition of 

related expenses was expanded to include course materials. Forty percent of the otherwise 

allowable AOTC is refundable (for a maximum refundable credit of $1,000). The credit is 

available for the first four years of postsecondary education. The credit phases out for taxpayers 

with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 if married 

filing jointly). 

All other aspects of the Hope Scholarship credit are retained under the AOTC. These include the 

requirement that AOTC recipients be enrolled at least half-time. 

Reasons for Change 

The AOTC makes college more affordable for millions of middle-income families and for the 

first time makes college tax incentives partially refundable. If college is not made more 

affordable, our nation runs the risk of losing a whole generation of potential and productivity. 

Making the AOTC partially refundable increases the likelihood that low-income families will 

send their children to college. Under prior law, low-income families (those without sufficient 

income tax liability) could not benefit from the Hope Scholarship credit or the Lifetime Learning 

Credit because they were not refundable. Under the proposal, low-income families could benefit 

from the refundable portion of the AOTC. The maximum available credit in 2011 would cover 

about 80 percent of tuition and fees at the average 2-year public institution, or about a third of 

tuition and fees at the average four-year public institution in 2011. 
9 

Moreover, the AOTC is available for the first four years of college, instead of only the first two 

years of college, increasing the likelihood that students will stay in school and attain their 

degrees. More years of schooling translates into higher future incomes (on average) for students 

and a more educated workforce for the country. 

Finally, the higher phase-out thresholds under the AOTC give targeted tax relief to an even 

greater number of middle-income families facing the high costs of college. 

Proposal 

The proposal would make the AOTC a permanent replacement for the Hope Scholarship credit. 

To preserve the value of the AOTC, the proposal would index the $2,000 tuition and expense 

amounts, as well as the phase-out thresholds, for inflation. 

This proposal would be effective for taxable years beginning after December 31, 2012. 
10 

PROVIDE EXCLUSION FROM INCOME FOR CERTAIN STUDENT LOAN 

FORGIVENESS 

Current Law

In general, loan amounts that are forgiven are considered gross income to the borrower and 

subject to individual income tax in the year of discharge. Exceptions exist for certain student 

loan repayment programs. Specifically, students who participate in the National Health Service 

Corps Loan Repayment program, certain state loan repayment programs, and certain professionbased loans may exclude discharged amounts from gross income. 

Students with higher education expenses may be eligible to borrow money for their education 

through the Federal Direct Loan Program. Prior to July 1, 2010, they may also have been 

eligible to borrow money through the Federal Family Education Loan Program. Both programs 

are administered by the Department of Education. Each program provides borrowers with an 

option for repaying the loan this is related to the borrower’s income level after college (the 

income-contingent and the income-based repayment options). Under both of these options 

borrowers complete their repayment obligation when they have repaid the loan in full, with 

interest, or have made those payments that are required under the plan for 25 years. For those 

who reach the 25-year point, any remaining loan balance is forgiven. Under current law, any 

debt forgiven by these programs is considered gross income to the borrower and thus subject to 

individual income tax. 

Reason for Change

At the time the loans are forgiven, the individuals who have met the requirements for debt 

forgiveness in the income-contingent and the income-based repayment programs would have 

been making payments for 25 years. In general, these individuals will have had low incomes 

relative to their debt burden for many years. For many of these individuals, paying the tax on the 

forgiven amounts will be difficult. Furthermore, the potential tax consequence may be making 

some student loan borrowers reluctant to accept forgiveness of the loan. 

Proposal

The proposal would exclude from gross income amounts forgiven at the end of the repayment 

period for Federal student loans using the income-contingent repayment option or the 

incomebased repayment option. 

The provision would be effective for loans forgiven after December 31, 2011. 
11 

TAX QUALIFIED DIVIDENDS AND NET LONG-TERM CAPITAL GAINS AT A 20-

PERCENT RATE FOR UPPER-INCOME TAXPAYERS 

Current Law

Under current law, the maximum rate of tax on the qualified dividends and net long-term capital 

gains of an individual is 15 percent. In addition, any qualified dividends and capital gains that 

would otherwise be taxed at a 10- or 15-percent ordinary income tax rate are taxed at a zeropercent rate. Gains from recapture of depreciation on certain real estate (section 1250) are taxed 

at ordinary rates up to 25 percent. Gains from the sale of collectibles are taxed at ordinary rates 

up to 28 percent. Special provisions also apply to gains from the sale of certain small business 

stock. The same rates apply for purposes of the alternative minimum tax. 

Capital losses generally are deductible in full against capital gains. In addition, individual 

taxpayers may deduct up to $3,000 of capital losses from ordinary income each year. Any 

remaining unused capital losses may be carried forward indefinitely to a future year. 

The zero- and 15-percent rates for qualified dividends and capital gains are scheduled to expire 

for taxable years beginning after December 31, 2012. In 2013, the maximum income tax rate on 

capital gains would increase to 20 percent (18 percent for assets purchased after December 31, 

2000 and held longer than five years), while all dividends would be taxed at ordinary tax rates of 

up to 39.6 percent. 

Reasons for Change

Taxing qualified dividends at the same low rate as capital gains for all taxpayers reduces the tax 

bias against equity investment and promotes a more efficient allocation of capital. Eliminating 

the special 18-percent rate on gains from assets held for more than five years further simplifies 

the tax code. 

Proposal

The Administration’s revenue baseline assumes that the current zero- and 15-percent tax rates for 

qualified dividends and net long-term net capital gains are permanently extended for middleclass taxpayers. 

The proposal would apply a 20-percent tax rate on qualified dividends that would otherwise be 

taxed at a 36- or 39.6 percent ordinary income tax rate. This is the same rate as will apply to net 

long-term capital gains for upper-income taxpayers under current law after 2012. The reduced 

rates on gains from assets held over five years would be repealed. The special rates applying to 

recapture of depreciation on certain real estate (Section 1250 recapture) and collectibles would 

be retained. 

This proposal would be effective for taxable years beginning after December 31, 2012. 
12 

TAX CUTS FOR BUSINESSES

ELIMINATE CAPITAL GAINS TAXATION ON INVESTMENTS IN SMALL 

BUSINESS STOCK 

Current Law

Under the Small Business Jobs Act, taxpayers other than corporations may exclude 100 percent 

of the gain from the sale of qualified small business stock acquired after September 27, 2010 and 

before January 1, 2011, and held for at least five years, provided various requirements are met 

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 

extended this 100 percent exclusion to eligible stock acquired before January 1, 2012. 

The excluded gain is not a preference under the Alternative Minimum Tax (AMT) for stock 

acquired during this period. Prior law provided a 50 percent exclusion (60 percent for certain 

empowerment zone businesses) for qualified small business stock. The taxable portion of the 

gain is taxed at a maximum rate of 28 percent. The AMT treats 28 percent of the excluded gain 

on eligible stock acquired after December 31, 2000 and 42 percent of the excluded gain on stock 

acquired before January 1, 2001 as a tax preference. A 75 percent exclusion enacted under the 

American Recovery and Reinvestment Act (ARRA) applies to qualified stock acquired after 

February 17, 2009, and before September 28, 2010 with the excluded gains subject to the AMT. 

The maximum amount of gain eligible for the exclusion by a taxpayer with respect to any 

corporation during any year is the greater of (1) ten times the taxpayer’s basis in stock issued by 

the corporation and disposed of during the year, or (2) $10 million reduced by gain excluded in 

prior years on dispositions of the corporation’s stock. To qualify as a small business, the 

corporation, when the stock is issued, may not have gross assets exceeding $50 million 

(including the proceeds of the newly issued stock) and must be a C corporation. 

The corporation also must meet certain active trade or business requirements. For example, the 

corporation must be engaged in a trade or business other than: one involving the performance of 

services in the fields of health, law, engineering, architecture, accounting, actuarial science, 

performing arts, consulting, athletics, financial services, brokerage services or any other trade or 

business where the principal asset of the trade or business is the reputation or skill of one or more 

employees; a banking, insurance, financing, leasing, investing or similar business; a farming 

business; a business involving production or extraction of items subject to depletion; or a hotel, 

motel, restaurant or similar business. There are limits on the amount of real property that may be 

held by a qualified small business, and ownership of, dealing in, or renting real property is not 

treated as an active trade or business. 

Reasons for Change

Making the exclusion permanent would encourage and reward new investment in qualified small 

business stock. 
13 

Proposal

The proposal would increase permanently to 100 percent the exclusion for qualified small 

business stock sold by an individual or other non-corporate taxpayer and would eliminate the 

AMT preference item for gain excluded under this provision. As under current law, the stock 

would have to be held for at least five years and other limitations on the section 1202 exclusion 

would continue to apply. The proposal would include additional documentation requirements to 

assure compliance with those limitations and taxpayers would be required to report qualified 

sales on their tax returns. 

The proposal would be effective for qualified small business stock acquired after December 31, 

2011. 
14 

ENHANCE AND MAKE PERMANENT THE RESEARCH AND EXPERIMENTATION 

(R&E) TAX CREDIT 

Current Law

The R&E tax credit is 20 percent of qualified research expenses above a base amount. The base 

amount is the product of the taxpayer’s “fixed base percentage” and the average of the taxpayer’s 

gross receipts for the four preceding years. The taxpayer’s fixed base percentage generally is the 

ratio of its research expenses to gross receipts for the 1984-88 period. The base amount cannot 

be less than 50 percent of the taxpayer’s qualified research expenses for the taxable year. 

Taxpayers can elect the alternative simplified research credit (ASC), which is equal to 14 percent 

of qualified research expenses that exceed 50 percent of the average qualified research expenses 

for the three preceding taxable years. Under the ASC, the rate is reduced to 6 percent if a 

taxpayer has no qualified research expenses in any one of the three preceding taxable years. An 

election to use the ASC applies to all succeeding taxable years unless revoked with the consent 

of the Secretary. 

The R&E tax credit also provides a credit for 20 percent of: (1) basic research payments above a 

base amount; and (2) all eligible payments to an energy research consortium for energy research. 

The R&E tax credit is scheduled to expire on December 31, 2011. 

Reasons for Change

The R&E tax credit encourages technological developments that are an important component of 

economic growth. However, uncertainty about the future availability of the R&E tax credit 

diminishes the incentive effect of the credit because it is difficult for taxpayers to factor the 

credit into decisions to invest in research projects that will not be initiated and completed prior to 

the credit’s expiration. To improve the credit’s effectiveness, the R&E tax credit should be made 

permanent. 

Currently, a taxpayer must choose between using an outdated formula for calculating the R&E 

credit that provides a 20-percent credit rate for research spending over a certain base amount 

related to the business’s historical research intensity and the much simpler ASC that provides a 

14-percent credit in excess of a base amount based on its recent research spending. Increasing 

the rate of the ASC to 17 percent would provide an improved incentive to increase research and 

would make the ASC a more attractive alternative. Because the ASC base is updated annually, 

the ASC more accurately reflects the business’s recent research experience and simplifies the 

R&E credit’s computation. 

Proposal

The proposal would make the R&E credit permanent and increase the rate of the alternative 

simplified research credit from 14 percent to 17 percent, effective after December 31, 2011.
15 

PROVIDE ADDITIONAL TAX CREDITS FOR INVESTMENT IN QUALIFIED 

PROPERTY USED IN A QUALIFYING ADVANCED ENERGY MANUFACTURING 

PROJECT (“48C”) 

Current Law

A 30-percent tax credit is provided for investments in eligible property used in a qualifying 

advanced energy project. A qualifying advanced energy project is a project that re-equips, 

expands, or establishes a manufacturing facility for the production of: (1) property designed to 

produce energy from renewable resources; (2) fuel cells, microturbines, or an energy storage 

system for use with electric or hybrid-electric vehicles; (3) electric grids to support the 

transmission, including storage, of intermittent sources of renewable energy; (4) property 

designed to capture and sequester carbon dioxide emissions; (5) property designed to refine or 

blend renewable fuels or to produce energy conservation technologies; (6) electric drive motor 

vehicles that qualify for tax credits or components designed for use with such vehicles; and (7) 

other advanced energy property designed to reduce greenhouse gas emissions. 

Eligible property is property: (1) that is necessary for the production of the property listed above; 

(2) that is tangible personal property or other tangible property (not including a building and its 

structural components) that is used as an integral part of a qualifying facility; and (3) with 

respect to which depreciation (or amortization in lieu of depreciation) is allowable. 

Under the American Recovery and Reinvestment Act of 2009 (ARRA), total credits were limited 

to $2.3 billion, and the Treasury Department, in consultation with the Department of Energy, was 

required to establish a program to consider and award certifications for qualified investments 

eligible for credits within 180 days of the date of enactment of ARRA. Credits may be allocated 

only to projects where there is a reasonable expectation of commercial viability. In addition, 

consideration must be given to which projects: (1) will provide the greatest domestic job 

creation; (2) will have the greatest net impact in avoiding or reducing air pollutants or 

greenhouse gas emissions; (3) have the greatest potential for technological innovation and 

commercial deployment; (4) have the lowest levelized cost of generated or stored energy, or of 

measured reduction in energy consumption or greenhouse gas emission; and (5) have the shortest 

completion time. Guidance under current law requires taxpayers to apply for the credit with 

respect to their entire qualified investment in a project. 

Applications for certification under the program may be made only during the two-year period 

beginning on the date the program is established. An applicant that is allocated credits must 

provide evidence that the requirements of the certification have been met within one year of the 

date of acceptance of the application and must place the property in service within three years 

from the date of the issuance of the certification. 

 

Reasons for Change

The $2.3 billion cap on the credit has resulted in the funding of less than one-third of the 

technically acceptable applications that have been received. Rather than turning down worthy 

projects that could be deployed quickly to create jobs and support economic activity, the 

program – which has proven successful in leveraging private investment in building and 
16 

equipping factories that manufacture clean energy products in America – should be expanded. 

An additional $5 billion in credits would support at least $15 billion in total capital investment, 

creating tens of thousands of new construction and manufacturing jobs. Because there is already 

an existing pipeline of worthy projects and substantial interest in this area, the additional credit 

can be deployed quickly to create jobs and support economic activity. 

Proposal

The proposal would authorize an additional $5 billion of credits for investments in eligible 

property used in a qualifying advanced energy manufacturing project. Taxpayers would be able 

to apply for a credit with respect to only part of their qualified investment. If a taxpayer applies 

for a credit with respect to only part of the qualified investment in the project, the taxpayer’s 

increased cost sharing and the project’s reduced revenue cost to the government would be taken 

into account in determining whether to allocate credits to the project. 

Applications for the additional credits would be made during the two-year period beginning on 

the date on which the additional authorization is enacted. As under current law, applicants that 

are allocated the additional credits must provide evidence that the requirements of the 

certification have been met within one year of the date of acceptance of the application and must 

place the property in service within three years from the date of the issuance of the certification. 

The change would be effective on the date of enactment. 
17 

PROVIDE TAX CREDIT FOR ENERGY-EFFICIENT COMMERCIAL BUILDING 

PROPERTY EXPENDITURES IN PLACE OF EXISTING TAX DEDUCTION 

Current Law

Under section 179D of the Internal Revenue Code, taxpayers are allowed to deduct expenditures 

for energy efficient commercial building property. Energy efficient commercial building 

property is defined as property (1) which is installed on or in any building that is located in the 

United States and is within the scope of Standard 90.1-2001, (2) which is installed as part of (i) 

the interior lighting systems, (ii) the heating, cooling, ventilation, and hot water systems, or (iii) 

the building envelope, (3) which is certified as being installed as part of a plan designed to 

reduce the total annual energy and power costs with respect to the interior lighting, heating, 

cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison 

to a reference building which meets the minimum requirements of Standard 90.1-2001, and (4) 

with respect to which depreciation (or amortization in lieu of depreciation) is allowable. 

Standard 90.1-2001, as referred to here, is Standard 90.1-2001 of the American Society of 

Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering 

Society of North America (ASHRAE/IESNA) as in effect on April 2, 2003 – a nationally 

accepted building energy code that has been adopted by local and state jurisdictions throughout 

the United States. The deduction with respect to a building is limited to $1.80 per square foot. 

In the case of a building that does not achieve a 50-percent energy savings, a partial deduction is 

allowed with respect to each separate building system (interior lighting; heating cooling, 

ventilation, and hot water; and building envelope) that meets the system-specific energy-savings 

target prescribed by the Secretary of the Treasury. The applicable system-specific savings 

targets are those that would result in a total annual energy savings with respect to the whole 

building of 50 percent, if each of the separate systems met the system-specific target. The 

maximum allowable deduction for each of the separate systems is $0.60 per square foot. 

The deduction is allowed in the year in which the property is placed in service. If the energy 

efficient commercial building property expenditures are made by a public entity, the deduction 

may be allocated under regulations to the person primarily responsible for designing the 

property. The deduction applies to property placed in service on or before December 31, 2013. 

Reasons for Change

The President has called for a new Better Buildings Initiative that would over 10 years reduce 

energy usage in commercial buildings by 20 percent. This initiative would catalyze private sector 

investment in upgrading the efficiency of commercial buildings. Changing the current tax 

deduction for energy efficient commercial building property to a tax credit and allowing a partial 

credit for achieving less stringent efficiency standards would encourage private sector 

investments in energy efficiency improvements. In addition, allowing a credit based on 

prescriptive efficiency standards would reduce the complexity of the current standards, which 

require whole-building auditing, modeling and simulation. 
18 

Proposal

The proposal would replace the existing deduction for energy efficient commercial building 

property with a tax credit equal to the cost of property that is certified as being installed as part 

of a plan designed to reduce the total annual energy and power costs with respect to the interior 

lighting, heating, cooling, ventilation, and hot water systems of the building by 20 percent or 

more in comparison to a reference building which meets the minimum requirements of 

ASHR2AE/IESNA Standard 90.1-2004, as in effect on the date of enactment. 

The credit with respect to a building would be limited to $0.60 per square foot in the case of 

energy efficient commercial building property designed to reduce the total annual energy and 

power costs by at least 20 percent but less than 30 percent, to $0.90 per square foot for qualifying 

property designed to reduce the total annual energy and power costs by at least 30 percent but 

less than 50 percent, and to $1.80 per square foot for qualifying property designed to reduce the 

total annual energy and power costs by 50 percent or more. 

In addition, the proposal would treat property as meeting the 20-, 30-, and 50-percent energy 

savings requirement if specified prescriptive standards are satisfied. Prescriptive standards would 

be based on building types (as specified by Standard 90.1-2004) and climate zones (as specified 

by Standard 90.1-2004). 

Special rules would be provided that would allow the credit to benefit a REIT or its shareholders. 

The tax credit would be available for property placed in service during calendar year 2012. 
19 

INCENTIVES TO PROMOTE REGIONAL GROWTH

EXTEND AND MODIFY THE NEW MARKETS TAX CREDIT (NMTC) 

Current Law

The NMTC is a 39-percent credit for qualified equity investments (QEIs) made to acquire stock 

in a corporation, or a capital interest in a partnership, that is a qualified community development 

entity (CDE) that is held for a period of seven years. The allowable credit amount for any given 

year is the applicable percentage (5 percent for the year the equity interest is purchased from the 

CDE and for each of the two subsequent years, and 6 percent for each of the following four 

years) of the amount paid to the CDE for the investment at its original issue. The NMTC is 

available for a taxable year to the taxpayer who holds the qualified equity investment on the date 

of the initial investment or on the respective anniversary date that occurs during the taxable 

year. The credit is recaptured if at any time during the seven-year period that begins on the date 

of the original issue of the investment the entity ceases to be a qualified CDE, the proceeds of the 

investment cease to be used as required, or the equity investment is redeemed. 

Under current law, the NMTC can be used to offset federal income tax liability but cannot be 

used to offset alternative minimum tax (AMT) liability. 

The NMTC will expire on December 31, 2011. 

Reasons for Change

An extension of the NMTC would allow CDEs to continue to generate investments in lowincome communities. 

Proposal

The proposal would extend the new markets tax credit for one year (2012), with an allocation 

amount of $5.0 billion. The Administration estimates that within this $5 billion, at least $250 

million will support financing healthy food options in distressed communities as part of the 

Healthy Food Financing Initiative. The proposal also would permit NMTC amounts resulting 

from QEIs made after December 31, 2010, to offset AMT liability. 

The proposal would be effective upon enactment. 
20 

REFORM AND EXTEND BUILD AMERICA BONDS 

Current Law

Build America Bonds are a new borrowing tool for State and local governments that were 

enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA). These bonds 

are conventional taxable bonds issued by State and local governments. The Treasury 

Department makes direct payments to State and local governmental issuers (called “refundable 

tax credits”) to subsidize a portion of their borrowing costs in an amount equal to 35 percent of 

the coupon interest on the bonds. Issuance of Build America Bonds is limited to original 

financing for public capital projects for which issuers otherwise could use tax-exempt 

“governmental bonds” (as contrasted with “private activity bonds” which benefit private 

entities.) ARRA authorized the issuance of Build America Bonds in 2009 and 2010 without 

volume limitation and authority to issue these bonds expired at the end of 2010. Build America 

Bonds are an optional alternative to traditional tax-exempt bonds. 

Tax-exempt bonds have broader program parameters than Build America Bonds, and may be 

used in the following ways: (1) original financing for public capital projects, as with Build 

America Bonds; (2) “current refundings” to refinance prior governmental bonds for interest cost 

savings where the prior bonds are repaid promptly within ninety days of issuance of the 

refunding bonds (as well as one “advance refunding,” in which two sets of bonds for the same 

governmental purpose may remain outstanding concurrently for a period of time longer than 

ninety days); (3) short-term “working capital” financings for governmental operating expenses 

for seasonal cash flow deficits (as well as certain longer-term deficit financings which have strict 

arbitrage restrictions); (4) financing for Code 501(c)(3) nonprofit entities, such as nonprofit 

hospitals and universities; and (5) qualified private activity bond financing for specified private 

projects and programs (including, for example, mass commuting facilities, solid waste disposal 

facilities, low-income residential rental housing projects, and single-family housing for low and 

moderate income homebuyers, among others), which are subject to annual state bond volume 

caps with certain exceptions. 

Reasons for Change

The Build America Bond program has been successful and has expanded the market for State 

and local governmental debt. From April 2009 through December 2010, more than $181 billion 

in Build America Bonds were issued in over 2,275 transactions in all 50 States, the District of 

Columbia, and two territories. During 2009-2010, Build America Bonds gained a market share 

of over 25 percent of the total dollar supply of State and local governmental debt. This program 

taps into a broader market for investors without regard to tax liability (e.g., pension funds may be 

investors in Build America Bonds, though they typically do not invest in tax-exempt bonds). By 

comparison, traditional tax-exempt bonds have a narrower class of investors with tax 

preferences, which generally consist of retail investors (individuals and mutual funds hold over 

70 percent of tax-exempt bonds). This program delivers an efficient Federal subsidy directly to 

State and local governments (rather than through third-party investors). By comparison, taxexempt bonds can be viewed as inefficient in that the Federal revenue cost of the tax exemption 

is often greater than the benefits to State and local governments achieved through lower 

borrowing costs. This program also has a potentially more streamlined tax compliance 
21 

framework focusing directly on governmental issuers who benefit from the subsidy, as compared 

with tax-exempt bonds and tax credit bonds which involve investors as tax intermediaries. This 

program also has relieved supply pressures in the tax-exempt bond market and has helped to 

reduce interest rates in that market. Making the Build America Bond program permanent could 

promote market certainty and greater liquidity. 

The 35-percent Federal subsidy rate for the original Build America Bond program represented a 

deeper Federal borrowing subsidy for temporary stimulus purposes under ARRA than the 

existing permanent Federal subsidy inherent in tax-exempt bonds. In structuring a permanent 

Build America Bond program in light of Federal revenue constraints, it is appropriate to develop 

a revenue neutral Federal subsidy rate relative to the Federal tax expenditure on tax-exempt 

bonds. 

For such a revenue neutral Federal subsidy rate, it also is appropriate to expand the eligible uses 

for Build America Bonds to include other program purposes for which tax-exempt bonds may be 

used. 

Proposal

Permanent Program for Build America Bonds. This proposal would make the Build America 

Bonds program permanent at a Federal subsidy level equal to 28 percent of the coupon interest 

on the bonds. The proposed Federal subsidy level is intended to be approximately revenue 

neutral relative to the estimated future Federal tax expenditure for tax-exempt bonds. A 

permanent Build America Bonds program should facilitate greater efficiency, a broader investor 

base, and lower costs for State and local governmental debt. 

Expanded Uses. This proposal would also expand the eligible uses for Build America Bonds to 

include the following: (1) original financing for governmental capital projects, as under the 

initial authorization of Build America Bonds; (2) current refundings of prior public capital 

project financings for interest cost savings where the prior bonds are repaid promptly within 

ninety days of issuance of the current refunding bonds; (3) short-term governmental working 

capital financings for governmental operating expenses (such as tax and revenue anticipation 

borrowings for seasonal cash flow deficits), subject to a thirteen-month maturity limitation; and 

(4) financing for Section 501(c)(3) nonprofit entities, such as nonprofit hospitals and universities. 

This proposal would be effective for bonds issued after the date of enactment. 
22 

Low-Income Housing Tax Credit (LIHTC) Provisions

ENCOURAGE MIXED-INCOME OCCUPANCY BY ALLOWING LIHTC-SUPPORTED 

PROJECTS TO ELECT AN AVERAGE-INCOME CRITERION 

Current law

In order for a building to qualify for the LIHTC, a minimum portion of the units in the building 

must be rent restricted and occupied by low-income tenants. Under section 42(g)(1), the 

taxpayer makes an irrevocable election between two criteria. Either— 

 At least 20 percent of the units must be rent restricted and occupied by tenants with 

income at or below 50 percent of area median income (AMI); or 

 At least 40 percent of the units must be rent restricted and occupied by tenants with 

incomes at or below 60 percent of AMI. 

In all cases, qualifying income standards are adjusted for family size. The amount of the credit 

reflects the fraction of the building’s eligible basis that is attributable to the low-income units. 

Reasons for change

In practice, these criteria often produce buildings that serve a very narrow income band of 

tenants—those just below the top of the eligible income range. For example, if the rentrestricted units in the building must be occupied by tenants at or below 60 percent of AMI, these 

units may end up being occupied by tenants with incomes that fall between 54 percent and 

60 percent of AMI. As a result, the income criteria do not include incentives to create mixedincome housing, and LIHTC-supported buildings often do not serve those most in need. In 

addition, the inflexibility of the income criteria makes it difficult for LIHTC to support 

acquisition of partially or fully occupied properties for preservation or repurposing. 

Proposal 

The proposal would add a third criterion to the two described above. When a taxpayer elects this 

criterion, at least 40 percent of the units would have to be occupied by tenants with incomes that 

average no more than 60 percent of AMI. No rent-restricted unit, however, could be occupied 

by a tenant with income over 80 percent of AMI; and, for purposes of computing the average, 

any unit with an income limit that is less than 20 percent of AMI would be treated as having a 

20-percent limit. 

For example, suppose that a building had 10 rent-restricted units with income limits of 

20 percent of AMI, 10 with limits of 40 percent of AMI, 20 with limits of 60 percent of AMI, 

and 30 with limits of 80 percent of AMI. This would satisfy the new criterion because none of 

the limits exceeds 80 percent of AMI and the average does not exceed 60 percent of AMI. 

(10×20 + 10×40 + 20×60 + 30×80 = 4200, and 4200/70 = 60.) 

The proposal would be effective for elections under section 42(g)(1) that are made after the date 

of enactment. 
23 

PROVIDE 30-PERCENT BASIS “BOOST” TO PROPERTIES THAT RECEIVE TAXEXEMPT BOND FINANCING 

Current law

Subject to certain adjustments and special rules, eligible basis for computing LIHTC is generally 

a building’s adjusted basis. In some situations, however, there is an increase (a “basis boost”) 

over the amount that would otherwise be eligible basis. For example, if the State housing credit 

agency designates a building as needing an enhanced credit in order to be financially feasible as 

part of a qualified low-income housing project, then the eligible basis for the building may be up 

to 130 percent of what it would be in the absence of any such boost. This basis boost is not 

available, however, for a building if any portion of the eligible basis of the building is financed 

by tax-exempt bonds subject to the private-activity-bond volume cap (volume cap). 

Reasons for Change

Preservation of existing affordable housing is acutely needed. Many tens of thousands of 

federally assisted housing units are being lost, in large part because of inability to fund necessary 

capital improvements. LIHTC-supported preservation offers the hope not only of protecting the 

existing Federal investment in affordable housing by leveraging private capital but also of 

gaining the benefits of private-market discipline for Federally assisted properties. Moreover, 

preservation is a cost-effective alternative to new construction. The per-unit cost of preservation 

is about one quarter that of new construction, and it greatly reduces the financial and human 

costs of relocating tenants. 

As currently structured, however, the LIHTC does not attract sufficient equity capital to address 

preservation needs. Historically, the 70-percent-present-value credit (colloquially called the 

“9-percent credit”) has been oversubscribed, with proposals for new construction tending to beat 

out those for preservation. The 30-percent-present-value credit (colloquially called the 

“4-percent credit”) often fails to provide sufficient incentive to make preservation projects 

economically attractive. 

Proposal

The proposal would allow State housing finance agencies to designate certain projects to receive, 

for purposes of computing LIHTC, a 30 percent boost in eligible basis. To receive this 

treatment, a project would have to satisfy the following requirements: 

 The project involves the preservation, recapitalization, and rehabilitation of existing 

housing; 

 The housing demonstrates a serious backlog of capital needs or deferred maintenance; 

 At least half of the aggregate basis of the building and of the land on which the building 

is located is financed by tax-exempt bonds that are subject to the volume cap; 

 The project involves housing that was previously financed with Federal funds (including 

having benefited from LIHTC); and 
24 

 Because of that funding, the housing was subject to a long-term use agreement limiting 

occupancy to low-income households. 

The volume of designations that a State housing finance agency can make would be limited by 

an amount that is computed using the State’s volume cap. The limitation applicable to a project 

would depend on the calendar year of issue of the tax-exempt bonds that help finance the project 

and not on which year’s volume cap was taken into account in issuing the bonds. Under the 

limitation, the aggregate issue price of the bonds that are issued in a calendar year and that 

finance projects whose bases are designated for a boost under this provision would not be 

allowed to exceed an amount equal to 0.4 percent of the State’s volume cap for that calendar 

year. Thus, for example, if an otherwise-qualifying project is financed with tax-exempt bonds 

that are issued in 2012 using volume cap that the state carried over from 2010, the basis boost for 

that project would be subject to a limitation that is based on an amount equal to 0.4 percent of the 

State’s volume cap for 2012. 

The proposal would be effective for projects that are financed by tax-exempt bonds issued after 

the date of enactment. 
25 

DESIGNATE GROWTH ZONES 

Current Law 

The Internal Revenue Code contains various incentives targeted to encourage the development of 

particular geographic regions, including empowerment zones and the Gulf Opportunity (GO) 

Zone. In addition, qualifying investment placed in service in 2011 and 2012 is eligible for 

additional first-year depreciation of the adjusted basis of the property. 

Empowerment Zones

There are currently 40 empowerment zones—30 in urban areas and 10 in rural areas—that have 

been designated through a competitive application process in three separate rounds in 1994, 

1998, and 2002.1

 State and local governments nominated distressed geographic areas, which 

were selected on the strength of their strategic plans for economic and social revitalization. The 

urban areas were designated by the Secretary of Housing and Urban Development. The rural 

areas were designated by the Secretary of Agriculture. Empowerment zone designation remains 

in effect through December 31, 2011. 

Incentives for businesses in empowerment zones include (1) a 20-percent wage credit for 

qualifying wages, (2) additional expensing for qualified zone property, (3) tax-exempt financing 

for certain qualifying zone facilities, (4) deferral of capital gains on sales and reinvestment in 

empowerment zone assets, and (5) exclusion of 60 percent (rather than 50 percent) of the gain on 

the sale of qualified small business stock held more than 5 years.2

 

The wage credit provides a 20 percent subsidy on the first $15,000 of annual wages paid to 

residents of empowerment zones by businesses located in these communities, if substantially all 

of the employee’s services are performed within the zone. The credit is not available for wages 

taken into account in determining the work opportunity tax credit. 

To be eligible for the capital incentives, businesses must generally satisfy the requirements of an 

enterprise zone business. Among other conditions, these requirements stipulate that at least 50 

percent of the total gross income of such business is derived from the active conduct of a 

business within an empowerment zone, a substantial portion of the use of tangible property of 

such business is within an empowerment zone, and at least 35 percent of its employees are 

residents of an empowerment zone. 

Enterprise zone businesses are allowed to expense the cost of certain qualified zone property 

(which, among other requirements, must be used in the active conduct of a qualified business in 

an empowerment zone) up to an additional $35,000 above the amounts generally available under 

 

1

 In addition, the District of Columbia Enterprise Zone (DC Zone) was established in 1998 and receives similar tax 

benefits to empowerment zones. The primary differences are that the eligibility rules are more generous for the DC 

Zone, the capital gains preferences are in the form of a full exclusion from income on the gain from qualified DC 

Zone assets held more than 5 years, and a homebuyer credit is provided to first-time homebuyers within DC. DC 

Zone status remains in effect through December 31, 2011. 2

 For qualified small business stock acquired after September 27, 2010 and before January 1, 2012, the exclusion 

percentage increases to 100 percent. This provision (100 percent exclusion) applies to all qualified small business 

stock, not just that issued by enterprise zone businesses. 
26 

section 179.3 In addition, only 50 percent of the cost of such qualified zone property counts 

toward the limitation under which section 179 deductions are reduced to the extent the cost of 

section 179 property exceeds a specified amount. 

Qualified enterprise zone businesses are eligible to apply for tax-exempt financing 

(empowerment zone facility bonds) for qualified zone property. These empowerment zone 

facility bonds do not count against state private activity bond limits; instead a limit is placed 

upon each zone, depending on population and whether the zone is in an urban or rural area. 

