General Explanations 

of the 

Administration’s Fiscal Year 2010 

Revenue Proposals 

Department of the Treasury 

May 2009 
General Explanations 

of the 

Administration’s Fiscal Year 2010 

Revenue Proposals 

Department of the Treasury 

May 2009 

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

http://www.treas.gov/offices/tax-policy/library/grnbk09.pdf

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Table of Contents1

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

Provide the “Making Work Pay” Credit................................................................................................................1

Expand the Earned Income Tax Credit (EITC): Provide Marriage Penalty Relief and Enhamced Benefits for 

Larger Families...............................................................................................................................................2

Expand the Refundability of the Child Tax Credit: Make Permanent the $3,000 Earnings Threshold and 

Eliminate Indexing ..........................................................................................................................................4

Expand the Saver’s Credit and Provide for Automatic Enrollment in IRAs...........................................................6

Provide the American Opportunity Tax Credit.....................................................................................................10

TAX CUTS FOR BUSINESS ...................................................................................................................................13

Eliminate Capital Gains Taxation on Investments in Small Business Stock.........................................................13

Make the Research & Experimentation (R&E) Tax Credit Permanent................................................................15

Expand Net Operating Loss Carryback................................................................................................................16

MODIFY FEDERAL AVIATION ADMINISTRATION FINANCING..............................................................17

CONTINUE CERTAIN EXPIRING PROVISIONS THROUGH CALENDAR YEAR 2010 ...........................19

OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS.........................................................................21

Reinstate Superfund Excise Taxes........................................................................................................................21

Reinstate Superfund Environmental Income Tax..................................................................................................22

Tax Carried (Profit) Interests as Ordinary Income..............................................................................................23

Codify “Economic Substance” Doctrine..............................................................................................................25

Repeal the Last-In, First-Out (LIFO) Method of Accounting for Inventories......................................................27

Reform U.S. International Tax System...................................................................................................................28

Reform Business Entity Classification Rules for Foreign Entities................................................................28

Defer Deduction of Expenses, Except R&E Expenses, Related to Deferred Income.....................................29

Reform Foreign Tax Credit: Determine the Foreign Tax Credit on a Pooling Basis ...................................30

Reform Foreign Tax Credit: Prevent Splitting of Foreign Income and Foreign Taxes.................................31

Limit Shifting of Income Through Intangible Property Transfers.................................................................32

Limit Earnings Stripping by Expatriated Entities .........................................................................................33

Prevent Repatriation of Earnings in Certain Cross-Border Reorganizations...............................................35

Repeal 80/20 Company Rules........................................................................................................................36

Prevent the Avoidance of Dividend Withholding Taxes................................................................................37

Modify the Tax Rules for Dual Capacity Taxpayers .....................................................................................39

Combat Under-Reporting of Income Through Use of Accounts and Entities in Offshore Jurisdictions................41

Require Greater Reporting by Qualified Intermediaries Regarding U.S. Account Holders.........................41

Require Withholding on Payments of FDAP Income Made Through Nonqualified Intermediaries .............43

Require Withholding on Gross Proceeds Paid to Certain Nonqualified Intermediaries...............................44

Require Reporting of Certain Transfers of Money or Property to Foreign Financial Accounts...................46

Require Disclosure of FBAR Accounts to be Filed with Tax Return.............................................................47

Require Third-Party Information Reporting Regarding the Transfer of Assets to Foreign Financial 

Accounts and the Establishment of Foreign Financial Accounts..................................................................48

Require Third-Party Information Reporting Regarding the Establishment of Offshore Entities..................50

Negative Presumption for Foreign Accounts with Respect to Which an FBAR has not Been Filed .............51

Negative Presumption Regarding Failure to File an FBAR For Accounts with Nonqualified 

Intermediaries...............................................................................................................................................52

Negative Presumption Regarding Withholding on FDAP Payments to Certain Foreign Entities ................53

Extend Statute of Limitations for Certain Reportable Cross-Border Transactions and Foreign Entities.....54

Double Accuracy-Related Penalties on Understatements Involving Undisclosed Foreign Accounts...........56

1

 The Administration’s primary policy proposals reflect changes from a tax baseline that modifies current law by 

“patching” the alternative minimum tax, freezing the estate tax, and making permanent a number of the tax cuts 

enacted in 2001 and 2003. The baseline changes to current law are described in the Appendix. In some cases, the 

policy descriptions in the body of this report make note of the baseline (e.g., descriptions of upper-income tax 

provisions), but elsewhere the baseline is implicit.

i 
Improve the Foreign Trust Reporting Penalty ..............................................................................................57

Require Information Reporting for Rental Property Expense Paymentss............................................................58

Eliminate Oil and Gas Company Preferences.........................................................................................................59

Levy Tax on Certain Offshore Oil and Gas Production ................................................................................59

 Repeal Credit for Enhanced Oil Recovery (EOR) Projects..........................................................................60

Repeal Credit for Production from Marginal Wells......................................................................................61

Repeal Expensing of Intangible Drilling Costs.............................................................................................62

Repeal Deduction for Tertiary Injectants......................................................................................................64

Repeal Passive Loss Exception for Working Interests in Oil and Gas Properties........................................65

Repeal Percentage Depletion........................................................................................................................66

Repeal Domestic Manufacturing Deduction for Oil and Gas Production ....................................................68

Increase the Amortization Period for Geological and Geophysical Costs to Seven Years ...........................69

Eliminate the Advanced Earned Income Tax Credit ............................................................................................70

UPPER-INCOME TAX PROVISIONS DEDICATED TO DEFICIT REDUCTION ........................................73

 Reinstate the 39.6-Percent Rate...........................................................................................................................73

Reinstate the 36-Percent Rate for Taxpayers with Income Over $250,000 (Married Filing a Joint Return) 

and $200,000 (Single) ...................................................................................................................................74

Reinstate the Limitation on Itemized Deductions for Taxpayers with Income Over $250,000 (Married Filing 

a Joint Return) and $200,000 (Single) ..........................................................................................................75

Reinstate the Personal Exemption Phase-Out (PEP) for Taxpayers with Income Over $250,000 (Married 

Filing a Joint Return) and $200,000 (Single)................................................................................................76

Impose a 20-Percent Rate on Dividends and Capital Gains for Taxpayers with Income Over $250,000 

(Married Filing a Joint Return) and $200,000 (Single)................................................................................77

USER FEES ...............................................................................................................................................................79

Preserve Cost-Sharing of Inland Waterways Capital Costs.................................................................................79

OTHER INITIATIVES.............................................................................................................................................81

Implement Unemployment Insurance Integrity Legislation..................................................................................81

Restructure Assistance to New York City ..............................................................................................................82

Provide Tax Incentives for Transportation Infrastructure ............................................................................82

Levy Payments to Federal Contractors with Delinquent Tax Debt ........................................................................85

Improve Debt Collection Adminstrative Procedures.....................................................................................85

 Increase Levy Authority to 100 Percent for Vendor Payments.....................................................................86

REVENUES DEDICATED TO THE HEALTH REFORM RESERVE FUND..................................................87

Limit the Tax Rate at Which Itemized Deductions Reduce Tax Liability to 28 Percent .......................................87

REDUCE THE TAX GAP AND MAKE REFORMS............................................................................................89

Expand Information Reporting ...............................................................................................................................89

 Require Information Reporting for Private Separate Accounts of Life Insurance Companies .....................89

Require Information Reporting on Payments to Corporations .....................................................................90

Require a Certified Taxpayer Identification Number From Contractors and Allow Certain Withholding...91

Require Increased Information Reporting for Certain Government Payments for Property and Services...92

Increase Information Return Penalties .........................................................................................................93

Improve Compliance by Business ..........................................................................................................................94

Require E-Filing by Certain Large Organizations........................................................................................94

Implement Standards Clarifying When Employee Leasing Companies can be Held Liable for Their 

 Clients’ Federal Employment Taxes..................................................................................................96

Strengthen Tax Administration...............................................................................................................................98

Allow Assessment of Criminal Restitution as Tax .........................................................................................98

Revise Offer-In-Compromise Application Rules ...........................................................................................99

Expand IRS Access to Information in the National Directory of New Hires for Tax Administration 

 Purposes ...........................................................................................................................................100

Make Repeated Willful Failure to File a Tax Return a Felony ...................................................................101

Facilitate Tax Compliance with Local Jurisdictions...................................................................................102

Extension of Statute of Limitations where State Tax Adjustment Affects Federal Tax Liability..................103

Improve Investigative Disclosure Statute....................................................................................................105

Expand Required Electronic Filing by Tax Return Preparers....................................................................106

ii 
Expand Penalties...................................................................................................................................................107

Clarify that the Bad Check Penalty Applies to Electronic Checks and Other Payment Forms...................107

Impose a Penalty on Failure to Comply with Electronic Filing Requirements...........................................108

Make Reforms to Close Tax Loopholes ...............................................................................................................109

Financial Institutions and Products.......................................................................................................................109

Require Accrual of Income on Forward Sale of Corporate Stock...............................................................109

Require Ordinary Treatment for Certain Dealers of Equity Options and Commodities.............................110

Modify Definition of Control for Purposes of the Section 249 Deduction Limit .........................................111

Insurance Companies and Products......................................................................................................................112

Modify Rules that Apply to Sales of Life Insurance Contracts....................................................................112

Modify Dividends-Received Deduction for Life Insurance Company Separate Accounts...........................113

 Expand Pro Rata Interest Expense Disallowance for Corporate-Owned Life Insurance (COLI)...............115

Tax Accounting Methods......................................................................................................................................117

Deny Deduction for Punitive Damages.......................................................................................................117

Repeal Lower-Of-Cost-Or-Market Inventory Accounting Method..............................................................118

Modify Estate and Gift Tax Valuation Discounts and Make Other Reforms.......................................................119

Require Consistency in Value for Transfer and Income Tax Purposes.......................................................119

Modify Rules on Valuation Discounts.........................................................................................................121

Require Minimum Term for Grantor Retained Annuity Trusts (GRATs) ....................................................123

Modify Alternative Fuel Mixture Credit.............................................................................................................124

APPENDIX: EXTENDING CURRENT POLICIES............................................................................................125

TABLES OF REVENUE ESTIMATES ................................................................................................................127

iii 
TAX CUTS FOR FAMILIES AND INDIVIDUALS 

PROVIDE THE “MAKING WORK PAY” CREDIT 

Current Law 

In 2009 and 2010, individual taxpayers are eligible for a refundable tax credit of 6.2 percent of 

earned income up to a maximum credit of $400 ($800 for joint filers). Thus, workers receive a 

credit on the first $8,065 of earned income ($16,130 for joint filers). The credit phases out at a 

rate of 2 percent for taxpayers with modified adjusted gross income in excess of $75,000 

($150,000 for joint filers). Dependent filers are not eligible for the credit. Neither the maximum 

credit amount nor the beginning of the phase-out range is indexed for inflation. 

 

The IRS withholding schedules are modified to reflect the Making Work Pay (MWP) credit, with 

reconciliation of overwithholding and underwithholding on annual income tax returns. 

Reasons for Change 

The MWP credit partially offsets the regressivity of the Social Security payroll tax. It effectively 

raises the income of workers eligible for the credit, which encourages individuals to enter the 

labor force. Permanency and indexing the beginning of the phase-out range for inflation would 

ensure that workers continue to receive some of the benefits of the credit and low-income 

workers continue to receive a work incentive. In addition, the MWP credit could be extended to 

more people by raising the phase-out range. 

The MWP credit contributes to the high marginal tax rates faced by workers in the phase-out 

range. Lowering the phase-out rate would produce fewer distortions. 

Proposal

The proposal would make the MWP credit permanent and index the beginning of the phase-out 

range for inflation. In addition, the phase-out rate would be reduced to 1.6 percent. 

 

The proposal is effective for tax years beginning after December 31, 2010. 

1
EXPAND THE EARNED INCOME TAX CREDIT (EITC): PROVIDE MARRIAGE 

PENALTY RELIEF AND ENHANCED BENEFITS FOR LARGER FAMILIES 

Current Law

Low and moderate-income workers may be eligible for a refundable earned income tax credit 

(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 earned 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 is larger for workers with more qualifying children, reaching a maximum amount at three 

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 for 2009. 

Childless Taxpayers with Qualifying Children 

Taxpayers One Child Two Children Three or More 

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

Minimum earnings 

for maximum credit $5,970 $8,950 $12,570 $12,570 

Maximum credit $457 $3,043 $5,028 $5,657 

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

Phase-out begins $7,470 

($12,470 joint)

$16,420 

($21,420 joint)

$16,420 

($21,420 joint) 

$16,420 

($21,420 joint) 

Phase-out ends $13,440 

($18,440 joint)

$35,463 

($40,463 joint)

$40,295 

($45,295 joint) 

$43,279 

($48,279 joint) 

To be eligible for the EITC, workers may have a maximum of $3,100 of investment income. 

(This amount is indexed for inflation.) 

 

In 2009 and 2010, the beginning of the phase-out range for joint filers is $5,000 higher than for 

other filers. (The amount will be indexed in 2010.) Under current law, beginning in 2011 the 

EITC for workers with the same number of qualifying children will phase-out over the same 

income range regardless of filing status. Under the assumption that certain provisions of the 

2
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) are made permanent, 

the additional $5,000 for married filers will revert in 2011 to $3,000 indexed from 2007. 

In 2009 and 2010, the EITC phases in at a faster rate for workers with three or more qualifying 

children than for workers with two qualifying children (45 and 40 percent, respectively). The 

accelerated phase-in rate results in a higher credit and a longer phase-out range. This provision 

expires after 2010, at which point workers with three or more qualifying children will receive the 

same EITC as similarly situated workers with two qualifying children. 

Reasons for Change

The beginning of the phase-out range for joint filers is higher than for other workers with the 

same number of qualifying children in order to reduce the “EITC marriage penalty.” This 

marriage penalty occurs because the income of both spouses is counted toward eligibility for 

joint filers, but the income of only the “head of household” filer is considered if the individuals 

are not married. Extending marriage penalty relief improves fairness and removes financial 

impediments to marriage for some low-income households. 

Families with many children face larger expenses related to raising their children than do smaller 

families and as a result have higher poverty rates. The steeper phase-in rate and larger maximum 

credit for workers with three or more qualifying children helps them meet their expenses while 

maintaining work incentives. 

Proposal

The proposal would make permanent the $5,000 (indexed) increase in the beginning of the 

phase-out range for joint filers relative to other individuals. 

Furthermore, 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 under the American Recovery and Reinvestment Act of 2009 

(ARRA) would be maintained at 45 percent, resulting in a higher maximum credit amount and 

longer phase-out range. 

The proposal would be effective for tax years beginning after December 31, 2010. 

3
EXPAND THE REFUNDABILITY OF THE CHILD TAX CREDIT: MAKE 

PERMANENT THE $3,000 EARNINGS THRESHOLD AND ELIMINATE INDEXING 

Current Law 

An individual may claim a $1,000 tax credit for each qualifying child. A qualifying child must 

meet the following four tests: 

(1) Relationship – The child generally must be the taxpayer’s son, daughter, grandchild, 

sibling, niece, nephew, or foster child. 

(2) Residence – The child must live with the taxpayer in the same principal place of abode 

for over half the year. 

(3) Support – The child must not have provided more than half of his or her own support. 

(4) Age – The child must be under the age of 17. 

For purposes of the child tax credit, a qualifying child must be a citizen, national, or resident of 

the United States. The child tax credit is phased out for individuals with income over certain 

thresholds,1

 and is partially refundable. 

In 2009 and 2010, individuals may be eligible for a refundable amount (the additional child tax 

credit) equal to the lesser of 15 percent of earned income in excess of $3,000 and any child credit 

unclaimed due to insufficient tax liability.2 Under the assumption that certain provisions of 

EGTRRA are made permanent, in 2011 the earned income threshold reverts to an amount 

indexed from $10,000 in 2000. 

Families with three or more children may determine the additional child tax credit using an 

alternative formula based on the extent to which a taxpayer’s social security taxes exceed the 

taxpayer’s EITC. 

Reasons for Change 

Because the wages of low-income families have failed to keep up with inflation, continued 

indexing will result in a decreasing number of low-income families able to take advantage of the 

credit each year and smaller credits for the families who receive the credit. 

 

1 Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of 

modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married 

individuals filing joint returns, and $55,000 for married individuals filing separate returns.

2

 Earned income for purposes of the refundable amount is defined as the sum of wages, salaries, tips, and other 

taxable employee compensation plus net self-employment earnings to the extent that these amounts are included 

when computing taxable income. 

4
Furthermore, if the threshold increases to $12,700 in 2011 as scheduled, an estimated 11 million 

low-income families would have a tax increase as a result. 

Proposal 

The proposal would make permanent the $3,000 earnings threshold for refundability of the child 

credit. In addition the earnings threshold would no longer be indexed for inflation. 

The proposal would be effective for tax years beginning after December 31, 2010. 

 

5
EXPAND THE SAVER’S CREDIT AND PROVIDE FOR AUTOMATIC ENROLLMENT 

IN IRAS 

Expand the Saver’s Credit

Current Law

A nonrefundable tax credit is available for eligible individuals who make voluntary contributions 

to 401(k) plans and other retirement plans, including IRAs. The maximum annual contribution 

eligible for the credit is $4,000 for married couples filing jointly and $2,000 for single taxpayers 

or married individuals filing separately, resulting in maximum credits of $2,000 and $1,000, 

respectively. The credit rate is 10 percent, 20 percent or 50-percent, depending on the taxpayer’s 

adjusted gross income (AGI) (the amount of which is adjusted each calendar year based on the 

cost-of-living adjustment). In 2009, "eligible individuals" who may claim the credit are 

• Married couples filing jointly with incomes up to $55,500; 

• Heads of households with incomes up to $41,625; and 

• Married individuals filing separately and singles with incomes up to $27,750, 

who are 18 or older, other than individuals who are full-time students or claimed as a dependent 

on another taxpayer’s return. 

The credit is available with respect to an eligible individual's “qualified retirement savings 

contributions.” These include (i) elective deferrals to a section 401(k) plan, section 403(b) plan, 

section 457 plan, SIMPLE, or simplified employee pension (SEP); (ii) contributions to a 

traditional or Roth IRA; and (iii) other voluntary employee contributions to a qualified 

retirement plan, including voluntary after-tax contributions and voluntary contributions to a 

defined benefit pension plan. The eligible individual may direct that the amount of any refund 

attributable to the credit may be directly deposited by the IRS into an IRA or certain other 

accounts. 