In addition, residents of empowerment zones aged 18-39 years old qualify as a targeted group for 

the work opportunity tax credit (WOTC). Employers who hire an individual in a targeted group 

receive a 40 percent credit that applies to the first $6,000 of qualified first-year wages. 

Empowerment zone residents aged 16-17 can also qualify as a targeted group for WOTC, but the 

qualifying wage limit is reduced to $3,000 and the period of employment must be between May 

1 and September 15. 

GO Zone

The GO Zone is the portion of the Hurricane Katrina disaster area determined by the President to 

warrant individual or individual and public assistance from the Federal Government under the 

Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina 

in 2005. Numerous tax incentives were provided to encourage the redevelopment of the areas 

within the GO zone, most of which have expired. Provisions still in effect through 2011 include 

an increase in available tax-exempt bond financing, an increase in the allocation of low-income 

housing tax credits, an increase in the rehabilitation credit rate for structures located in the GO 

Zone, and an additional first-year depreciation deduction for qualified property described below. 

An additional first-year depreciation deduction is allowed for specified GO Zone extension 

property placed in service prior to January 1, 2012. The deduction equals 50 percent of the cost 

of qualified property. Specified GO Zone extension property is defined as property substantially 

all the use of which is in one or more specified portions of the GO Zone. Qualifying property 

must either be (1) nonresidential real property or residential rental property, or (2) in the case of 

a taxpayer who places in service a building described in (1), tangible personal property contained 

in the building as described in section 168(k)(2)(A)(i), if substantially all the use of such 

property is in such building and such property is placed in service within 90 days of the date the 

building is placed in service. The specified portions of the GO Zone are defined as those 

portions of the GO Zone which is identified by the Secretary of the Treasury as being in a county 

or parish in which hurricanes occurring in 2005 damaged more than 60 percent of the occupied 

housing units in such county or parish. 

 

3

 Section 179 provides that, in place of depreciation, certain taxpayers, typically small businesses, may elect to 

deduct up to $500,000 of the cost of section 179 property placed in service in 2011. In general, section 179 property 

is defined as including depreciable tangible personal property, certain depreciable real property (not including a 

building, or its structural components), and (through 2013) certain computer software. In 2011, section 179 property 

also includes up to $250,000 of certain qualified real property (which includes leasehold improvement property, 

restaurant property, and retail improvement property). Section 179 property must be purchased for use in the active 

conduct of a trade or business. 
27 

Bonus Depreciation

An additional first-year depreciation deduction is allowed for qualified property placed in service 

during 2011 and 2012. The deduction equals 100 percent of the cost of qualified property placed 

in service in 2011 and 50 percent of the cost of qualified property placed in service in 2012, and 

is allowed for both regular tax and alternative minimum tax purposes. The property’s 

depreciable basis is adjusted to reflect this additional deduction. However, the taxpayer may 

elect out of additional first-year depreciation for any class of property for any taxable year. 

Qualified property for this purpose includes tangible property with a recovery period of 20 years 

or less, water utility property, certain computer software, and qualified leasehold improvement 

property. Qualified property must be new property, and excludes property that is required to be 

depreciated under the alternative depreciation system (ADS). To qualify for the 50 percent 

additional first-year depreciation deduction, property must be (1) acquired after December 31, 

2007 and before January 1, 2013 (but only if no written binding contract for the acquisition was 

in effect before January 1, 2008), or (2) acquired pursuant to a written binding contract entered 

into after December 31, 2007, and before January 1, 2013. In general, the property must be 

placed in service by January 1, 2013. If property is self-constructed, the taxpayer must begin 

manufacture or construction of the property after December 31, 2007 and before January 1, 

2013. To qualify for the 100 percent additional first-year deduction, the property must be 

acquired after September 8, 2010 and before January 1, 2012, and placed in service before 

January 1, 2012. An extension by one year of the placed-in-service date is allowed for certain 

property with a recovery period of ten years or longer and certain transportation property, if the 

property has an estimated production period exceeding one year and a cost exceeding $1 million. 

Certain aircraft not used in providing transportation services are also granted a one-year 

extension of the placed-in-service deadline. In these cases, the additional allowance applies only 

to adjusted basis attributable to manufacture or construction occurring before January 1, 2013. 

Special rules apply to syndications, sale-leasebacks, and transfers to related parties of qualified 

property. 

Corporations otherwise eligible for additional first-year depreciation may elect to claim 

additional research or minimum tax credits in lieu of claiming additional depreciation for 

“eligible qualified property.” Such property only includes otherwise qualified property that was 

acquired after March 31, 2008, but only taking into account adjusted basis attributable to the 

manufacture or construction of the property either (1) after March 31, 2008 and before January 1, 

2010, or (2) after December 31, 2010, and before January 1, 2013. Only additional minimum tax 

credits may be taken with respect to property qualifying under (2). Depreciation for eligible 

qualified property must be computed using the straight-line method. 

Reasons for Change 

Growth zones would promote job creation and investment in economically distressed areas that 

have demonstrated potential for future growth and diversification into new industries. While 

current law provides regionally targeted benefits to numerous areas, these incentives are due to 

expire soon and some of these designations have been in effect over 16 years. The 

Administration desires to target resources to areas where they would provide the most benefit on 

a going-forward basis. In particular, the national competition for growth zone status would 
28 

drivers of regional economic growth. The targeted tax incentives provided to the zone would 

encourage private sector investment and other forms of increased economic activity in these 

areas. The current tax incentives are perceived as complex and difficult for businesses to 

navigate, potentially reducing the take-up rate for these incentives. 

Proposal 

The Administration proposes to designate 20 growth zones (14 in urban areas and 6 in rural 

areas). The zone designation and corresponding tax incentives would be in effect from January 

1, 2012 through December 31, 2016. The Secretary of Commerce would select the zones in 

consultation with the Secretary of Housing and Urban Development and the Secretary of 

Agriculture. 

 

The zones would be chosen through a competitive application process. A State, county, city, or 

other general purpose political subdivision of a State or possession (a “local government”), or an 

Indian tribal government would be eligible to nominate an area for growth zone status. Areas 

could be nominated by more than one local government, if the nominated area is within the 

jurisdiction of more than one local government or State. In addition, local governments within a 

region could join together to jointly nominate multiple areas for growth zone status, so long as 

each designated zone independently satisfies the eligibility criteria. To be eligible to be 

nominated, an area must satisfy the following criteria: 

1. A nominated area would have to have a continuous boundary (that is, an area must be a 

single area; it cannot be comprised of two or more separate areas) and could not exceed 

20 square miles if an urban area or 1,000 square miles if a rural area. 

2. A nominated urban area would have to include a portion of at least one local government 

jurisdiction with a population of at least 50,000. The population of a nominated urban 

area could not exceed the lesser of: (1) 200,000; or (2) the greater of 50,000 or ten 

percent of the population of the most populous city in the nominated area. A nominated 

rural area could not have a population that exceeded 30,000. 

Nominated areas would be designated as growth zones based on the strength of the applicant’s 

“competitiveness plan” and its need to attract investment and jobs. Communities would be 

encouraged to develop a strategic plan to build on their economic strengths and outline targeted 

investments to develop their competitive advantages. Collaboration across a wide range of 

stakeholders would be useful in developing a coherent and comprehensive strategic plan. A 

successful plan would clearly outline how the economic strategy would connect the zone to 

drivers of regional economic growth. 

In evaluating applications, the Secretary of Commerce could consider other factors, including: 

unemployment rates, poverty rates, household income, homeownership, labor force participation 

and educational attainment. In addition, the Secretary may set minimal standards for the levels 

of unemployment and poverty that must be satisfied by the nominated area. 

“Rural area” would be defined as any area that is (1) outside of a metropolitan statistical area 

(within the meaning of section 143(k)(2)(B)) or (2) determined by the Secretary of Commerce, 
29 

after consultation with the Secretary of Agriculture, to be a rural area. “Urban area” would be 

defined as any area that is not a rural area. 

Two tax incentives would be applicable to growth zones. First, an employment credit would be 

provided to businesses that employ zone residents. The credit would apply to the first $15,000 of 

qualifying zone employee wages. The credit rate would be 20 percent for zone residents who are 

employed within the zone and 10 percent for zone residents employed outside of the zone. The 

definition of a qualified zone employee would follow rules found in section 1396(d). For the 

purposes of the 10 percent credit, the requirement that substantially all of the services performed 

by the employee for the employer are within the zone would not apply. The definition of 

qualified zone wages would follow the definitions provided in section 1396(c) and 1397(a). 

Second, qualified property placed in service within the zone would be eligible for additional 

first-year depreciation of 100 percent of the adjusted basis of the property. Qualified property 

for this purpose includes tangible property with a recovery period of 20 years or less, water 

utility property, certain computer software, and qualified leasehold improvement property. 

Qualified property must be new property. Qualified property excludes property that is required 

to be depreciated under the ADS. The taxpayer must purchase (or begin the manufacture or 

construction of) the property after the date of zone designation and before January 1, 2017 (but 

only if no written binding contract for the acquisition was in effect before zone designation). 

The property must be placed in service within the zone before January 1, 2017. 

The Secretary of the Treasury would be given authority to collect data from taxpayers on the use 

of such tax incentives by zone. The Secretary of Commerce may require the nominating local 

government to provide other data on the economic conditions in the zones both before and after 

designation. These data would be used to evaluate the effectiveness of the growth zones 

program. 
30 

RESTRUCTURE ASSISTANCE TO NEW YORK CITY: PROVIDE TAX INCENTIVES 

FOR TRANSPORTATION INFRASTRUCTURE 

Current Law 

The Job Creation and Worker Assistance Act of 2002 (the Act) provided tax incentives for the 

area of New York City damaged or affected by the terrorist attacks on September 11, 2001. The 

Act created the “New York Liberty Zone,” defined as the area located on or south of Canal 

Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its 

intersection with East Broadway) in the Borough of Manhattan in the City of New York, New 

York. New York Liberty Zone tax incentives included: (1) an expansion of the work opportunity 

tax credit (WOTC) for New York Liberty Zone business employees; (2) a special depreciation 

allowance for qualified New York Liberty Zone property; (3) a five-year recovery period for 

depreciation of qualified New York Liberty Zone leasehold improvement property; (4) $8 billion 

of tax-exempt private activity bond financing for certain nonresidential real property, residential 

rental property and public utility property; (5) $9 billion of additional tax-exempt, advance 

refunding bonds; (6) increased section 179 expensing; and (7) an extension of the replacement 

period for nonrecognition of gain for certain involuntary conversions.4

The expanded WOTC credit provided a 40-percent subsidy on the first $6,000 of annual wages 

paid to New York Liberty Zone business employees for work performed during 2002 or 2003. 

The special depreciation allowance for qualified New York Liberty Zone property equals 30 

percent of the adjusted basis of the property for the taxable year in which the property was 

placed in service. Qualified nonresidential real property and residential rental property must have 

been purchased by the taxpayer after September 10, 2001, and placed in service before January 

1, 2010. Such property is qualified property only to the extent it rehabilitates real property 

damaged, or replaces real property destroyed or condemned, as a result of the September 11, 

2001, terrorist attacks.5 

The five-year recovery period for qualified leasehold improvement property applied, in general, 

to buildings located in the New York Liberty Zone if the improvement was placed in service 

after September 10, 2001, and before January 1, 2007, and no written binding contract for the 

improvement was in effect before September 11, 2001. 

The $8 billion of tax-exempt private activity bond financing is authorized to be issued by the 

State of New York or any political subdivision thereof after March 9, 2002, and before January 

1, 2012. 

The $9 billion of additional tax-exempt, advance refunding bonds was available after March 9, 

2002, and before January 1, 2006, with respect to certain State or local bonds outstanding on 

September 11, 2001. 

 

4

 The Working Families Tax Relief Act of 2004 amended certain of the New York Liberty Zone provisions relating 

to tax-exempt bonds. 

5

 Other qualified property must have been placed in service prior to January 1, 2007. 
31 

Businesses were allowed to expense the cost of certain qualified New York Liberty Zone 

property placed in service prior to 2007, up to an additional $35,000 above the amounts 

generally available under section 179. In addition, only 50 percent of the cost of such qualified 

New York Liberty Zone property counted toward the limitation under which section 179 

deductions are reduced to the extent the cost of section 179 property exceeds a specified amount. 

A taxpayer may elect not to recognize gain with respect to property that is involuntarily 

converted if the taxpayer acquires within an applicable period (the replacement period) property 

similar or related in service or use. In general, the replacement period begins with the date of the 

disposition of the converted property and ends two years (three years if the converted property is 

real property held for the productive use in a trade or business or for investment) after the close 

of the first taxable year in which any part of the gain upon conversion is realized. The Act 

extended the replacement period to five years for property in the New York Liberty Zone that 

was involuntarily converted as a result of the terrorist attacks on September 11, 2001, if 

substantially all of the use of the replacement property is in New York City. 

Reasons for Change 

Some of the tax benefits that were provided to New York following the attacks of September 11, 

2001, likely will not be usable in the form in which they were originally provided. State and 

local officials in New York have concluded that improvements to transportation infrastructure 

and connectivity in the Liberty Zone would have a greater impact on recovery and continued 

development than would continuing some of the original tax incentives. 

Proposal 

The proposal would provide tax credits to New York State and New York City for expenditures 

relating to the construction or improvement of transportation infrastructure in or connecting to 

the New York Liberty Zone. New York State and New York City each would be eligible for a 

tax credit for expenditures relating to the construction or improvement of transportation 

infrastructure in or connecting to the New York Liberty Zone. The tax credit would be allowed 

in each year from 2012 to 2021, inclusive, subject to an annual limit of $200 million (for a total 

of $2 billion in tax credits), and would be divided evenly between the State and the City. Any 

unused credits below the annual limit would be added to the $200 million annual limit for the 

following year, including years after 2021. Similarly, expenditures that exceed the annual limit 

would be carried forward and subtracted from the annual limit in the following year. The credit 

would be allowed against any payments (other than payments of excise taxes and social security 

and Medicare payroll taxes) made by the City and State under any provision of the Code, 

including income tax withholding. The Treasury Department would prescribe such rules as are 

necessary to ensure that the expenditures are made for the intended purposes. The amount of the 

credit received would be considered State and local funds for the purpose of any Federal 

program. 

The proposal would be effective after December 31, 2011. 
32 

CONTINUE CERTAIN EXPIRING PROVISIONS THROUGH CALENDAR

YEAR 2012

A number of temporary tax provisions that have been routinely extended have expired or are 

scheduled to expire on or before December 31, 2011. The Administration proposes to extend a 

number of these provisions through December 31, 2012. For example, the optional deduction for 

State and local general sales taxes; the deduction for qualified out-of-pocket classroom expenses; 

the deduction for qualified tuition and related expenses; the Subpart F “active financing” and 

“look-through” exceptions; the modified recovery period for qualified leasehold, restaurant, and 

retail improvements; and several trade agreements would be extended through December 31, 

2012. Temporary incentives provided for the production of fossil fuels would be allowed to 

expire as scheduled under current law. 

See Table 4 for a list of the provisions that the Administration proposes to extend. 
33 

OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS

Reform Treatment of Financial Institutions and Products

IMPOSE A FINANCIAL CRISIS RESPONSIBILITY FEE 

Current Law 

There is no sector-specific Federal tax applied to financial firms (although these firms are subject 

to the general corporate income tax and potentially a wide range of excise taxes). Financial 

sector firms are subject to a range of fees, depending on the lines of business in which they 

participate. For example, banks are assessed fees by the Federal Deposit Insurance Corporation 

to cover the costs of insuring deposits made at these institutions. 

Reasons for Change 

Excessive risk undertaken by major financial firms was a significant cause of the recent financial 

crisis. Extraordinary steps were taken by the Federal government to inject funds into the 

financial system, guarantee certain types of securities, and purchase securities from weakened 

firms. The law which enabled some of these actions and which created the Troubled Asset 

Relief Program (TARP) requires the President to propose an assessment on the financial sector to 

pay back the costs of these extraordinary actions. Accordingly, the Financial Crisis 

Responsibility Fee is intended to recoup the costs of the TARP program as well as discourage 

excessive risk-taking, as the combination of high levels of risky assets and less stable sources of 

funding were key contributors to the financial crisis. The structure of this fee would be broadly 

consistent with the principles agreed to by the G-20 leaders and similar to fees proposed by other 

countries. 

Proposal

The Financial Crisis Responsibility Fee would be assessed on certain liabilities of the largest 

firms in the financial sector. Specific components of the proposal are described here. 

Firms Subject to the Fee: The fee would apply to U.S.-based bank holding companies, thrift 

holding companies, certain broker-dealers, companies that control certain broker-dealers and 

insured depository institutions. U.S. companies owning and controlling these types of entities as 

of January 14, 2010 also would be subject to the fee. Firms with worldwide consolidated assets 

of less than $50 billion would not be subject to the fee for the period when their assets are below 

this threshold. U.S. subsidiaries of foreign firms that fall into these categories and that have 

assets in excess of $50 billion also would be covered. 

Base of Fee: The fee would be based on the covered liabilities of a financial firm. Covered 

liabilities are generally the consolidated risk-weighted assets of a financial firm, less its capital, 

insured deposits, and certain loans to small business. These would be computed using 

information filed with the appropriate Federal or State regulators. For insurance companies, 
34 

certain insurance policy reserves and other policyholder obligations also would be deducted in 

computing covered liabilities. In addition, adjustments would be provided to prevent avoidance. 

Fee Rates: The rate of the fee applied to covered liabilities would be approximately 7.5 basis 

points. A discount would apply to more stable sources of funding, including long-term 

liabilities. 

Deductibility: The fee would be deductible in computing corporate income tax. 

Filing and Payment Requirements: A financial entity subject to the fee would report it on its 

annual Federal income tax return. Estimated payments of the fee would be made on the same 

schedule as estimated income tax payments. 

The fee would be effective as of the day after December 31, 2012. 
35 

REQUIRE ACCRUAL OF INCOME ON FORWARD SALE OF CORPORATE STOCK 

Current Law

A corporation generally does not recognize gain or loss on the issuance or repurchase of its own 

stock. Thus, a corporation does not recognize gain or loss on the forward sale of its own stock. 

A corporation sells its stock forward by agreeing to issue its stock in the future in exchange for 

consideration to be paid in the future. 

Although a corporation does not recognize gain or loss on the issuance of its own stock, a 

corporation does recognize interest income upon the current sale of any stock (including its own) 

for deferred payment. 

Reasons for Change

There is little substantive difference between a corporate issuer’s current sale of its stock for 

deferred payment and an issuer’s forward sale of the same stock. The only difference between 

the two transactions is the timing of the stock issuance. In a current sale, the stock is issued at 

the inception of the transaction, but in a forward sale, the stock is issued at the time the deferred 

payment is received. In both cases, a portion of the deferred payment economically compensates 

the corporation for the time value of deferring receipt of the payment. It is inappropriate to treat 

these two transactions differently. 

Proposal

The proposal would require a corporation that enters into a forward contract to issue its stock to 

treat a portion of the payment on the forward issuance as a payment of interest. 

The proposal would be effective for forward contracts entered into after December 31, 2011. 
36 

REQUIRE ORDINARY TREATMENT OF INCOME FROM DAY-TO-DAY DEALER 

ACTIVITIES FOR CERTAIN DEALERS OF EQUITY OPTIONS AND COMMODITIES 

Current Law

Under current law, certain dealers treat the income from some of their day-to-day dealer 

activities as capital gain. This special rule applies to certain transactions in section 1256 

contracts by commodities dealers (within the meaning of section 1402(i)(2)(B)), commodities 

derivatives dealers (within the meaning of section 1221(b)(1)(A)), dealers in securities (within 

the meaning of section 475(c)(1)), and options dealers (within the meaning of section 

1256(g)(8)). Under section 1256, these dealers treat 60 percent of their income (or loss) from 

their dealer activities in section 1256 contracts as long-term capital gain (or loss) and 40 percent 

of their income (or loss) from these dealer activities as short-term capital gain (or loss). Dealers 

in other types of property generally treat the income from their day-to-day dealer activities as 

ordinary income. 

Reasons for Change

There is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in 

securities, and dealers in options differently from dealers in other types of property. Dealers earn 

their income from their day-to-day dealer activities, and this income should be taxed at ordinary 

rates. 

Proposal

The proposal would require dealers in commodities, commodities derivatives dealers, dealers in 

securities, and dealers in options to treat the income from their day-to-day dealer activities in 

section 1256 contracts as ordinary in character, not capital. 

The proposal would be effective for taxable years beginning after the date of enactment. 
37 

MODIFY THE DEFINITION OF “CONTROL” FOR PURPOSES OF SECTION 249 OF 

THE INTERNAL REVENUE CODE 

Current Law

In general, if a corporation repurchases a debt instrument that is convertible into its stock, or into 

stock of a corporation in control of, or controlled by, the corporation, section 249 may disallow 

or limit the issuer's deduction for a premium paid to repurchase the debt instrument. For this 

purpose, “control” is determined by reference to section 368(c), which encompasses only direct 

relationships (e.g., a parent corporation and its wholly-owned, first-tier subsidiary). 

Reasons for Change

The definition of “control” in section 249 is unnecessarily restrictive and has allowed the 

limitation in section 249 to be too easily avoided. Indirect control relationships (e.g., a parent 

corporation and a second-tier subsidiary) present the same economic identity of interests as 

direct control relationships and should be treated in a similar manner. 

Proposal

The proposal would amend the definition of “control” in section 249(b)(2) to incorporate indirect 

control relationships of the nature described in section 1563(a)(1). 

The proposal would be effective on the date of enactment. 
38 

Reinstate Superfund Taxes

REINSTATE SUPERFUND EXCISE TAXES 

Current Law

The following Superfund excise taxes were imposed before January 1, 1996: 

(1) An excise tax on domestic crude oil and on imported petroleum products at a rate of 9.7 cents 

per barrel; 

(2) An excise tax on listed hazardous chemicals at a rate that varied from 22 cents to $4.87 per 

ton; and 

(3) An excise tax on imported substances that use as materials in their manufacture or production 

one or more of the hazardous chemicals subject to the excise tax described in (2) above. 

Amounts equivalent to the revenues from these taxes were dedicated to the Hazardous Substance 

Superfund Trust Fund (the Superfund Trust Fund). Amounts in the Superfund Trust Fund are 

available for expenditures incurred in connection with releases or threats of releases of hazardous 

substances into the environment under specified provisions of the Comprehensive Environmental 

Response, Compensation, and Liability Act of 1980 (as amended). 

Reasons for Change

The Superfund excise taxes should be reinstated because of the continuing need for funds to 

remedy damages caused by releases of hazardous substances. 

Proposal

The proposal would reinstate the three Superfund excise taxes for periods after December 31, 

2011 and before January 1, 2022. 
39 

REINSTATE SUPERFUND ENVIRONMENTAL INCOME TAX 

Current Law

For taxable years beginning before January 1, 1996, a corporate environmental income tax was 

imposed at a rate of 0.12 percent on the amount by which the modified alternative minimum 

taxable income of a corporation exceeded $2 million. Modified alternative minimum taxable 

income was defined as a corporation's alternative minimum taxable income, determined without 

regard to the alternative tax net operating loss deduction and the deduction for the corporate 

environmental income tax. 

The tax was dedicated to the Hazardous Substance Superfund Trust Fund (the Superfund Trust 

Fund). Amounts in the Superfund Trust Fund are available for expenditures incurred in 

connection with releases or threats of releases of hazardous substances into the environment 

under specified provisions of the Comprehensive Environmental Response, Compensation, and 

Liability Act of 1980 (as amended). 

Reasons for Change

The corporate environmental income tax should be reinstated because of the continuing need for 

funds to remedy damages caused by releases of hazardous substances. 

Proposal

The proposal would reinstate the corporate environmental income tax for taxable years beginning 

after December 31, 2011 and before January 1, 2022. 

 
40 

Reform U.S. International Tax System

DEFER DEDUCTION OF INTEREST EXPENSE RELATED TO DEFERRED INCOME 

Current Law 

Taxpayers generally may deduct ordinary and necessary expenses paid or incurred in carrying on 

any trade or business. The Internal Revenue Code and the regulations thereunder contain detailed 

rules regarding allocation and apportionment of expenses for computing taxable income from 

sources within and without the United States. Under current rules, a U.S. person that incurs 

interest expense properly allocable and apportioned to foreign-source income may deduct those 

expenses even if the expenses exceed the taxpayer’s gross foreign-source income or if the 

taxpayer earns no foreign-source income. For example, a U.S. person that incurs debt to acquire 

stock of a foreign corporation is generally permitted to deduct currently the interest expense from 

the acquisition indebtedness even if no income is derived currently from such stock. Current law 

includes provisions that may require a U.S. person to recapture as U.S.-source income the 

amount by which foreign-source expenses exceed foreign-source income for a taxable year. 

However, if in a taxable year the U.S. person earns sufficient foreign-source income of the same 

statutory grouping in which the stock of the foreign corporation is classified, expenses, such as 

interest expense, properly allocated and apportioned to the stock of the foreign corporation may 

not be subject to recapture in a subsequent taxable year. 

Reasons for Change 

The ability to deduct expenses from overseas investments while deferring U.S. tax on the income 

from the investment may cause U.S. businesses to shift their investments and jobs overseas, 

harming our domestic economy. 

Proposal 

The proposal would defer the deduction of interest expense that is properly allocated and 

apportioned to a taxpayer’s foreign-source income that is not currently subject to U.S. tax. For 

purposes of the proposal, foreign-source income earned by a taxpayer through a branch would be 

considered currently subject to U.S. tax; thus, the proposal would not apply to interest expense 

properly allocated and apportioned to such income. Other directly earned foreign source income 

(for example, royalty income) would be similarly treated. 

For purposes of the proposal, the amount of a taxpayer’s interest expense that is properly 

allocated and apportioned to foreign-source income would generally be determined under current 

Treasury regulations. The Treasury Department, however, will revise existing Treasury 

regulations and propose such other statutory changes as necessary to prevent inappropriate 

decreases in the amount of interest expense that is allocated and apportioned to foreign-source 

income. 

Deferred interest expense would be deductible in a subsequent tax year in proportion to the 

amount of the previously deferred foreign-source income that is subject to U.S. tax during that 
41 

subsequent tax year. Treasury regulations may modify the manner in which a taxpayer can 

deduct previously deferred interest expenses in certain cases. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
42 

DETERMINE THE FOREIGN TAX CREDIT ON A POOLING BASIS 

Current Law

Section 901 provides that, subject to certain limitations, a taxpayer may choose to claim a credit 

against its U.S. income tax liability for income, war profits, and excess profits taxes paid or 

accrued during the taxable year to any foreign country or any possession of the United States. 

Under section 902, a domestic corporation is deemed to have paid the foreign taxes paid by 

certain foreign subsidiaries from which it receives a dividend (the deemed paid foreign tax 

credit). The foreign tax credit is limited to an amount equal to the pre-credit U.S. tax on the 

taxpayer’s foreign-source income. This foreign tax credit limitation is applied separately to 

foreign-source income in each of the separate categories described in section 904(d)(1), i.e., the 

passive category and general category. 

Reasons for Change 

The purpose of the foreign tax credit is to mitigate the potential for double taxation when U.S. 

taxpayers are subject to foreign taxes on their foreign-source income. The reduction to two 

foreign tax credit limitation categories, for passive category income and general category income 

under the American Jobs Creation Act of 2004, enhanced U.S. taxpayers’ ability to reduce the 

residual U.S. tax on foreign-source income through “cross-crediting.” 

Proposal 

The proposal would require a U.S. taxpayer to determine its deemed paid foreign tax credit on a 

consolidated basis based on the aggregate foreign taxes and earnings and profits of all of the 

foreign subsidiaries with respect to which the U.S. taxpayer can claim a deemed paid foreign tax 

credit (including lower tier subsidiaries described in section 902(b)). The deemed paid foreign 

tax credit for a taxable year would be determined based on the amount of the consolidated 

earnings and profits of the foreign subsidiaries repatriated to the U.S. taxpayer in that taxable 

year. The Secretary would be granted authority to issue any Treasury regulations necessary to 

carry out the purposes of the proposal. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
43 

TAX CURRENTLY EXCESS RETURNS ASSOCIATED WITH TRANSFERS OF 

INTANGIBLES OFFSHORE 

Current Law 

Section 482 authorizes the Secretary to distribute, apportion, or allocate gross income, 

deductions, credits, and other allowances between or among two or more organizations, trades, 

or businesses under common ownership or control whenever “necessary in order to prevent 

evasion of taxes or clearly to reflect the income of any of such organizations, trades, or 

businesses.” The regulations under section 482 provide that the standard to be applied is that of 

unrelated persons dealing at arm’s length. In the case of transfers of intangible assets, section 

482 further provides that the income with respect to the transaction must be commensurate with 

the income attributable to the transferred intangible assets. 

In general, the subpart F rules (sections 951-964) require U.S. shareholders with a 10- 

percent or greater interest in a controlled foreign corporation (CFC) to include currently in 

income for U.S. tax purposes their pro rata share of certain income of the CFC (referred to as 

“subpart F income”), without regard to whether the income is actually distributed to the 

shareholders. A CFC generally is defined as any foreign corporation if U.S. persons own 

(directly, indirectly, or constructively) more than 50 percent of the corporation’s stock (measured 

by vote or value), taking into account only those U.S. persons that own at least 10 percent of the 

corporation’s voting stock. 

Subpart F income consists of foreign base company income, insurance income, and certain 

income relating to international boycotts and other proscribed activities. Foreign base company 

income consists of foreign personal holding company income (which includes passive income 

such as dividends, interest, rents, royalties, and annuities) and other categories of income from 

business operations, including foreign base company sales income, foreign base company 

services income, and foreign base company oil-related income. 

A foreign tax credit is generally available for foreign income taxes paid by a CFC to the extent 

that the CFC’s income is taxed to a U.S. shareholder under subpart F, subject to the limitations 

set forth in section 904. 

Reasons for Change 

The potential tax savings from transactions between related parties, especially with regard to 

transfers of intangible assets to low-taxed affiliates, puts significant pressure on the enforcement 

and effective application of transfer pricing rules. There is evidence indicating that income 

shifting through transfers of intangibles to low-taxed affiliates has resulted in a significant 

erosion of the U.S. tax base. Expanding subpart F to include excess income from intangibles 

transferred to low-taxed affiliates will reduce the incentive for taxpayers to engage in these 

transactions. 
44 

Proposal 

The proposal would provide that if a U.S. person transfers (directly or indirectly) an intangible 

from the United States to a related CFC (a “covered intangible”), then certain excess income 

from transactions connected with or benefitting from the covered intangible would be treated as 

subpart F income if the income is subject to a low foreign effective tax rate. For this purpose, 

excess intangible income would be defined as the excess of gross income from transactions 

connected with or benefitting from such covered intangible over the costs (excluding interest and 

taxes) properly allocated and apportioned to this income increased by a percentage mark-up. For 

purposes of this proposal, the transfer of an intangible includes by sale, lease, license, or through 

any shared risk or development agreement (including any cost sharing arrangement)). This 

subpart F income will be a separate category of income for purposes of determining the 

taxpayer’s foreign tax credit limitation under section 904. 

The proposal would be effective for transactions in taxable years beginning after December 31, 

2011. 
45 

LIMIT SHIFTING OF INCOME THROUGH INTANGIBLE PROPERTY TRANSFERS 

Current Law 

Section 482 authorizes the Secretary to distribute, apportion, or allocate gross income, 

deductions, credits, and other allowances between or among two or more organizations, trades, 

or businesses under common ownership or control whenever “necessary in order to prevent 

evasion of taxes or clearly to reflect the income of any of such organizations, trades, or 

businesses.” Section 482 also provides that in the case of transfers of intangible assets, the 

income with respect to the transaction must be commensurate with the income attributable to the 

transferred intangible assets. Further, under section 367(d), if a U.S. person transfers intangible 

property (as defined in section 936(h)(3)(B)) to a foreign corporation in certain nonrecognition 

transactions, the U.S. person is treated as selling the intangible property for a series of payments 

contingent on the productivity, use, or disposition of the property that are commensurate with the 

transferee's income from the property. The payments generally continue annually over the useful 

life of the property. 

Reasons for Change 

Controversy often arises concerning the value of intangible property transferred between related 

persons and the scope of the intangible property subject to sections 482 and 367(d). This lack of 

clarity may result in the inappropriate avoidance of U.S. tax and misuse of the rules applicable to 

transfers of intangible property to foreign persons. 

Proposal 

The proposal would clarify the definition of intangible property for purposes of sections 367(d) 

and 482 to include workforce in place, goodwill and going concern value. The proposal also 

would clarify that where multiple intangible properties are transferred, the Commissioner may 

value the intangible properties on an aggregate basis where that achieves a more reliable result. 

In addition, the proposal would clarify that the Commissioner may value intangible property 

taking into consideration the prices or profits that the controlled taxpayer could have realized by 

choosing a realistic alternative to the controlled transaction undertaken. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
46 

DISALLOW THE DEDUCTION FOR NON-TAXED REINSURANCE PREMIUMS PAID 

TO AFFILIATES 

Current Law

Insurance companies are generally allowed a deduction for premiums paid for reinsurance. If the 

reinsurance transaction results in a transfer of reserves and reserve assets to the reinsurer, 

potential tax liability for earnings on those assets is generally shifted to the reinsurer as well. 

While insurance income of a controlled foreign corporation is generally subject to current U.S. 

taxation, insurance income of a foreign-owned foreign company that is not engaged in a trade or 

business in the United States is not subject to U.S. income tax. Reinsurance policies issued by 

foreign reinsurers with respect to U.S. risks are generally subject to an excise tax equal to one 

percent of the premiums paid, unless waived by treaty. 