The credit is nonrefundable and, therefore, offsets regular tax liability or minimum tax liability. 

The credit is in addition to any deduction or exclusion that would otherwise apply with respect to 

the contribution. 

Reason for Change

The saver’s credit should be amended to more effectively encourage moderate- and lowerincome individuals to save for retirement. Because it is currently nonrefundable, the saver's 

credit only offsets a taxpayer’s income tax liability and therefore gives no saving incentive to 

tens of millions of households without income tax liability. In addition, the current three-tier 

credit rate structure should be simplified, the eligibility income threshold should be raised to 

increase the number of households eligible for the credit, and the credit rate should be increased 

for most eligible households. Finally, making the saver’s credit more like a matching 

contribution would enhance the likelihood that the credit would be saved and would increase the 

6
salience of the incentive by framing it as a match similar to the familiar employer matching 

contributions to 401(k) plans. 

Proposal

The proposal would make the saver’s credit fully refundable and would provide for the credit to 

be deposited automatically in the qualified retirement plan account or IRA to which the eligible 

individual contributed. Making the saver’s credit more like a matching contribution would 

enhance the likelihood that the credit would be saved and would increase the salience of the 

incentive by framing it as a match similar to the familiar employer matching contributions to 

401(k) plans. The proposal would offer a meaningful saving incentive to tens of millions of 

additional households while simplifying the current three-tier credit structure and raising the 

eligibility income threshold to cover millions of additional moderate-income taxpayers. 

In place of the current 10-percent/20-percent/50-percent credit for qualified retirement savings 

contributions up to $2,000 per individual, the proposal would match 50-percent of such 

contributions up to $500 per individual (indexed annually for inflation beginning in taxable year 

2011). The eligibility income threshold would be increased to $65,000 for married couples filing 

jointly, $48,750 for heads of households, and $32,500 for singles and married individuals filing 

separately, with the amount of savings eligible for the credit phased out at a 5-percent rate for 

AGI exceeding those levels. 

The proposal would be effective December 31, 2010. 

Automatic Enrollment in IRAS

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 and SIMPLE IRAs for small employers. 

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

may be eligible to make smaller tax-favored contributions to individual retirement accounts or 

individual retirement annuities (IRAs). 

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. 

7
Reasons for Change

For many years, until the current recession, the personal saving rate in the United States has been 

exceedingly low. In addition, tens of millions of U.S. households have not placed themselves on 

a path to become financially prepared for retirement, and 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-sector and congressional 

attempts to expand coverage. Participation in employer-sponsored retirement saving plans such 

as 401(k) plans typically has ranged from two thirds to three quarters of eligible employees, but 

making saving easier by making it automatic has been shown to be remarkably effective at 

boosting participation. Automatic enrollment in 401(k) plans (enrolling employees by default 

unless they opt out) has tended to increase participation to more than 9 out of 10 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 1 out of 10. 

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 or 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 excess capacity to promote saving that is inherent in employer payroll systems, 

especially those that use automatic enrollment. However, despite efforts a decade ago by 

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 that are above a 

certain size) to make their payroll system available to employees and automatically enroll them 

in IRAs could achieve a major breakthrough in retirement saving coverage. Many employers 

may then be more willing to take the next step and adopt an employer plan (permitting much 

greater tax-favored employee contributions than an IRA plus the option of employer 

contributions). In addition, the process of saving and choosing investments 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 

annuitized over the worker’s lifetime. 

Proposal

Employers in business for at least two years that have 10 or more employees would be required 

to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular 

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

8
retirement plan or SIMPLE for its employees, it would not be required to provide an automatic 

IRA option for any employee. 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 

collectively bargained, under age 18, 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 

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. Employees could opt for a lower 

or higher contribution rate up to the IRA dollar limits. 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. 

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

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

$250 each year 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 fewer than 

ten employees). 

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

the contributor and the contributions otherwise qualified), and the proposed expanded saver's 

credit would be deposited to the IRA to which the eligible individual contributed. 

The proposal would become effective January 1, 2012. 

9
PROVIDE THE AMERICAN OPPORTUNITY TAX CREDIT 

Current Law

Prior to 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 

limited to 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 American Opportunity Tax Credit (AOTC) to replace the Hope Scholarship 

Credit for taxable years 2009 and 2010. The new tax credit is partially refundable, has a higher 

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

higher 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). Under ARRA, the definition of 

related expenses for both the LLC and the AOTC 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 tax 

liability) could not benefit from the Hope Scholarship credit because it was not refundable. 

Under the proposal, low-income families could benefit from both Federal Pell Grants and the 

refundable portion of the AOTC. In combination, these grants and credits would cover all tuition 

and fees at an average 2-year public college and about half of tuition and fees at an average 4-

year public college. 

10
Moreover, the new credit applies to 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 for students and a more 

educated work force 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, 2010. 

11
TAX CUTS FOR BUSINESS 

ELIMINATE CAPITAL GAINS TAXATION ON INVESTMENTS IN SMALL 

BUSINESS STOCK 

Current Law

Taxpayers other than corporations may exclude 50-percent (60 percent for certain empowerment 

zone businesses) of the gain from the sale of certain small business stock acquired at original 

issue and held for at least five years. Under ARRA the exclusion is increased to 75 percent for 

stock acquired in 2009 (after February 17, 2009) and in 2010. The taxable portion of the gain is 

taxed at a maximum rate of 28 percent. Under current law, 7 percent of the excluded gain is a tax 

preference subject to the alternative minimum tax (AMT). The AMT preference is scheduled to 

increase to 28 percent of the excluded gain on eligible stock acquired after December 31, 2000 

and to 42 percent of the excluded gain on stock acquired on or before that date. 

The 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 may not be an S 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

Because the taxable portion of gain from the sale of qualified small business stock is subject to 

tax at a maximum of 28 percent and a percentage of the excluded gain is a preference under the 

AMT, the current 50-percent provision provides little benefit. Increasing the exclusion would 

encourage and reward new investment in qualified small business stock. 

Proposal

Under the proposal the percentage exclusion for qualified small business stock sold by an 

individual or other non-corporate taxpayer would be increased to 100 percent and the AMT 

preference item for gain excluded under this provision would be eliminated. The stock would 

13
have to be held for at least five years and other provisions applying to the section 1202 exclusion 

would also apply. The proposal would include additional documentation requirements to assure 

compliance with the statute. 

The proposal would be effective for qualified small business stock issued after February 17, 

2009. 

14
MAKE THE RESEARCH & EXPERIMENTATION (R&E) TAX CREDIT 

PERMANENT 

Current Law

The research and experimentation (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 basic research payments in excess of 

a base amount and payments to an energy research consortium for energy research. The credit 

for energy research applies to all qualified expenditures, not solely those in excess of a base 

amount. 

The R&E credit is scheduled to expire on December 31, 2009. 

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. 

Proposal

The proposal would make the R&E credit permanent. 

15
EXPAND NET OPERATING LOSS CARRYBACK 

Current Law

A net operating loss (NOL) generally is the amount by which a taxpayer’s business deductions 

exceed its gross income. For taxpayers other than certain eligible small businesses, an NOL may 

be carried back two years and carried forward 20 years to offset taxable income in such years. 

NOLs offset taxable income in the order of the taxable years to which the NOL may be carried. 

The AMT rules provide that a taxpayer’s NOL deduction cannot reduce the taxpayer’s 

alternative minimum taxable income (AMTI) by more than 90 percent of the AMTI. 

Different rules apply with respect to NOLs arising in certain circumstances. A three-year 

carryback applies with respect to: (1) losses arising from casualty or theft losses of individuals, 

and (2) losses attributable to Presidentially declared disasters for taxpayers engaged in a farming 

business or a small business. A five-year carryback applies to: (1) farming losses (regardless of 

whether the loss was incurred in a Presidentially declared disaster area); (2) certain losses related 

to Hurricane Katrina, Gulf Opportunity Zone, and Midwestern Disaster Area; and (3) qualified 

disaster losses. Special rules also apply to real estate investment trusts (no carryback), specified 

liability losses (10-year carryback), and excess interest losses (no carryback to any year 

preceding a corporate equity reduction transaction). Additionally, a special rule applies to 

certain electric utility companies. In the case of a life insurance company, present law allows a 

deduction for the taxable year for operations loss carryovers and carrybacks in lieu of the 

deduction for NOLs allowed to other corporations. A life insurance company is permitted to 

treat a loss from operations for any taxable year as an operations loss carryback to each of the 

three taxable years preceding the loss year and an operations loss carryover to each of the 15 

taxable years following the loss year. Special rules apply to new life insurance companies. 

Most recently, the ARRA extended the carryback period for applicable 2008 NOLs to up to five 

years by certain eligible small businesses whose average annual gross receipts do not exceed 

$15,000,000. 

Reasons for Change

The NOL carryback and carryover rules are designed to allow taxpayers to smooth out swings in 

business income (and Federal income taxes thereon) that result from business cycle fluctuations. 

The recent economic conditions have resulted in many taxpayers incurring significant financial 

losses. A temporary extension of the NOL carryback period provides taxpayers in all sectors of 

the economy that experience such losses with the ability to obtain refunds of income taxes paid 

in prior years. These refunds can be used to fund capital investment or other operating expenses. 

Proposal

The Administration looks forward to working with the Congress to make a lengthened NOL 

carryback period available to more taxpayers. 