Reasons for Change

Reinsurance transactions with affiliates that are not subject to U.S. federal income tax on 

insurance income can result in substantial U.S. tax advantages over similar transactions with 

entities that are subject to tax in the United States. The excise tax on reinsurance policies issued 

by foreign reinsurers is not always sufficient to offset this tax advantage. These tax advantages 

create an inappropriate incentive for foreign-owned domestic insurance companies to reinsure 

U.S. risks with foreign affiliates. 

Proposal

The proposal would (1) deny an insurance company a deduction for reinsurance premiums paid 

to affiliated foreign reinsurance companies to the extent that the foreign reinsurer (or its parent 

company) is not subject to U.S. income tax with respect to the premiums received; and (2) would 

exclude from the insurance company’s income (in the same proportion that the premium 

deduction was denied) any ceding commissions received or reinsurance recovered with respect to 

reinsurance policies for which a premium deduction is wholly or partially denied. 

A foreign corporation that is paid a premium from an affiliate that would otherwise be denied a 

deduction under this proposal would be permitted to elect to treat those premiums and the 

associated investment income as income effectively connected with the conduct of a trade or 

business in the United States and attributable to a permanent establishment for tax treaty 

purposes. For foreign tax credit purposes, reinsurance income treated as effectively connected 

under this rule would be treated as foreign source income and would be placed into a separate 

category within section 904. 

The provision is effective for policies issued in taxable years beginning after December 31, 2011.
47 

LIMIT EARNINGS STRIPPING BY EXPATRIATED ENTITIES 

Current Law

Section 163(j) limits the deductibility of certain interest paid by a corporation to related persons. 

The limitation applies to a corporation that fails a debt-to-equity safe harbor (greater than 1.5 to 

1) and that has net interest expense in excess of 50 percent of adjusted taxable income (generally 

computed by adding back net interest expense, depreciation, amortization and depletion, any net 

operating loss deduction, and any deduction for domestic production activities under section 

199). Disallowed interest expense may be carried forward indefinitely for deduction in a 

subsequent year. In addition, the corporation’s excess limitation for a tax year (i.e., the amount 

by which 50 percent of adjusted taxable income exceeds net interest expense) may be carried 

forward to the three subsequent tax years. 

Section 7874 provides special rules for expatriated entities and the acquiring foreign 

corporations. The rules apply to certain defined transactions in which a U.S. parent company 

(the expatriated entity) is essentially replaced with a foreign parent (the surrogate foreign 

corporation). The tax treatment of an expatriated entity and a surrogate foreign corporation 

varies depending on the extent of continuity of shareholder ownership following the transaction. 

The surrogate foreign corporation is treated as a domestic corporation for all purposes of the 

Code if shareholder ownership continuity is at least 80 percent (by vote or value). If shareholder 

ownership continuity is at least 60 percent, but less than 80 percent, the surrogate foreign 

corporation is treated as a foreign corporation but certain tax consequences apply, including that 

any applicable corporate-level income or gain required to be recognized by the expatriated entity 

generally cannot be offset by tax attributes. Section 7874 generally applies to transactions 

occurring on or after March 4, 2003. 

Reasons for Change 

Under current law, opportunities are available to reduce inappropriately the U.S. tax on income 

earned from U.S. operations through the use of foreign related-party debt. In its 2007 study of 

earnings stripping, the Treasury Department found strong evidence of the use of such techniques 

by expatriated entities. Consequently, amending the rules of section 163(j) for expatriated 

entities is necessary to prevent these inappropriate income-reduction opportunities. 

Proposal 

The proposal would revise section 163(j) to tighten the limitation on the deductibility of interest 

paid by an expatriated entity to related persons. The current law debt-to-equity safe harbor 

would be eliminated. The 50 percent adjusted taxable income threshold for the limitation would 

be reduced to 25 percent. The carryforward for disallowed interest would be limited to ten years 

and the carryforward of excess limitation would be eliminated. 

An expatriated entity would be defined by applying the rules of section 7874 and the regulations 

thereunder as if section 7874 were applicable for taxable years beginning after July 10, 1989. 

This special rule would not apply, however, if the surrogate foreign corporation is treated as a 

domestic corporation under section 7874. 
48 

The proposal would be effective for taxable years beginning after December 31, 2011.
49 

MODIFY THE TAX RULES FOR DUAL CAPACITY TAXPAYERS 

Current Law

Section 901 provides that, subject to certain limitations, a taxpayer may choose to claim a credit 

against its U.S. income tax liability for income, war profits, and excess profits taxes paid or 

accrued during the taxable year to any foreign country or any possession of the United States. 

To be a creditable tax, a foreign levy must be substantially equivalent to an income tax under 

United States tax principles, regardless of the label attached to the levy under law. Under current 

Treasury regulations, a foreign levy is a tax if it is a compulsory payment under the authority of a 

foreign government to levy taxes and is not compensation for a specific economic benefit 

provided by the foreign country. Taxpayers that are subject to a foreign levy and that also 

receive a specific economic benefit from the levying country (dual capacity taxpayers) may not 

credit the portion of the foreign levy paid for the specific economic benefit. The current 

Treasury regulations provide that, if a foreign country has a generally-imposed income tax, the 

dual capacity taxpayer may treat as a creditable tax the portion of the levy that application of the 

generally imposed income tax would yield (provided that the levy otherwise constitutes an 

income tax or an in lieu of tax). The balance of the levy is treated as compensation for the 

specific economic benefit. If the foreign country does not generally impose an income tax, the 

portion of the payment that does not exceed the applicable federal tax rate applied to net income 

is treated as a creditable tax. A foreign tax is treated as generally imposed even if it applies only 

to persons who are not residents or nationals of that country. 

There is no separate section 904 foreign tax credit limitation category for oil and gas income. 

However, under section 907, the amount of creditable foreign taxes imposed on foreign oil and 

gas income is limited in any year to the applicable U.S. tax on that income. 

Reasons for Change

The purpose of the foreign tax credit is to mitigate double taxation of income by the United 

States and a foreign country. When a payment is made to a foreign country in exchange for a 

specific economic benefit, there is no double taxation. Current law recognizes the distinction 

between a payment of creditable taxes and a payment in exchange for a specific economic 

benefit but fails to achieve the appropriate split between the two when a single payment is made 

in a case where, for example, a foreign country imposes a levy only on oil and gas income, or 

imposes a higher levy on oil and gas income as compared to other income. 

Proposal

The proposal would allow a dual capacity taxpayer to treat as a creditable tax the portion of a 

foreign levy that does not exceed the foreign levy that the taxpayer would pay if it were not a 

dual-capacity taxpayer. The proposal would replace the current regulatory provisions, including 

the safe harbor, that apply to determine the amount of a foreign levy paid by a dual-capacity 

taxpayer that qualifies as a creditable tax. The proposal also would convert the special foreign 

tax credit limitation rules of section 907 into a separate category within section 904 for foreign 

oil and gas income. The proposal would yield to United States treaty obligations to the extent 

that they allow a credit for taxes paid or accrued on certain oil or gas income. 
50 

The proposal would be effective for taxable years beginning after December 31, 2011. 

 
51 

Reform Treatment of Insurance Companies and Products

MODIFY RULES THAT APPLY TO SALES OF LIFE INSURANCE CONTRACTS 

Current Law

The seller of a life insurance contract generally must report as taxable income the difference 

between the amount received from the buyer and the adjusted basis in the contract, unless the 

buyer is a viatical settlement provider and the insured person is terminally or chronically ill. 

Under a transfer-for-value rule, the buyer of a previously-issued life insurance contract who 

subsequently receives a death benefit generally is subject to tax on the difference between the 

death benefit received and the sum of the amount paid for the contract and premiums 

subsequently paid by the buyer. This rule does not apply if the buyer's basis is determined in 

whole or in part by reference to the seller's basis, nor does the rule apply if the buyer is the 

insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation 

in which the insured is a shareholder or officer. 

Persons engaged in a trade or business that make payments of premiums, compensations, 

remunerations, other fixed or determinable gains, profits and income, or certain other types of 

payments in the course of that trade or business to another person generally are required to report 

such payments of $600 or more to the Internal Revenue Service (IRS). However, reporting may 

not be required in some circumstances involving the purchase of a life insurance contract. 

Reasons for Change

Recent years have seen a significant increase in the number and size of life settlement 

transactions, wherein individuals sell previously-issued life insurance contracts to investors. 

Compliance is sometimes hampered by a lack of information reporting. In addition, the current 

law exceptions to the transfer-for-value rule may give investors the ability to structure a 

transaction to avoid paying tax on the profit when the insured person dies. 

Proposal

The proposal would require a person or entity who purchases an interest in an existing life 

insurance contract with a death benefit equal to or exceeding $500,000 to report the purchase 

price, the buyer's and seller's taxpayer identification numbers (TINs), and the issuer and policy 

number to the IRS, to the insurance company that issued the policy, and to the seller. 

The proposal also would modify the transfer-for-value rule to ensure that exceptions to that rule 

would not apply to buyers of policies. Upon the payment of any policy benefits to the buyer, the 

insurance company would be required to report the gross benefit payment, the buyer's TIN, and 

the insurance company's estimate of the buyer's basis to the IRS and to the payee. 

The proposal would apply to sales or assignment of interests in life insurance policies and 

payments of death benefits in taxable years beginning after December 31, 2011. 
52 

MODIFY DIVIDENDS-RECEIVED DEDUCTION (DRD) FOR LIFE INSURANCE 

COMPANY SEPARATE ACCOUNTS 

Current Law

Corporate taxpayers may generally qualify for a DRD with regard to dividends received from 

other domestic corporations, in order to prevent or limit taxable inclusion of the same income by 

more than one corporation. No DRD is allowed, however, in respect of any dividend on any 

share of stock (1) to the extent the taxpayer is under an obligation to make related payments with 

respect to positions in substantially similar or related property, or (2) that is held by the taxpayer 

for 45 days or less during the 91-day period beginning on the date that is 45 days before the 

share becomes ex-dividend with respect to the dividend. For this purpose, the taxpayer’s holding 

period is reduced for any period in which the taxpayer has diminished its risk of loss by holding 

one or more positions with respect to substantially similar or related property. 

In the case of a life insurance company, the DRD is permitted only with regard to the "company's 

share" of dividends received, reflecting the fact that some portion of the company's dividend 

income is used to fund tax-deductible reserves for its obligations to policyholders. Likewise, the 

net increase or net decrease in reserves is computed by reducing the ending balance of the 

reserve items by the policyholders’ share of tax-exempt interest. The regime for computing the 

company's share and policyholders’ share of net investment income is sometimes referred to as 

proration. 

The policyholders’ share equals 100 percent less the company’s share, whereas the latter is equal 

to the company’s share of net investment income divided by net investment income. The 

company's share of net investment income is the excess, if any, of net investment income over 

certain amounts, including “required interest,” that are set aside to satisfy obligations to 

policyholders. Required interest with regard to an account is calculated by multiplying a 

specified account earnings rate by the mean of the reserves with regard to the account for the 

taxable year. 

A life insurance company's separate account assets, liabilities, and income are segregated from 

those of the company’s general account in order to support variable life insurance and variable 

annuity contracts. A company’s share and policyholders’ share are computed for the company’s 

general account and separately for each separate account. 

Reasons for Change

The proration methodology currently used by some taxpayers may produce a company’s share 

that greatly exceeds the company's economic interest in the net investment income earned by its 

separate account assets, generating controversy between life insurance companies and the 

Internal Revenue Service. The purposes of the proration regime would be better served, and life 

insurance companies would be treated more like other taxpayers with a diminished risk of loss in 

stock or an obligation to make related payments with respect to dividends, if the company's share 

bore a more direct relationship to the company's actual economic interest in the account. 
53 

Proposal

The proposal would repeal the existing regime for prorating investment income between the 

"company's share" and the "policyholders' share." The general account DRD, tax-exempt 

interest, and increases in certain policy cash values of a life insurance company would instead be 

subject to a fixed 15 percent proration in a manner similar to that which applies under current 

law to non-life insurance companies. The limitations on DRD that apply to other corporate 

taxpayers would be expanded to apply explicitly to life insurance company separate account 

dividends in the same proportion as the mean of reserves bears to the mean of total assets of the 

account. The proposal would thus put the company's general account DRD on a similar footing 

to that of a non-life company, and would put its separate account DRD on a similar footing to 

that of any other taxpayer with a diminished risk of loss in stock that it owns, or with an 

obligation to make related payments with regard to dividends. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
54 

EXPAND PRO RATA INTEREST EXPENSE DISALLOWANCE FOR CORPORATEOWED LIFE INSURANCE 

Current Law

In general, no Federal income tax is imposed on a policyholder with respect to the earnings 

credited under a life insurance or endowment contract, and Federal income tax generally is 

deferred with respect to earnings under an annuity contract (unless the annuity contract is owned 

by a person other than a natural person). In addition, amounts received under a life insurance 

contract by reason of the death of the insured generally are excluded from gross income of the 

recipient. 

Interest on policy loans or other indebtedness with respect to life insurance, endowment or 

annuity contracts generally is not deductible, unless the insurance contract insures the life of a 

key person of the business. A key person includes a 20-percent owner of the business, as well as 

a limited number of the business' officers or employees. However, this interest disallowance rule 

applies to businesses only to the extent that the indebtedness can be traced to a life insurance, 

endowment or annuity contract. 

In addition, the interest deductions of a business other than an insurance company are reduced to 

the extent the interest is allocable to unborrowed policy cash values based on a statutory formula. 

An exception to the pro rata interest disallowance applies with respect to contracts that cover 

individuals who are officers, directors, employees, or 20-percent owners of the taxpayer. In the 

case of both life and non-life insurance companies, special proration rules similarly require 

adjustments to prevent or limit the funding of tax-deductible reserve increases with tax preferred 

income, including earnings credited under life insurance, endowment and annuity contracts that 

would be subject to the pro rata interest disallowance rule if owned by a non-insurance company. 

Reasons for Change

Leveraged businesses can fund deductible interest expenses with tax-exempt or tax-deferred 

income credited under life insurance, endowment or annuity contracts insuring certain types of 

individuals. For example, these businesses frequently invest in investment-oriented insurance 

policies covering the lives of their employees, officers, directors or owners. These entities 

generally do not take out policy loans or other indebtedness that is secured or otherwise traceable 

to the insurance contracts. Instead, they borrow from depositors or other lenders, or issue bonds. 

Similar tax arbitrage benefits result when insurance companies invest in certain insurance 

contracts that cover the lives of their employees, officers, directors or 20-percent shareholders 

and fund deductible reserves with tax-exempt or tax-deferred income.

Proposal

The proposal would repeal the exception from the pro rata interest expense disallowance rule for 

contracts covering employees, officers or directors, other than 20-percent owners of a business 

that is the owner or beneficiary of the contracts. 
55 

The proposal would apply to contracts issued after December 31, 2011, in taxable years ending 

after that date. For this purpose, any material increase in the death benefit or other material 

change in the contract would be treated as a new contract except that in the case of a master 

contract, the addition of covered lives would be treated as a new contract only with respect to the 

additional covered lives. 
56 

Miscellaneous Changes

INCREASE THE OIL SPILL LIABILITY TRUST FUND FINANCING RATE BY ONE 

CENT 

Current Law

An excise tax is imposed on domestic crude oil and on imported petroleum products at a rate of 8 

cents per barrel (9 cents per barrel after December 31, 2016). The tax is deposited in the Oil 

Spill Liability Trust Fund to pay costs associated with oil removal and damages resulting from 

oil spills, as well as to provide annual funding to certain agencies for a wide range of oil 

pollution prevention and response programs, including research and development. In an oil spill, 

the fund makes it possible for the Federal government to pay for removal costs up front, and then 

seek full reimbursement from the responsible parties. 

Reasons for Change

The Deepwater Horizon oil spill was the worst oil spill in American history, releasing nearly 5 

million barrels of oil into the Gulf of Mexico, and led to the nation’s largest oil spill response. 

The magnitude of the Federal response reinforced the importance of the Oil Spill Liability Trust 

Fund and the need to maintain a sufficient balance, particularly in order to accommodate spills of 

national significance. 

Proposal

The proposal would increase the rate of the Oil Spill Liability Trust Fund tax to 9 cents per barrel 

for periods after December 31, 2011, and to 10 cents per barrel for periods after December 31, 

2016. 
57 

MAKE UNEMPLOYMENT INSURANCE SURTAX PERMANENT 

Current Law

The Federal Unemployment Tax Act (FUTA) currently imposes a Federal payroll tax on 

employers of 6.2 percent of the first $7,000 paid annually to each employee. The tax funds a 

portion of the Federal/State unemployment benefits system. This 6.2 percent rate includes a 

temporary surtax of 0.2 percent (discussed below). States also impose an unemployment tax on 

employers. Employers in States that meet certain Federal requirements are allowed a credit for 

State unemployment taxes of up to 5.4 percent, making the minimum net Federal tax rate 0.8 

percent. Generally, Federal and State unemployment taxes are collected quarterly and deposited 

in Federal trust fund accounts. 

In 1976, Congress passed a temporary surtax of 0.2 percent of taxable wages to be added to the 

permanent FUTA tax rate. Thus, the current 0.8 percent net FUTA tax rate has two components: 

a permanent tax rate of 0.6 percent and a temporary surtax rate of 0.2 percent. The surtax has 

been extended several times, most recently through June 30, 2011. 

Reasons for Change

Extending the surtax will support the continued solvency of the Federal unemployment trust 

funds. 

Proposal

The proposal would make the 0.2 percent surtax permanent. 

The proposal would be effective as of the date of enactment. 
58 

PROVIDE SHORT-TERM TAX RELIEF TO EMPLOYERS AND EXPAND FEDERAL 

UNEMPLOYMENT TAX ACT (FUTA) BASE 

Current Law

The FUTA currently imposes a Federal payroll tax on employers of 6.2 percent of the first 

$7,000 paid annually to each employee. Generally, these funds support the administrative costs 

of the unemployment insurance (UI) benefits system. Employers in States that meet certain 

Federal requirements are allowed a credit against FUTA taxes of up to 5.4 percent, making the 

minimum net Federal rate 0.8 percent. States that become non-compliant experience a reduction 

in FUTA credit, causing employers to face a higher Federal UI tax. 

Each State also imposes an unemployment insurance tax on employers to fund its State UI trust 

fund. State UI trust funds are used to pay unemployment benefits. When State trust funds are 

exhausted, States borrow from the Federal UI trust fund to pay for unemployment benefits. 

States that borrow from the Federal UI trust fund are required to pay back the borrowed amount 

including interest. This debt is partly repaid by increases in the Federal UI tax (reductions in the 

credit) on employers in these States. 

Reasons for Change

In aggregate, States entered this recession with extremely low levels of reserves in their trust 

funds. Partly because of this, States have accrued large amounts of debt to the Federal UI trust 

fund. Employers in indebted States face immediate tax increases to repay these debts. These tax 

increases discourage job creation at a time when growth is needed. At the same time, many 

States do not have a long-term plan to restore solvency to their trust funds. Short-term relief 

from State debt burdens coupled with longer-term increases in States’ minimum taxable wage 

base will encourage economic growth and lead many States to repay the debts they owe, 

restoring solvency to the UI system. 

Proposal

The proposal would provide short-term relief to employers by suspending interest payments on 

State UI debt and suspending the FUTA credit reduction for employers in borrowing States in 

2011 and 2012. The proposal would also raise the FUTA wage base to $15,000 per worker paid 

annually in 2014, index the wage base to wage growth for subsequent years, and reduce the net 

Federal UI tax from 0.8 percent (after the proposed permanent extension of the FUTA surtax) to 

0.38 percent. States with wage bases below $15,000 would need to conform to the new FUTA 

base. States would maintain the ability to set their own tax rates, as under current law. 

The proposal would be effective upon the date of enactment. 
59 

REPEAL LAST-IN, FIRST-OUT (LIFO) METHOD OF ACCOUNTING FOR 

INVENTORIES 

Current Law 

A taxpayer with inventory may determine the value of its inventory and its cost of goods sold 

using a number of different methods. The most prevalent method is the first-in, first-out (FIFO) 

method, which matches current sales with the costs of the earliest acquired (or manufactured) 

inventory items. As an alternative, a taxpayer may elect to use the LIFO method, which treats the 

most recently acquired (or manufactured) goods as having been sold during the year. The LIFO 

method can provide a tax benefit for a taxpayer facing rising inventory costs, since the cost of 

goods sold under this method is based on more recent, higher inventory values, resulting in lower 

taxable income. If inventory levels fall during the year, however, a LIFO taxpayer must include 

lower-cost LIFO inventory values (reflecting one or more prior-year inventory accumulations) in 

the cost of goods sold, and its taxable income will be correspondingly higher. To be eligible to 

elect LIFO for tax purposes, a taxpayer must use LIFO for financial accounting purposes. 

Reasons for Change 

The repeal of the LIFO method would eliminate a tax deferral opportunity available to taxpayers 

that hold inventories, the costs of which increase over time. In addition, LIFO repeal would 

simplify the Code by removing a complex and burdensome accounting method that has been the 

source of controversy between taxpayers and the Internal Revenue Service. 

International Financial Reporting Standards do not permit the use of the LIFO method, and their 

adoption by the Securities and Exchange Commission would cause violations of the current 

LIFO book/tax conformity requirement. Repealing LIFO would remove this possible 

impediment to the implementation of these standards in the United States. 

Proposal

The proposal would not allow the use of the LIFO inventory accounting method for Federal 

income tax purposes. Taxpayers that currently use the LIFO method would be required to write 

up their beginning LIFO inventory to its FIFO value in the first taxable year beginning after 

December 31, 2012. However, this one-time increase in gross income would be taken into 

account ratably over ten years, beginning with the first taxable year beginning after December 

31, 2012. 
60 

REPEAL GAIN LIMITATION FOR DIVIDENDS RECEIVED IN REORGANIZATION 

EXCHANGES 

Current Law 

Under section 356(a)(1), if as part of a reorganization transaction an exchanging shareholder 

receives in exchange for its stock of the target corporation both stock and property that cannot be 

received without the recognition of gain (often referred to as “boot”), the exchanging shareholder 

is required to recognize gain equal to the lesser of the gain realized in the exchange or the 

amount of boot received (commonly referred to as the “boot within gain” limitation). Further, 

under section 356(a)(2), if the exchange has the effect of the distribution of a dividend, then all 

or part of the gain recognized by the exchanging shareholder is treated as a dividend to the extent 

of the shareholder’s ratable share of the corporation’s earnings and profits. The remainder of the 

gain (if any) is treated as gain from the exchange of property. 

 

Reasons for Change 

There is not a significant policy reason to vary the treatment of a distribution that otherwise 

qualifies as a dividend by reference to whether it is received in the normal course of a 

corporation’s operations or is instead received as part of a reorganization exchange. Thus, 

repealing the boot-within-gain limitation for an exchange that has the effect of the distribution of 

a dividend will provide more uniform treatment for dividends that is less dependent on context. 

Moreover, in cross-border reorganizations, the boot-within-gain limitation can permit U.S. 

shareholders to repatriate previously-untaxed earnings and profits of foreign subsidiaries with 

minimal U.S. tax consequences. For example, if the exchanging shareholder’s stock in the target 

corporation has little or no built-in gain at the time of the exchange, the shareholder will 

recognize minimal gain even if the exchange has the effect of the distribution of a dividend 

and/or a significant amount (or all) of the consideration received in the exchange is boot. This 

result applies even if the corporation has previously untaxed earnings and profits equal to or 

greater than the boot. This result is inconsistent with the principle that previously untaxed 

earnings and profits of a foreign subsidiary should be subject to U.S. tax upon repatriation. 

Proposal 

The proposal would repeal the boot-within-gain limitation of current law in the case of any 

reorganization transaction if the exchange has the effect of the distribution of a dividend, as 

determined under section 356(a)(2). 

The proposal would be effective for taxable years beginning after December 31, 2011. 
61 

TAX CARRIED (PROFITS) INTERESTS IN INVESTMENT PARTNERSHIPS AS 

ORDINARY INCOME 

Current Law

A partnership is not subject to Federal income tax. Instead, an item of income or loss of the 

partnership retains its character and flows through to the partners, who must include such item on 

their tax returns. Generally, certain partners receive partnership interests in exchange for 

contributions of cash and/or property, while certain partners (not necessarily other partners) 

receive partnership interests, typically interests in future profits (“profits interests” or “carried 

interests”), in exchange for services. Accordingly, if and to the extent a partnership recognizes 

long-term capital gain, the partners, including partners who provide services, will reflect their 

shares of such gain on their tax returns as long-term capital gain. If the partner is an individual, 

such gain would be taxed at the reduced rates for long-term capital gains. Gain recognized on the 

sale of a partnership interest, whether it was received in exchange for property, cash or services, 

is generally treated as capital gain. 

Under current law, income attributable to a profits interest of a general partner is generally 

subject to self-employment tax, except to the extent the partnership generates types of income 

that are excluded from self-employment taxes, e.g., capital gains, certain interest, and dividends. 

Reasons for Change

Although profits interests are structured as partnership interests, the income allocable to such 

interests is received in connection with the performance of services. A service provider’s share 

of the income of a partnership attributable to a carried interest should be taxed as ordinary 

income and subject to self-employment tax because such income is derived from the 

performance of services. By allowing service partners to receive capital gains treatment on labor 

income without limit, the current system creates an unfair and inefficient tax preference. The 

recent explosion of activity among large private equity firms and hedge funds has increased the 

breadth and cost of this tax preference, with some of the highest-income Americans benefiting 

from the preferential treatment. 

Proposal 

The proposal would tax as ordinary income a partner’s share of income on an “investment 

services partnership interest” (ISPI) in an investment partnership, regardless of the character of 

the income at the partnership level. Accordingly, such income would not be eligible for the 

reduced rates that apply to long-term capital gains. In addition, the proposal would require the 

partner to pay self-employment taxes on such income. Gain recognized on the sale of an ISPI 

would generally be taxed as ordinary income, not as capital gain. 

An ISPI is a carried interest in an investment partnership that is held by a person who provides 

services to the partnership. A partnership is an investment partnership if the majority of its assets 

are investment-type assets (certain securities, real estate, interests in partnerships, commodities, 

cash or cash equivalents, or derivative contracts with respect to those assets), but only if over 

half of the partnership’s contributed capital is from partners in whose hands the interests 
62 

constitute property held for the production of income. To the extent that the partner who holds 

an ISPI contributes “invested capital” and the partnership reasonably allocates its income and 

loss between such invested capital and the remaining interest, income attributable to the invested 

capital would not be recharacterized. Similarly, the portion of any gain recognized on the sale of 

an ISPI that is attributable to the invested capital would be treated as capital gain. “Invested 

capital” is defined as money or other property contributed to the partnership. However, 

contributed capital that is attributable to the proceeds of any loan or other advance made or 

guaranteed by any partner or the partnership is not treated as “invested capital.” 

Also, any person who performs services for an entity and holds a “disqualified interest” in the 

entity is subject to tax at rates applicable to ordinary income on any income or gain received with 

respect to the interest. A “disqualified interest” is defined as convertible or contingent debt, an 

option, or any derivative instrument with respect to the entity (but does not include a partnership 

interest or stock in certain taxable corporations). This is an anti-abuse rule designed to prevent 

the avoidance of the proposal through the use of compensatory arrangements other than 

partnership interests. Other anti-abuse rules may be necessary. 

The proposal is not intended to adversely affect qualification of a real estate investment trust 

owning a carried interest in a real estate partnership. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
63 

DENY DEDUCTION FOR PUNITIVE DAMAGES

Current Law 

No deduction is allowed for a fine or similar penalty paid to a government for the violation of 

any law. If a taxpayer is convicted of a violation of the antitrust laws, or the taxpayer’s plea of 

guilty or nolo contendere to such a violation is entered or accepted in a criminal proceeding, no 

deduction is allowed for two-thirds of any amount paid or incurred on a judgment or in 

settlement of a civil suit brought under section 4 of the Clayton Antitrust Act on account of such 

or any related antitrust violation. Where neither of these two provisions is applicable, a deduction 

is allowed for damages paid or incurred as ordinary and necessary expenses in carrying on any 

trade or business, regardless of whether such damages are compensatory or punitive. 

Reasons for Change 

The deductibility of punitive damage payments undermines the role of such damages in 

discouraging and penalizing certain undesirable actions or activities. 

Proposal 

The proposal would not allow a deduction for punitive damages paid or incurred by the taxpayer, 

whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is 

covered by insurance, such damages paid or incurred by the insurer would be included in the 

gross income of the insured person. The insurer would be required to report such payments to the 

insured person and to the Internal Revenue Service. 

The proposal would apply to damages paid or incurred after December 31, 2012. 
64 

REPEAL LOWER-OF-COST-OR-MARKET (LCM) INVENTORY ACCOUNTING 

METHOD

Current Law

Taxpayers required to maintain inventories are permitted to use a variety of methods to 

determine the cost of their ending inventories, including methods such as the last-in, first-out 

(LIFO) method, the first-in, first-out method, and the retail method. Taxpayers not using a LIFO 

method may: (1) write down the carrying values of their inventories by applying the LCM 

method instead of the cost method, and (2) write down the cost of “subnormal” goods (i.e., those 

that are unsalable at normal prices or unusable in the normal way because of damage, 

imperfection or other similar causes). 

Reasons for Change

The allowance of inventory write-downs under the LCM and subnormal goods provisions is an 

exception from the realization principle, and is essentially a one-way mark-to-market regime that 

understates taxable income. Thus, a taxpayer is able to obtain a larger cost-of-goods-sold 

deduction by writing down an item of inventory if its replacement cost falls below historical cost, 

but need not increase an item’s inventory value if its replacement cost increases above historical 

cost. This asymmetric treatment is unwarranted. Also, the market value used under LCM for tax 

purposes generally is the replacement or reproduction cost of an item of inventory, not the item’s 

net realizable value, as is required under generally accepted financial accounting rules. While 

the operation of the retail method is technically symmetric, it also allows retailers to obtain 

deductions for write-downs below inventory cost because of normal and anticipated declines in 

retail prices. 

Proposal

The proposal would statutorily prohibit the use of the LCM and subnormal goods methods. 

Appropriate wash-sale rules also would be included to prevent taxpayers from circumventing the 

prohibition. The proposal would result in a change in the method of accounting for inventories 

for taxpayers currently using the LCM and subnormal goods methods, and any resulting section 

481(a) adjustment generally would be included in income ratably over a four-year period 

beginning with the year of change. 

The proposal would be effective for taxable years beginning after December 31, 2012. 
65 

ELIMINATE FOSSIL-FUEL PREFERENCES

Eliminate Oil and Gas Preferences

REPEAL ENHANCED OIL RECOVERY (EOR) CREDIT 

Current Law

The general business credit includes a 15-percent credit for eligible costs attributable to EOR 

projects. If the credit is claimed with respect to eligible costs, the taxpayer’s deduction (or basis 

increase) with respect to those costs is reduced by the amount of the credit. Eligible costs 

include the cost of constructing a gas treatment plant to prepare Alaska natural gas for pipeline 

transportation and any of the following costs with respect to a qualified EOR project: (1) the cost 

of depreciable or amortizable tangible property that is an integral part of the project; (2) 

intangible drilling and development costs (IDCs) that the taxpayer can elect to deduct; and (3) 

deductible tertiary injectant costs. A qualified EOR project must be located in the United States 

and must involve the application of one or more of nine listed tertiary recovery methods that can 

reasonably be expected to result in more than an insignificant increase in the amount of crude oil 

which ultimately will be recovered. The allowable credit is phased out over a $6 range for a 

taxable year if the annual average unregulated wellhead price per barrel of domestic crude oil 

during the calendar year preceding the calendar year in which the taxable year begins (the 

reference price) exceeds an inflation adjusted threshold. The credit was completely phased out 

for taxable years beginning in 2010, because the reference price ($56.39) exceeded the inflation 

adjusted threshold ($42.57) by more than $6. 

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The credit, like other oil 

and gas preferences the Administration proposes to repeal, distorts markets by encouraging more 

investment in the oil and gas industry than would occur under a neutral system. This market 

distortion is detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of supporting a clean energy economy, reducing our reliance on oil, and 

cutting carbon pollution. Moreover, the credit must ultimately be financed with taxes that result 

in underinvestment in other, potentially more productive, areas of the economy. 

Proposal

The proposal would repeal the investment tax credit for enhanced oil recovery projects for 

taxable years beginning after December 31, 2011. 
66 

REPEAL CREDIT FOR OIL AND GAS PRODUCED FROM MARGINAL WELLS 

Current Law

The general business credit includes a credit for crude oil and natural gas produced from 

marginal wells. The credit rate is $3.00 per barrel of oil and 50 cents per 1,000 cubic feet of 

natural gas for taxable years beginning in 2005 and is adjusted for inflation in taxable years 

beginning after 2005. The credit is available for production from wells that produce oil and gas 

qualifying as marginal production for purposes of the percentage depletion rules or that have 

average daily production of not more than 25 barrel-of-oil equivalents and produce at least 95 

percent water. The credit per well is limited to 1,095 barrels of oil or barrel-of-oil equivalents 

per year. The credit rate for crude oil is phased out for a taxable year if the annual average 

unregulated wellhead price per barrel of domestic crude oil during the calendar year preceding 

the calendar year in which the taxable year begins (the reference price) exceeds the applicable 

threshold. The phase-out range and the applicable threshold at which phase-out begins are $3.00 

and $15.00 for taxable years beginning in 2005 and are adjusted for inflation in taxable years 

beginning after 2005. The credit rate for natural gas is similarly phased out for a taxable year if 

the annual average wellhead price for domestic natural gas exceeds the applicable threshold. 

The phase-out range and the applicable threshold at which phase-out begins are 33 cents and 

$1.67 for taxable years beginning in 2005 and are adjusted for inflation in taxable years 

beginning after 2005. The credit has been completely phased out for all taxable years since its 

enactment. The marginal well credit can be carried back up to five years unlike other 

components of the general business credit, which can be carried back only one year. 