16
MODIFY FEDERAL AVIATION ADMINISTRATION FINANCING 

Current Law 

The Airport and Airway Trust Fund is supported by taxes on air passenger transportation, 

domestic air freight transportation, and aviation fuel. The tax on domestic air passenger 

transportation is 7.5 percent of the amount paid for the transportation plus a segment fee of $3.60 

per segment. The tax on international air transportation is $16.10 on each international arrival or 

departure. Both the segment fee and the international arrival and departure fee are adjusted 

annually for inflation. The tax on domestic air freight transportation is 6.25 percent of the 

amount paid for the transportation. The tax on aviation fuel, to the extent dedicated to the 

Airport and Airway Trust Fund, is 4.3 cents per gallon for kerosene used in commercial aviation, 

21.8 cents per gallon for kerosene used in noncommercial (general) aviation, and 19.3 cents per 

gallon for aviation gasoline. The tax is generally imposed when the fuel is removed from a 

terminal. 

The taxes that support the Airport and Airway Trust Fund expire on September 30, 2009. The 

taxes on air transportation do not apply to amounts paid after September 30, 2009. The taxes on 

aviation fuel do not apply to fuel removed from a terminal after September 30, 2009. The 

authority to make expenditures from the Trust Fund for airport and airway programs also expires 

on October 30, 2009. 

Reasons for Change 

The Federal Aviation Administration’s (FAA’s) financing system should be more cost based. 

The current excise tax system, to the extent based on taxes on the amount paid for air 

transportation, does not provide a direct relationship between the taxes paid by users and the air 

traffic control services provided by the FAA. The Administration believes that the FAA should 

move toward a model whereby FAA’s funding is related to its costs, the financing burden is 

distributed more equitably, and funds are used to pay directly for services the users need. 

To provide for necessary Federal airport and airway expenditures until a cost-based system is 

developed, the aviation excise taxes and the expenditure authority from the Airport and Airway 

Trust Fund should be temporarily extended. 

Proposal 

The taxes on air transportation and aviation fuel would be extended through September 30, 2011, 

at their current rates. Beginning October 1, 2011, the Budget assumes that the air traffic control 

system will be funded with direct charges levied on users of the system. The Budget reflects 

such a reform being in place starting in 2011, with a user charge collecting $9.6 billion in that 

year and with aviation excise taxes being commensurately reduced. Expenditure authority from 

the Airport and Airway Trust Fund would be extended through September 30, 2019. 

17
CONTINUE CERTAIN EXPIRING PROVISIONS THROUGH CALENDAR YEAR 2010 

Current Law

The existing tax code includes a number of provisions that are scheduled to expire before

December 31, 2010. These provisions include the optional deduction for State and local general 

sales taxes, Subpart F “active financing” and “look-through” exceptions, the exclusion from 

unrelated business income of certain payments to controlling exempt organizations, the new 

markets tax credit, the modified recovery period for qualified leasehold improvements and 

qualified restaurant property, incentives for empowerment and community renewal zones, credits 

for biodiesel and renewable diesel fuels, and several trade agreements, including the Generalized 

System of Preferences and the Caribbean Basin Initiative. 

Reasons for Change.

In the past, these expiring provisions have been routinely extended. Extending them before they 

expire helps to provides certainty to taxpayers. 

Proposal

This proposal would extend these provisions through December 31, 2010. 

19
OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS 

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 $0.22 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 three Superfund excise taxes would be reinstated for periods after December 31, 2010. 

21
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 minimum 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 corporate environmental income tax would be reinstated for taxable years beginning after 

December 31, 2010. 

22
TAX CARRIED (PROFIT) INTERESTS AS ORDINARY INCOME 

Current Law

A partnership is not subject to federal income tax. Instead, income and loss of the partnership 

retains its character and flows through to its partners, who must include such items 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”) 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. 

Reason 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 has increased the breadth and cost 

of this tax preference, with some of the highest-income Americans benefiting from the 

preferential treatment. 

Proposal

A partner’s share of income on a “services partnership interest” (SPI) would be subject to tax as 

ordinary income, 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 SPI would generally be taxed as ordinary income, not as 

capital gain. 

An SPI is a carried interest held by a person who provides services to the partnership. To the 

extent that the partner who holds an SPI 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 SPI 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 

23
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 ordinary income tax 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. 

The proposal is not intended to adversely impact 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, 2010. 

24
CODIFY “ECONOMIC SUBSTANCE” DOCTRINE 

Current Law

Economic Substance Doctrine. The common-law “economic substance” doctrine generally 

denies tax benefits from a transaction that does not meaningfully change a taxpayer’s economic 

position, other than tax consequences, even if the transaction literally satisfies the requirements 

of the Internal Revenue Code. Although courts have applied the economic substance doctrine 

with increasing frequency, they have not applied it uniformly. Some courts require both (i) a 

meaningful change to the taxpayer’s economic position (referred to as “objective” economic 

substance), and (ii) a substantial non-tax business purpose, while other courts require only one of 

the two factors to satisfy the economic substance doctrine. Still other courts consider objective 

economic substance and business purpose to be only two factors in a general investigation into 

whether a transaction has economic effects other than tax benefits. 

Accuracy-Related Penalties. Current law contains an accuracy-related penalty that applies to an 

underpayment of tax attributable to a substantial understatement of income tax. The penalty 

equals 20 percent of the tax underpayment. Except in the case of tax shelters, the penalty may be 

reduced if (i) the taxpayer’s treatment is supported by substantial authority or (ii) the relevant 

facts were adequately disclosed, and there is a reasonable basis for the item’s tax treatment. A 

separate 20-percent penalty applies to an understatement of income tax attributable to a “listed 

transaction” or a “reportable transaction” with a significant purpose of tax avoidance or evasion. 

The penalty rate is increased to 30 percent if the taxpayer has not disclosed the transaction as 

required by law. Either penalty may be set aside or reduced if the taxpayer can demonstrate that 

there was “reasonable cause” for the taxpayer’s position and that the taxpayer acted in good 

faith. 

Denial of Interest Deduction. Current law denies any deduction for interest paid with respect to 

a reportable transaction understatement where the relevant facts were not adequately disclosed. 

Reason for Change

Clarifying the economic substance doctrine and increasing the penalty for transactions that lack 

economic substance will further deter transactions designed solely to obtain tax benefits. 

Proposal

Clarification of Economic Substance Doctrine. The proposal would clarify that a transaction 

satisfies the economic substance doctrine only if (i) it changes in a meaningful way (apart from 

federal tax effects) the taxpayer’s economic position, and (ii) the taxpayer has a substantial 

purpose (other than a federal tax purpose) for entering into the transaction. The proposal would 

also clarify that a transaction will not be treated as having economic substance solely by reason 

of a profit potential unless the present value of the reasonably expected pre-tax profit is 

substantial in relation to the present value of the net federal tax benefits arising from the 

transaction. The proposal would allow the Treasury Department to publish regulations to carry 

out the purposes of the proposal.

25
New Understatement Penalty. The proposal would impose a 30-percent penalty on an 

understatement of tax attributable to a transaction that lacks economic substance, reduced to 20 

percent if there were adequate disclosure of the relevant facts in the taxpayer’s return. The 

proposed penalty would be imposed with regard to an understatement due to a transaction’s lack 

of economic substance in lieu of other accuracy-related penalties that might be levied with 

respect to the tax understatement, although any understatement arising from a lack of economic 

substance would be taken into account in determining whether there is a substantial 

understatement of income tax under current law. 

The IRS could assert and abate the new economic substance penalty. The IRS could assert the 

penalty even if there has not been a court determination that the economic substance doctrine 

was relevant. Any abatement of the economic substance penalty would have to be proportionate 

to the abatement of the underlying tax liability. 

Denial of Interest Deduction. The proposal would deny any deduction for interest attributable to 

an understatement of tax arising from the application of the economic substance doctrine. 

The proposal would apply to transactions entered into after the date of enactment. The denial of 

interest deduction component would be effective for taxable years ending after the date of 

enactment with respect to transactions entered into after such date.

26
REPEAL THE LAST-IN, FIRST-OUT (LIFO) METHOD OF ACCOUNTING FOR 

INVENTORIES 

Current Law

The Internal Revenue Code (Code) permits a taxpayer with inventories to 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 last-in, first-out (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 LIFO would eliminate a tax deferral opportunity that is available to taxpayers that 

possess inventories whose costs 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 IRS. 

International Financial Reporting Standards do not permit the use of the LIFO method, and their 

adoption by the Security and Exchange Commission would cause violations of the current LIFO 

book/tax conformity requirement. Repealing LIFO removes 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, 2011. However, this one-time increase in gross income would be taken into 

account ratably over the first taxable year and the following seven taxable years. 

27
Reform U.S. International Tax System 

REFORM BUSINESS ENTITY CLASSIFICATION RULES FOR FOREIGN ENTITIES 

Current Law

Under current Treasury regulations, an eligible business entity can elect its classification for 

federal tax purposes. An eligible business entity with a single owner may elect to be treated as a 

corporation or as an entity disregarded as an entity separate from its owner (a “disregarded 

entity”). An eligible business entity with at least two owners may elect to be treated as a 

partnership or as a corporation. Certain foreign entities are always treated as corporations for 

federal tax purposes (so called “per se corporations”). 