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The credit, like other oil 

and gas preferences the Administration proposes to repeal, distorts markets by encouraging more 

investment in the oil and gas industry than would occur under a neutral system. This market 

distortion is detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of supporting a clean energy economy, reducing our reliance on oil, and 

cutting carbon pollution. Moreover, the credit must ultimately be financed with taxes that result 

in underinvestment in other, potentially more productive, areas of the economy. 

Proposal

The proposal would repeal the production tax credit for oil and gas from marginal wells for 

production in taxable years beginning after December 31, 2011. 
67 

REPEAL EXPENSING OF INTANGIBLE DRILLING COSTS (IDCS)

Current Law

In general, costs that benefit future periods must be capitalized and recovered over such periods 

for income tax purposes, rather than being expensed in the period the costs are incurred. In 

addition, the uniform capitalization rules require certain direct and indirect costs allocable to 

property to be included in inventory or capitalized as part of the basis of such property. In 

general, the uniform capitalization rules apply to real and tangible personal property produced by 

the taxpayer or acquired for resale. 

Special rules apply to IDCs. IDCs include all expenditures made by an operator for wages, fuel, 

repairs, hauling, supplies, and other expenses incident to and necessary for the drilling of wells 

and the preparation of wells for the production of oil and gas. In addition, IDCs include the cost 

to operators of any drilling or development work (excluding amounts payable only out of 

production or gross or net proceeds from production, if the amounts are depletable income to the 

recipient, and amounts properly allocable to the cost of depreciable property) done by contractors 

under any form of contract (including a turnkey contract). IDCs include amounts paid for labor, 

fuel, repairs, hauling, and supplies which are used in the drilling, shooting, and cleaning of wells; 

in such clearing of ground, draining, road making, surveying, and geological works as are 

necessary in preparation for the drilling of wells; and in the construction of such derricks, tanks, 

pipelines, and other physical structures as are necessary for the drilling of wells and the 

preparation of wells for the production of oil and gas. Generally, IDCs do not include expenses 

for items which have a salvage value (such as pipes and casings) or items which are part of the 

acquisition price of an interest in the property. 

Under the special rules applicable to IDCs, an operator (i.e., a person who holds a working or 

operating interest in any tract or parcel of land either as a fee owner or under a lease or any other 

form of contract granting working or operating rights) who pays or incurs IDCs in the 

development of an oil or gas property located in the United States may elect either to expense or 

capitalize those costs. The uniform capitalization rules do not apply to otherwise deductible 

IDCs. 

If a taxpayer elects to expense IDCs, the amount of the IDCs is deductible as an expense in the 

taxable year the cost is paid or incurred. Generally, IDCs that a taxpayer elects to capitalize may 

be recovered through depletion or depreciation, as appropriate; or in the case of a nonproductive 

well (“dry hole”), the operator may elect to deduct the costs. In the case of an integrated oil 

company (i.e., a company that engages, either directly or through a related enterprise, in 

substantial retailing or refining activities) that has elected to expense IDCs, 30 percent of the 

IDCs on productive wells must be capitalized and amortized over a 60-month period. 

A taxpayer that has elected to deduct IDCs may, nevertheless, elect to capitalize and amortize 

certain IDCs over a 60-month period beginning with the month the expenditure was paid or 

incurred. This rule applies on an expenditure-by-expenditure basis; that is, for any particular 

taxable year, a taxpayer may deduct some portion of its IDCs and capitalize the rest under this 

provision. This allows the taxpayer to reduce or eliminate IDC adjustments or preferences under 

the alternative minimum tax. 
68 

The election to deduct IDCs applies only to those IDCs associated with domestic properties. For 

this purpose, the United States includes certain wells drilled offshore. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The expensing of IDCs, 

like other oil and gas preferences the Administration proposes to repeal, distorts markets by 

encouraging more investment in the oil and gas industry than would occur under a neutral 

system. This market distortion is detrimental to long-term energy security and is also 

inconsistent with the Administration’s policy of supporting a clean energy economy, reducing 

our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and gas must 

ultimately be financed with taxes that result in underinvestment in other, potentially more 

productive, areas of the economy. Capitalization of IDCs would place the oil and gas industry 

on a cost recovery system similar to that employed by other industries and reduce economic 

distortions. 

Proposal

The proposal would not allow expensing of intangible drilling costs and 60-month amortization 

of capitalized intangible drilling costs. Intangible drilling costs would be capitalized as 

depreciable or depletable property, depending on the nature of the cost incurred, in accordance 

with the generally applicable rules. 

The proposal would be effective for costs paid or incurred after December 31, 2011. 

 
69 

REPEAL DEDUCTION FOR TERTIARY INJECTANTS

Current Law

Taxpayers are allowed to deduct the cost of qualified tertiary injectant expenses for the taxable 

year. Qualified tertiary injectant expenses are amounts paid or incurred for any tertiary 

injectants (other than recoverable hydrocarbon injectants) that are used as a part of a tertiary 

recovery method to increase the recovery of crude oil. The deduction is treated as an 

amortization deduction in determining the amount subject to recapture upon disposition of the 

property. 

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The deduction for 

tertiary injectants, like other oil and gas preferences the Administration proposes to repeal, 

distorts markets by encouraging more investment in the oil and gas industry than would occur 

under a neutral system. This market distortion is detrimental to long-term energy security and is 

also inconsistent with the Administration’s policy of supporting a clean energy economy, 

reducing our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and 

gas must ultimately be financed with taxes that result in underinvestment in other, potentially 

more productive, areas of the economy. Capitalization of tertiary injectants would place the oil 

and gas industry on a cost recovery system similar to that employed by other industries and 

reduce economic distortions. 

Proposal

The proposal would not allow the deduction for qualified tertiary injectant expenses for amounts 

paid or incurred after December 31, 2011. 
70 

REPEAL EXCEPTION TO PASSIVE LOSS LIMITATION FOR WORKING 

INTERESTS IN OIL AND NATURAL GAS PROPERTIES 

Current Law

The passive loss rules limit deductions and credits from passive trade or business activities. 

Deductions attributable to passive activities, to the extent they exceed income from passive 

activities, generally may not be deducted against other income, such as wages, portfolio income, 

or business income that is not derived from a passive activity. A similar rule applies to credits. 

Suspended deductions and credits are carried forward and treated as deductions and credits from 

passive activities in the next year. The suspended losses and credits from a passive activity are 

allowed in full when the taxpayer completely disposes of the activity. 

Passive activities are defined to include trade or business activities in which the taxpayer does 

not materially participate. An exception is provided, however, for any working interest in an oil 

or gas property that the taxpayer holds directly or through an entity that does not limit the 

liability of the taxpayer with respect to the interest. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The special tax treatment 

of working interests in oil and gas properties, like other oil and gas preferences the 

Administration proposes to repeal, distorts markets by encouraging more investment in the oil 

and gas industry than would occur under a neutral system. This market distortion is detrimental 

to long-term energy security and is also inconsistent with the Administration’s policy of 

supporting a clean energy economy, reducing our reliance on oil, and cutting carbon pollution. 

Moreover, the working interest exception for oil and gas must ultimately be financed with taxes 

that result in underinvestment in other, potentially more productive, areas of the economy. 

Eliminating the working interest exception would subject oil and gas properties to the same 

limitations as other activities and reduce economic distortions. 

Proposal

The proposal would repeal the exception from the passive loss rules for working interests in oil 

and gas properties for taxable years beginning after December 31, 2011. 
71 

REPEAL PERCENTAGE DEPLETION FOR OIL AND NATURAL GAS WELLS 

Current Law

The capital costs of oil and gas wells are recovered through the depletion deduction. Under the 

cost depletion method, the basis recovery for a taxable year is proportional to the exhaustion of 

the property during the year. This method does not permit cost recovery deductions that exceed 

basis or that are allowable on an accelerated basis. 

A taxpayer may also qualify for percentage depletion with respect to oil and gas properties. The 

amount of the deduction is a statutory percentage of the gross income from the property. For oil 

and gas properties, the percentage ranges from 15 to 25 percent and the deduction may not 

exceed 100 percent of the taxable income from the property. In addition, the percentage 

depletion deduction for oil and gas properties may not exceed 65 percent of the taxpayer’s 

overall taxable income (determined before the deduction and with certain other adjustments). 

Other limitations and special rules apply to the percentage depletion deduction for oil and gas 

properties. In general, only independent producers and royalty owners (in contrast to integrated 

oil companies) qualify for the percentage depletion deduction. In addition, oil and gas producers 

may claim percentage depletion only with respect to up to 1,000 barrels of average daily 

production of domestic crude oil or an equivalent amount of domestic natural gas (applied on a 

combined basis in the case of taxpayers that produce both). This quantity limitation is allocated, 

at the taxpayer’s election, between oil production and gas production and then further allocated 

within each class among the taxpayer’s properties. Special rules apply to oil and gas production 

from marginal wells (generally, wells for which the average daily production is less than 15 

barrels of oil or barrel-of-oil equivalents or that produce only heavy oil). Only marginal well 

production can qualify for percentage depletion at a rate of more than 15 percent. The rate is 

increased in a taxable year that begins in a calendar year following a calendar year during which 

the annual average unregulated wellhead price per barrel of domestic crude oil is less than $20. 

The increase is one percentage point for each whole dollar of difference between the two 

amounts. In addition, marginal wells are exempt from the 100-percent-of-net-income limitation 

described above in taxable years beginning during the period 1998-2007 and in taxable years 

beginning during the period 2009-2011. Unless the taxpayer elects otherwise, marginal well 

production is given priority over other production in applying the 1,000-barrel limitation on 

percentage depletion. 

A qualifying taxpayer determines the depletion deduction for each oil and gas property under 

both the percentage depletion method and the cost depletion method and deducts the larger of the 

two amounts. Because percentage depletion is computed without regard to the taxpayer’s basis 

in the depletable property, a taxpayer may continue to claim percentage depletion after all the 

expenditures incurred to acquire and develop the property have been recovered. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. Percentage depletion 

effectively provides a lower rate of tax with respect to a favored source of income. The lower 
72 

rate of tax, like other oil and gas preferences the Administration proposes to repeal, distorts 

markets by encouraging more investment in the oil and gas industry than would occur under a 

neutral system. This market distortion is detrimental to long-term energy security and is also 

inconsistent with the Administration’s policy of supporting a clean energy economy, reducing 

our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and gas must 

ultimately be financed with taxes that result in underinvestment in other, potentially more 

productive, areas of the economy. 

Cost depletion computed by reference to the taxpayer’s basis in the property is the equivalent of 

economic depreciation. Limiting oil and gas producers to cost depletion would place them on a 

cost recovery system similar to that employed by other industries and reduce economic 

distortions. 

Proposal

The proposal would not allow percentage depletion with respect to oil and gas wells. Taxpayers 

would be permitted to claim cost depletion on their adjusted basis, if any, in oil and gas wells. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
73 

REPEAL DOMESTIC MANUFACTURING DEDUCTION FOR OIL AND NATURAL 

GAS COMPANIES 

Current Law

A deduction is allowed with respect to income attributable to domestic production activities (the 

manufacturing deduction). For taxable years beginning after 2009, the manufacturing deduction 

is generally equal to 9 percent of the lesser of qualified production activities income for the 

taxable year or taxable income for the taxable year, limited to 50 percent of the W-2 wages of the 

taxpayer for the taxable year. The deduction for income from oil and gas production activities is 

computed at a 6 percent rate. 

Qualified production activities income is generally calculated as a taxpayer’s domestic 

production gross receipts (i.e., the gross receipts derived from any lease, rental, license, sale, 

exchange, or other disposition of qualifying production property manufactured, produced, grown, 

or extracted by the taxpayer in whole or significant part within the United States; any qualified 

film produced by the taxpayer; or electricity, natural gas, or potable water produced by the 

taxpayer in the United States) minus the cost of goods sold and other expenses, losses, or 

deductions attributable to such receipts. 

The manufacturing deduction generally is available to all taxpayers that generate qualified 

production activities income, which under current law includes income from the sale, exchange 

or disposition of oil, natural gas or primary products thereof produced in the United States. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The manufacturing 

deduction for oil and gas effectively provides a lower rate of tax with respect to a favored source 

of income. The lower rate of tax, like other oil and gas preferences the Administration proposes 

to repeal, distorts markets by encouraging more investment in the oil and gas industry than 

would occur under a neutral system. This market distortion is detrimental to long-term energy 

security and is also inconsistent with the Administration’s policy of supporting a clean energy 

economy, reducing our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy 

for oil and gas must ultimately be financed with taxes that result in underinvestment in other, 

potentially more productive, areas of the economy. 

Proposal

The proposal would retain the overall manufacturing deduction, but exclude from the definition 

of domestic production gross receipts all gross receipts derived from the sale, exchange or other 

disposition of oil, natural gas or a primary product thereof for taxable years beginning after 

December 31, 2011. There is a parallel proposal to repeal the domestic manufacturing deduction 

for coal and other hard mineral fossil fuels. 
74 

INCREASE GEOLOGICAL AND GEOPHYSICAL AMORTIZATION PERIOD FOR 

INDEPENDENT PRODUCERS TO SEVEN YEARS 

Current Law

Geological and geophysical expenditures are costs incurred for the purpose of obtaining and 

accumulating data that will serve as the basis for the acquisition and retention of mineral 

properties. The amortization period for geological and geophysical expenditures incurred in 

connection with oil and gas exploration in the United States is two years for independent 

producers and seven years for integrated oil and gas producers. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The accelerated 

amortization of geological and geophysical expenditures incurred by independent producers, like 

other oil and gas preferences the Administration proposes to repeal, distorts markets by 

encouraging more investment in the oil and gas industry than would occur under a neutral 

system. This market distortion is detrimental to long-term energy security and is also 

inconsistent with the Administration’s policy of supporting a clean energy economy, reducing 

our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and gas must 

ultimately be financed with taxes that result in underinvestment in other, potentially more 

productive, areas of the economy. 

Increasing the amortization period for geological and geophysical expenditures incurred by 

independent oil and gas producers from two years to seven years would provide a more accurate 

reflection of their income and more consistent tax treatment for all oil and gas producers. 

Proposal

The proposal would increase the amortization period from two years to seven years for 

geological and geophysical expenditures incurred by independent producers in connection with 

all oil and gas exploration in the United States. Seven-year amortization would apply even if the 

property is abandoned and any remaining basis of the abandoned property would be recovered 

over the remainder of the seven-year period. 

The proposal would be effective for amounts paid or incurred after December 31, 2011. 
75 

Eliminate Coal Preferences

REPEAL EXPENSING OF EXPLORATION AND DEVELOPMENT COSTS 

Current Law

In general, costs that benefit future periods must be capitalized and recovered over such periods 

for income tax purposes, rather than being expensed in the period the costs are incurred. In 

addition, the uniform capitalization rules require certain direct and indirect costs allocable to 

property to be included in inventory or capitalized as part of the basis of such property. In 

general, the uniform capitalization rules apply to real and tangible personal property produced by 

the taxpayer or acquired for resale. 

Special rules apply in the case of mining exploration and development expenditures. A taxpayer 

may elect to expense the exploration costs incurred for the purpose of ascertaining the existence, 

location, extent, or quality of an ore or mineral deposit, including a deposit of coal or other hardmineral fossil fuel. Exploration costs that are expensed are recaptured when the mine reaches the 

producing stage either by a reduction in depletion deductions or, at the election of the taxpayer, 

by an inclusion in income in the year in which the mine reaches the producing stage. 

After the existence of a commercially marketable deposit has been disclosed, costs incurred for 

the development of a mine to exploit the deposit are deductible in the year paid or incurred 

unless the taxpayer elects to deduct the costs on a ratable basis as the minerals or ores produced 

from the deposit are sold. 

In the case of a corporation that elects to deduct exploration costs in the year paid or incurred, 30 

percent of the otherwise deductible costs must be capitalized and amortized over a 60-month 

period. In addition, a taxpayer that has elected to deduct exploration costs may, nevertheless, 

elect to capitalize and amortize those costs over a 10-year period. This rule applies on an 

expenditure-by-expenditure basis; that is, for any particular taxable year, a taxpayer may deduct 

some portion of its exploration costs and capitalize the rest under this provision. This allows the 

taxpayer to reduce or eliminate adjustments or preferences for exploration costs under the 

alternative minimum tax. Similar rules limiting corporate deductions and providing for 60-

month and 10-year amortization apply with respect to mine development costs. 

The election to deduct exploration costs and the rule making development costs deductible in the 

year paid or incurred apply only with respect to domestic ore and mineral deposits. 

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The expensing of 

exploration and development costs relating to coal and other hard-mineral fossil fuels, like other 

fossil-fuel preferences the Administration proposes to repeal, distorts markets by encouraging 

more investment in fossil-fuel production than would occur under a neutral system. This market 

distortion is inconsistent with the Administration’s policy of supporting a clean energy economy 

and cutting carbon pollution. Moreover, the tax subsidy for coal and other hard-mineral fossil 
76 

fuels must ultimately be financed with taxes that result in underinvestment in other, potentially 

more productive, areas of the economy. Capitalization of exploration and development costs 

relating to coal and other hard-mineral fossil fuels would place taxpayers in that industry on a 

cost recovery system similar to that employed by other industries and reduce economic 

distortions. 

Proposal

The proposal would not allow expensing, 60-month amortization, and 10-year amortization of 

exploration and development costs relating to coal and other hard-mineral fossil fuels. The costs 

would be capitalized as depreciable or depletable property, depending on the nature of the cost 

incurred, in accordance with the generally applicable rules. The other hard-mineral fossil fuels 

for which expensing, 60-month amortization, and 10-year amortization would not be allowed 

include lignite and oil shale to which a 15-percent depletion rate applies. 

The proposal would be effective for costs paid or incurred after December 31, 2011. 
77 

REPEAL PERCENTAGE DEPLETION FOR HARD MINERAL FOSSIL FUELS 

Current Law

The capital costs of coal mines and other hard-mineral fossil-fuel properties are recovered 

through the depletion deduction. Under the cost depletion method, the basis recovery for a 

taxable year is proportional to the exhaustion of the property during the year. This method does 

not permit cost recovery deductions that exceed basis or that are allowable on an accelerated 

basis. 

A taxpayer may also qualify for percentage depletion with respect to coal and other hard-mineral 

fossil-fuel properties. The amount of the deduction is a statutory percentage of the gross income 

from the property. The percentage is 10 percent for coal and lignite and 15 percent for oil shale 

(other than oil shale to which a 7 1⁄2 percent depletion rate applies because it is used for certain 

nonfuel purposes). The deduction may not exceed 50 percent of the taxable income from the 

property (determined before the deductions for depletion and domestic manufacturing). 

A qualifying taxpayer determines the depletion deduction for each property under both the 

percentage depletion method and the cost depletion method and deducts the larger of the two 

amounts. Because percentage depletion is computed without regard to the taxpayer’s basis in the 

depletable property, a taxpayer may continue to claim percentage depletion after all the 

expenditures incurred to acquire and develop the property have been recovered. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. Percentage depletion 

effectively provides a lower rate of tax with respect to a favored source of income. The lower 

rate of tax, like other fossil-fuel preferences the Administration proposes to repeal, distorts 

markets by encouraging more investment in fossil-fuel production than would occur under a 

neutral system. This market distortion is inconsistent with the Administration’s policy of 

supporting a clean energy economy and cutting carbon pollution. Moreover, the tax subsidy for 

coal and other hard-mineral fossil fuels must ultimately be financed with taxes that result in 

underinvestment in other, potentially more productive, areas of the economy. 

Cost depletion computed by reference to the taxpayer’s basis in the property is the equivalent of 

economic depreciation. Limiting fossil-fuel producers to cost depletion would place them on a 

cost recovery system similar to that employed by other industries and reduce economic 

distortions. 

Proposal

The proposal would not allow percentage depletion with respect to coal and other hard-mineral 

fossil fuels. The other hard-mineral fossil fuels for which no percentage depletion would be 

allowed include lignite and oil shale to which a 15-percent depletion rate applies. Taxpayers 

would be permitted to claim cost depletion on their adjusted basis, if any, in coal and other hardmineral fossil-fuel properties. 
78 

The proposal would be effective for taxable years beginning after December 31, 2011. 
79 

REPEAL CAPITAL GAINS TREATMENT FOR ROYALTIES 

Current Law

Royalties received on the disposition of coal or lignite generally qualify for treatment as longterm capital gain, and the royalty owner does not qualify for percentage depletion with respect to 

the coal or lignite. This treatment does not apply unless the taxpayer has been the owner of the 

mineral in place for at least one year before it is mined. The treatment also does not apply to 

income realized as a co-adventurer, partner, or principal in the mining of the mineral or to certain 

related-party transactions. 

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The capital gain 

treatment of coal and lignite royalties, like other fossil-fuel preferences the Administration 

proposes to repeal, distorts markets by encouraging more investment in fossil-fuel production 

than would occur under a neutral system. This market distortion is inconsistent with the 

Administration’s policy of supporting a clean energy economy and cutting carbon pollution. 

Moreover, the tax subsidy for coal and lignite must ultimately be financed with taxes that result 

in underinvestment in other, potentially more productive, areas of the economy. 

Proposal

The proposal would repeal capital gains treatment of coal and lignite royalties and would tax 

those royalties as ordinary income. 

The proposal would be effective for amounts realized in taxable years beginning after December 

31, 2011. 
80 

REPEAL DOMESTIC MANUFACTURING DEDUCTION FOR COAL AND OTHER 

HARD MINERAL FOSSIL FUELS 

Current Law

A deduction is allowed with respect to income attributable to domestic production activities (the 

manufacturing deduction). For taxable years beginning after 2009, the manufacturing deduction 

is generally equal to 9 percent of the lesser of qualified production activities income for the 

taxable year or taxable income for the taxable year, limited to 50 percent of the W-2 wages of the 

taxpayer for the taxable year. 

Qualified production activities income is generally calculated as a taxpayer’s domestic 

production gross receipts (i.e., the gross receipts derived from any lease, rental, license, sale, 

exchange, or other disposition of qualifying production property manufactured, produced, grown, 

or extracted by the taxpayer in whole or significant part within the United States; any qualified 

film produced by the taxpayer; or electricity, natural gas, or potable water produced by the 

taxpayer in the United States) minus the cost of goods sold and other expenses, losses, or 

deductions attributable to such receipts. 

The manufacturing deduction generally is available to all taxpayers that generate qualified 

production activities income, which under current law includes income from the sale, exchange 

or disposition of coal, other hard-mineral fossil fuels, or primary products thereof produced in 

the United States. 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The manufacturing 

deduction for coal and other hard mineral fossil fuels effectively provides a lower rate of tax with 

respect to a favored source of income. The lower rate of tax, like other fossil-fuel preferences 

the Administration proposes to repeal, distorts markets by encouraging more investment in 

fossil-fuel production than would occur under a neutral system. This market distortion is 

inconsistent with the Administration’s policy of supporting a clean energy economy and cutting 

carbon pollution. Moreover, the tax subsidy for coal and other hard-mineral fossil fuels must 

ultimately be financed with taxes that result in underinvestment in other, potentially more 

productive, areas of the economy. 

Proposal

The proposal would retain the overall manufacturing deduction, but exclude from the definition 

of domestic production gross receipts all gross receipts derived from the sale, exchange or other 

disposition of coal, other hard-mineral fossil fuels, or a primary product thereof. The hardmineral fossil fuels to which the exclusion would apply include lignite and oil shale to which a 

15-percent depletion rate applies. There is a parallel proposal to repeal the domestic 

manufacturing deduction for oil and natural gas companies. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
81 

SIMPLIFY THE TAX CODE

ALLOW VEHICLE SELLER TO CLAIM QUALIFIED PLUG-IN ELECTRIC-DRIVE 

MOTOR VEHICLE CREDIT 

Current Law

A tax credit is provided for plug-in electric drive motor vehicles. A plug-in electric drive motor 

vehicle is a vehicle that has at least four wheels, is manufactured for use on public roads, is 

treated as a motor vehicle for purposes of title II of the Clean Air Act (that is, is not a low-speed 

vehicle), has a gross vehicle weight of less than 14,000 pounds, meets certain emissions 

standards, draws propulsion energy using a traction battery with at least four kilowatt hours of 

capacity, is capable of being recharged from an external source, and meets certain other 

requirements. The credit is $2,500 plus $417 for each kilowatt hour of battery capacity in excess 

of four kilowatt hours, up to a maximum credit of $7,500. The credit phases out for a 

manufacturer’s vehicles over four calendar quarters beginning with the second calendar quarter 

following the quarter in which 200,000 of the manufacturer’s credit-eligible vehicles have been 

sold. The credit is generally allowed to the taxpayer that places the vehicle in service (including 

a person placing the vehicle in service as a lessor). In the case of a vehicle used by a tax-exempt 

or governmental entity, however, the credit is allowed to the person selling the vehicle to the taxexempt or governmental entity, but only if the seller clearly discloses the amount of the credit to 

the purchaser. 

 

Reasons for Change

In 2008, the President set an ambitious goal of putting 1 million advanced technology vehicles 

on the road by 2015 – which would reduce dependence on foreign oil and lead to a reduction in 

oil consumption of about 750 million barrels through 2030. To help achieve that goal, the 

President is proposing increased investment in R&D, a competitive program to encourage 

communities to invest in electric vehicle infrastructure, and a transformation of the existing tax 

credit into one that is allowed generally to the seller, which will permit sellers to offer immediate 

rebates to consumers at the point of sale. 

Changing the credit into one that is allowed, in all cases, to the person that sells or finances the 

sale of the vehicle to the ultimate owner would enable the seller or person financing the sale to 

offer a point-of-sale rebate to consumers. Disclosure requirements similar to those currently 

applicable in the case of sales to tax-exempt and governmental entities would ensure that the 

benefit of the credit is passed on to consumers. Shifting the process of claiming the credit from a 

large number of individual consumers to a relatively small number of business entities would 

also simplify tax preparation for individuals and reduce the potential for taxpayer error. 

Proposal

The proposal would change the credit from one that is allowed to the person placing the vehicle 

in service to one that is allowed to the person selling the vehicle to the person placing the vehicle 

in service (or, at the election of the seller, to the person financing the sale). The credit would be 
82 

allowed only if the seller (or person financing the sale) clearly discloses the amount of the credit 

to the purchaser. 

The change would be effective for vehicles sold after December 31, 2011. 
83 

ELIMINATE MINIMUM REQUIRED DISTRIBUTION (MRD) RULES FOR 

INDIVIDUAL RETIREMENT ACCOUNT OR ANNUITY (IRA)/PLAN BALANCES OF 

$50,000 OR LESS 

Current Law

The MRD rules generally require that participants in tax-favored retirement plans, including 

qualified plans under section 401(a), section 401(k) cash or deferred arrangements, section 

403(a) annuity plans, section 403(b) programs for public schools and charitable organizations, 

eligible deferred compensation plans under section 457(b), Simplified Employee Pensions 

(SEPs), and SIMPLE plans, and owners of IRAs, begin receiving distributions shortly after 

attaining age 701⁄2. The rules also generally require that these retirement assets be distributed to 

the plan participant or IRA owner (or their spouses or other beneficiaries), in accordance with 

regulations, over their life or periods based on their life expectancy (or the joint lives or life 

expectancies of the participant/owner and beneficiary).6 Roth IRAs are not subject to the MRD 

rules during the life of the Roth IRA holder, but the MRD rules do apply to Roth IRAs after the 

death of the holder. 

If a participant or account owner fails to take, in part or in full, the minimum required 

distribution for a year by the applicable deadline, the amount not withdrawn is subject to a 50-

percent excise tax. 

Reasons for Change

The MRD rules are designed largely to prevent taxpayers from deferring taxation of amounts that 

were accorded tax-favored treatment to provide financial security during retirement and instead 

leaving them to accumulate in tax-exempt arrangements for the benefit of their heirs. Therefore, 

in the case of taxpayers who have accumulated substantial tax-favored retirement assets, the 

MRD rules help ensure that tax-favored retirement benefits are in fact used for retirement. Under 

current law, however, millions of senior citizens with only modest tax-favored retirement 

benefits to fall back on during retirement also must calculate the amount and timing of their 

minimum required distributions, even though they are highly unlikely to try to defer withdrawal 

and taxation of these benefits for estate planning purposes. In addition to simplifying tax 

compliance for these individuals, the proposal permits them greater flexibility in determining 

when and how rapidly to draw down their limited retirement savings. 

Proposal

The proposal would exempt an individual from the MRD requirements if the aggregate value of 

the individual’s IRA7 and tax-favored retirement plan accumulations does not exceed $50,000 on 

a measurement date. However, benefits under qualified defined benefit pension plans that have 

 

6

 Participants in tax-favored retirement plans (excluding IRAs) other than owners of at least 5 percent of the 

business sponsoring the retirement plan may wait to begin distributions until the year of retirement, if that year is 

later than the year in which the participant reaches age 70 1⁄2 . 

7

 While Roth IRAs are exempt from the pre-death MRD rules, amounts held in Roth IRAs would be taken into 

account in determining whether an individual’s aggregate retirement accumulations exceed the $50,000 threshold. 
84 

already begun to be paid in life annuity form (including all forms of life annuity, such as joint 

and survivor, single, life and term certain) would be excluded. The MRD requirements would 

phase in ratably for individuals with aggregate retirement benefits between $50,000 and $60,000. 

The initial measurement date for the dollar threshold would be the beginning of the calendar year 

in which the individual reaches age 701⁄2 or, if earlier, in which the individual dies, with 

additional measurement dates only at the beginning of the calendar year immediately following 

any calendar year in which the individual’s IRAs or plans receive contributions, rollovers, or 

transfers of amounts that were not previously taken into account. 

The proposal would be effective for taxpayers attaining age 701⁄2 on or after December 31, 2011. 
85 

ALLOW ALL INHERITED PLAN AND INDIVIDUAL RETIREMENT ACCOUNT OR 

ANNUITY (IRA) BALANCES TO BE ROLLED OVER WITHIN 60 DAYS 

Current Law

Generally, assets can be moved from a tax-favored employer retirement plan or from an IRA into 

an IRA or into an eligible retirement plan without adverse tax consequences. This movement of 

assets can generally be accomplished through a direct rollover of a distribution, a 60-day 

rollover, or a direct trustee-to-trustee transfer that is not a distribution. However, not all of these 

methods are available with respect to assets of a plan or IRA account inherited by a non-spouse 

beneficiary. 

In particular, when a participant in a tax-favored employer retirement plan dies before all assets 

in the plan have been distributed, a beneficiary who is a surviving spouse may roll over the 

assets, by direct rollover or 60-day rollover, into an IRA that is treated either as a spousal 

inherited IRA or as the surviving spouse’s own IRA. A beneficiary who is not a surviving 

spouse, on the other hand, may roll over the assets into an IRA that is a non-spousal inherited 

IRA only by means of a direct rollover; a 60-day rollover is not available to a surviving nonspouse beneficiary. 

Similarly, when the owner of an IRA dies before all assets in the IRA have been distributed, a 

surviving spouse beneficiary may elect to treat the assets as his or her own IRA or as a spousal 

inherited IRA. In addition, a surviving spouse beneficiary may roll over the assets into an IRA 

that is treated either as the surviving spouse’s own IRA or as a spousal inherited IRA. A 

surviving non-spouse beneficiary, on the other hand, may treat the assets as a non-spousal 

inherited IRA, and may move the assets to another non-spousal inherited IRA only by means of a 

direct trustee-to-trustee transfer; rollovers from the deceased owner’s IRA to another IRA are not 

available for a surviving non-spouse beneficiary. 

Reasons for Change

The rules that a surviving non-spouse beneficiary under a tax-favored employer retirement plan 

may roll over assets to an IRA only by means of a direct rollover and that a surviving non-spouse 

beneficiary under an IRA may move assets to a non-spousal inherited IRA only by means of a 

direct trustee-to-trustee transfer create traps for the unwary. These differences in rollover 

eligibility between surviving non-spouse beneficiaries and surviving spouse beneficiaries (and 

living participants) serve little purpose and generate confusion among plan and IRA 

administrators and beneficiaries. For example, IRA administrators often treat all transfers 

(whether or not an IRA account is a non-spousal inherited IRA) as rollovers, thereby causing 

confusion for individuals and the Internal Revenue Service. Similarly non-spouse beneficiaries 

may attempt to move assets to an inherited IRA by means of a 60-day rollover. 

Proposal

The proposal would expand the options that are available to a surviving non-spouse beneficiary 

under a tax-favored employer retirement plan or IRA for moving inherited plan or IRA assets to 

a non-spousal inherited IRA by allowing 60-day rollovers of such assets. 
86 

The proposal would be effective for distributions after December 31, 2011. 
87 

CLARIFY EXCEPTION TO RECAPTURE OF UNRECOGNIZED GAIN ON SALE OF 

STOCK TO AN EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) 

Current Law

Section 1042 allows a taxpayer to elect to defer the recognition of long-term capital gain on the 

sale of employer securities to an ESOP under certain circumstances and subject to certain 

conditions, including purchase of qualified replacement property within a specified period. The 

deferred gain is subject to recapture on disposition of the qualified replacement property unless 

an exception applies. One of the exceptions is for a disposition by gift. 

Reasons for Change

Section 1041 generally provides that no gain or loss is recognized on a transfer of property 

between spouses, including former spouses if incident to divorce, treating such a transfer instead 

as a gift received by the transferee. However, section 1041 does not expressly address the 

treatment of the transferor, and section 1042 provides no express exception to the recapture rules 

for a nontaxable transfer of qualified replacement property to a spouse, including pursuant to a 

divorce, under section 1041. This has given rise to questions as to whether a transfer incident to 

a divorce is a disposition that triggers recapture under 1042. 

Proposal

The proposal would amend the recapture rules of section 1042 to provide an exception for 

transfers under section 1041. 

The proposal would be effective with respect to transfers made under section 1041 after 

December 31, 2011. No inference as to prior law is intended. 
88 

REPEAL NON-QUALIFIED PREFERRED STOCK (NQPS) DESIGNATION 

Current Law 

In 1997 Congress added a provision to section 351 that treats NQPS as taxable “boot” for certain 

purposes. In addition to its treatment as boot in corporate organizations, NQPS is also treated as 

boot in certain shareholder exchanges pursuant to a plan of corporate reorganization. NQPS is 

stock that (i) is limited and preferred as to dividends and does not participate in corporate growth 

to any significant extent; and (ii) has a dividend rate that varies with reference to an index, or, in 

certain circumstances, a put right, a call right, or a mandatory redemption feature. The addition 

of this provision reflected the belief that the receipt of certain types of preferred stock more 

appropriately represented taxable consideration because the investor/transferor obtained a more 

secure form of investment. 

Reasons for Change 

NQPS is treated like debt for certain limited purposes but is otherwise generally treated as stock. 

This hybrid nature of NQPS has transformed it into a staple of affirmative corporate tax 

planning: its issuance often occurs in loss-recognition planning, where NQPS is treated as debtlike boot, or to avoid the application of a provision that treats a related-party stock sale as a 

dividend. Thus, for the unwary, the designation and treatment of NQPS represents a proverbial 

trap that adds additional complexity to the tax code, while for the well-advised, the issuance of 

NQPS often arises in transactions that are inconsistent with the original purpose of the 1997 

provision. 

Proposal

The proposal would repeal the NQPS provision and other cross-referencing provisions of the 

Code that treat NQPS as boot. 

The proposal would be effective for stock issued after December 31, 2011. 
89 

REVISE AND SIMPLIFY THE "FRACTIONS RULE" 

Current Law

Section 514(a) generally provides that a tax-exempt organization will recognize unrelated 

business taxable income (UBTI) with respect to debt-financed property. In order to allow certain 

organizations to participate in ordinary real estate transactions, section 514(c)(9) excepts 

indebtedness incurred by a qualified organization in acquiring or improving any real property. 

Qualified organizations include certain educational organizations, pension funds, and title trusts. 

If a qualified organization invests in real property through a partnership that has incurred 

indebtedness, in order to qualify under section 514(c)(9), the partnership must consist entirely of 

qualified funds, have entirely pro rata allocations, or have allocations that satisfy the fractions 

rule described in section 514(c)(9)(E). The fractions rule generally provides that the allocation 

of items to any partner which is a qualified organization cannot result in such partner having a 

share of the overall partnership income for any taxable year greater than such partner’s share of 

the overall partnership loss for the taxable year for which such partner’s loss share will be the 

smallest, and each allocation with respect to the partnership must have substantial economic 

effect within the meaning of section 704(b)(2). Allocations under section 704(c) of built-in gain 

and built-in loss are not taken into account in applying the fractions rule, nor are certain 

chargebacks, preferred returns, and guaranteed payments. 

Under section 704(b), a partner’s distributive share of income, gain, loss, deduction, or credit (or 

item thereof) is determined in accordance with the partner’s interest in the partnership if: (1) the 

partnership agreement does not specify the partner’s distributive share of the item, or (2) the 

allocation to a partner under the agreement does not have substantial economic effect. The 

regulations under section 704(b) further define the substantial economic effect test. Under those 

regulations, a partnership’s allocations will have substantial economic effect if the partnership 

maintains capital accounts for its partners in compliance with numerous technical rules, the 

partnership liquidates according to those capital account balances, and the partnership’s 

allocations do not violate an anti-abuse rule commonly referred to as the “substantiality test.” 

Special rules apply to losses financed by nonrecourse debt. 

Reasons for Change

The fractions rule was enacted to prevent tax abuses that could arise in situations where a 

partnership allocates its income to exempt organizations and its losses to taxable persons. The 

fractions rule has been heavily criticized for its complexity and its unnecessary hindrance to 

qualified organizations entering into ordinary, commercially reasonable business transactions. 

Since the fractions rule was first adopted in 1984, a number of additional limitations have been 

placed on the ability of taxable investors in real estate partnerships to use the tax benefits 

generated by those partnerships. These include: (1) the expansion and refinement of the 

substantial economic effect rules; (2) the lengthening of the depreciation period for commercial 

real estate; (3) the enactment of the passive activity loss and at risk rules; and (4) the 

strengthening of the alternative minimum tax. These developments alleviate the need for a strict, 

formulaic fractions rule. 
90 

Proposal

The proposal would replace the fractions rule with a rule that requires each partnership allocation 

to have substantial economic effect (as required by current law) and no allocation to have a 

principal purpose of tax avoidance. Regulatory authority would be granted to eliminate the “cliff 

effect” of a technical violation of the rule. 

The proposal would be effective as of the date of enactment. 
91 

REPEAL PREFERENTIAL DIVIDEND RULE FOR PUBLICLY TRADED REAL 

ESTATE INVESTMENT TRUSTS (REITS) 

Current Law

REITs are allowed a deduction for dividends paid to their shareholders. In order to qualify for 

the deduction, a dividend must not be a “preferential dividend.”8

 For this purpose, a dividend is 

preferential unless it is distributed pro rata to shareholders, with no preference to any share of 

stock compared with other shares of the same class, and with no preference to one class as 

compared with another except to the extent the class is entitled to a preference. Until last year, a 

similar rule had applied to all regulated investment companies (RICs). Section 307 of the 

Regulated Investment Company Modernization Act of 2010 (Pub. L. No. 111–325) repealed 

application of that rule for publicly offered RICs. 

Reasons for Change

The original purpose of the preferential dividend rule in 1936 was to prevent tax avoidance by 

closely held personal holding companies. The inflexibility of the rule can produce harsh results 

for inadvertent deviations in the timing or amount of distributions to some shareholders. 

Because an attempt to compensate for a preference in one distribution produces a preference in a 

second offsetting distribution, it is almost impossible to undo the impact of a prior error. 

As applied to publicly traded REITs, the rule has ceased to serve a necessary function either in 

preventing tax avoidance or in ensuring fairness among shareholders. Today, for these 

shareholders, corporate and securities laws bar preferences and ensure fair treatment. 

Proposal

The proposal would repeal the preferential dividend rule for publicly traded REITs. The 

Treasury Department would also be given explicit authority to provide for cures of inadvertent 

violations of the preferential dividend rule where it continues to apply and, where appropriate, to 

require consistent treatment of shareholders. 

The proposal would apply to distributions that are made (without regard to section 858) in 

taxable years beginning after the date of enactment.

 

8

 Section 562(c). 
92 

REFORM EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE 

FOUNDATIONS 

Current Law

Private foundations that are exempt from federal income tax generally are subject to a twopercent excise tax on their net investment income. The excise tax rate is reduced to one percent 

in any year in which the foundation’s distributions for charitable purposes exceed the average 

level of the foundation’s charitable distributions over the five preceding taxable years (with 

certain adjustments). Private foundations that are not exempt from federal income tax, including 

certain charitable trusts, must pay an excise tax equal to the excess (if any) of the sum of the 

excise tax on net investment income and the amount of the unrelated business income tax that 

would have been imposed if the foundation were tax exempt, over the income tax imposed on the 

foundation. Under current law, private nonoperating foundations generally are required to make 

annual distributions for charitable purposes equal to five percent of the fair market value of the 

foundation’s noncharitable use assets (with certain adjustments). The amount that a foundation 

is required to distribute annually for charitable purposes is reduced by the amount of the excise 

tax paid by the foundation. 

Reasons for Change

The current “two-tier” structure of the excise tax on private foundation net investment income 

may discourage foundations from significantly increasing their charitable distributions in any 

particular year. An increase in a private foundation’s distributions in one year will increase the 

foundation’s five-year average percentage payout, making it more difficult for the foundation to 

qualify for the reduced one-percent excise tax rate in subsequent years. Because amounts paid 

by foundations in excise tax generally reduce the funds available for distribution to charitable 

beneficiaries, eliminating the “two-tier” structure of this excise tax would ensure that a private 

foundation’s grantees do not suffer adverse consequences if the foundation increases its 

grantmaking in a particular year to respond to charitable needs (for example, disaster relief). 

Such a change would also simplify both the calculation of the excise tax and charitable 

distribution planning for private foundations. 

Proposal

This proposal would replace the two rates of tax on private foundations that are exempt from 

federal income tax with a single tax rate of 1.35 percent. The tax on private foundations not 

exempt from federal income tax would be equal to the excess (if any) of the sum of the 1.35-

percent excise tax on net investment income and the amount of the unrelated business income tax 

that would have been imposed if the foundation were tax exempt, over the income tax imposed 

on the foundation. The special reduced excise tax rate available to tax-exempt private 

foundations that maintain their historic level of charitable distributions would be repealed. 

The proposal would be effective for taxable years beginning after the date of enactment. 
93 

Simplify Tax-Exempt Bonds

SIMPLIFY ARBITRAGE INVESTMENT RESTRICTIONS 

Current Law

Section 103 provides generally that interest on debt obligations issued by State and local 

governments for governmental purposes is excludable from gross income. Section 148 imposes 

two types of complex arbitrage investment restrictions on investments of tax-exempt bond 

proceeds pending use for governmental purposes. These restrictions generally limit investment 

returns that exceed the yield or effective interest rate on the tax-exempt bonds. One type of 

restriction, called “yield restriction,” limits investment returns in the first instance, and a second 

type, called “rebate,” requires issuers to repay arbitrage investment earnings to the Federal 

Government at prescribed intervals. These restrictions developed in different ways over a long 

period of time, beginning with yield restriction in 1969 and continuing with the extension of the 

rebate requirement to all tax-exempt bonds in 1986. Various exceptions apply in different ways 

to these two types of arbitrage restrictions, including exceptions for prompt expenditures of bond 

proceeds, reasonable debt service reserve funds, small issuers, and other situations. 

With respect to spending exceptions, a two-year construction spending exception to arbitrage 

rebate under section 148(f)(4)(C) applies to certain categories of tax-exempt bonds (including 

bonds for governmental entities and nonprofit entities, but excluding most private activity 

bonds). This two-year construction spending exception has semiannual spending targets, 

bifurcation rules to isolate construction expenditures, and elective penalties in lieu of rebate for 

failures to meet spending targets. Separately, a longstanding regulatory three-year spending 

exception to yield restriction is available for all tax-exempt bonds used for capital projects. 

A small issuer exception to arbitrage rebate under section 148(f)(4)(D) applies to certain 

governmental small issuers with general taxing powers if they issue no more than $5 million in 

tax-exempt bonds in a particular year. The small issuer exception has been in effect since 1986 

without change, except for an increase to $15 million for certain public school expenditures. 

Reasons for Change

The arbitrage investment restrictions create unnecessary complexity and compliance burdens for 

State and local governments in several respects. In general, the two types of arbitrage 

restrictions (yield restriction and rebate) are duplicative and overlapping and they have the same 

tax policy objective to limit arbitrage profit incentives for excess issuance of tax-exempt bonds. 

While Treasury Regulations have integrated these restrictions partially, further statutory 

integration of the arbitrage restrictions could provide a simpler and more unified framework. 

Moreover, the two-year construction spending exception to arbitrage rebate is extremely 

complex. This exception has restricted eligibility rules, unduly-short spending targets, and 

complex penalty elections that are rarely used. A streamlined spending exception could provide 

meaningful simplification and reduce compliance burdens. Limited arbitrage potential exists if 

issuers spend proceeds fairly promptly. By comparison, a recent uniform provision for qualified 
94 

tax credit bonds under section 54A has a simplified three-year spending exception to arbitrage 

restrictions, along with a requirement to redeem bonds upon a failure to meet the spending rules. 

An increase in the small issuer exception to arbitrage rebate would reduce compliance burdens 

for a large number of State and local governmental issuers while affecting a disproportionately 

smaller amount of tax-exempt bond dollar volume. For example, in 2008, issuers under a similar 

$10 million small issuer exception for bank-qualified tax-exempt bonds under section 265 issued 

about 39 percent of the total number of tax-exempt bond issues (4,195 out of 10,830 total bond 

issues), but only 3.9 percent of total dollar volume ($15.3 billion out of $389.6 billion). 

Proposal

Unify Yield Restriction and Rebate Further. The proposal would unify yield restriction and 

rebate further. The proposal would rely on arbitrage rebate as the principal type of arbitrage 

restriction on tax-exempt bonds. The proposal generally would repeal yield restriction, subject 

to limited exceptions under which yield restriction would continue to apply to investments of 

refunding escrows in advance refunding issues under section 149(d) and to other situations 

identified in regulations. 

Broader Streamlined Three-year Spending Exception. The proposal would provide a broader 

streamlined three-year spending exception to arbitrage rebate for tax-exempt bonds which meet 

the following requirements: 

 (1) Eligible Tax-exempt Bonds. Eligible tax-exempt bonds would include all 

governmental bonds and private activity bonds, excluding only bonds used for advance 

refundings under section 149(d) or restricted working capital expenditures (as defined in 

regulations). 

 (2) Long-term Fixed Rate Bonds. The tax-exempt bonds would be required to have a 

fixed yield and a minimum weighted average maturity of at least five years. 

 (3) Spending Period. The issuer would be required to spend 95 percent of the bond 

within three years after the issue date. 

(This 5 percent de minimis provision broadens the availability exception to cover many 

circumstances in which minor amounts of bond proceed remain unspent for bona fide reasons.) 

 (4) Due Diligence. The issuer would be required to proceed with due diligence to spend 

the bond proceeds. 

Upon a failure to meet the spending requirements for this exception, the tax-exempt bond issue 

would revert to become subject to the arbitrage rebate requirement. 

Increase Small Issuer Exception. The proposal would increase the small issuer exception to the 

arbitrage rebate requirement for tax-exempt bonds from $5 million to $10 million and index the 

size limit for inflation. The proposal also would remove the general taxing power constraint on 

small issuer eligibility. 

The proposal would be effective for bonds issued after the date of enactment. 
95 

SIMPLIFY SINGLE-FAMILY HOUSING MORTGAGE BOND TARGETING 

REQUIREMENTS 

Current Law

Section 143 allows use of tax-exempt qualified mortgage bonds to finance mortgage loans for 

owner-occupied single-family housing residences, subject to a number of targeting requirements, 

including, among others: a mortgagor income limitation (generally not more than 115 percent of 

applicable median family income, increased to 140 percent of such income for certain targeted 

areas, and also increased for certain high-cost areas); a purchase price limitation (generally not 

more than 90 percent of average area purchase prices, increased to 110 percent in targeted areas); 

refinancing limitation (generally only new mortgages for first-time homebuyers are eligible); and 

a targeted area availability requirement. In addition, the general restrictions on tax-exempt 

private activity bonds apply to these qualified mortgage bonds, including, among other 

restrictions, the State private activity bond volume cap under section 146. 

Reasons for Change

The targeting requirements for qualified mortgage bonds are complex and excessive. The 

mortgagor income limit generally serves as an appropriate limit to target this lower cost 

borrowing subsidy to a needy class of low and moderate income beneficiaries. The mortgagor 

income limit typically is a more constraining factor than the purchase price limit. The restriction 

against refinancing limits the availability of this lower cost borrowing subsidy as a tool to 

address needs for affordable mortgage loan refinancing within a needy class of existing low and 

moderate income homeowners. 

Proposal

The proposal would repeal the purchase price limitation under section 143(e) and the refinancing 

limitation under section 143(d) on tax-exempt qualified mortgage bonds. 

This proposal would be effective for bonds issued after the date of enactment. 
96 

STREAMLINE PRIVATE BUSINESS LIMITS ON GOVERNMENTAL BONDS 

Current Law

Section 141 treats tax-exempt bonds issued by State and local governments as governmental 

bonds if the issuer limits private business use and other private involvement sufficiently to avoid 

treatment as “private activity bonds.” Bonds generally are classified as private activity bonds 

under a two-part test if more than 10 percent of the bond proceeds are both (i) used for private 

business use, and (ii) payable or secured from property or payments derived from private 

business use. 

Subsidiary restrictions further reduce the permitted thresholds of private involvement for 

governmental bonds in several ways. Section 141(b)(3) imposes a 5 percent unrelated or 

disproportionate private business use limit. Section 141(b)(4) imposes a $15 million cap on 

private business involvement for governmental output facilities (such as electric, gas, or other 

output generation, transmission, and distribution facilities, but excluding water facilities). 

Section 141(c) imposes a private loan limit equal to the lesser of 5 percent or $5 million of bond 

proceeds. Section 141(b)(5) requires a volume cap allocation for private business involvement 

that exceeds $15 million in larger transactions which otherwise comply with the general 10 

percent private business limits. 

Reasons for Change

The 10 percent private business limit generally represents a sufficient and workable threshold for 

governmental bond status. The volume cap requirement for private business involvement in 

excess of $15 million serves a control on private business involvement in larger transactions. 

The particular subsidiary restriction which imposes a 5 percent limit on unrelated or 

disproportionate private business use introduces undue complexity, a narrow disqualification 

trigger, and attendant compliance burdens for State and local governments. The 5 percent 

unrelated or disproportionate private business use test requires difficult factual determinations 

regarding the relationship of private business use to governmental use in financed projects. This 

test is difficult to apply, particularly in governmental bond issues that finance multiple projects. 

Proposal

The proposal would repeal the 5 percent unrelated or disproportionate private business use test 

under section 141(b)(3) to simplify the private business limits on tax-exempt governmental 

bonds. 

This proposal would be effective for bonds issued after the date of enactment. 
97 

REDUCE THE TAX GAP AND MAKE REFORMS

Expand Information Reporting

REPEAL AND MODIFY INFORMATION REPORTING ON PAYMENTS TO 

CORPORATIONS AND PAYMENTS FOR PROPERTY 

Current Law 

Generally, a taxpayer making payments to a recipient aggregating to $600 or more for services or 

determinable gains in the course of a trade or business in a calendar year is required to send an 

information return to the Internal Revenue Service (IRS) setting forth the amount, as well as 

name and address of the recipient of the payment (generally on Form 1099). Under a 

longstanding regulatory regime, there were certain exceptions for payments to corporations, as 

well as tax-exempt and government entities. Also, this information reporting requirement did not 

apply to payments for property. 

Effective for payments made after December 31, 2011, the Affordable Care Act expanded the 

information reporting requirement to include payments to a corporation (except a tax-exempt 

corporation) and payments for property. 

Reasons for Change 

Generally, compliance increases significantly for payments that a third party reports to the IRS. 

In the case of payments to tax-exempt or government entities that are generally not subject to 

income tax, information returns may not be necessary. On the other hand, during the decades in 

which the regulatory exception for payments to corporations has become established, the number 

and complexity of corporate taxpayers have increased. Moreover, the longstanding regulatory 

exception from information reporting for payments to corporations has created compliance 

issues. In addition, the expanded information reporting requirements imposed by the Affordable 

Care Act will put an undue burden on small businesses. 

Proposal 

The proposal would repeal the additional information reporting requirements imposed by the 

Affordable Care Act. Further, the proposal would require businesses to file an information 

return for payments for services or for determinable gains aggregating to $600 or more in a 

calendar year to a corporation (except a tax-exempt corporation). Regulatory authority would be 

provided to make appropriate exceptions where reporting would be especially burdensome. 

Information returns would not be required for payments for property. 

This proposal would be effective for payments made after December 31, 2011. 
98 

REQUIRE INFORMATION REPORTING FOR PRIVATE SEPARATE ACCOUNTS OF 

LIFE INSURANCE COMPANIES 

Current Law

Earnings from direct investment in securities generally result in taxable income to the holder. In 

contrast, investments in comparable assets through a separate account of a life insurance 

company generally give rise to tax-free or tax-deferred income. This favorable tax treatment for 

investing through a life insurance company is not available if the policyholder has so much 

control over the investments in the separate account that the policyholder, rather than the 

insurance company, is treated as the owner of those investments. 

Reasons for Change

In some cases, private separate accounts are being used to avoid tax that would be due if the 

assets were held directly. Better reporting of investments in private separate accounts will help 

the Internal Revenue Service (IRS) to ensure that income is properly reported. Moreover, such 

reporting will enable the IRS to identify more easily which variable insurance contracts qualify 

as insurance contracts under current law and which contracts should be disregarded under the 

investor control doctrine. 

Proposal

The proposal would require life insurance companies to report to the IRS, for each contract 

whose cash value is partially or wholly invested in a private separate account for any portion of 

the taxable year and represents at least 10 percent of the value of the account, the policyholder’s 

taxpayer identification number, the policy number, the amount of accumulated untaxed income, 

the total contract account value, and the portion of that value that was invested in one or more 

private separate accounts. For this purpose, a private separate account would be defined as any 

account with respect to which a related group of persons owns policies whose cash values, in the 

aggregate, represent at least 10 percent of the value of the separate account. Whether a related 

group of persons owns policies whose cash values represent at least 10 percent of the value of 

the account would be determined quarterly, based on information reasonably within the issuer's 

possession. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
99 

REQUIRE A CERTIFIED TAXPAYER IDENTIFICATION NUMBER (TIN) FROM 

CONTRACTORS AND ALLOW CERTAIN WITHHOLDING 

Current Law 

In the course of a trade or business, service recipients (“businesses”) making payments 

aggregating to $600 or more in a calendar year to any non-employee service provider 

(“contractor”) that is not a corporation are required to send an information return to the Internal 

Revenue Service (IRS) setting forth the amount, as well as name, address, and TIN of the 

contractor. The information returns, required annually after the end of the year, are made on 

Form 1099-MISC based on identifying information furnished by the contractor but not verified 

by the IRS. Copies are provided both to the contractor and to the IRS. Withholding is not 

required or permitted for payments to contractors. Since contractors are not subject to 

withholding, they may be required to make quarterly payments of estimated income taxes and 

self-employment (SECA) taxes near the end of each calendar quarter. The contractor is required 

to pay any balance due when the annual income tax return is subsequently filed. 

Reasons for Change 

Without accurate taxpayer identifying information, information reporting requirements impose 

avoidable burdens on businesses and the IRS, and cannot reach their potential to improve 

compliance. 

Estimated tax filing is relatively burdensome, especially for less sophisticated and lower-income 

taxpayers. Moreover, by the time estimated tax payments (or final tax payments) are due, some 

contractors will not have put aside the necessary funds. Given that the SECA tax rate is 15.3 

percent (up to certain income limits), the required estimated tax payments can be more than 25 

percent of a contractor’s gross receipts, even for a contractor with modest income. 

An optional withholding method for contractors would reduce the burdens of having to make 

quarterly payments, would help contractors automatically set aside funds for tax payments, and 

would help increase compliance. 

Proposal 

The proposal would require a contractor receiving payments of $600 or more in a calendar year 

from a particular business to furnish to the business (on Form W-9) the contractor’s certified 

TIN. A business would be required to verify the contractor’s TIN with the IRS, which would be 

authorized to disclose, solely for this purpose, whether the certified TIN-name combination 

matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business 

would be required to withhold a flat-rate percentage of gross payments. Contractors receiving 

payments of $600 or more in a calendar year from a particular business could require the 

business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage 

of 15, 25, 30, or 35 percent being selected by the contractor. 

The proposal would be effective for payments made to contractors after December 31, 2011. 
100 

Improve Compliance by Businesses

REQUIRE GREATER ELECTRONIC FILING OF RETURNS 

Current Law 

Corporations with assets of $10 million or more filing Form 1120 are required to file Schedule 

M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or 

More). This Schedule M-3 filing requirement also applies to S corporations, life insurance 

corporations, property and casualty insurance corporations, and cooperative associations filing 

various versions of Form 1120 and having $10 million or more in assets. Schedule M-3 is also 

required for partnerships with assets of $10 million or more and certain other partnerships. 

Corporations and tax-exempt organizations that have assets of $10 million or more and file at 

least 250 returns during a calendar year, including income tax, information, excise tax, and 

employment tax returns, are required to file electronically their Form 1120/1120S income tax 

returns and Form 990 information returns. In addition, private foundations and charitable trusts 

that file at least 250 returns during a calendar year are required to file electronically their Form 

990-PF information returns, regardless of their asset size. Taxpayers can request waivers of the 

electronic filing requirement if they cannot meet that requirement due to technological 

constraints, or if compliance with the requirement would result in undue financial burden on the 

taxpayer. Although electronic filing is required of certain corporations and other taxpayers, 

others may convert voluntarily to electronic filing. 

Generally, regulations may require electronic filing by taxpayers (other than individuals, estates 

and trusts) that file at least 250 returns annually. Before requiring electronic filing, the Internal 

Revenue Service (IRS) and Treasury Department must take into account the ability of taxpayers 

to comply at a reasonable cost. 

Reasons for Change 

Generally, compliance increases when taxpayers are required to provide better information to the 

IRS in usable form. Large organizations with assets of $10 million or more generally maintain 

financial records in electronic form, and generally either hire tax professionals who use tax 

preparation software or use tax preparation software themselves although they may not currently 

file electronically. 

Electronic filing supports the broader goals of improving IRS service to taxpayers, enhancing 

compliance, and modernizing tax administration. Overall, increased electronic filing of returns 

may improve customer satisfaction and confidence in the filing process, and it may be more cost 

effective for affected entities. Expanding electronic filing to certain additional large entities will 

help provide tax return information in a more uniform electronic form. This will enhance the 

ability of the IRS to more productively focus its audit activities. This can reduce burdens on 

businesses where the need for an audit can be avoided. 
101 

In the case of a large business, adopting the same standard for electronic filing as for filing 

Schedule M-3 provides simplification benefits. 

Proposal 

The proposal would require to all those corporations and partnerships that must file Schedule M3 to file their tax returns electronically. In the case of certain other large taxpayers not required 

to file Schedule M-3 (such as exempt organizations), the regulatory authority to require 

electronic filing would be expanded to allow reduction of the current threshold of filing 250 or 

more returns during a calendar year. Additionally, the regulatory authority would be expanded 

to allow reduction of the 250-return threshold in the case of information returns such as those 

required by Subpart B, Part III, Subchapter A, Chapter 61, Subtitle F, of the Internal Revenue 

Code (generally Forms 1099, 1098, 1096, and 5498). Nevertheless, any new regulations would 

balance the benefits of electronic filing against any burden that might be imposed on taxpayers, 

and implementation would take place incrementally to afford adequate time for transition to 

electronic filing. Taxpayers would be able to request waivers of this requirement if they cannot 

meet the requirement due to technological constraints, if compliance with the requirement would 

result in undue financial burden, or if other criteria specified in regulations are met. 

The proposal would be effective for taxable years ending after December 31, 2011. 
102 

AUTHORIZE THE DEPARTMENT OF THE TREASURY TO REQUIRE ADDITIONAL 

INFORMATION TO BE INCLUDED IN ELECTRONICALLY FILED FORM 5500 

ANNUAL REPORTS 

Current Law 

Code section 6058 requires the sponsor of a funded plan of deferred compensation (or the 

administrator of the plan) to file an annual return containing certain information in accordance 

with regulations prescribed by the Secretary of the Treasury. Section 6059 requires that a 

pension plan subject to the minimum funding requirements of section 412 file an actuarial report 

prepared by an enrolled actuary. Similarly, Title I of the Employee Retirement Income Security 

Act of 1974 (ERISA) requires that certain pension and welfare benefit plans file an annual report 

disclosing certain information to the Department of Labor (DOL). These Code and ERISA filing 

requirements have been consolidated into a single series of forms (Form 5500 and attachments) 

that is filed with the DOL and then shared with the Internal Revenue Service (IRS). This filing 

serves as the primary tool for gathering information and for appropriate targeting of enforcement 

activity regarding such plans. It also serves to satisfy certain requirements for filing with the 

Pension Benefit Guaranty Corporation. 

Reasons for Change 

The Department of Labor has the authority to require electronic filing of information relevant to 

Title I of ERISA and has exercised its authority to require that Form 5500 and its attachments be 

filed electronically. However, under section 6011(e), the Treasury and IRS lack general 

statutory authority to require electronic filing of returns unless the person subject to the filing 

requirement must file at least 250 returns during the year. As a result, information relevant only 

to tax code requirements (such as data on coverage needed to test compliance with 

nondiscrimination rules) and not to DOL’s ERISA Title I jurisdiction cannot be requested on the 

electronically-filed joint Form 5500 and currently is not collected. Collecting it would require a 

separate “IRS only” form that could be filed on paper, a process that would be neither simple nor 

efficient for taxpayers or for the IRS and DOL. 

Proposal 

The proposal would provide the IRS the authority to require in the electronically filed annual 

reports the inclusion of information that is relevant only to employee benefit plan tax 

requirements, giving the IRS authority with respect to such tax information comparable to that 

DOL already has with respect to information relevant to ERISA Title I. 

The proposal would be effective for plan years beginning after December 31, 2011. 
103 

IMPLEMENT STANDARDS CLARIFYING WHEN EMPLOYEE LEASING 

COMPANIES CAN BE HELD LIABLE FOR THEIR CLIENTS’ FEDERAL 

EMPLOYMENT TAXES 

Current Law 

Employers are required to withhold and pay Federal Insurance Contribution Act (FICA) taxes 

and to withhold and remit income taxes, and are required to pay Federal Unemployment Tax Act 

(FUTA) taxes (collectively “Federal employment taxes”) with respect to wages paid to their 

employees. Liability for Federal employment taxes generally lies with the taxpayer that is 

determined to be the employer under a multi-factor common law test or under specific statutory 

provisions. For example, a third party that is not the common law employer can be a statutory 

employer if the third party has control over the payment of wages. In addition, certain designated 

agents are jointly and severally liable with their principals for employment taxes with respect to 

wages paid to the principals’ employees. These designated agents prepare and file employment 

tax returns using their own name and employer identification number. In contrast, reporting 

agents (often referred to as payroll service providers) are generally not liable for the employment 

taxes reported on their clients’ returns. Reporting agents prepare and file employment tax returns 

for their clients using the client’s name and employer identification number. 

Employee leasing is the practice of contracting with an outside business to handle certain 

administrative, personnel, and payroll matters for a taxpayer’s employees. Employee leasing 

companies (often referred to as professional employer organizations) typically prepare and file 

employment tax returns for their clients using the leasing company’s name and employer 

identification number, often taking the position that the leasing company is the statutory or 

common law employer of their clients’ workers. 

Reasons for Change 

Under present law, there is often uncertainty as to whether the employee leasing company or its 

client is liable for unpaid Federal employment taxes arising with respect to wages paid to the 

client’s workers. Thus, when an employee leasing company files employment tax returns using 

its own name and employer identification number, but fails to pay some or all of the taxes due, or 

when no returns are filed with respect to wages paid by a taxpayer that uses an employee leasing 

company, there can be uncertainty as to how the Federal employment taxes are assessed and 

collected. 

Providing standards for when an employee leasing company and its clients will be held liable for 

Federal employment taxes will facilitate the assessment, payment and collection of those taxes 

and will preclude taxpayers who have control over withholding and payment of those taxes from 

denying liability when the taxes are not paid. 

Proposal 

The proposal would set forth standards for holding employee leasing companies jointly and 

severally liable with their clients for Federal employment taxes. The proposal would also provide 
104 

standards for holding employee leasing companies solely liable for such taxes if they meet 

specified requirements. 

The provision would be effective for employment tax returns required to be filed with respect to 

wages paid after December 31, 2011. 
105 

INCREASE CERTAINTY WITH RESPECT TO WORKER CLASSIFICATION 

Current Law

For both tax and nontax purposes, workers must be classified into one of two mutually exclusive 

categories: employees or self-employed (sometimes referred to as independent contractors). 

Worker classification generally is based on a common-law test for determining whether an 

employment relationship exists. The main determinant is whether the service recipient 

(employer) has the right to control not only the result of the worker’s services but also the means 

by which the worker accomplishes that result. For classification purposes, it does not matter 

whether the service recipient exercises that control, only that he or she has the right to exercise it. 

Even though it is generally recognized that more highly skilled workers may not require much 

guidance or direction from the service recipient, the underlying concept of the right to control is 

the same for them. In addition, only individuals can be employees. In determining worker 

status, the Internal Revenue Service (IRS) looks to three categories of evidence that may be 

relevant in determining whether the requisite control exists under the common-law test: 

behavioral control, financial control, and the relationship of the parties. 

For employees, employers are required to withhold income and Federal Insurance Contribution 

Act (FICA) taxes and to pay the employer’s share of FICA taxes. Employers are also required to 

pay Federal Unemployment Tax Act (FUTA) taxes and generally state unemployment 

compensation taxes. Liability for Federal employment taxes and the obligation to report the 

wages generally lie with the employer. 

For workers who are classified as independent contractors, service recipients engaged in a trade 

or business and that make payments totaling $600 or more in a calendar year to an independent 

contractor that is not a corporation are required to send an information return to the IRS and to 

the independent contractor stating the total payments made during the year. The service 

recipient generally does not need to withhold taxes from the payments reported unless the 

independent contractor has not provided its taxpayer identification number to the service 

recipient. Independent contractors pay Self-Employment Contributions Act (SECA) tax on their 

net earnings from self-employment (which generally is equivalent to both the employer and 

employee shares of FICA tax). Independent contractors generally are required to pay their 

income tax, including SECA liabilities, by making quarterly estimated tax payments. 

For workers, whether employee or independent contractor status is more beneficial depends on 

many factors including the extent to which an independent contractor is able to negotiate for 

gross payments that include the value of nonwage costs that the service provider would have to 

incur in the case of an employee. In some circumstances, independent contractor status is more 

beneficial; in other circumstances, employee status is more advantageous. 

Under a special provision (section 530 of the Revenue Act of 1978 which was not made part of 

the Internal Revenue Code), a service recipient may treat a worker as an independent contractor 

for Federal employment tax purposes even though the worker actually may be an employee 

under the common law rules if the service recipient has a reasonable basis for treating the worker 

as an independent contractor and certain other requirements are met. The special provision 
106 

applies only if (1) the service recipient has not treated the worker (or any worker in a 

substantially similar position) as an employee for any period beginning after 1977 and (2) the 

service recipient has filed all Federal tax returns, including all required information returns, on a 

basis consistent with treating the worker as an independent contractor. 