Reasons for Change

As applied to foreign eligible entities, the entity classification rules may result in the unintended 

avoidance of current U.S. tax, particularly if a foreign eligible entity elects to be treated as a 

disregarded entity. In certain cases, locating a foreign disregarded entity under a centralized 

holding company (or partnership) may permit the migration of earnings to low-taxed 

jurisdictions without a current income inclusion of the amount of such earnings to a U.S. 

taxpayer under the subpart F provisions of the Code. 

Proposal 

Under the proposal, a foreign eligible entity may be treated as a disregarded entity only if the 

single owner of the foreign eligible entity is created or organized in, or under the law of, the 

foreign country in, or under the law of, which the foreign eligible entity is created or organized. 

Therefore, a foreign eligible entity with a single owner that is organized or created in a country 

other than that of its single owner would be treated as a corporation for federal tax purposes. 

Except in cases of U.S. tax avoidance, the proposal would generally not apply to a first-tier 

foreign eligible entity wholly owned by a United States person. The tax treatment of the 

conversion to a corporation of a foreign eligible entity treated as a disregarded entity would be 

consistent with current Treasury regulations and relevant tax principles. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

28
DEFER DEDUCTION OF EXPENSES, EXCEPT R&E EXPENSES, 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. 

Reasons for Change

Under current law, a U.S. person that incurs expenses 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. The U.S. person is also permitted to deduct currently other 

expenses properly allocated or apportioned to the stock of the foreign corporation. 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, the interest and 

other expenses properly allocated and apportioned to the stock of the foreign corporation may 

not be subject to recapture in a subsequent taxable year. This 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 a deduction for expenses (other than research and experimentation 

expenditures) of a U.S. person that are properly allocated and apportioned to foreign-source 

income to the extent the foreign-source income associated with the expenses is not currently 

subject to U.S. tax. The amount of expenses properly allocated and apportioned to foreignsource income generally would be determined under current Treasury regulations. The amount 

of deferred expenses for a particular year would be carried forward to subsequent years and 

combined with the foreign-source expenses of the U.S. person for such year before determining 

the impact of the proposal in such year. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

29
REFORM FOREIGN TAX CREDIT: 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), 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 through “crosscrediting” to reduce the residual U.S. tax on foreign-source income. 

Proposal

Under the proposal, a U.S. taxpayer would determine its deemed paid foreign tax credit on a 

consolidated basis by determining 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 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 proposal would be effective for taxable years beginning after December 31, 2010. 

30
REFORM FOREIGN TAX CREDIT: PREVENT SPLITTING OF FOREIGN INCOME 

AND FOREIGN TAXES 

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 current law, the person considered to have paid the foreign tax is the person on whom 

foreign law imposes legal liability for such tax. 

Reasons for Change

Current law permits inappropriate separation of creditable foreign taxes from the associated 

foreign income in certain cases such as those involving hybrid arrangements.

Proposal

The proposal would adopt a matching rule to prevent the separation of creditable foreign taxes 

from the associated foreign income. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

31
LIMIT SHIFTING OF INCOME THROUGH INTANGIBLE PROPERTY TRANSFERS 

Current Law

Section 482 permits the Commissioner 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 any transfer (or license) of intangible 

property (as defined in section 936(h)(3)(B)), the income with respect to such transfer or license 

must be commensurate with the income attributable to the intangible property. 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. Further, the scope of the intangible property subject to sections 482 and 367(d) is not 

entirely clear or consistent. This lack of clarity and consistency 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

To prevent inappropriate shifting of income outside the United States, 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 would also clarify that in a 

transfer of multiple intangible properties, the Commissioner may value the intangible properties 

on an aggregate basis where that achieves a more reliable result. The proposal would also clarify 

that intangible property must be valued at its highest and best use, as it would change hands 

between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell 

and both having reasonable knowledge of relevant facts. 

The proposal would be effective for taxable years beginning after December 31, 2010.

32
LIMIT EARNINGS STRIPPING BY EXPATRIATED ENTITIES 

Current Law

Section 163(j) applies to limit 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 

(computed by adding back net interest expense, depreciation, amortization and depletion, and 

any net operating loss deduction). Disallowed interest expense may be carried forward 

indefinitely for deduction in a subsequent year. In addition, the corporations’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 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 recent 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. Because the 

study did not find conclusive evidence of earnings stripping by foreign-controlled domestic 

corporations that have not expatriated, additional information is needed to determine whether 

changes to section 163(j) should be made with respect to those companies. The new Form 8926, 

Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related 

Information, should assist in obtaining this information. 

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 of adjusted taxable income with respect to disqualified interest other 

than interest paid to unrelated parties on debt that is subject to a related-party guarantee 

(“guaranteed debt”). The 50 percent adjusted taxable income threshold would generally contine 

33
to apply to interest on guaranteed debt. 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. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

34
PREVENT REPATRIATION OF EARNINGS IN CERTAIN CROSS-BORDER 

REORGANIZATIONS 

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 (so-called “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

In cross-border reorganizations, the boot-within-gain limitation of current law 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 in which the acquiring corporation is foreign and the shareholder’s 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, 2010. 

35
REPEAL 80/20 COMPANY RULES 

Current Law

Dividends and interest paid by a domestic corporation are generally U.S.-source income to the 

recipient and are generally subject to gross basis withholding tax if paid to a foreign person. A 

limited exception to these general rules applies with respect to a domestic corporation (a socalled “80/20” company) if at least 80 percent of the corporation’s gross income during a threeyear testing period is foreign-source and attributable to the active conduct of a foreign trade or 

business. Look-through rules apply to determine the character of certain income of the 80/20 

company for this purpose. 

Reasons for Change

The 80/20 company provisions can be manipulated and should be repealed. 

Proposal

The proposal would repeal the 80/20 company provisions under current law. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

36
PREVENT THE AVOIDANCE OF DIVIDEND WITHHOLDING TAXES 

Current Law

A withholding agent generally must withhold a tax of 30 percent from the gross amount of all 

U.S.-source fixed or determinable annual or periodical (FDAP) income, profits, or gains of a 

nonresident alien individual, foreign corporation, or foreign partnership. In general, dividends 

paid with respect to the stock of a domestic corporation are U.S.-source dividends. Thus, foreign 

investors holding stock in domestic corporations are generally subject to 30 percent tax on 

dividends paid with respect to that stock. This rate may be reduced where the dividends are paid 

to a resident of a jurisdiction with which the United States has entered into a tax treaty. 

The source of income from notional principal contracts is generally determined based on the 

residence of the investor. As a result, substitute dividend payments made to a foreign investor 

with respect to an equity swap referencing U.S. equities are treated as foreign-source and are 

therefore not subject to U.S. withholding tax. 

Reason for Change

Foreign portfolio investors seeking to benefit from the appreciation in value and dividends paid 

with respect to the stock of a domestic corporation are not limited to holding stock in the 

corporation. Instead, such an investor can enter into an equity swap. The U.S. tax consequences 

of these two alternative investments differ significantly. By entering into equity swaps, foreign 

portfolio investors receive the economic benefit of dividends paid and appreciation in value with 

respect to U.S. stock without being subject to gross-basis withholding tax. 

Proposal

In order to address the avoidance of U.S. withholding tax through the use of securities lending 

transactions, the Treasury Department plans to revoke Notice 97-66 and issue guidance 

that eliminates the benefits of such transactions but minimizes over-withholding. 

Further, income earned by foreign persons with respect to equity swaps that reference U.S. 

equities would be treated as U.S.-source to the extent that the income is attributable to (or 

calculated by reference to) dividends paid by a domestic corporation. An exception to this 

source rule would apply to swaps with all of the following characteristics: 

• the terms of the equity swap do not require the foreign person to post more than 20 

percent of the value of the underlying stock as collateral; 

• the terms of the equity swap do not include any provision addressing the hedge position 

of the counterparty to the transaction; 

• the underlying stock is publicly traded and the notional amount of the swap represents 

less than 5 percent of the total public float of that class of stock and less than 20 percent 

of the 30-day average daily trading volume; 

• the foreign person does not sell the stock to the counterparty at the inception of the 

contract, or buy the stock from the counterparty at the termination of the contract; 

37
• the prices of the equity that are used to measure the parties’ entitlements or obligations 

are based on an objectively observable price; and 

• the swap has a term of at least 90 days. 

The Treasury Department would be given regulatory authority to provide additional exceptions 

to implement the purpose of the rule. 

The proposal would be effective for payments made after December 31, 2010. 

38
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 

U.S. tax principles, regardless of the label attached to the levy under foreign 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 section 904 foreign tax credit separate category for foreign 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 creditable taxes and non-creditable payments for a specific economic benefit but fails to 

achieve the appropriate split between the two in a case where a foreign country imposes a levy 

on, for example, oil and gas income only, but has no generally imposed income tax. 

Proposal

In the case of a dual-capacity taxpayer, the proposal would treat a foreign levy that would 

otherwise qualify as an income tax or in lieu of tax as a creditable tax only if the foreign country 

generally imposes an income tax. An income tax would be considered generally imposed for this 

purpose only if the income tax applies to trade or business income from sources in that country, 

and only if the income tax has substantial application to non-dual-capacity taxpayers and to 

persons who are nationals or residents of that country. The proposal would replace the part of 

the regulatory safe harbor that applies when a foreign country does not generally impose an 

income tax. The proposal generally would retain the rule of present law where the foreign 

39
country does generally impose an income 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 U.S. treaty obligations that allow a 

credit for taxes paid or accrued on certain oil or gas income. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

40
Combat Under-Reporting of Income Through Use of Accounts and Entities in Offshore 

Jurisdictions 

The Administration is concerned about the use of offshore accounts and entities by certain U.S. 

and foreign persons to evade U.S. tax. To reduce such evasion, the Administration is proposing 

a series of measures to strengthen the information reporting and withholding systems that 

support U.S. taxation of income earned or held through offshore accounts or entities. 

The qualified intermediary (QI) program is intended to bring foreign financial institutions more 

directly into the U.S. information reporting and withholding tax system, thereby helping to 

ensure that foreign persons are subject to the proper U.S. withholding tax. Strengthening the 

withholding and reporting rules under which QIs operate with respect to U.S. and foreign 

persons while creating incentives for more foreign financial institutions to become QIs will help 

to ensure that U.S. persons are properly paying tax in connection with foreign income and 

accounts and that proper withholding tax applies with respect to foreign persons. 

REQUIRE GREATER REPORTING BY QUALIFIED INTERMEDIARIES 

REGARDING U.S. ACCOUNT HOLDERS 

Current Law

A withholding agent generally must withhold tax at a rate of 30 percent from the gross amount of 

all U.S.-source fixed or determinable annual or periodical gains, profits, or income (FDAP 

income) of a nonresident alien individual or foreign entity. A payor is generally required to 

withhold tax at a rate of 28 percent on a reportable payment made to a U.S. non-exempt recipient 

if the payee fails to provide a taxpayer identification number or fails to certify, when required, 

that the payee is not subject to backup withholding, or the payor is notified by the IRS or a 

broker that the payee is subject to backup withholding. 

Treasury regulations address certification, documentation, withholding, and reporting of 

payments to U.S. and foreign persons through foreign financial institutions. Foreign financial 

institutions may contract with the IRS to operate according to a set of withholding and reporting 

rules under the so-called “qualified intermediary” (QI) program. QIs agree to collect identifying 

documentation from their customers, file withholding tax returns and information returns, and 

submit to periodic audits performed by external auditors supervised by IRS examiners. QIs may 

furnish a withholding certificate to a withholding agent in lieu of transmitting to the withholding 

agent documentation for persons for whom the QI receives the payment and, in the case of U.S. 

non-exempt recipients, assumes primary Form 1099 reporting and backup withholding 

responsibility. 

QIs need not assume primary Form 1099 reporting and backup withholding responsibility. If a 

QI nevertheless assumes primary Form 1099 reporting and backup withholding responsibility 

with respect to accounts held by U.S. persons, such reporting may be limited to certain income 

earned through those accounts. Further, a QI that assumes primary Form 1099 reporting and 

backup withholding responsibility with respect to U.S. persons is not required to assume that 

responsibility for all accounts. Moreover, in the case of financial institutions that are part of a 

41
controlled group, one member of the controlled group may contract to be a QI while other 

members of the controlled group do not, and thus accounts and clients may be divided between 

commonly-controlled QI and non-QI institutions. 

Reasons for Change

Strengthening the withholding and reporting rules under which QIs operate with respect to U.S. 

persons while creating incentives for the use of QIs would help to ensure that U.S. persons are 

properly paying tax on income earned through foreign accounts and that proper withholding tax 

applies with respect to foreign persons. In order to facilitate operation of this strengthened QI 

program, a list of QIs must be made publicly available. 

Proposal

Under the proposal, no foreign financial institution would qualify as a QI unless it identifies all 

of its account holders that are U.S. persons. A QI would be required to report all reportable 

payments (for this purpose, treating the QI as a U.S. payor) received on behalf of all U.S. 

account holders. Thus, a QI would file Form 1099s with respect to payments to those U.S. 

account holders as though the QI were a U.S. financial institution. The Treasury Department 

would be authorized to issue regulations to implement the purposes of this proposal, including 

authority to require that for any financial institution to be a QI, commonly-controlled foreign 

financial institutions must meet certain reporting obligations with respect to account holders or 

that a financial institution may be a QI only if all commonly-controlled financial institutions are 

also QIs, and including authority to provide that for any financial institution to be a QI it must 

collect information indicating the beneficial owners of foreign entity account holders and 

specifically report if a U.S. person is a beneficial owner. The proposal would also clarify that 

under section 6103 of the Code the IRS may publish the list of QIs. 

The proposal would be effective beginning after December 31 of the year of enactment.

42
REQUIRE WITHHOLDING ON PAYMENTS OF FDAP INCOME MADE THROUGH 

NONQUALIFIED INTERMEDIARIES 

Current Law

In general, payments of U.S.-source fixed or determinable annual or periodical gains, profits, or 

income (FDAP income) to nonresident alien individuals and foreign entities are subject to 

withholding tax at a rate of 30 percent. This 30-percent withholding tax may be reduced or 

eliminated pursuant to certain statutory provisions or pursuant to the terms of a tax treaty. 

 

To determine whether the recipient of a payment is exempt from withholding tax or eligible for a 

reduced rate, withholding agents generally must rely on beneficial ownership documentation 

provided by the payee certifying that the payee is entitled to an exemption from withholding tax 

or a reduced rate of withholding tax under a Code provision or relevant tax treaty. In general, 

withholding agents are entitled to rely on the self-certification they receive absent actual 

knowledge or reason to know that the information provided is incorrect or unreliable. In the case 

of payments made through an intermediary, the intermediary generally provides to the 

withholding agent the appropriate documentation on behalf of the payment’s beneficial owners. 

Reasons for Change

The Administration is concerned that some persons that are not entitled to an exemption from 

withholding tax or a reduced rate of withholding tax may attempt to avoid U.S. tax by arranging 

to receive payments through foreign intermediaries that are not qualified intermediaries 

(nonqualified intermediaries). The proposal would discourage U.S. and foreign persons from 

attempting to avoid U.S. tax or to obtain a lower rate of withholding tax by providing incorrect 

self-certification or otherwise relying on the lack of information reporting associated with using 

nonqualified intermediaries. The proposal would also encourage use of the strengthened 

qualified intermediary system, by requiring withholding of tax on payments made through 

nonqualified intermediaries. 

Proposal

Any withholding agent making a payment of FDAP income to a nonqualified intermediary 

would be required to treat the payment as made to an unknown foreign person (and therefore to 

withhold tax at a rate of 30 percent). The Treasury Department would receive regulatory 

authority to provide exceptions, including exceptions for payments collected by nonqualified 

intermediaries for foreign government, central bank, foreign pension fund, and foreign insurance 

company payees, and other similar investors, and for payments that the Treasury Department 

concludes present a low risk of tax evasion. The rules will be designed so as not to disrupt 

ordinary and customary market transactions. Foreign persons that are subject to overwithholding as a result of this proposal would be permitted to apply for a refund of any excess 

tax withheld. 

The proposal would be effective for payments made after December 31 of the year of enactment. 

43
REQUIRE WITHHOLDING ON GROSS PROCEEDS PAID TO CERTAIN 

NONQUALIFIED INTERMEDIARIES 

Current Law

Brokers are generally required to withhold tax at a rate of 28 percent on certain reportable 

payments made to a U.S. non-exempt recipient if the payee fails to provide a taxpayer 

identification number or fails to certify that the payee is not subject to backup withholding, or the 

payor is notified by the IRS or a broker that the payee is subject to backup withholding. 

Reportable payments include the gross proceeds from certain transactions effected by brokers for 

their customers. A broker is exempt from reporting a payment (and thus backup withholding) 

where the broker can, prior to payment, associate the payment with documentation upon which it 

can rely to either treat the customer as a foreign beneficial owner, or treat the payment as made 

or presumed to be made to a foreign payee. With respect to payments through foreign 

intermediaries that are not qualified intermediaries (nonqualified intermediaries), brokers may 

rely on the beneficial owner’s self-certification of non-U.S. status passed on by the nonqualified 

intermediary to determine whether certain third-party information reporting, and therefore 

backup withholding, may be required. 

A withholding agent generally must withhold tax at a rate of 30 percent from the gross amount of 

all U.S.-source fixed or determinable annual or periodical gains, profits, or income (FDAP 

income) of a nonresident alien individual or foreign entity. FDAP income includes interest and 

dividends, but generally does not include gross proceeds or gains from sales. A foreign payee 

may claim a refund of any overpayment of tax which is withheld at source. 

Reasons for Change

U.S. persons seeking to evade U.S. tax may arrange to receive payments, with respect to which 

gross proceeds would otherwise be reported, through nonqualified intermediaries and certify that 

they qualify as foreign persons. A broker making a payment through a nonqualified 

intermediary is unlikely to be in a position to verify whether self-certification regarding foreign 

status is accurate. The proposal would discourage U.S. persons from attempting to evade U.S. 

tax by providing incorrect self-certification or otherwise relying on the lack of information 

reporting associated with using nonqualified intermediaries. The proposal would also encourage 

use of the strengthened qualified intermediary system by requiring withholding on gross 

proceeds on the sale of securities held through nonqualified intermediaries. 