If an employer meets the requirements for the special provision with respect to a class of 

workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively 

and even as to newly hired workers in the same class. Since 1996, the IRS has considered the 

availability of the special provision as the first part of any examination concerning worker 

classification. If the IRS determines that the special provision applies to a class of workers, it 

does not determine whether the workers are in fact employees or independent contractors. Thus, 

the worker classification continues indefinitely even if it is incorrect. 

The special provision also prohibits the IRS from issuing generally applicable guidance 

addressing the proper classification of workers. Current law and procedures also provide for 

reduced penalties for misclassification where the special provision is not available but where, 

among other things, the employer agrees to prospective reclassification of the workers as 

employees. 

Reasons for Change

Since 1978, the IRS has not been permitted to issue general guidance addressing worker 

classification, and in many instances has been precluded from reclassifying workers – even 

prospectively – who may have been misclassified. Since 1978 there have been many changes in 

working relationships between service providers and service recipients. As a result, there has 

been continued and growing uncertainty about the correct classification of some workers. 

Many benefits and worker protections are available only for workers who are classified as 

employees. Incorrect classification as an independent contractor for tax purposes may spill over 

to other areas and, for example, lead to a worker not receiving benefits for unemployment 

(unemployment insurance) or on-the-job injuries (workers’ compensation), or not being 

protected by various on-the-job health and safety requirements. 

The incorrect classification of workers also creates opportunities for competitive advantages over 

service recipients who properly classify their workers. Such misclassification may lower the 

service recipient’s total cost of labor by avoiding workers’ compensation and unemployment 

compensation premiums, and could also provide increased opportunities for noncompliance by 

service providers. 

Workers, service recipients, and tax administrators would benefit from reducing uncertainty 

about worker classification, eliminating potential competitive advantages and incentives to 

misclassify workers associated with worker misclassification by competitors, and reducing 

opportunities for noncompliance by workers classified as self-employed, while maintaining the 

benefits and worker protections associated with an administrative and social policy system that is 

based on employee status. 
107 

Proposal

The proposal would permit the IRS to require prospective reclassification of workers who are 

currently misclassified and whose reclassification has been prohibited under current law. The 

reduced penalties for misclassification provided under current law would be retained, except that 

lower penalties would apply only if the service recipient voluntarily reclassifies its workers 

before being contacted by the IRS or another enforcement agency and if the service recipient had 

filed all required information returns (Forms 1099) reporting the payments to the independent 

contractors. For service recipients with only a small number of employees and a small number 

of misclassified workers, even reduced penalties would be waived if the service recipient (1) had 

consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed 

to prospective reclassification of misclassified workers. It is anticipated that, after enactment, 

new enforcement activity would focus mainly on obtaining the proper worker classification 

prospectively, since in many cases the proper classification of workers may not have been clear. 

(Statutory employee or nonemployee treatment as specified under current law would be 

retained.) 

The Department of the Treasury and the IRS also would be permitted to issue generally 

applicable guidance on the proper classification of workers under common law standards. This 

would enable service recipients to properly classify workers with much less concern about future 

IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting 

common law in a neutral manner recognizing that many workers are, in fact, not employees. 

Further, Treasury and the IRS would develop guidance that would provide safe harbors and/or 

rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful 

for service recipients, it would generally be industry- or job-specific. Priority for the 

development of guidance would be given to industries and jobs in which application of the 

common law test has been particularly problematic, where there has been a history of worker 

misclassification, or where there have been failures to report compensation paid. 

Service recipients would be required to give notice to independent contractors, when they first 

begin performing services for the service recipient, that explains how they will be classified and 

the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and 

hour implications. 

The IRS would be permitted to disclose to the Department of Labor information about service 

recipients whose workers are reclassified. 

To ease compliance burdens for independent contractors, independent contractors receiving 

payments totaling $600 or more in a calendar year from a service recipient would be permitted to 

require the service recipient to withhold for Federal tax purposes a flat rate percentage of their 

gross payments, with the flat rate percentage being selected by the contractor. 

The proposal would be effective upon enactment, but prospective reclassification of those 

covered by the current special provision would not be effective until the first calendar year 

beginning at least one year after date of enactment. The transition period could be up to two 

years for independent contractors with existing written contracts establishing their status.
108 

REPEAL SPECIAL ESTIMATED TAX PAYMENT PROVISION FOR CERTAIN 

INSURANCE COMPANIES 

Current Law

An insurance company uses reserve accounting to compute losses incurred. That is, losses 

incurred for the taxable year includes losses paid during the taxable year (net of salvage and 

reinsurance recovered), plus or minus the increase or decrease in discounted unpaid losses during 

the year. An adjustment is also made for the change in discounted estimated salvage and 

reinsurance recoverable. 

Unpaid losses are determined on a discounted basis to account for the time that may elapse 

between an insured loss event and the payment or other resolution of the claim. Taxpayers may, 

however, elect under section 847 to take an additional deduction equal to the difference between 

the amount of their reserves computed on a discounted basis and the amount computed on an 

undiscounted basis. In order to do so, a taxpayer must make a special estimated tax payment 

(SETP) equal to the tax benefit attributable to the additional deduction. In addition, the 

additional deductions are added to a special loss discount account. In future years, as losses are 

paid, amounts are subtracted from the special discount account and included in gross income; the 

SETPs are used to offset tax generated by these income inclusions. To the extent an amount 

added to the special loss discount account is not subtracted within 15 years, it is automatically 

subtracted (and included in gross income) for the 15th year. This regime of additional 

deductions and SETPs is, by design, revenue neutral. 

Reasons for Change

Although this provision is revenue neutral, it imposes a substantial recordkeeping burden on both 

taxpayers and the Internal Revenue Service. Records must be maintained for up to 15 years for 

both amounts added to the special loss discount account and amounts paid as SETPs. 

Additional complexities frequently arise, such as when a taxpayer has a net operating loss 

carryback, or when a taxpayer is subject to regular tax in one year and alternative minimum tax 

in another. Also, further complexity arises under section 847 because an insurance company 

must account for tax benefits that would arise from the filing of a consolidated return with other 

insurance companies without taking into account statutory limitations on the absorption of losses 

of non-life insurers against income of life insurance companies. 

Proposal

The proposal would repeal section 847 of the Internal Revenue Code, effective for taxable years 

beginning after December 31, 2011. 

The entire balance of any existing special loss discount account would be included in gross 

income for the first taxable year beginning after December 31, 2011, and the entire amount of 

existing SETPs would be applied against additional tax that is due as a result of that inclusion. 

Any SETPs in excess of the additional tax that is due would be treated as an estimated tax 

payment under section 6655. 
109 

In lieu of immediate inclusion in gross income for the first taxable year beginning after 

December 31, 2011, taxpayers would be permitted to elect to include the balance of any existing 

special loss discount account in gross income ratably over a four taxable year period, beginning 

with the first taxable year beginning after December 31, 2011. During this period, taxpayers 

would be permitted to use existing SETPs to offset any additional tax that is due as a result of 

that inclusion. At the end of the fourth year, any remaining SETPs would be treated as an 

estimated tax payment under section 6655. 
110 

ELIMINATE SPECIAL RULES MODIFYING THE AMOUNT OF ESTIMATED TAX 

PAYMENTS BY CORPORATIONS 

Current Law

Under section 6655 of the Internal Revenue Code, corporations generally are required to pay 

their income tax liability for a taxable year in quarterly estimated payments. For corporations 

that keep their accounts on a calendar year basis, these payments are generally due on or before 

April 15, June 15, September 15 and December 15 of the particular taxable year. The amount 

due each quarter is generally one-quarter (25 percent) of the amount due for the year. 

A number of acts have modified the standard rules as to the amount due by “large corporations” 

for a particular quarter. A large corporation, for this purpose, means a corporation with assets of 

$1 billion or more, determined as of the end of the preceding taxable year. For example, Public 

Law 111-210, which renewed import restrictions under the Burmese Freedom and Democracy 

Act of 2003, increased the quarterly estimated tax payment required by large corporations for 

July, August or September, 2015, to 121.75 percent of the amount otherwise due. Where the 

amount required for a particular quarter has been increased, the amount of the next required 

quarterly payment is reduced accordingly. 

Reasons for Change

The frequent changes to the corporate estimated tax payment schedule do not generally increase 

a corporation’s income tax liability for a particular taxable year. However, the frequency of such 

changes operates to increase uncertainty within the corporate tax system. 

Proposal

The proposal would repeal all legislative acts that cause the amount and timing of corporate 

estimated payments to differ from the rules described under section 6655. 

The proposal would be effective for taxable years beginning after December 31, 2011. 
111 

Strengthen Tax Administration

REVISE OFFER-IN-COMPROMISE APPLICATION RULES

Current Law

Current law provides that the Internal Revenue Service (IRS) may compromise any civil or 

criminal case arising under the internal revenue laws prior to a reference to the Department of 

Justice for prosecution or defense. In 2006, a new provision was enacted to require taxpayers to 

make certain nonrefundable payments with any initial offer-in-compromise of a tax case. The 

new provision requires taxpayers making a lump-sum offer-in-compromise to include a 

nonrefundable payment of 20 percent of the lump-sum with the initial offer. In the case of an 

offer-in-compromise involving periodic payments, the initial offer must be accompanied by a 

nonrefundable payment of the first installment that would be due if the offer were accepted. 

Reasons for Change

Requiring nonrefundable payments with an offer-in-compromise may substantially reduce access 

to the offer-in-compromise program. The offer-in-compromise program is designed to settle 

cases in which taxpayers have demonstrated an inability to pay the full amount of a tax liability. 

The program allows the IRS to collect the portion of a tax liability that the taxpayer has the 

ability to pay. Reducing access to the offer-in-compromise program makes it more difficult and 

costly to obtain the collectable portion of existing tax liabilities. 

Proposal

The proposal would eliminate the requirements that an initial offer-in-compromise include a 

nonrefundable payment of any portion of the taxpayer’s offer. 

The proposal would be effective for offers-in-compromise submitted after the date of enactment.
112 

EXPAND INTERNAL REVENUE SERVICE (IRS) ACCESS TO INFORMATION IN 

THE NATIONAL DIRECTORY OF NEW HIRES FOR TAX ADMINISTRATION 

PURPOSES 

Current Law 

The Office of Child Support Enforcement of the Department of Health and Human Services 

maintains the National Directory of New Hires (NDNH), which is a database that contains data 

from Form W-4 for newly-hired employees, quarterly wage data from State workforce and 

Federal agencies for all employees, and unemployment insurance data from State workforce 

agencies for all individuals who have applied for or received unemployment benefits. The 

NDNH was created to help State child support enforcement agencies enforce obligations of 

parents across State lines. 

Under current provisions of the Social Security Act, the IRS may obtain data from the NDNH, 

but only for the purpose of administering the earned income tax credit (EITC) and verifying 

employment reported on a tax return. 

Generally, the IRS obtains employment and unemployment data less frequently than quarterly, 

and there are significant internal costs of preparing these data for use. Under various State laws, 

the IRS may negotiate for access to employment and unemployment data directly from State 

agencies that maintain these data. 

Reasons for Change 

Employment data are useful to the IRS in administering a wide range of tax provisions beyond 

the EITC, including verifying taxpayer claims and identifying levy sources. Currently, the IRS 

may obtain employment and unemployment data on a State-by-State basis, which is a costly and 

time-consuming process. NDNH data are timely, uniformly compiled, and electronically 

accessible. Access to the NDNH would increase the productivity of the IRS by reducing the 

amount of IRS resources dedicated to obtaining and processing data without reducing the current 

levels of taxpayer privacy. 

Proposal 

The proposal would amend the Social Security Act to expand IRS access to NDNH data for 

general tax administration purposes, including data matching, verification of taxpayer claims 

during return processing, preparation of substitute returns for non-compliant taxpayers, and 

identification of levy sources. Data obtained by the IRS from the NDNH would be protected by 

existing taxpayer privacy law, including civil and criminal sanctions. 

The proposal would be effective upon enactment. 
113 

MAKE REPEATED WILLFUL FAILURE TO FILE A TAX RETURN A FELONY 

Current Law 

Current law provides that willful failure to file a tax return is a misdemeanor punishable by a 

term of imprisonment for not more than one year, a fine of not more than $25,000 ($100,000 in 

the case of a corporation), or both. A taxpayer who fails to file returns for multiple years 

commits a separate misdemeanor offense for each year. 

Reasons for Change 

Increased criminal penalties would help to deter multiple willful failures to file tax returns. 

Proposal 

The proposal would provide that any person who willfully fails to file tax returns in any three 

years within any five consecutive year period, if the aggregated tax liability for such period is at 

least $50,000, would be subject to a new aggravated failure to file criminal penalty. The proposal 

would classify such failure as a felony and, upon conviction, impose a fine of not more than 

$250,000 ($500,000 in the case of a corporation) or imprisonment for not more than five years, 

or both. 

The proposal would be effective for returns required to be filed after December 31, 2011. 
114 

FACILITATE TAX COMPLIANCE WITH LOCAL JURISDICTIONS 

Current Law 

Although Federal tax returns and return information (FTI) generally are confidential, the Internal 

Revenue Service (IRS) and Treasury Department may share FTI with States as well as certain 

local government entities that are treated as States for this purpose. Generally, the purpose of 

information sharing is to facilitate tax administration. Where sharing of FTI is authorized, 

reciprocal provisions generally authorize disclosure of information to the IRS by State and local 

governments. State and local governments that receive FTI must safeguard it according to 

prescribed protocols that require secure storage, restricted access, reports to IRS, and shredding 

or other proper disposal. See, e.g., IRS Publication 1075. Criminal and civil sanctions apply to 

unauthorized disclosure or inspection of FTI. Indian Tribal Governments (ITGs) are treated as 

States by the tax law for several purposes, such as certain charitable contributions, excise tax 

credits, and local tax deductions, but not for purposes of information sharing. 

Reasons for Change 

IRS and Treasury compliance activity, especially with respect to alcohol, tobacco and fuel excise 

taxes, may necessitate information sharing with ITGs. For example, the IRS may wish to confirm 

if a fuel supplier’s claim to have delivered particular amounts to adjacent jurisdictions is 

consistent with that reported to the IRS. If not, the IRS in conjunction with the ITG, which would 

have responsibility for administering taxes imposed by the ITG, can take steps to ensure 

compliance with both Federal and ITG tax laws. Where the local government is treated as a State 

for information sharing purposes, IRS, Treasury, and local officials can support each other’s 

efforts. Where the local government is not so treated, there is an impediment to compliance 

activity. 

Proposal 

For purposes of information sharing, the proposal would treat as States those ITGs that impose 

alcohol, tobacco, or fuel excise or income or wage taxes, to the extent necessary for ITG tax 

administration. An ITG that receives FTI would be required to safeguard it according to 

prescribed protocols. The criminal and civil sanctions would apply. 

The proposal would be effective for disclosures made after enactment. 
115 

EXTEND STATUTE OF LIMITATIONS WHERE STATE ADJUSTMENT AFFECTS 

FEDERAL TAX LIABILITY 

Current Law 

In general, additional Federal tax liabilities in the form of tax, interest, penalties and additions to 

tax must be assessed by the Internal Revenue Service (IRS) within three years after the date a 

return is filed. If an assessment is not made within the required time period, the additional 

liabilities generally cannot be assessed or collected at any future time. In general, the statute of 

limitations with respect to claims for refund expires three years from the time the return was filed 

or two years from the time the tax was paid, whichever is later. The Code contains exceptions to 

the general statute of limitations. 

State and local authorities employ a variety of statutes of limitations for State and local tax 

assessments. Pursuant to agreement, the IRS and State and local revenue agencies exchange 

reports of adjustments made through examination so that corresponding adjustments can be made 

by each taxing authority. In addition, States provide the IRS with reports of potential 

discrepancies between State returns and Federal returns. 

Reasons for Change 

The general statute of limitations serves as a barrier to the effective use by the IRS of State and 

local tax adjustment reports when the reports are provided by the State or local revenue agency 

to the IRS with little time remaining for assessments to be made at the Federal level. Under the 

current statute of limitations framework, taxpayers may seek to extend the State statute of 

limitations or postpone agreement to State proposed adjustments until such time as the Federal 

statute of limitations expires in order to preclude assessment at the Federal level. In addition, it is 

not always the case that a taxpayer that files an amended State or local return reporting additional 

liabilities at the State or local level that also affect Federal tax liability will file an amended 

return at the Federal level. 

Proposal 

The proposal would create an additional exception to the general three-year statute of limitations 

for assessment of Federal tax liability resulting from adjustments to State or local tax liability. 

The statute of limitations would be extended to the greater of: (1) one year from the date the 

taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local 

tax return; or (2) two years from the date the IRS first receives information from the State or 

local revenue agency under an information sharing agreement in place between the IRS and a 

State or local revenue agency. The statute of limitations would be extended only with respect to 

the increase in Federal tax attributable to the State or local tax adjustment. The statute of 

limitations would not be further extended if the taxpayer files additional amended returns for the 

same tax periods as the initial amended return or if the IRS receives additional information from 

the State or local revenue agency under an information sharing agreement. The statute of 

limitations on claims for refund would be extended correspondingly so that any overall increase 

in tax assessed by the IRS as a result of the State or local examination report would take into 

account agreed-upon tax decreases or reductions attributable to a refund or credit. 
116 

The proposal would be effective for returns required to be filed after December 31, 2011. 
117 

IMPROVE INVESTIGATIVE DISCLOSURE STATUTE 

Current Law 

Generally, tax return information is confidential, unless a specific exception in the Code applies. 

In the case of tax administration, the Code permits Treasury and Internal Revenue Service (IRS) 

officers and employees to disclose return information to the extent necessary to obtain 

information not otherwise reasonably available, in the course of an audit or investigation, as 

prescribed by regulation. Thus, for example, a revenue agent may identify himself or herself as 

affiliated with the IRS, and may disclose the nature and subject of an investigation, as necessary 

to elicit information from a witness in connection with that investigation. Criminal and civil 

sanctions apply to unauthorized disclosures of return information. 

Reasons for Change 

Treasury Regulations effective since 2003 state that the term “necessary” in this context does not 

mean essential or indispensable, but rather appropriate and helpful in obtaining the information 

sought. In other contexts, a “necessary” disclosure is one without which performance cannot be 

accomplished reasonably without the disclosure. Determining if an investigative disclosure is 

“necessary” is inherently factual, leading to inconsistent opinions by the courts. Eliminating this 

uncertainty from the statute would facilitate investigations by IRS officers and employees, while 

setting forth clear guidance for taxpayers, thus enhancing compliance with the tax Code. 

Proposal 

The proposal would clarify the taxpayer privacy law by stating that the law does not prohibit 

Treasury and IRS officers and employees from identifying themselves, their organizational 

affiliation, and the nature and subject of an investigation, when contacting third parties in 

connection with a civil or criminal tax investigation. 

The proposal would be effective for disclosures made after enactment. 
118 

REQUIRE TAXPAYERS WHO PREPARE THEIR RETURNS ELECTRONICALLY 

BUT FILE THEIR RETURNS ON PAPER TO PRINT THEIR RETURNS WITH A 2-D 

BAR CODE 

Current Law 

Taxpayers can prepare their tax returns electronically (either by utilizing a tax return preparer or 

using tax return software at home) and, instead of filing their returns electronically, may print out 

a paper copy and file the return on paper by mailing it to the Internal Revenue Service (IRS).

Reasons for Change 

Electronically filed tax returns are processed more efficiently and more accurately than paper tax 

returns. When tax returns are filed on paper—even if that paper return was prepared 

electronically—the IRS is unable to scan the return and the information contained on the return 

must be manually entered into the IRS’s systems. 

New scanning technology would allow the IRS to scan paper tax returns and capture all data 

shown on the return, if the paper return contains a 2-D bar code that would allow conversion of 

the paper return into an electronic format. This would reduce the amount of training, recruiting, 

and staffing that the IRS requires to process paper tax returns. In addition, the IRS would have 

greater access to more accurate tax data, thereby improving case selection, assisting in the 

detection of fraudulent tax returns, and allowing more comprehensive analysis of taxpayer 

behavior. 

Proposal 

The proposal would require all taxpayers who prepare their tax returns electronically but print 

their returns and file them on paper to print their returns with a 2-D bar code that can be scanned 

by the IRS to convert the paper return into an electronic format. 

The proposal would be effective for tax returns filed after December 31, 2011. 
119 

REQUIRE PRISONS LOCATED IN THE U.S. TO PROVIDE INFORMATION TO THE 

INTERNAL REVENUE SERVICE (IRS) 

Current Law 

The IRS is unable to cross reference tax returns received with a list of prison inmates to 

determine whether inmates are claiming tax benefits to which they are not entitled. 

Reasons for Change 

The IRS has become aware that some incarcerated individuals are claiming tax benefits to which 

they may not be entitled. For example, some inmates file false returns claiming a refund, based 

upon false W-2 statements created by the inmate showing that the inmate has earned income 

from a legitimate business and that taxes were withheld on that income. Some inmates claim the 

earned income tax credit (EITC), even though section 32 provides that no income for services 

provided while the individual is an inmate at a penal institution shall be taken into account for 

purposes of the EITC. 

By requiring that all inmates’ names and validated Social Security numbers be provided to the 

IRS, the IRS could cross reference tax returns with the list of inmates to determine if a legitimate 

return is filed, before tax refunds are paid. Although the IRS is working with state and federal 

prison systems to collect information on the prison population, the IRS is currently unable to 

consistently identify tax returns filed by prisoners and may not be able to immediately determine 

that income could not have been earned outside of the institution where the inmate was 

incarcerated. 

Proposal 

The proposal would require all prisons located in the United States to submit to the IRS by 

December 1 of each year a list of names and validated Social Security numbers of all inmates 

serving sentences of one year or more. 

The proposal would be effective upon enactment. 
120 

ALLOW THE INTERNAL REVENUE SERVICE (IRS) TO ABSORB CREDIT AND 

DEBIT CARD PROCESSING FEES FOR CERTAIN TAX PAYMENTS 

Current Law 

Section 6311 permits the IRS to receive payment of taxes by any commercially acceptable means 

that the Secretary deems appropriate. Taxpayers may make credit or debit card payments by 

phone through IRS-designated third party service providers, but these providers charge the 

taxpayer a convenience fee over and above the taxes due. Taxpayers cannot make a credit or 

debit card payment by phone directly to IRS collection representatives. Under current law, if the 

IRS were to accept credit or debit card payments directly from taxpayers, the IRS is prohibited 

from absorbing credit or debit card processing fees. 

Reasons for Change 

When taxpayers agree to make additional payments during in telephone consultations with IRS 

agents, it is inefficient for both taxpayers and the IRS to require taxpayers to contact a third party 

service provider to make credit and debit card payments. Both the requirement for a separate call 

to a service provider and the additional processing fee for such payments may also discourage 

payment of outstanding liabilities, resulting in greater collection costs for the IRS, fewer IRS 

resources available to contact additional taxpayers, and lower tax collections. Allowing IRS to 

accept credit and debit card payments directly and allowing the IRS to absorb the credit and debit 

card processing fees would increase efficiency and the number of collection cases worked. 

Permitting the IRS to absorb the processing fee would increase payment options available to 

taxpayers. 

Proposal 

The proposal would amend Section 6311(d) to allow the IRS to accept credit or debit card 

payments directly from taxpayers and to absorb the credit and debit card processing fees for 

certain tax payments, without charging a separate processing fee to the taxpayer. 

The proposal would be effective for payments made after the date of enactment. 
121 

Expand Penalties

IMPOSE A PENALTY ON FAILURE TO COMPLY WITH ELECTRONIC FILING 

REQUIREMENTS 

Current Law 

Certain corporations and tax-exempt organizations (including certain charitable trusts and private 

foundations) are required to file their returns electronically. Generally, filing on paper instead of 

electronically is treated as a failure to file if electronic filing is required. Additions to tax are 

imposed for the failure to file tax returns reporting a liability. For failure to file a corporate 

return, the addition to tax is 5 percent of the amount required to be shown as tax due on the 

return, for the first month of failure, and an additional 5 percent for each month or part of a 

month thereafter, up to a maximum of 25 percent. 

For failure to file a tax-exempt organization return, the addition to tax is $20 a day for each day 

the failure continues. The maximum amount per return is $10,000 or 5 percent of the 

organization’s gross receipts for the year, whichever is less. Organizations with annual gross 

receipts exceeding $1 million, however, are subject to an addition to tax of $100 per day, with a 

maximum of $50,000. 

Reasons for Change 

Although there are additions to tax for the failure to file returns, there is no specific penalty for a 

failure to comply with a requirement to file electronically. Because the addition to tax for failure 

to file a corporate return is based on an underpayment of tax, no addition is imposed if the 

corporation is in a refund, credit, or loss status. Thus, the existing addition to tax may not 

provide an adequate incentive for certain corporations to file electronically. Generally, electronic 

filing increases efficiency of tax administration because the provision of tax return information 

in an electronic form enables the Internal Revenue Service to focus audit activities where they 

can have the greatest impact. This also assists taxpayers where the need for audit is reduced. 

Proposal 

The proposal would establish an assessable penalty for a failure to comply with a requirement of 

electronic (or other machine-readable) format for a return that is filed. The amount of the penalty 

would be $25,000 for a corporation or $5,000 for a tax-exempt organization. For failure to file in 

any format, the existing penalty would remain, and the proposed penalty would not apply. 

The proposal would be effective for returns required to be electronically filed after December 31, 

2011. 
122 

INCREASE PENALTY IMPOSED ON PAID PREPARERS WHO FAIL TO COMPLY 

WITH EARNED INCOME TAX CREDIT (EITC) DUE DILIGENCE REQUIREMENTS 

Current Law 

Section 6695(g) imposes a $100 penalty on tax return preparers who fail to comply with the due 

diligence requirements imposed by regulations with respect to determining eligibility for, or the 

amount of, the EITC for each such failure. 

Reasons for Change 

The Internal Revenue Service estimates that as many as a quarter of EITC claims are made in 

error. Since more than two-thirds of EITC claims are prepared by paid tax return preparers, tax 

return preparers can have a substantial impact on reducing the number of errors in EITC claims. 

Increasing the due diligence penalty amount, which has not been adjusted since the penalty was 

introduced in 1997, will help ensure that preparers comply with the due diligence requirements. 

Proposal 

The proposal would increase the Section 6695(g) penalty from $100 to $500. 

The proposal would be effective for returns required to be filed after December 31, 2011. 
123 

Modify Estate and Gift Tax Valuation Discounts and Make Other Reforms

MAKE PERMANENT THE PORTABILITY OF UNUSED EXEMPTION BETWEEN 

SPOUSES 

Current Law

Each individual has a lifetime exclusion for purposes of estate and gift taxes. That exclusion is 

$5 million in 2011 and will be indexed for inflation after 2011. However, after 2012, the amount 

of this exclusion is scheduled to revert to the amount that would have been in effect had the 

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) never been enacted 

(thus, $1 million). For the first time, current law now provides that the surviving spouse of a 

person who dies after December 31, 2010, may be eligible to increase the surviving spouse’s 

exclusion amount by the portion of the predeceased spouse’s exclusion that remained unused at 

the predeceased spouse’s death. In no event, however, may the surviving spouse’s exclusion 

amount be increased by more than the amount of exclusion available to a person in that calendar 

year. This provision allowing the portability of the predeceased spouse’s unused exemption 

applies through December 31, 2012. If a surviving spouse is predeceased by more than one 

spouse, the amount of unused exclusion that is available for use by such surviving spouse is 

limited to the unused exclusion of the last such deceased spouse to die. The surviving spouse 

may use his or her exclusion, augmented by such predeceased spouse’s unused exclusion, for 

taxable transfers made during life or at death. 

The surviving spouse may use the unused exclusion of such predeceased spouse only if the 

executor of that predeceased spouse makes an election on a timely filed estate tax return 

(including extensions) for the estate of that predeceased spouse on which such unused exemption 

amount is computed, regardless of whether the estate of that predeceased spouse otherwise is 

required to file an estate tax return. Notwithstanding the statute of limitations for assessing estate 

or gift tax with respect to that predeceased spouse, the return of that predeceased spouse may be 

examined and adjusted for purposes of determining the deceased spouse’s unused exclusion 

amount available for use by the surviving spouse. 

Reasons for Change

Without this portability provision, spouses are often required to retitle assets into each spouse’s 

separate name and create complex trusts in order to allow the first spouse to die to take full 

advantage of his or her exclusion. Depending upon the nature of the couple’s assets, such a 

division may not be possible. Such a division also has significant consequences under property 

law and often is not consistent with the way in which the married couple would prefer to handle 

their financial affairs. Portability would obviate the need for such burdensome planning. 
124 

Proposal

This proposal would extend portability permanently, thus making the use of the last predeceased 

spouse’s unused exemption available to all estates of decedents dying and gifts made after 

December 31, 2012. 
125 

REQUIRE CONSISTENCY IN VALUE FOR TRANSFER AND INCOME TAX 

PURPOSES 

Current Law

Section 1014 provides that the basis of property acquired from a decedent generally is the fair 

market value of the property on the decedent’s date of death. Similarly, property included in the 

decedent’s gross estate for estate tax purposes generally must be valued at its fair market value 

on the date of death. Although the same valuation standard applies to both provisions, current 

law does not explicitly require that the recipient’s basis in that property be the same as the value 

at which that property was reported for estate tax purposes. 

Section 1015 provides that the donee’s basis in property received by gift during the life of the 

donor generally is the donor’s adjusted basis in the property, increased by gift tax paid on the 

transfer. If, however, the donor’s basis exceeds the fair market value of the property on the date 

of the gift, the donee’s basis is limited to that fair market value for purposes of determining any 

subsequent loss. 

Section 1022, applicable to the estates of decedents dying during 2010 if a timely election to that 

effect is made, provides that the basis of property acquired from such a decedent is the lesser of 

the decedent’s adjusted basis in that property or the fair market value of the property on the 

decedent’s date of death. 

Section 6034A imposes a consistency requirement – specifically, that the recipient of a 

distribution of income from a trust or estate must report on the recipient’s own income tax return 

the exact information included on the Schedule K-1 of the trust’s or estate’s income tax return – 

but this provision applies only for income tax purposes, and the Schedule K-1 does not include 

basis information. 

 

Reasons for Change

Taxpayers should be required to take consistent positions in dealing with the Internal Revenue 

Service, whether or not principles of privity apply. If the logic underlying the determination of 

the new basis in property acquired on the death of the owner is that the new basis is the amount 

used to determine the decedent’s estate tax liability, then the law should require that the same 

value be used by the recipient, unless that value is in excess of the accurate value. In the case of 

property transferred on death or by gift during life, often the executor of the estate or the donor, 

respectively, will be in the best position to ensure that the recipient receives the information that 

will be necessary to determine the recipient’s basis in the transferred property. 

Proposal

This proposal would impose both a consistency and a reporting requirement. The basis of 

property received by reason of death under section 1014 must equal the value of that property for 

estate tax purposes. The basis of property received by gift during the life of the donor must 

equal the donor’s basis determined under section 1015. The basis of property acquired from a 

decedent to whose estate section 1022 is applicable is the lesser of the decedent’s adjusted basis 

or the fair market value of the property on the decedent’s death. This proposal would require 
126 

that the basis of the property in the hands of the recipient be no greater than the value of that 

property as determined for estate or gift tax purposes (subject to subsequent adjustments). 

A reporting requirement would be imposed on the executor of the decedent’s estate and on the 

donor of a lifetime gift to provide the necessary valuation information to both the recipient and 

the Internal Revenue Service. 

A grant of regulatory authority would be included to provide details about the implementation 

and administration of these requirements, including rules for situations in which no estate tax 

return is required to be filed or gifts are excluded from gift tax under section 2503, for situations 

in which the surviving joint tenant or other recipient may have better information than the 

executor, and for the timing of the required reporting in the event of adjustments to the reported 

value subsequent to the filing of an estate or gift tax return. 

The proposal would be effective as of the date of enactment. 
127 

MODIFY RULES ON VALUATION DISCOUNTS 

Current Law

The fair market value of property transferred, whether on the death or during the life of the 

transferor, generally is subject to estate or gift tax at the time of the transfer. Sections 2701 

through 2704 of the Internal Revenue Code were enacted to prevent the reduction of taxes 

through the use of “estate freezes” and other techniques designed to reduce the value of the 

transferor’s taxable estate and discount the value of the taxable transfer to the beneficiaries of the 

transferor without reducing the economic benefit to the beneficiaries. Generally, section 2704(b) 

provides that certain “applicable restrictions” (that would normally justify discounts in the value 

of the interests transferred) are to be ignored in valuing interests in family-controlled entities if 

those interests are transferred (either by gift or on death) to or for the benefit of other family 

members. The application of these special rules results in an increase in the transfer tax value of 

those interests above the price that a hypothetical willing buyer would pay a willing seller, 

because section 2704(b) generally directs an appraiser to ignore the rights and restrictions that 

otherwise would support significant discounts for lack of marketability and control. 

Reasons for Change

Judicial decisions and the enactment of new statutes in most states, in effect, have made section 

2704(b) inapplicable in many situations by recharacterizing restrictions such that they no longer 

fall within the definition of an “applicable restriction”. In addition, the Internal Revenue Service 

has identified additional arrangements designed to circumvent the application of section 2704. 