Proposal

Under the proposal, a withholding agent would be required to withhold tax at a rate of 20 percent 

on gross proceeds from the sale of any security of a type that would be reported to a U.S. nonexempt payee, when paid by the withholding agent to a nonqualified intermediary that is located 

in a jurisdiction with which the United States does not have a comprehensive income tax treaty 

that includes a satisfactory exchange of information program. The Treasury Department would 

receive regulatory authority to provide exceptions, including exceptions for payments collected 

by nonqualified intermediaries for foreign government, central bank, foreign pension fund, and 

44
foreign insurance company payees, and other similar investors; payments to nonqualified 

intermediaries located in jurisdictions with which the United States has a tax information 

exchange agreement; and payments that the Treasury Department concludes present a low risk of 

tax evasion. The rules will be designed so as not to disrupt ordinary and customary market 

transactions. Nonqualified intermediaries would be eligible to claim a refund on behalf of their 

direct account holders for any taxable year in which they identified all of their direct account 

holders that are U.S. persons and reported all reportable payments received on behalf of U.S. 

account holders. Foreign persons that are subject to withholding tax in excess of their income 

tax liability as a result of this proposal, and on whose behalf a refund claim is not made by a 

nonqualified intermediary, would be permitted to apply for a refund of any tax withheld. 

The proposal would be effective for payments made after December 31 of the year of enactment. 

45
REQUIRE REPORTING OF CERTAIN TRANSFERS OF MONEY OR PROPERTY TO 

FOREIGN FINANCIAL ACCOUNTS 

Current Law

United States persons must disclose whether, at any time during the preceding year, they had an 

interest in, or signature or other authority over, financial accounts in a foreign country, if the 

aggregate value of these accounts exceeds $10,000. United States persons must also report 

certain information with respect to certain foreign business entities that they control. Under 

Treasury regulations, a U.S. person controls a foreign corporation for this purpose if the person 

owns, actually or constructively, more than 50 percent of the corporation’s stock, by vote or by 

value. Current law does not contain a provision that generally requires reporting of transfers of 

money or property to, or receipt of money or property from, a foreign bank, brokerage, or other 

financial account by U.S. individuals. 

Reason for Change

The Administration is concerned about the use of foreign accounts by U.S. citizens and residents 

to evade U.S. tax. To reduce such evasion, the Administration proposes to increase information 

reporting requirements with respect to transfers to and from certain foreign accounts. 

Proposal

A U.S. individual would be required to report, on the individual’s income tax return, any transfer 

of money or property made to, or receipt of money or property from, any foreign bank, 

brokerage, or other financial account by the individual, or by any entity of which the individual 

owns, actually or constructively, more than 50 percent of the ownership interest. Transfers to 

accounts held at qualified intermediaries and receipts from accounts held by U.S. persons at 

qualified intermediaries would not be required to be reported. In addition, individuals would be 

exempt from the reporting requirement if the cumulative amount or value of transfers and the 

cumulative amount or value of receipts that would otherwise be reportable on the individual’s 

income tax return for a given year were each less than $10,000. Failure to report a covered 

transfer would result in the imposition of a penalty equal to the lesser of $10,000 per reportable 

transfer or 10 percent of the cumulative amount or value of the unreported covered transfers. No 

penalty would be imposed for a failure to report due to reasonable cause. The Treasury 

Department would receive regulatory authority to issue rules to prevent abuse of the reporting 

exemptions and to provide exceptions to the reporting requirement, such as an exception for 

arm’s-length payments in the ordinary course of business for services or tangible property. 

The proposal would be effective for transfers made after December 31 of the year of enactment. 

46
REQUIRE DISCLOSURE OF FBAR ACCOUNTS TO BE FILED WITH TAX RETURN 

Current Law

Individual taxpayers currently must indicate on their income tax returns whether they had an 

interest in or signature or other authority over a financial account in a foreign country during the 

year to which the tax return relates. If a taxpayer has a foreign account, the tax return refers the 

taxpayer to the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (FBAR). 

The FBAR requires a citizen, resident, or person in and doing business in the United States to 

disclose whether, at any time during the preceding year, that person had an interest in, or 

signature authority over, financial accounts, if the aggregate value of these accounts exceeds 

$10,000. The FBAR further requires the person to disclose certain information regarding the 

foreign account, including the account number, financial institution, and maximum value during 

the year. The FBAR is not required to be filed until June 30 of the year following the calendar 

year to which it relates. The FBAR is filed with the Treasury Department generally and not 

directly with the IRS. 

Reasons for Change

Disclosure of more detailed information regarding foreign accounts on the income tax return 

itself would assist the IRS in identifying and investigating instances where taxpayers have used 

foreign accounts to evade U.S. taxes. Further, associating the FBAR disclosure requirements 

with a taxpayer’s obligation to file an income tax return would improve awareness and 

compliance with the FBAR disclosure obligations and improve the IRS’s ability to review FBAR 

compliance. 

Proposal

Individual taxpayers required to file an FBAR would be required to disclose certain information 

on their income tax returns. The information would be disclosed on a schedule that would be 

considered part of the individual’s income tax return. The schedule would be consistent with the 

information disclosure obligations of the FBAR itself, and would require the taxpayer to provide 

information such as the account number, financial institution, and maximum value during the 

year. The disclosures would be required when the income tax return is due, even if Title 31 does 

not require the FBAR to be filed until a later date. 

The tax return disclosure would not replace or mitigate the individual’s obligation to separately 

file an FBAR with the Treasury Department as required under Title 31. The penalties imposed 

under Title 31 for failing to file an FBAR would continue to apply to a failure to file an FBAR as 

required under Title 31. Failure to disclose the foreign accounts with the income tax return 

would not be subject to the Title 31 penalties, although it could give rise to penalties and other 

consequences imposed under the Code, including extension of the statute of limitations. 

The proposal would be effective for taxable years beginning after December 31 of the year of 

enactment.

47
REQUIRE THIRD-PARTY INFORMATION REPORTING REGARDING THE 

TRANSFER OF ASSETS TO FOREIGN FINANCIAL ACCOUNTS AND THE 

ESTABLISHMENT OF FOREIGN FINANCIAL ACCOUNTS 

Current Law

United States persons must disclose whether, at any time during the preceding year, they had an 

interest in, or signature or other authority over, financial accounts in a foreign country, if the 

aggregate value of these accounts exceeds $10,000. Current law does not generally require thirdparty information reporting to the IRS with regard to the transfer of money or property to, or 

receipt of money or property from, a foreign bank, brokerage, or other financial account on 

behalf of a U.S. person, or with regard to the establishment of a foreign bank, brokerage, or other 

financial account on behalf of a U.S. person. 

Reasons for Change

The Administration is concerned that U.S. persons are failing to comply with the requirement to 

report certain foreign financial accounts. Establishing a third-party reporting requirement with 

respect to transfers to foreign financial accounts, receipts from such accounts, and the 

establishment of such accounts would lead to greater disclosure of foreign financial accounts, 

and consequently would discourage the evasion of U.S. taxation. These third-party reporting 

requirements complement taxpayer reporting requirements. 

Proposal

Any U.S. financial intermediary and any qualified intermediary that transfers money or property 

with a value of more than $10,000 to a foreign bank, brokerage, or other financial account on 

behalf of a U.S. person (or on behalf of any entity of which a U.S. person owns, actually or 

constructively, more than 50 percent of the ownership interest) would be required to file an 

information return regarding such transfer. Any U.S. financial intermediary and any qualified 

intermediary that receives a transfer of money or property with a value of more than $10,000 

from a foreign bank, brokerage, or other financial account on behalf of a U.S. person (or on 

behalf of any entity of which a U.S. person owns, actually or constructively, more than 50 

percent of the ownership interest) would be required to file an information return regarding such 

transfer. Any U.S. financial intermediary and any qualified intermediary that opens a foreign 

bank, brokerage, or other financial account on behalf of a U.S. person (or on behalf of any entity 

of which a U.S. person owns, actually or constructively, more than 50 percent of the ownership 

interest) would be required to file an information return with the IRS regarding such account, 

including reporting any amounts of money or property transferred by the financial intermediary 

to such account. Exceptions to the reporting requirement would be provided for 1) accounts 

opened and amounts transferred to, from, or on behalf of, publicly traded companies and their 

subsidiaries, 2) accounts opened at and transfers made to qualified intermediaries on behalf of a 

U.S. person (or on behalf of any entity of which a U.S. person owns, actually or constructively, 

more than 50 percent of the ownership interest) or 3) transfers received by or on behalf of a U.S. 

person (or on behalf of any entity of which a U.S. person owns, actually or constructively, more 

than 50 percent of the ownership interest) from accounts held by a U.S. person at a qualified 

48
intermediary. The Treasury Department would receive regulatory authority to provide additional 

exceptions to the reporting requirement, to require that certain additional information be 

reported, and to permit U.S. financial intermediaries and qualified intermediaries to report 

additional transfers of money or property to a foreign bank, brokerage, or other financial account 

on behalf of a U.S. person (or on behalf of an entity of which the U.S. person owns, actually or 

constructively, more than 50 percent of the ownership interest). 

The proposal would be effective for amounts transferred and accounts opened beginning after 

December 31 of the year of enactment. 

49
REQUIRE THIRD-PARTY INFORMATION REPORTING REGARDING THE 

ESTABLISHMENT OF OFFSHORE ENTITIES 

Current Law

United States persons must report certain information with respect to certain foreign business 

entities that they control. Current law does not generally require third-party information 

reporting in connection with the acquisition or formation of a foreign business entity on behalf of 

a U.S. individual. Current law does not require withholding agents to ascertain the ownership of 

foreign payees that may be entities with respect to which U.S. persons have a U.S. reporting or 

income tax obligation. 