Proposal

This proposal would create an additional category of restrictions (“disregarded restrictions”) that 

would be ignored in valuing an interest in a family-controlled entity transferred to a member of 

the family if, after the transfer, the restriction will lapse or may be removed by the transferor 

and/or the transfer’s family. Specifically, the transferred interest would be valued by substituting 

for the disregarded restrictions certain assumptions to be specified in regulations. Disregarded 

restrictions would include limitations on a holder’s right to liquidate that holder’s interest that are 

more restrictive than a standard to be identified in regulations. A disregarded restriction also 

would include any limitation on a transferee’s ability to be admitted as a full partner or to hold an 

equity interest in the entity. For purposes of determining whether a restriction may be removed 

by member(s) of the family after the transfer, certain interests (to be identified in regulations) 

held by charities or others who are not family members of the transferor would be deemed to be 

held by the family. Regulatory authority would be granted, including the ability to create safe 

harbors to permit taxpayers to draft the governing documents of a family-controlled entity so as 

to avoid the application of section 2704 if certain standards are met. This proposal would make 

conforming clarifications with regard to the interaction of this proposal with the transfer tax 

marital and charitable deductions. 

This proposal would apply to transfers after the date of enactment of property subject to 

restrictions created after October 8, 1990 (the effective date of section 2704). 

 
128 

REQUIRE A MINIMUM TERM FOR GRANTOR RETAINED ANNUITY TRUSTS 

(GRATS) 

Current Law

Section 2702 provides that, if an interest in a trust is transferred to a family member, the value of 

any interest retained by the grantor is valued at zero for purposes of determining the transfer tax 

value of the gift to the family member(s). This rule does not apply if the retained interest is a 

“qualified interest.” A fixed annuity, such as the annuity interest retained by the grantor of a 

GRAT, is one form of qualified interest, so the gift of the remainder interest in the GRAT is 

determined by deducting the present value of the retained annuity during the GRAT term from 

the fair market value of the property contributed to the trust. 

Generally, a GRAT is an irrevocable trust funded with assets expected to appreciate in value, in 

which the grantor retains an annuity interest for a term of years that the grantor expects to 

survive. At the end of that term, the assets then remaining in the trust are transferred to (or held 

in further trust for) the beneficiaries, who generally are descendants of the grantor. If the grantor 

dies during the GRAT term, however, the trust assets (at least the portion needed to produce the 

retained annuity) are included in the grantor’s gross estate for estate tax purposes. To this extent, 

although the beneficiaries will own the remaining trust assets, the estate tax benefit of creating 

the GRAT (specifically, the tax-free transfer of the appreciation during the GRAT term in excess 

of the annuity payments) is not realized. 

Reasons for Change

GRATs have proven to be a popular and efficient technique for transferring wealth while 

minimizing the gift tax cost of transfers, providing that the grantor survives the GRAT term and 

the trust assets do not depreciate in value. The greater the appreciation, the greater the transfer 

tax benefit achieved. Taxpayers have become adept at maximizing the benefit of this technique, 

often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during 

the term), in many cases to two years, and by retaining annuity interests significant enough to 

reduce the gift tax value of the remainder interest to zero or to a number small enough to 

generate only a minimal gift tax liability. 

Proposal

This proposal would require, in effect, some downside risk in the use of this technique by 

imposing the requirement that a GRAT have a minimum term of ten years.9 The proposal would 

also include a requirement that the remainder interest have a value greater than zero and would 

prohibit any decrease in the annuity during the GRAT term. Although a minimum term would 

not prevent “zeroing-out” the gift tax value of the remainder interest, it would increase the risk of 

the grantor’s death during the GRAT term and the resulting loss of any anticipated transfer tax 

benefit. 

This proposal would apply to trusts created after the date of enactment. 

 

9

 Cf. section 673 as applicable to a so-called Clifford trust created before or on March 1, 1986, with a ten-year 

minimum term. 
129 

LIMIT DURATION OF GENERATION-SKIPPING TRANSFER (GST) TAX 

EXEMPTION 

Current Law

Generation-skipping transfer tax is imposed on gifts and bequests to transferees who are two or 

more generations younger than the transferor. The GST tax was enacted to “backstop” the estate 

and gift tax system by preventing the avoidance of those taxes through the use of a trust that 

gives successive life interests to multiple generations of beneficiaries. In such a trust, no estate 

tax would be incurred as beneficiaries died because their respective life interests would die with 

them and thus would cause no inclusion of the trust assets in the deceased beneficiary’s gross 

estate. The GST tax is a flat tax on the value of the transfer at the highest estate tax bracket 

applicable in that year. Each person has a GST tax exemption (originally $1 million, $3.5 

million in 2009, and $5 million in 2010 and 2011), that can be allocated to transfers made by that 

person, whether made directly to a grandchild or other “skip person” or in trust. The allocation 

of GST exemption to a transfer or to a trust excludes from the GST tax not only the amount of 

the transfer or trust assets equal to the amount of GST exemption allocated, but also all 

appreciation and income on that amount during the existence of the trust. 

At the time of the enactment of the GST provisions, the law of most (generally, all but about 

three) states included the common law Rule against Perpetuities (RAP) or some statutory 

enactment or version of it. The RAP generally requires that every trust terminate no later than 21 

years after the death of a person who was alive (a life in being) at the time of the creation of the 

trust. 

Reasons for Change

Many states have now either repealed or limited the application of their RAP statutes, with the 

effect that trusts created subject to the law of those jurisdictions may continue in perpetuity. (A 

trust may be sitused anywhere; a grantor is not limited to the jurisdiction of the grantor’s 

domicile for this purpose.) As a result, the transfer tax shield provided by the GST exemption 

effectively has been expanded from trusts funded with $1 million and a maximum duration 

limited by the RAP, to trusts funded with $5 million and continuing (and growing) in perpetuity. 

Proposal

This proposal would provide that, on the 90th anniversary of the creation of a trust, the GST 

exclusion allocated to the trust would terminate. Specifically, this would be achieved by 

increasing the inclusion ratio of the trust (as defined in section 2642) to one, thereby rendering 

no part of the trust exempt from GST tax. Because contributions to a trust from a different 

grantor are deemed to be held in a separate trust under section 2654(b), each such separate trust 

would be subject to the same 90-year rule, measured from the date of the first contribution by the 

grantor of that separate trust. The special rule for pour-over trusts under section 2653(b)(2) 

would continue to apply to pour-over trusts and to trusts created under a decanting authority, and 

for purposes of this rule, such trusts will be deemed to have the same date of creation as the 

initial trust, with one exception, as follows. If, prior to the 90th anniversary of the trust, trust 

property is distributed to a trust for a beneficiary of the initial trust, and the distributee trust is as 
130 

described in section 2642(c)(2), the inclusion ratio of the distributee trust will not be changed to 

one (with regard to the distribution from the initial trust) by reason of this rule. This exception is 

intended to permit an incapacitated beneficiary’s distribution to continue to be held in trust 

without incurring GST tax on distributions to the beneficiary as long as that trust is to be used for 

the sole benefit of that beneficiary and any trust balance remaining on the beneficiary’s death 

will be included in the beneficiary’s gross estate for Federal estate tax purposes. The other rules 

of section 2653 also would continue to apply, and would be relevant in determining when a 

taxable distribution or taxable termination occurs after the 90th anniversary of the trust. An 

express grant of regulatory authority would be included to facilitate the implementation and 

administration of this provision. 

This proposal would apply to trusts created after enactment, and to the portion of a pre-existing 

trust attributable to additions to such a trust made after that date (subject to rules substantially 

similar to the grandfather rules currently in effect for additions to trusts created prior to the 

effective date of the GST tax). 
131 

UPPER-INCOME TAX PROVISION

 REDUCE THE VALUE OF CERTAIN TAX EXPENDITURES 

Current Law

Under current law, individual taxpayers may elect to itemize their deductions instead of claiming 

a standard deduction. The allowable portion of an individual taxpayer’s itemized deductions 

reduces the amount of taxable income. The value of (i.e., the reduction in tax from) the last 

dollar deducted is equal to the marginal tax rate multiplied times $1, e.g., if the marginal tax rate 

was 35 percent, then the value of the last dollar deducted would be 35 cents. 

In general, itemized deductions include medical and dental expenses (in excess of 7.5 percent of 

adjusted gross income (AGI)10), state and local property taxes, either income or sales taxes, 

mortgage and investment interest paid, gifts to charities, casualty and theft losses (in excess of 10 

percent of AGI), and job expenses and certain miscellaneous expenses (some only in excess of 2 

percent of AGI). 

For higher-income taxpayers, otherwise allowable itemized deductions (other than medical 

expenses, investment interest, theft and casualty losses, and gambling losses) were reduced prior 

to 2010 if AGI exceeded a statutory floor that was indexed annually for inflation. Prior to the 

enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 

itemized deductions were reduced by 3 percent of AGI over the threshold, but not by more than 

80 percent of the otherwise allowable deductions. EGTRRA reduced the itemized deduction 

limitation in three steps. For 2006 and 2007, itemized deductions were reduced by 2 percent of 

AGI over the threshold, but not by more than 53-1/3 percent. For 2008 and 2009, itemized 

deductions were reduced by 1 percent of AGI over the threshold, but not by more than 26-2/3 

percent. For 2010, the reduction was completely eliminated. Under EGTRRA, the full itemized 

deduction reduction of 3 percent of AGI exceeding the floor (up to a maximum reduction of 80 

percent of deductions), was scheduled to be reinstated in 2011. However, the Tax Relief, 

Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the 

elimination of the itemized deduction reduction through 2012. 

For 2011, the AGI floor, if it were applicable, would be $169,550 ($84,775 if married filing 

separately). 

The Administration’s modified PAYGO baseline assumes that in 2013 the income thresholds 

beyond which itemized deductions are reduced would be $250,000 for married taxpayers filing 

jointly and $200,000 for single taxpayers. The thresholds are expressed in 2009 dollars, and 

would be indexed for price inflation above the 2009 price level. 

The Administration’s baseline also assumes that the top individual income tax rate will be 35 

percent through 2012, after which it will rise to 39.6 percent (see the description below of the 

modified PAYGO baseline). 

 

10 The AGI floor rises to 10 percent in 2013 for taxpayers under 65 years of age (2017 for all other taxpayers). 
132 

Reasons for Change

Increasing the income tax liability of higher-income taxpayers would reduce the deficit, make the 

income tax system more progressive, and distribute the cost of government more fairly among 

taxpayers of various income levels. In particular, capping the value of itemized deductions 

would reduce the benefit that high income taxpayers receive from the tax expenditures for the 

deduction of home mortgage interest, state and local property taxes, and charitable donations. 

Proposal

This proposal would apply to itemized deductions after they have been reduced by the limitation 

on certain itemized deductions that is retained in the adjusted PAYGO baseline. 

The proposal would further limit the value of all itemized deductions by limiting the tax value of 

otherwise allowable deductions to 28 percent for high income taxpayers. In 2012, the limitation 

would affect itemized deductions that would otherwise reduce taxable income in the 35 percent 

bracket and a portion of the 33 percent bracket. For 2013 and beyond the limitation would affect 

itemized deductions that would otherwise reduce taxable income in the 36 or 39.6 percent tax 

brackets. A similar limitation also would apply under the alternative minimum tax. 

The proposal would be effective for taxable years beginning after December 31, 2011.
133 

USER FEES

REFORM INLAND WATERWAYS FUNDING 

Current Law 

The Inland Waterways Trust Fund is authorized to pay 50 percent of the capital costs of the locks 

and dams that make commercial transportation possible on the inland and intracoastal 

waterways. This trust fund is supported by a 20-cents-per-gallon tax on liquids used as fuel in a 

vessel in commercial waterway transportation. Commercial waterway transportation is defined 

as any use of a vessel on a listed inland or intracoastal waterway of the United States: (1) in the 

business of transporting property for compensation or hire; or (2) in transporting property in the 

business of the owner, lessee, or operator of the vessel (other than fish or other aquatic animal 

life caught on the voyage). The inland or intracoastal waterways of the United States are the 

inland and intracoastal waterways of the United States described in section 206 of the Inland 

Waterways Revenue Act of 1978. Exceptions are provided for deep-draft ocean-going vessels, 

passenger vessels, State and local governments, and certain ocean-going barges. 

Reasons for Change 

The fuel excise tax does not raise enough revenue to pay the full amount of the authorized 

expenditures from this trust fund. Moreover, the tax is not the most efficient method for 

financing expenditures on those waterways. Sufficient funding can be provided through a more 

efficient user fee system that is based on lock usage and is tied to the level of spending for inland 

waterways construction, replacement, expansion, and rehabilitation work. 

Proposal 

One possible approach to the issue is a recent proposal by the Department of the Army (DOA). 

On behalf of the Administration, the DOA submitted a legislative proposal to the Congress in 

July 2009 under which the tax on liquids used as fuel in a vessel in commercial waterway 

transportation would be phased out and replaced by a fee system based on lock usage. Under an 

updated version of the 2009 proposal, the tax would be phased out and the fee system would be 

phased in as follows. The rate would be reduced to 10 cents per gallon beginning January 1, 

2014 and would be repealed for periods after December 31, 2015. The fee system based on lock 

usage would be phased in beginning on October 1, 2012. For calendar year 2016 and each 

subsequent calendar year, the fee schedule would be adjusted as necessary to maintain an 

appropriate level of net assets in the Inland Waterways Trust Fund. 

Based on the DOA proposal, or other sensible approaches, the Administration intends to work 

with the 112th Congress to reform the laws governing the Inland Waterways Trust Fund, 

including increasing the fees paid by commercial navigation users sufficiently to meet their share 

of the costs of activities financed from this trust fund. 

 
134 

OTHER INITIATIVES

ALLOW OFFSET OF FEDERAL INCOME TAX REFUNDS TO COLLECT 

DELINQUENT STATE INCOME TAXES FOR OUT-OF-STATE RESIDENTS 

Current Law

Generally, the Treasury refunds a taxpayer who makes an overpayment (by withholding or 

otherwise) of Federal tax. The overpayment amount is reduced by (i.e., offset by) debts of the 

taxpayer for past-due child support, debts to Federal agencies, fraudulently obtained 

unemployment compensation, and past-due, legally enforceable State income tax obligations. In 

the latter case, a refund offset is permitted only if the delinquent taxpayer resides in the State 

seeking the offset. 

Reasons for Change

Under current law, a delinquent taxpayer can escape offset of a Federal refund for a State tax 

liability as long as the taxpayer is not a resident of the State. Foreclosing this possibility would 

better leverage the capacity of the Federal tax refund offset program for the country as a whole. 

Proposal

The proposal would permit offset of Federal refunds to collect State income tax, regardless of 

where the delinquent taxpayer resides. 

The proposal would be effective on the date of enactment. 
135 

AUTHORIZE THE LIMITED SHARING OF BUSINESS TAX RETURN 

INFORMATION TO IMPROVE THE ACCURACY OF IMPORTANT MEASURES OF 

OUR ECONOMY 

Current Law

Current law authorizes the Internal Revenue Service (IRS) to disclose certain federal tax 

information (FTI) for governmental statistical use. Business FTI may be disclosed to officers 

and employees of the Census Bureau for all businesses. Similarly, business FTI may be 

disclosed to officers and employees of the Bureau of Economic Analysis (BEA), but only for 

corporate businesses. Specific items permitted to be disclosed are detailed in the associated 

Treasury Regulations. The Bureau of Labor Statistics (BLS) is currently not authorized to 

receive FTI. 

Reasons for Change

BEA’s limited access to business FTI and BLS’s lack of access to business FTI prevents BEA, 

Census, and BLS from synchronizing their business lists. Synchronization of business lists 

would significantly improve the consistency and quality of sensitive economic statistics 

including productivity, payroll, employment, and average hourly earnings. 

In addition, given the growth of non-corporate businesses, especially in the service sector, the 

current limitation on BEA’s access to corporate FTI impedes the measurement of income and 

international transactions in the National Accounts. The accuracy and consistency of income 

data are important to the formulation of fiscal policies. 

 

Further, the Census’s Business Register is constructed using both FTI and non-tax business data 

derived from the Economic Census and current economic surveys. Because this non-tax 

business data is inextricably co-mingled with FTI, it is not possible for Census to share data with 

BEA and BLS in any meaningful way. 

Proposal

This proposal would give officers and employees of BEA access to FTI of those sole 

proprietorships with receipts greater than $250,000 and of all partnerships. BEA contractors 

would not have access to FTI. 

This proposal would also give officers and employees of BLS access to certain business (and 

tax-exempt entities) FTI including: taxpayer identification number; name(s) of the business; 

business address (mailing address and physical location); principal industry activity (including 

business description); number of employees and total business-level wages (including wages, 

tips, and other compensation, quarterly from Form 941 and annually from Forms 943 and 944); 

and sales revenue for employer businesses only. BLS would not have access to individual 

employee FTI. Additionally, for the purpose of synchronizing BLS and Census business lists, 

the proposal would permit employees of state agencies to receive from BLS the following FTI 

identity items: taxpayer identification number, business name(s), business address(es), and 
136 

principal industry activity (including business description). No BLS contractor or State agency 

contractor would have access to FTI. 

Additionally, the proposal would require any FTI to which BEA and BLS would have access, 

either directly from IRS, from Census, or from each other, to be used for statistical purposes 

consistently with the Confidential Information Protection and Statistical Efficiency Act 

(CIPSEA). The three statistical agencies and state agencies would be subject to taxpayer privacy 

law, safeguards and penalties. They would also be subject to CIPSEA confidentiality safeguard 

procedures, requirements, and penalties. Conforming amendments to applicable statutes would 

be made as necessary to apply the taxpayer privacy law, including safeguards and penalties to 

BLS as well as Census and BEA. BLS would be required to monitor compliance by state 

agencies with the prescribed safeguard protocols. 

The proposal would be effective upon enactment. 
137 

ELIMINATE CERTAIN REVIEWS CONDUCTED BY THE U.S. TREASURY 

INSPECTOR GENERAL FOR TAX ADMINISTRATION (TIGTA) 

Current Law 

Section 7803(d) requires the TIGTA to conduct reviews of certain administrative and civil 

actions and reviews of Internal Revenue Service (IRS) compliance with respect to certain 

requirements in order to comply with TIGTA’s reporting requirements. 

Reasons for Change 

The statutory reviews that are proposed to be eliminated are of relatively low value and yield 

little in the way of performance measures. In order to make more efficient use of TIGTA’s 

resources, TIGTA would prefer to redirect the resources applied to conduct these reviews to 

conducting high-risk audits. 

Proposal 

As requested by TIGTA, the proposal would eliminate TIGTA’s obligation to report information 

regarding any administrative or civil actions related to Fair Tax Collection Practices violations in 

one of TIGTA’s Semiannual Reports, review and certify annually that the IRS is complying with 

the requirements of section 6103(e)(8) regarding information on joint filers, and annually report 

on the IRS’s compliance with sections 7521(b)(2) and (c) requiring IRS employees to stop a 

taxpayer interview whenever a taxpayer requests to consult with a representative and to obtain 

their immediate supervisor’s approval to contact the taxpayer instead of the representative if the 

representative has unreasonably delayed the completion of an examination or investigation. 

The proposal would revise the annual reporting requirement for all remaining provisions in the 

IRS Restructuring and Reform Act of 1998 to a biennial reporting requirement. 

The proposal would be effective after December 31, 2011. 
138 

MODIFY INDEXING TO PREVENT DEFLATIONARY ADJUSTMENTS 

Current Law 

Many parameters of the tax system – including the size of personal exemptions and standard 

deductions, the width of income tax rate brackets, the amount of other deductions and credits, 

and the maximum amount of various saving and retirement deductions – may be adjusted 

annually for the effects of inflation. The adjustments are based on annual changes in the level of 

the Consumer Price Index (CPI-U). Depending on the particular tax parameter, the adjustment 

may be based on CPI-U for a particular month, its average for a calendar quarter, or its average 

for a 12-month period (with various ending dates). The adjusted values are rounded differently, 

as specified in the Internal Revenue Code. 

When inflation adjustment of tax parameters was enacted, it was generally contemplated that 

indexing would result in upward adjustments to reflect inflation. If price levels decline for the 

year, the inflation adjustment provisions for most adjusted tax parameters permit the tax 

parameters to become smaller, so long as they do not decline to less than their base period values 

specified in the Code. However, the statutory provisions for the indexing of those tax parameters 

adjusted pursuant to section 415(d) (generally relating to benefits and contributions under 

qualified plans) are held at their previous year’s level if the relevant price index declines. In 

subsequent years, they increase only to the extent that the relevant price index exceeds its highest 

preceding relevant level. 

Reasons for Change 

Between 2008 and 2009, for the first time since inflation adjustments were enacted, the annual 

index values used for two of the indexing methods declined for the relevant annual period. The 

index level relevant for section 415(d) adjustments fell, but by statute those parameters remain at 

their 2009 levels for 2010. (They did not increase for 2011.) Also, the maximum size of a cash 

method debt instrument, as adjusted under section 1274A(d)(2) decreased for 2010. Other tax 

parameters did not decrease, since the price index relevant for their adjustments did not decline 

between 2008 and 2009. 

The 2008 to 2009 price index changes demonstrate that a year-to-year decrease is possible. 

Preventing tax parameters from falling if the underlying price levels fall would make the tax 

system a more effective automatic economic stabilizer than it is under current law. Holding tax 

parameters constant would also prevent reductions in certain tax benefits for saving and 

retirement which should not be affected by short-term price level reductions. 

Proposal 

The proposal would modify inflation adjustment provisions so as to prevent tax parameters from 

declining from the previous year’s levels if the underlying price index falls. Future inflationrelated increases would be based on the highest previous level of the price index relevant for 

adjusting the particular tax parameter. 

The proposal would be effective beginning on the date of enactment. 
139 

PROGRAM INTEGRITY INITIATIVES 

INCREASE LEVY AUTHORITY FOR PAYMENTS TO FEDERAL CONTRACTORS 

WITH DELINQUENT TAX DEBT 

Current Law 

If a federal vendor has an unpaid tax liability, the Internal Revenue Service (IRS) can levy 100 

percent of any payment due to the vendor for goods or services sold or leased to the federal 

government. 

Reason for Change 

The statutory language “goods or services sold or leased” has been interpreted as excluding 

payments for the sale or lease of real estate or other types of property not considered “goods or 

services.” 

Proposal 

The proposal would amend the statute to clarify that the IRS can levy 100 percent of any 

payment due to a federal vendor with unpaid tax liabilities, including payments made for the sale 

or lease of real estate and other types of property not considered “goods or services.” 

The proposal would be effective for payments made after the date of enactment. 
140 

INCREASE LEVY AUTHORITY FOR PAYMENTS TO MEDICARE PROVIDERS 

WITH DELINQUENT TAX DEBT 

Current Law 

Under the Medicare Improvement for Patients and Providers Act of 2008, the Treasury 

Department is authorized to continuously levy up to 15 percent of a payment to a Medicare 

provider in order to collect delinquent tax debt. Through the Federal Payment Levy Program, 

Treasury deducts (levies) a portion of a Government payment to an individual or business in 

order to collect unpaid taxes. 

Reasons for Change 

Certain Medicare providers fail to comply with their Federal income tax and/or employment tax 

obligations. Expanding to 100 percent the amount of Federal payments that can be levied for 

such providers will help recover a greater amount of delinquent taxes and will promote these 

providers’ compliance with their Federal tax obligations. 

Proposal 

The proposal would allow Treasury to levy up to 100 percent of a payment to a Medicare 

provider to collect unpaid taxes. 

The proposal would be effective for payments made after the date of enactment. 
141 

MODIFIED PAY-AS-YOU-GO (PAYGO) BASELINE

An important step in addressing the nation’s fiscal problems is to be upfront about them, and to 

establish a revenue baseline that accurately measures where we are before new policies are 

enacted. This Budget does so by adjusting the Budget Enforcement Act (BEA) baseline to 

reflect the cost of the current policy path, to the extent current policy can be determined. The 

BEA baseline, which is commonly used in budgeting, reflects the projected receipts level under 

current law, with very limited exceptions. But it is widely believed that a number of future tax 

law changes scheduled under current law are unlikely to occur. These scheduled, but unlikely to 

occur, changes include the expiration of many of the tax cuts enacted by the Economic Growth 

and Tax Relief Reconciliation Act of 2001 ( EGTRRA) and the Job Growth and Tax Relief 

Reconciliation Act of 2003 ( JGTRRA), and extended by the Tax Relief, Unemployment 

Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA). Therefore current law 

does not provide a reasonable benchmark for judging the effect of new legislation. 

Congress recognized that the expiration of a number of tax provisions was unrealistic, and 

allowed certain adjustments to the cost of legislation in the Statutory Pay-As-You-Go (PAYGO) 

Act of 2010 (Public Law 111-139). The Statutory PAYGO Act requires that new legislation 

changing taxes, fees, or mandatory expenditures, taken together, must not increase projected 

deficits. It establishes four cases for which an adjustment to the cost of legislation may be made, 

effectively exempting Congress from requiring tax or spending offsets to pay for these 

provisions if they are enacted by December 31, 2011. The excepted tax provisions relate to the 

Estate and Gift Tax, the Alternative Minimum Tax (AMT) and most provisions of EGTRRA and 

JGTRRA.11 

Many of the excepted tax provisions were adopted on a temporary basis (usually through tax 

year 2012) by TRUIRJCA. 

As a result, the Administration views adoption of the PAYGO adjustments as the appropriate 

baseline for considering further tax policy changes after TRUIRJCA expires, with two 

modifications to the Estate and Gift and AMT provisions. Specifically, the Statutory PAYGO 

Act adjustments to cost estimates and modifications for the Administration’s baseline include: 

Estate and Gift Tax – the Administration’s baseline assumes that the Estate and Gift Tax 

provisions in effect for tax year 2009 are permanently extended, once Public Law 111-312 

expires. This provides for an exemption of $3.5 million per estate (not indexed) and a tax rate of 

45 percent, for decedents dying after December 31, 2012. Under current law, the Estate and Gift 

Tax provisions are set to revert to the levels provided under pre-2001 law (which include a lower 

exemption and higher rates than in effect in 2009). The Statutory PAYGO Act allows an 

adjustment for the extension of 2009 parameters only through December 31, 2011; however, 

since Congress recently enacted more generous estate tax provisions through 2012, there is 

 

11Statutory PAYGO also provides for an adjustment for the cost of Medicare payments to physicians that are in 

excess of what payments would be under the sustainable growth rate formula. Congress has, however, recently 

chosen to pay for these Medicare expenditures. Similarly, the Administration’s baseline does not except these 

Medicare payments, effectively assuming that continuation of payments in excess of the sustainable growth rate 

formula should be paid for. 
142 

considerable expectation that future legislation will provide more generous treatment than pre2001 law. 

AMT – the Administration’s baseline assumes that the 2011 AMT parameters are permanently 

indexed for inflation after 2011. The baseline also allows non-refundable credits to be claimed 

against the AMT. The Statutory PAYGO Act allows an adjustment for the cost of extending 

AMT relief through December 31, 2011 only; however, Congress has repeatedly extended AMT 

relief and it is reasonable to expect similar legislation in the future. 

Middle-class tax cuts – the Statutory PAYGO Act allows an adjustment for the permanent 

extension of the “middle-class tax cuts” in effect for tax year 2010, as provided under EGTRRA 

and JGTRRA and any amendments through December 31, 2009. Specifically, the PAYGO 

exceptions and the Administration’s baseline include the cost of permanently extending: 

 The 10-percent income tax bracket and the reduction of the 28 and 31-percent tax rates to 

25 and 28 percent as provided under section 101(a) of EGTRRA. 

 The reduction of the 36 percent tax rate to 33 percent as provided for under section 

101(a) of EGTRRA, but only for taxpayers with adjusted gross income (AGI) of 

$200,000 or less for single filers or $250,000 or less for married filers (in 2009 dollars, 

indexed for inflation thereafter). The modified PAYGO baseline does not allow 

extension of the EGTRRA/JGTRRA tax rate cuts for upper-income families. Instead, 

these rate cuts would expire, and the top ordinary income tax rate would be 39.6 percent 

beginning in 2013. 

 The child tax credit as provided under section 201 of EGTRRA and amended by the 

American Recovery and Reinvestment Act of 2009 (Public Law 111-5, or ARRA); that 

is, a credit of $1,000 per child, allowed against regular tax and the AMT, and refundable 

up to an amount equal to 15 percent of earned income in excess of $3,000 (not indexed). 

 Tax benefits for married couples as provided for under title III of EGTRRA and amended 

by ARRA; that is, the increase in the standard deduction for joint filers to equal twice that 

of single taxpayers, the expansion of the 15-percent tax bracket for joint filers to twice 

the width of that for single taxpayers, and the $5,000 increase in the starting point of the 

earned income tax credit (EITC) phase-out range for joint filers (indexed beginning in 

2010). Title III of EGTRRA and the baseline also include several modifications to 

simplify and improve compliance with the EITC. 

 The expanded adoption tax credit as provided for under section 202 of EGTRRA; that is, 

a maximum credit of $10,000 (indexed for inflation after 2002) for adoptions of children 

with special-needs (without regard to expenses) and expenses related to other adoptions, 

allowed against regular tax and the AMT. 

 The dependent care tax credit as provided for under section 204 of EGTRRA; that is, the 

maximum credit is $1,050 for one qualifying individual and $2,100 for two qualifying 

individuals. 
143 

 The employer-provided child care tax credit as provided for under section 205 of 

EGTRRA. 

 The education tax benefits as provided for under title IV of EGTRRA. These benefits 

include an exclusion of up to $5,250 in employer provided education assistance; an 

increase in the phase-out range and elimination of the 60-month limit on the deductibility 

of student loan interest payments; and an exclusion from income of awards received 

under certain health professional programs. 

 The reduction in tax rates on capital gains from 10 and 20 percent to 0 and 15 percent and 

the taxation of dividends at capital gains rather than ordinary rates, as provided for under 

sections 301 and 302 of JGTRRA, but only for taxpayers with AGI of $200,000 or less 

for single filers or $250,000 or less for married filers (in 2009 dollars, indexed for 

inflation thereafter). 

 The elimination of the phase-out of personal exemptions and the elimination of the 

limitation on itemized deductions (Pease), as provided for under sections 102 and 103 of 

EGTRRA, but only for taxpayers with AGI of $200,000 or less for single filers or 

$250,000 or less for married filers (in 2009 dollars, indexed for inflation thereafter). 

 The increased limits on expensing small business assets under section 179(b) of the 

Internal Revenue Code as provided for under section 202 of JGTRRA; that is, businesses 

would be able to expense up to $125,000 of investment, phased out dollar for dollar after 

investment reaches $500,000 (dollar levels indexed for inflation from 2006). 

The Administration interprets sections 7(a)(4)(D) and 7(f)(1)(I)-(K), of the Statutory PAYGO 

Act as follows: (1) In applying the AGI thresholds of $200,000 for single filers and $250,000 for 

joint filers we assume that the threshold for married filing separately taxpayers is set equal to 

half that of married filing jointly taxpayers, the AGI threshold for head of household filers is set 

half-way between that of single and married filing jointly taxpayers at $225,000, and the AGI 

threshold for qualifying widows and widowers is set equal to that for married filing jointly 

taxpayers; (2) All taxpayers face the same income tax rate schedule for their applicable filing 

status; that is, high-income taxpayers benefit from lower rates exempted under the Statutory 

PAYGO Act; (3) The amount of taxable income at which the marginal tax rate increases from 33 

percent to 36 percent is equal to the applicable AGI threshold less the standard deduction for the 

taxpayer’s filing status and one personal exemption (two in the case of married filing jointly 

taxpayers); and (4) The AGI thresholds are indexed for inflation after 2009. 

For 2011 the Administration’s baseline is current law (including extension of the 

EGTRRA/JGTRRA tax cuts for upper-income families) and for 2012 it is current law (including 

extension of the EGTRRA/ JGTRRA tax cuts for upper-income families) with AMT relief as 

described above. 
144 
145 

TABLES OF REVENUE ESTIMATES

Revenue estimates begin on next page. 
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Tax cuts for families and individuals:

Provide $250 refundable tax credit for Federal, State and local government retirees not eligible for social security 4/ ...................................................................................................

... -216 -159 0 0 0 000000 -159 -159

Extend the earned income tax credit (EITC) for larger families 4/ ...................................................... 0 0 -81 -1,422 -1,442 -1,469 -1,509 -1,544 -1,579 -1,610 -1,657 -4,414 -12,313Expand the child and dependent care tax credit 4/ ........................................................................

... 0 -283 -1,043 -1,045 -1,042 -1,039 -1,035 -1,036 -1,033 -1,028 -1,021 -4,452 -9,605

Provide for automatic enrollment in IRAs and double the tax credit for small employer plan startup costs 4/ ............................................................................................................

... 0 0 -638 -1,043 -1,100 -1,240 -1,448 -1,704 -2,015 -2,381 -2,809 -4,021 -14,378

Extend the American opportunity tax credit (AOTC) 4/ ..................................................................

... 0 0 -650 -10,772 -10,832 -11,552 -11,533 -11,364 -12,111 -12,117 -12,665 -33,806 -93,596

Provide exclusion from income for certain student loan forgiveness .................................................

... Negligible Revenue Effect

Tax qualified dividends and net long-term capital gains at a 20-percent rate for upper- income taxpayers ................................................................................................................. 0 -7,868 -9,582 -5,405 -9,416 -12,964 -14,688 -15,119 -15,586 -16,158 -16,885 -45,235 -123,671

 Subtotal, tax cuts for families and individuals ....................................................... -216 -8,310 -11,994 -19,687 -23,832 -28,264 -30,213 -30,767 -32,324 -33,294 -35,037 -92,087 -253,722

Tax cuts for businesses:

Eliminate capital gains taxation on investments in small business stock ............................................. 000000 -183 -566 -1,055 -1,587 -2,026 0 -5,417

Enhance and make permanent the research and experimentation (R&E) tax credit .............................. 0 -4,610 -8,063 -8,884 -9,708 -10,520 -11,318 -12,103 -12,887 -13,686 -14,499 -41,785 -106,278Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project ("48C") ........................................................................

... 0 -284 -731 -1,089 -1,138 -578 -120 73 115 64 27 -3,820 -3,661

Provide tax credit for energy-efficient commercial building property expenditures in place of existing tax deduction ...............................................................................................

... 0 -450 -425 -100 -25 -25 0 0 0 0 0 -1,025 -1,025

 Subtotal, tax cuts for businesses ................................................................................... 0 -5,344 -9,219 -10,073 -10,871 -11,123 -11,621 -12,596 -13,827 -15,209 -16,498 -46,630 -116,381

Incentives to promote regional growth:

Extend and modify the New Markets tax credit (NMTC) .................................................................. -41 -62 -116 -183 -234 -263 -272 -264 -243 -170 -63 -858 -1,870Reform and extend Build America bonds 4/ .................................................................................

... -1 -2 -2 -2 -4 -3 -3 -3 -3 -3 -3 -13 -28

Low-income housing tax credit (LIHTC) provisions: -1 -5 -16 -32 -52 -71 -94 -116 -139 -162 -185 -176 -872

Encourage mixed-income occupancy by allowing LIHTC-supported projects to elect an average-income criterion ........................................................................ 0 -1 -2 -3 -6 -8 -12 -15 -18 -21 -24 -20 -110

Provide 30-percent basis "boost" to properties that receive tax-exempt bond financing .....................

... -1 -4 -14 -29 -46 -63 -82 -101 -121 -141 -161 -156 -762

 subtotal, LIHTC provisions ......................................................................................

... -1 -5 -16 -32 -52 -71 -94 -116 -139 -162 -185 -176 -872

Designate Growth Zones 4/ ...................................................................................................... 0 -279 -863 -860 -839 -815 -186 383 374 329 273 -3,656 -2,483Restructure assistance to New York City: Provide tax incentives for transportation infrastructure .....................................................................................................................

... 0 -200 -200 -200 -200 -200 -200 -200 -200 -200 -200 -1,000 -2,000

 Subtotal, incentives to promote regional growth ............................................................

... -43 -548 -1,197 -1,277 -1,329 -1,352 -755 -200 -211 -206 -178 -5,703 -7,253

Continue certain expiring provisions through calendar year 2012 4/ 5/ ..................................... -282 -9,061 -10,182 -734 -372 -158 -61 -95 -122 -169 -192 -20,507 -21,146Other revenue changes and loophole closers:

Reform treatment of financial institutions and products:

Impose a financial crisis responsibility fee ..............................................................................

... 0 0 1,000 3,000 3,000 3,000 4,000 4,000 4,000 4,000 4,000 10,000 30,000

Require accrual of income on forward sale of corporate stock ...................................................... 1 6 12 19 26 33 36 38 40 42 44 96 296Require ordinary treatment of income from day-to-day dealer activities for certain  dealers of equity options and commodities ...........................................................................

... 35 144 226 240 254 270 286 303 321 341 361 1,134 2,746

Modify the definition of “control” for purposes of section 249 of the Internal Revenue Code ................................................................................................... 0 9 15 16 17 17 18 19 20 21 22 74 174

 subtotal, reform treatment of financial institutions and products .......................................

... 36 159 1,253 3,275 3,297 3,320 4,340 4,360 4,381 4,404 4,427 11,304 33,216

Reinstate Superfund taxes:

Reinstate Superfund excise taxes .......................................................................................... 0 588 790 805 819 833 845 853 865 877 887 3,835 8,162Reinstate Superfund environmental income tax ........................................................................

... 0 786 1,136 1,233 1,274 1,311 1,340 1,359 1,381 1,395 1,442 5,740 12,657

 subtotal, reinstate Superfund taxes ...........................................................................

... 0 1,374 1,926 2,038 2,093 2,144 2,185 2,212 2,246 2,272 2,329 9,575 20,819

Reform U.S. international tax system:

Defer deduction of interest expense related to deferred income ...................................................

... 0 2,986 5,138 5,396 5,636 5,861 6,080 3,114 1,103 1,149 1,202 25,017 37,665

Determine the foreign tax credit on a pooling basis ..................................................................

... 0 2,655 4,568 4798 5011 5211 5,406 5,601 5,810 6,051 6,333 22,243 51,444

Tax currently excess returns associated with transfers of intangibles offshore ................................. 0 1,204 2,038 2,114 2,212 2,280 2,290 2,231 2,158 2,138 2,166 9,848 20,831Limit shifting of income through intangible property transfers ......................................................

... 0 29 63 90 118 148 178 209 242 276 315 448 1,668

Disallow the deduction for non-taxed reinsurance premiums paid to affiliates .................................

... 0 129 223 237 250 264 277 289 302 315 328 1,103 2,614

Limit earnings stripping by expatriated entities ........................................................................

... 0 212 364 382 401 421 442 464 487 512 537 1,780 4,222

Modify the tax rules for dual capacity taxpayers ........................................................................ 0 532 918 974 1,031 1,085 1,138 1,190 1,242 1,296 1,352 4,540 10,758

 subtotal, reform U.S. international tax system ............................................................

... 0 7,747 13,312 13,991 14,659 15,270 15,811 13,098 11,344 11,737 12,233 64,979 129,202

Reform treatment of insurance companies and products:

Modify rules that apply to sales of life insurance contracts .........................................................

... 0 8 42 82 97 115 134 154 177 203 231 344 1,243

Modify dividends-received deduction (DRD) for life insurance company separate accounts ...............

... 0 172 465 547 579 605 607 585 555 528 503 2,368 5,146

Expand pro rata interest expense disallowance for corporate-owed life insurance ..........................

... 0 21 71 181 273 433 652 900 1,280 1,714 2,166 979 7,691

 subtotal, reform treatment of insurance companies and products ....................................

... 0 201 578 810 949 1,153 1,393 1,639 2,012 2,445 2,900 3,691 14,080

Table 1: Revenue Estimates of FY 2012 Budget Proposals 1/ 2/ 3/

Fiscal Years

(in millions of dollars)

146
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Fiscal Years

(in millions of dollars)

Miscellaneous changes:

Increase the Oil Spill Liability Trust Fund financing rate by one cent .............................................

... 0 35 46 46 46 46 46 46 47 46 47 219 451

Make unemployment insurance surtax permanent ..................................................................... 0 1,375 1,413 1,449 1,477 1,503 1,526 1,543 1,558 1,577 1,594 7,217 15,015Provide short-term tax relief to employers and expand Federal Unemployment Tax Act (FUTA) base ......................................................................................................

... 0 -1,714 -3,541 7,477 12,863 10,544 11,814 8,555 -34 -263 167 25,629 45,868

Repeal last-in, first-out (LIFO) method of accounting for inventories .............................................

... 0 0 2,598 5,649 6,484 6,457 6,435 6,387 6,337 6,293 6,240 21,188 52,880

Repeal gain limitation for dividends received in reorganization exchanges ....................................

... 0 47 79 81 84 86 89 92 94 97 100 377 849

Tax carried (profits) interests in investment partnerships as ordinary income .................................

... 318 2,274 2,123 2,154 1,927 1,608 1,322 1,089 908 762 640 10,086 14,807

Deny deduction for punitive damages ....................................................................................

... 0 0 23 34 35 35 36 36 37 37 39 127 312

Repeal lower-of-cost-or-market (LCM) inventory accounting method ............................................. 0 0 188 1,435 2,334 1,532 1,358 309 323 337 352 5,489 8,168

 subtotal, miscellaneous changes ..............................................................................

... 318 2,017 2,929 18,325 25,250 21,811 22,626 18,057 9,270 8,886 9,179 70,332 138,350

 Subtotal, other revenue changes and loophole closers ............................................. 354 11,498 19,998 38,439 46,248 43,698 46,355 39,366 29,253 29,744 31,068 159,881 335,667

Eliminate fossil-fuel preferences:

Eliminate oil and gas preferences:

Repeal enhanced oil recovery (EOR) credit 6/ ........................................................................

... 00000000000 0 0

Repeal credit for oil and gas produced from marginal wells 6/ ...................................................

... 00000000000 0 0

Repeal expensing of intangible drilling costs (IDCs) ..................................................................

... 0 1,875 2,512 1,762 1,403 1,331 1,124 830 640 523 447 8,883 12,447

Repeal deduction for tertiary injectants .................................................................................

... 0 6 10 10 10 10 10 9 9 9 9 46 92

Repeal exception to passive loss limitation for working interests in oil and natural gas properties ...............................................................................................................

... 0 23 27 24 22 21 19 18 17 16 16 117 203

Repeal percentage depletion for oil and natural gas wells .........................................................

... 0 607 1,038 1,079 1,111 1,142 1,177 1,211 1,243 1,273 1,321 4,977 11,202

Repeal domestic manufacturing deduction for oil and natural gas companies .................................

... 0 902 1,558 1,653 1,749 1,842 1,932 2,020 2,108 2,200 2,296 7,704 18,260

Increase geological and geophysical amortization period for independent producers to seven years ...............................................................................................................

... 0 59 215 330 306 230 152 75 22 9 10 1,140 1,408

 subtotal, eliminate oil and gas preferences ............................................................

... 0 3,472 5,360 4,858 4,601 4,576 4,414 4,163 4,039 4,030 4,099 22,867 43,612

Eliminate coal preferences:

Repeal expensing of exploration and development costs ............................................................ 0 27 45 47 49 51 50 48 47 45 38 219 447Repeal percentage depletion for hard mineral fossil fuels ............................................................ 0 78 129 129 130 135 139 145 149 154 165 601 1,353Repeal capital gains treatment for royalties .............................................................................. 6 11 13 22 31 38 43 47 51 55 58 115 369Repeal domestic manufacturing deduction for coal and other hard mineral fossil fuels ............... 0 20 35 38 39 41 44 45 48 49 51 173 410

 subtotal, eliminate coal preferences .....................................................................

... 6 136 222 236 249 265 276 285 295 303 312 1,108 2,579

 Subtotal, eliminate fossil-fuel preferences .......................................................................

... 6 3,608 5,582 5,094 4,850 4,841 4,690 4,448 4,334 4,333 4,411 23,975 46,191

Simplify the tax code:

Allow vehicle seller to claim qualified plug-in electric-drive motor vehicle credit ............................. 0 -64 -30 -59 -53 135 166 -232 -103 -11 -18 -71 -269

Eliminate minimum required distribution (MRD) rules for IRA/plan balances of $50,000 or less ...............................................................................................................

... 0 -2 -5 -7 -9 -12 -15 -19 -23 -28 -31 -35 -151

Allow all inherited plan and IRA balances to be rolled over within 60 days .............................. Negligible Revenue EffectClarify exception to recapture of unrecognized gain on sale of stock to an employee stock ownership plan (ESOP) ...............................................................................................

... Negligible Revenue Effect

Repeal non-qualified preferred stock (NQPS) designation ............................................................... 22 101 112 110 105 97 87 77 68 61 54 525 872Revise and simplify the "fractions rule" .......................................................................................

... -5 -19 -22 -24 -23 -24 -24 -26 -26 -26 -28 -112 -242

Repeal preferential dividend rule for publicly traded real estate investment trusts (REITs) .....................

... Negligible Revenue Effect

Reform excise tax based on investment income of private foundations ................................... -1 -4 -4 -5 -5 -5 -6 -6 -6 -7 -7 -23 -55Simplify tax-exempt bonds:

Simplify arbitrage investment restrictions ................................................................................. 0 -4 -13 -21 -30 -40 -49 -59 -68 -76 -86 -108 -446Simplify single-family housing mortgage bond targeting requirements ...................................... 0 0 0 -1 -1 -1 -1 -3 -3 -3 -3 -3 -16Streamline private business limits on governmental bonds .........................................................

... 0 -1 -3 -5 -7 -9 -11 -13 -15 -17 -19 -25 -100

 subtotal, simplify tax exempt bonds ........................................................................ 0 -5 -16 -27 -38 -50 -61 -75 -86 -96 -108 -136 -562 Subtotal, simplify the tax code ......................................................................................

... 16 7 35 -12 -23 141 147 -281 -176 -107 -138 148 -407

Reduce the tax gap and make reforms:

Expand Information Reporting:

Repeal and modify information reporting on payments to corporations and  payments for property ......................................................................................................

... 0 -475 -618 -756 -929 -961 -1,000 -1,047 -1,096 -1,147 -1,180 -3,739 -9,209

Require information reporting for private separate accounts of life insurance companies ............ 0 0 1 2 3 3 4 5 6 7 8 9 39Require a certified Taxpayer Identification Number (TIN) from contractors and allow certain withholding .........................................................................................................

... 21 48 81 110 115 121 126 132 138 144 150 475 1,165

 subtotal, expand information reporting ..................................................................

... 21 -427 -536 -644 -811 -837 -870 -910 -952 -996 -1,022 -3,255 -8,005

Improve compliance by businesses:

Require greater electronic filing of returns ..............................................................................

... No Revenue Effect

Authorize the Department of the Treasury to require additional information to be included in electronically filed Form 5500 Annual Reports ......................................................

... No Revenue Effect

Implement standards clarifying when employee leasing companies can be held liable  for their clients' Federal employment taxes ...........................................................................

... 0 4 5 6 6 6 7 7 7 8 8 27 64

147
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Fiscal Years

(in millions of dollars)

Increase certainty with respect to worker classification .............................................................

... 0 12 230 1,237 956 819 904 994 1,088 1,186 1,284 3,254 8,710

Repeal special estimated tax payment provision for certain insurance companies ...................... Negligible Revenue EffectEliminate special rules modifying the amount of estimated tax payments by corporations .................. 0 0 0 -53,610 4,320 49,290 0 0 -5,630 5,630 0 0 0

 subtotal, improve compliance by businesses ............................................................ 0 16 235 -52,367 5,282 50,115 911 1,001 -4,535 6,824 1,292 3,281 8,774

 Strengthen tax administration:

Revise offer-in-compromise application rules ...........................................................................

... 0 2 2 2 2 2 3 3 3 3 3 10 25

Expand IRS access to information in the National Directory of New Hires for tax  administration purposes ...................................................................................................

... No Revenue Effect

Make repeated willful failure to file a tax return a felony ............................................................

... 0 0 0 0 1 1 1 1 2 2 2 2 10

Facilitate tax compliance with local jurisdictions ........................................................................ 00001111111 2 7Extend of statute of limitations where State adjustment affects Federal tax liability .........................

... 0 0 0 0 2 4 4 4 4 4 5 6 27

Improve investigative disclosure statute .................................................................................

... 0 0 0 0 1 1 1 1 2 2 2 2 10

Require taxpayers who prepare their returns electronically but file their returns on paper to print their returns with a 2-D bar code .....................................................................

... No Revenue Effect

Require prisons located in the U.S. to provide information to the IRS ..........................................

... 0 10 15 16 16 17 18 18 18 19 19 74 166

Allow the IRS to absorb credit and debit card processing fees for certain tax payments ..................... 0 1 1 2 2 2 2 2 2 2 2 8 18 subtotal, strengthen tax administration ..................................................................

... 0 13 18 20 25 28 30 30 32 33 34 104 263

Expand penalties:

Impose a penalty on failure to comply with electronic filing requirements .......................................

... 00000111222 1 9

Increase penalty imposed on paid preparers who fail to comply with EITC due diligence requirements ...................................................................................................... 0 13 27 31 32 34 35 35 36 37 38 137 318

 subtotal, expand penalties .................................................................................... 0 13 27 31 32 35 36 36 38 39 40 138 327 Subtotal, reduce the tax gap and make reforms ...............................................................

... 21 -385 -256 -52,960 4,528 49,341 107 157 -5,417 5,900 344 268 1,359

Modify estate and gift tax valuation discounts and make other reforms:

Make permanent the portability of unused exemption between spouses .................................. 0 0 0 -107 -217 -321 -421 -516 -609 -699 -791 -645 -3,681Require consistency in value for transfer and income tax purposes ................................................... 0 127 171 182 192 204 216 229 243 258 273 876 2,095Modify rules on valuation discounts ..........................................................................................

... 0 806 860 1,558 1,687 1,823 1,966 2,116 2,277 2,444 2,629 6,734 18,166

Require a minimum term for grantor retained annuity trusts (GRATs) ................................................ 0 15 46 93 160 231 308 389 477 570 670 545 2,959Limit duration of generation-skipping transfer (GST) tax exemption ................................................... Negligible Revenue Effect

 Subtotal, estate and gift tax ............................................................................................ 0 948 1,077 1,726 1,822 1,937 2,069 2,218 2,388 2,573 2,781 7,510 19,539

Upper-income tax provision: Reduce the value of certain tax expenditures .............................. 0 6,008 18,996 26,418 29,766 32,696 35,699 38,644 41,496 44,388 47,180 113,884 321,291

User fees: Reform inland waterways funding ..............................................................................

... 0 0 196 163 135 72 72 71 69 70 69 566 917

Other initiatives:

Allow offset of Federal income tax refunds to collect delinquent State income taxes for out-of-state residents ......................................................................................................

... No Revenue Effect

Authorize the limited sharing of business tax return information to improve the accuracy of important measures of our economy ........................................................................ No Revenue EffectEliminate certain reviews conducted by the U.S. Treasury Inspector General for Tax Administration (TIGTA) .........................................................................................................

... No Revenue Effect

Modify indexing to prevent deflationary adjustments .....................................................................

... No Revenue Effect

 Subtotal, other initiatives .............................................................................................

... 00000000000 0 0

Program integrity initiatives:

Increase levy authority for payments to Federal contractors with delinquent tax debt ...........................

... 5 59 61 64 67 69 73 76 80 83 87 320 719

Increase levy authority for payments to Medicare providers with delinquent tax debt ...........................

... 17 64 68 71 74 76 76 78 80 80 81 353 748

 Subtotal, program integrity initiatives ................................................................................. 22 123 129 135 141 145 149 154 160 163 168 673 1,467

Total Effect of FY 2012 Budget Tax Proposals Relative to the Adjusted Baseline ...........................

... -122 -1,456 13,165 -12,768 51,063 91,974 46,638 41,119 25,623 38,186 33,978 141,978 327,522

Total receipt effect .................................................................................................................. 15 -294 16,028 -3,245 61,772 103,950 59,729 55,414 41,484 55,332 52,701 178,211 442,871Total outlay effect ..................................................................................................................

... 137 1,162 2,863 9,523 10,709 11,976 13,091 14,295 15,861 17,146 18,723 36,233 115,349

Department of the TreasuryNotes:

1/ Presentation in this table does not reflect the order in which these proposals were estimated.2/ Table 2 below details the budgetary impact of adjusting the Budget Enforcement Act baseline to extend certain tax policies. These extensions were estimated before the policy proposals shown in this table. 3/ Tables 15-3 and 15-4 in the Analytical Perspectives of the FY 2012 Budget includes the effects of a number of proposals that are not reflected here. These proposals would levy a fee on the production of hardrock

minerals to restore abandoned mines, expand short-time compensation unemployment program, increase fees for Migratory Bird Hunting and Conservation Stamps, support certain trade initiatives, reauthorize surface transportation, enhance UI integrity, and implement program integrity allocation adjustments for the IRS.

4/ This provision affects both receipts and outlays. The combined effects are shown here and the outlays effects included in these estimates are detailed in Table 3.5/ Detail on the estimates included in this item are reported in Table 4.6/ This provision is estimated to have zero receipt effect under the Administration's current projections for energy prices.

148
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Adjustments to BEA baseline:

Continue the 2001 and 2003 tax cuts for middle-income taxpayers:

Tax dividends with a 0%/15% rate structure for taxpayers with income below $250,000 (joint) and $200,000 (single) ..................................................................

... 0 0 -4,170 -9,047 -10,471 -11,804 -12,589 -12,865 -13,083 -13,326 -13,627 -35,492 -100,982

Tax capital gains with a 0%/15% rate structure for taxpayers with income below  $250,000 (joint) and $200,000 (single) ..................................................................

... 0 -757 -1,949 -2,754 -3,837 -5,231 -6,086 -6,389 -6,616 -6,800 -6,965 -14,528 -47,384

Expand expensing for small businesses ..................................................................

... 0 0 -5,632 -8,133 -6,413 -5,225 -4,364 -3,834 -3,603 -3,526 -3,561 -25,403 -44,291

Reduce marginal individual income tax rates ............................................................

... 0 0 -44,118 -62,378 -63,023 -63,417 -64,279 -64,832 -65,241 -65,522 -65,566 -232,936 -558,376

Repeal the personal exemption phaseout (PEP) ......................................................... 0 0 -10 -21 -23 -24 -27 -29 -32 -34 -34 -78 -234Repeal the limitation on itemized deductions (Pease) ................................................

... 0 0 -479 -1,035 -1,165 -1,272 -1,380 -1,484 -1,585 -1,685 -1,790 -3,951 -11,875

Increase the child credit 2/ ....................................................................................

... 0 0 -6,326 -44,395 -44,803 -45,120 -45,454 -45,697 -46,081 -46,363 -46,687 -140,644 -370,926

Provide relief for married taxpayers 2/ .....................................................................

... 0 0 -5,479 -11,619 -11,503 -11,223 -11,076 -10,850 -10,635 -10,501 -10,512 -39,824 -93,398

Provide education incentives .................................................................................

... 0 -4 -894 -1,843 -1,914 -1,987 -2,064 -2,145 -2,228 -2,316 -2,410 -6,642 -17,805

Provide other incentives for families and children ......................................................

... 0 6 -114 -644 -624 -602 -584 -566 -544 -522 -520 -1,978 -4,714

Extend estate, gift, and generation-skipping transfer taxes at 2009 parameters ..................... -1,258 -1,860 -4,841 -23,977 -26,449 -29,198 -31,704 -34,517 -36,858 -39,181 -41,625 -86,325 -270,210Index to inflation the 2011 parameters of the AMT .........................................................

... 0 -33,292 -106,436 -106,467 -123,773 -142,376 -162,269 -183,068 -206,156 -230,455 -255,894 -512,344 -1,550,186

Total Effect of Adjustments to BEA Baseline ...............................................................

... -1,258 -35,907 -180,448 -272,313 -293,998 -317,479 -341,876 -366,276 -392,662 -420,231 -449,191 -1,100,145 -3,070,381

Total receipt effect ...................................................................................................

... -1,258 -35,907 -179,056 -244,461 -266,131 -289,650 -313,942 -338,328 -364,554 -392,018 -420,731 -1,015,205 -2,844,778

Total outlay effect ...................................................................................................

... 0 0 1,392 27,852 27,867 27,829 27,934 27,948 28,108 28,213 28,460 84,940 225,603

Department of the TreasuryNotes:

1/ Proposals in this table were estimated before the proposals shown in Table 1.2/ This provision affects both receipts and outlays. The combined effects are shown here and the outlays effects included in these estimates are detailed in Table 3 below.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Increase the child credit ............................................................................................. 0 0 1,187 23,753 23,812 23,807 23,903 23,908 24,030 24,112 24,300 72,559 192,812Provide relief for married taxpayers .............................................................................. 0 0 205 4,099 4,055 4,022 4,031 4,040 4,078 4,101 4,160 12,381 32,791Provide $250 refundable credit for federal, state and local government retirees not eligible for social security .......................................................................................

... 0 47 0 0 0 0 0 0 0 0 0 47 47

Extend the earned income tax credit (EITC) for larger families ..........................................

... 0 0 69 1,372 1,384 1,404 1,436 1,463 1,490 1,512 1,551 4,229 11,681

Expand the child and dependent care tax credit ............................................................

... 0 0 337 347 354 363 372 386 398 410 420 1,401 3,387

Provide for automatic enrollment in IRAs and double the tax credit for small employer plan startup costs ................................................................................................

... 0 0 38 66 71 79 90 105 122 142 167 254 880

Extend American opportunity tax credit ........................................................................

... 0 0 16 4,465 4,425 4,655 4,608 4,531 4,791 4,775 5,038 13,561 37,304

Reform and extend Build America bonds .....................................................................

... 105 599 1,580 2,793 4,048 5,314 6,575 7,830 9,080 10,324 11,561 14,334 59,704

Designate Growth Zones ..........................................................................................

... 0 14 34 43 43 40 10 -20 -20 -17 -14 174 113

Continue certain expiring provisions through calendar year 2012: 0 0

Grants for specified energy property in lieu of tax credits .............................................

... 0 357 426 428 383 121 0 0 0 0 0 1,715 1,715

Temporary increase in limit on cover over of rum excise tax revenues (from $10.50  to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands .................................

... 0 80 26 0 0 0 0 0 0 0 0 106 106

Expansion of the adoption credit .............................................................................. 0 0 300 0 0 0 0 0 0 0 0 300 300Health coverage tax credit (HCTC) ........................................................................

... 32 65 37 9 1 0 0 0 0 0 0 112 112

Total Outlay Effect of Proposals ..................................................................................

... 137 1,162 4,255 37,375 38,576 39,805 41,025 42,243 43,969 45,359 47,183 121,173 340,952

Department of the Treasury

(in millions of dollars)(in millions of dollars)

Table 2: Adjustments to the Budget Enforcement Act Baseline for the Adjusted Baseline 1/

Fiscal Years

Table 3: Outlay Effects Included in Revenue Estimates

Fiscal Years

149
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Continue certain expiring provisions through calendar year 2012:Energy:

Incentives for biodiesel and renewable diesel ...............................................................

... 0 -465 -462 -3 -2 -1 -1 0000 -933 -934

Credit for construction of energy efficient new homes ......................................................

... 0 -34 -33 -10 -8 -5 -4 -2 -2 -2 -1 -90 -101

Incentives for alternative fuel and alternative fuel mixtures ................................................ 0 -34 -168 0 0 000000 -202 -202Special rule to implement electric transmission restructuring ............................................. -3 -205 -118 43 52 52 52 52 54 22 0 -176 4

Grants for specified energy property in lieu of tax credits 2/ .............................................

... 0 -188 -204 -119 -74 3 34 29 26 23 24 -582 -446

Incentives for alcohol fuels .......................................................................................

... 0 -2,346 -2,430 -8 -3 -2 -2 0000 -4,789 -4,791

Extension and modification of section 25C nonbusiness energy property ...........................

... 0 -478 -585 0 0 000000 -1,063 -1,063

Credit for energy efficient appliances ...........................................................................

... 0 -7 -6 -5 -3 -2 -1 -1 0 0 0 -23 -25

Alternative fuel vehicle refueling property (non-hydrogen refueling property) ........................

... 5 8 5 2 1 0 0 0 0 0 0 16 16

 subtotal, energy ..........................................................................................

... 2 -3,749 -4,001 -100 -37 45 78 78 78 43 23 -7,842 -7,542

Individual tax relief:

Above-the-line deduction of up to $250 for teacher classroom expenses ...........................

... 0 -19 -171 0 0 000000 -190 -190

Deduction of State and local general sales taxes ............................................................ 0 -905 -1,357 0 0 000000 -2,262 -2,262

Contributions of capital gain real property made for qualified conservation purposes ............

... 0 -6 -27 0 0 0 0 0 0 0 0 -33 -33

Deduction for qualified tuition and related expenses ......................................................

... 0 -88 -791 0 0 000000 -879 -879

Tax-free distributions from IRAs to certain public charities for individuals age 70 1/2 or  older, not to exceed $100,000 per taxpayer per year ...................................................

... 0 -226 -258 -46 -25 -21 -17 -14 -10 -5 -3 -576 -625

Estate tax look-through for certain RIC stock held by nonresidents ....................................

... 0 -2 -5 -1 0 0 0 0 0 0 0 -8 -8

Parity for exclusion for employer-provided mass transit and parking benefits ........................ 0 -33 -43 0 0 0 0 0 0 0 0 -76 -76

 subtotal, individual tax relief ........................................................................... 0 -1,279 -2,652 -47 -25 -21 -17 -14 -10 -5 -3 -4,024 -4,073

Business tax relief:

Indian employment tax credit ....................................................................................

... 0 -10 -18 -14 -11 -9 -6 -5 -5 -3 -3 -62 -84

50% tax credit for certain expenditures for maintaining railroad tracks ................................. -123 -112 -34 -16 -9 -4 -2 -1 0 0 0 -175 -178Mine rescue team training credit .................................................................................

... 0 -4 -2 0 0 0 0 0 0 0 0 -6 -6

Employer wage credit for activated military reservists ......................................................

... 0 -1 -1 0 0 0 0 0 0 0 0 -2 -2

15-year straight line cost recovery for qualified leasehold, restaurant and  retail improvements ................................................................................................ 0 -38 -108 -141 -143 -144 -144 -144 -145 -145 -145 -574 -1,2977-year recovery period for certain motorsports racing track facilities .................................... 0 -6 -17 -17 -10 -4 -3 -4 -1 6 9 -54 -47

Accelerated depreciation for business property on Indian reservations ..............................

... 0 -160 -265 -82 36 83 99 54 17 -6 -13 -388 -237

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

... 0 -12 -21 0 0 0 0 0 0 0 0 -33 -33

Enhanced charitable deduction for contributions of book inventories to public schools ............ 0 -43 -77 0 0 000000 -120 -120Enhanced charitable deduction for corporate contributions of computer inventory  for educational purposes .......................................................................................

... 0 -102 -68 0 0 000000 -170 -170

Election to expense mine safety equipment ..................................................................

... 0 -1 -1 0 0 0 0 0 0 0 0 -2 -2

Special expensing rules for certain film and television productions ....................................

... -125 -187 -131 -92 -57 -25 -9 -1 0 0 0 -492 -502

Expensing of "Brownfields" environmental remediation costs ..........................................

... 0 -210 -118 13 12 12 12 11 11 10 10 -291 -237

Deduction allowable with respect to income attributable to domestic production  activities in Puerto Rico ..........................................................................................

... 0 -106 -70 0 0 000000 -176 -176

Modify tax treatment of certain payments under existing arrangements to controlling exempt organizations ............................................................................................

... 0 -8 -6 0 0 0 0 0 0 0 0 -14 -14

Treatment of certain dividends of regulated investment companies (RICs) ........................... 0 -8 -44 0 0 0 0 0 0 0 0 -52 -52Extend the treatment of RICs as "qualified investment entities" under section 897 ...............

... 0 -10 -7 0 0 0 0 0 0 0 0 -17 -17

Exception under subpart F for active financing income ...................................................

... 0 -1,850 -1,233 0 0 000000 -3,083 -3,083

Look-through treatment of payments between related CFCs under foreign personal  holding company income rules .................................................................................

... 0 -402 -268 0 0 000000 -670 -670

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

... 0 -8 -12 0 0 0 0 0 0 0 0 -20 -20

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

... 0 -13 -31 0 -3 -7 -16 -21 -16 -17 -17 -54 -141

Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to  $13.25 per proof gallon) to Puerto Rico and the Virgin Islands 2/ ....................................

... 0 -80 -26 0 0 0 0 0 0 0 0 -106 -106

Economic development credit for American Samoa ......................................................... 0 -6 -8 0 0 0 0 0 0 0 0 -14 -14Work opportunity tax credit .......................................................................................

... 0 -140 -276 -184 -83 -41 -7 0000 -724 -731

Qualified zone academy bonds ...................................................................................

... 00000000000 0 0

Premiums for mortgage insurance deductible as interest that is qualified residence interest ...

... -2 -102 -144 10 9 7 5 4 2 1 0 -220 -208

 subtotal, business tax relief ...........................................................................

... -250 -3,619 -2,986 -523 -259 -132 -71 -107 -137 -154 -159 -7,519 -8,147

Table 4: Supplementary Detail on the Effects of Continuing Certain Expiring Provisions Through Calendar Year 2012 1/

Fiscal Years

(in millions of dollars)

150
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 2012-2021

Fiscal Years

(in millions of dollars)

Temporary disaster provisions:

New York Liberty Zone: tax exempt bond financing ......................................................... 0 -3 -12 -18 -18 -18 -18 -18 -18 -18 -18 -69 -159GO Zone: Extend the higher credit rate for GO Zone rehabilitation ................................................

... 0 -13 -18 -6 0 0 0 0 0 0 0 -37 -37

 Extend the placed-in-service deadline for GO Zone low-income housing credits ...............

... 0 -1 -2 -4 -5 -4 -5 -5 -5 -5 -4 -16 -40

 Tax-exempt bond financing ....................................................................................

... 0 -7 -30 -30 -30 -30 -30 -30 -30 -30 -30 -127 -277

 Bonus depreciation for specified GO Zone extension property .......................................

... 0 -100 -64 5 5 5 5 5 5 5 5 -149 -124

 subtotal, temporary disaster relief ..................................................................

... 0 -124 -126 -53 -48 -47 -48 -48 -48 -48 -47 -398 -637

Other tax provisions:

Expansion of the adoption credit 2/ .............................................................................. 0 -221 -374 0 0 000000 -595 -595Plug-in hybrid conversion credit .................................................................................

... 0 0 -3 0 0 0 0 0 0 0 0 -3 -3

LIHTC treatment of military housing allowances ............................................................

... 0 0 0 -1 -1 -2 -2 -3 -4 -4 -5 -4 -22

Green bonds .........................................................................................................

... 0 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -10

Health coverage tax credit (HCTC) 2/ ........................................................................... -34 -68 -39 -9 -1 0 0 0 0 0 0 -117 -117

 subtotal, other tax provisions ........................................................................

... -34 -290 -417 -11 -3 -3 -3 -4 -5 -5 -6 -724 -747

Total Effect of Extending Expiring Provisions Through 2012 ..........................................

... -282 -9,061 -10,182 -734 -372 -158 -61 -95 -122 -169 -192 -20,507 -21,146

Total receipt effect ...................................................................................................

... -250 -8,559 -9,393 -297 12 -37 -61 -95 -122 -169 -192 -18,274 -18,913

Total outlay effect ...................................................................................................

... 32 502 789 437 384 121 0 0 0 0 0 2,233 2,233

Department of the TreasuryNotes:

1/ Trade provisions are excluded from this table; extending expiring trade provisions would reduce receipts by $584 million in 2011, $898 million in 2012, and $277 million in 2013.2/ This provision affects both receipts and outlays. The combined effects are shown here and the outlays effects included in these estimates are detailed in Table 3.

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