Reasons for Change

Because no information is reported to the IRS by third parties with respect to the formation of 

foreign business entities, the IRS cannot readily ascertain whether U.S. individuals are 

complying with their reporting obligations in regard of foreign business entities that they control. 

Requiring third-party reporting, and providing for additional information collection by 

withholding agents, would supplement the reporting requirements of current law and help the 

IRS to enforce U.S. tax law and reduce tax evasion through the use of foreign entities. 

Proposal

Any U.S. person, or any qualified intermediary, that forms or acquires a foreign entity on behalf 

of a U.S. individual (or on behalf of any entity of which the individual owns, actually or 

constructively, more than 50 percent of the ownership interest) would be required to file an 

information return with the IRS regarding the foreign entity that is formed or acquired. The 

Treasury Department would receive regulatory authority to determine the information to be 

reported and to provide exceptions to the reporting requirement. In addition, the Treasury 

Department would receive regulatory authority to require, as necessary, withholding agents to 

collect additional information to determine whether a U.S. person is the beneficial owner of a 

foreign entity and specifically report if a U.S. person is a beneficial owner. 

The proposal would be effective for entities formed or acquired after December 31 of the year of 

enactment. 

50
NEGATIVE PRESUMPTION FOR FOREIGN ACCOUNTS WITH RESPECT TO 

WHICH AN FBAR HAS NOT BEEN FILED 

Current Law

A citizen or resident of the United States, or a person in and doing business in the United States, 

who has a financial interest in, or signature or other authority over, financial accounts in a 

foreign country must file a Report of Foreign Bank and Financial Accounts (FBAR) if the 

aggregate value of these accounts exceeds $10,000 at any time during the preceding year. The 

civil penalty for failing to disclose a foreign financial account on an FBAR will not exceed 

$10,000 absent a willful violation. The penalty may not be imposed if the violation was due to 

reasonable cause and the balance in the account was properly reported. For willful violations, 

the maximum civil penalty is the greater of $100,000 or 50 percent of the balance in the account 

at the time of the violation. The criminal penalties for willfully failing to report a foreign bank 

account include a maximum fine of $250,000, a maximum term of imprisonment of five years, or 

both, with higher penalties if the defendant violates any other U.S. law, or if the violation was 

part of a pattern of any illegal activity involving more than $100,000 in a 12-month period. Civil 

and criminal penalties may be imposed together. 

Reasons for Change

The Administration is concerned that U.S. persons are failing to comply with FBAR filing 

obligations. Under current law, the civil penalty provisions associated with the requirement to 

file an FBAR may be difficult to apply in cases where the IRS is aware of the existence of 

unreported foreign financial accounts but cannot ascertain without documentation from the 

foreign financial institution whether those accounts contain more than $10,000. Imposing a 

rebuttable evidentiary presumption would encourage voluntary disclosure of account information 

and assist the IRS in its enforcement efforts with respect to undisclosed foreign financial 

accounts. 

Proposal

A rebuttable evidentiary presumption would be applicable in a civil administrative or judicial 

proceeding providing that any foreign bank, brokerage, or other financial account in which a 

citizen or resident of the United States, or a person in and doing business in the United States, 

has a financial interest in or signature or other authority over the account contains enough funds 

to require that an FBAR be filed. An exception would apply for accounts held through a 

qualified intermediary. The Treasury Department would receive regulatory authority to provide 

additional exceptions. The rebuttable evidentiary presumption would not apply in criminal 

proceedings. 

The proposal would be effective for FBARs due to be filed beginning after the date of 

enactment. 

51
NEGATIVE PRESUMPTION REGARDING FAILURE TO FILE AN FBAR FOR 

ACCOUNTS WITH NONQUALIFIED INTERMEDIARIES 

Current Law

A citizen or resident of the United States, or a person in and doing business in the United States, 

who has a financial interest in, or signature or other authority over, financial accounts in a 

foreign country must file a Report of Foreign Bank and Financial Accounts (FBAR) if the 

aggregate value of these accounts exceeds $10,000 at any time during the preceding year. The 

civil penalty for failing to disclose a foreign financial account on an FBAR will not exceed 

$10,000 absent a willful violation. The penalty may not be imposed if the violation was due to 

reasonable cause and the balance in the account was properly reported. For willful violations, 

the maximum civil penalty is the greater of $100,000 or 50 percent of the balance in the account 

at the time of the violation. The criminal penalties for willfully failing to report a foreign bank 

account include a maximum fine of $250,000, a maximum term of imprisonment of five years, or 

both, with higher penalties if the defendant violates any other U.S. law, or if the violation was 

part of a pattern of any illegal activity involving more than $100,000 in a 12-month period. Civil 

and criminal penalties may be imposed together. 

Reasons for Change

The Administration is concerned that U.S. persons are failing to comply with FBAR filing 

obligations. Although qualified intermediaries must perform certain information reporting with 

respect to U.S. accountholders, foreign intermediaries that are not qualified intermediaries 

(nonqualified intermediaries) do not perform such information reporting. As a result, the ability 

of the IRS to discover unreported accounts and enforce compliance with respect to those 

accounts is limited. Imposing a rebuttable evidentiary presumption with respect to accounts held 

with nonqualified intermediaries would encourage voluntary disclosure of account information 

and assist the IRS in its enforcement efforts with respect to undisclosed foreign financial 

accounts. 

Proposal

A rebuttable evidentiary presumption would be applicable in a civil administrative or judicial 

proceeding providing that failure to file an FBAR with respect to any foreign bank, brokerage, or 

other financial account held with a nonqualified intermediary is willful if the account has a 

balance of greater than $200,000 at any point during the calendar year. The evidentiary 

presumption would not apply to accounts in which the person has signature or other authority by 

virtue of being an officer or employee of a corporation, but otherwise has no more than a de 

minimis financial interest in that corporation. The Treasury Department would receive 

regulatory authority to provide additional exceptions to the evidentiary presumption. The 

evidentiary presumption would not apply in criminal proceedings. 

The proposal would be effective for FBARs due to be filed beginning after the date of 

enactment.

52
NEGATIVE PRESUMPTION REGARDING WITHHOLDING ON FDAP PAYMENTS 

TO CERTAIN FOREIGN ENTITIES 

Current Law

In general, payments of U.S.-source fixed or determinable annual or periodical gains, profits, or 

income (FDAP income) to nonresident alien individuals and foreign entities are subject to 

withholding tax at a rate of 30 percent. This 30 percent withholding tax may be reduced or 

eliminated pursuant to certain statutory provisions or pursuant to the terms of a tax treaty. 

 

To determine whether the recipient of a payment is exempt from withholding tax or eligible for a 

reduced rate, withholding agents generally must rely on beneficial ownership documentation 

provided by the payee certifying that the payee is entitled to an exemption from withholding tax 

or a reduced rate of withholding tax under a Code provision or relevant tax treaty. In general, 

withholding agents are entitled to rely on the self-certification they receive absent actual 

knowledge or reason to know that the information provided is incorrect or unreliable. In the case 

of payments made through an intermediary, the intermediary generally provides to the 

withholding agent the appropriate documentation on behalf of the payment’s beneficial owners. 

Reasons for Change

Persons that are not entitled to an exemption from withholding tax or a reduced rate of 

withholding tax may arrange to receive payments through entities that appear to qualify for an 

exemption or a reduced rate. A withholding agent making a payment to such an entity is 

unlikely to be in a position to determine whether the entity’s self-certification regarding its 

qualification is accurate. 

Proposal

Any withholding agent making a payment of FDAP income to a foreign entity would be required 

to treat the payment as made to an unknown person (and therefore subject to 30 percent grossbasis withholding tax), unless the foreign entity provides documentation of the entity’s beneficial 

owners. Exceptions would be provided for payments to publicly traded companies and their 

subsidiaries, foreign governments, and pension funds. In addition, the Treasury Department 

would receive regulatory authority to provide additional exceptions for payments to entities 

engaged in the active conduct of a trade or business in their country of residence, charities, 

widely-held investment vehicles, entities that enter into an agreement with the IRS to collect 

documentation for all owners and report all U.S. non-exempt owners to the IRS, and for any 

other payment that the Treasury Department concludes presents a low risk of tax evasion. 

The proposal would be effective for payments made after December 31 of the year of 

enactment. 

53
EXTEND STATUTE OF LIMITATIONS FOR CERTAIN REPORTABLE CROSSBORDER TRANSACTIONS AND FOREIGN ENTITIES 

Current Law

In general, additional Federal tax liabilities in the form of tax, interest, penalties, and additions to 

tax must be assessed by the 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. Section 6501(c)(8) of the Code provides an 

exception to this general statute of limitations with respect to any tax relating to any event or 

period for which certain information returns are required with respect to certain foreign transfers, 

foreign entities, and foreign-owned entities. In these cases, the statute of limitations does not 

expire until three years after the taxpayer furnishes the information required to be reported. 

Section 6038A of the Code requires certain foreign-owned domestic corporations to file 

information returns containing specified information with respect to related-party transactions, 

and to maintain such records as may be appropriate to determine the correct treatment of such 

transactions. Failure to file the required information returns triggers the section 6501(c)(8) 

extension of the statute of limitations. 

Reasons for Change

Compliance with reporting and recordkeeping obligations is essential in order to enable the IRS 

to enforce the tax laws. The three-year period provided by section 6501(c)(8) does not always 

allow sufficient time for the IRS to determine a taxpayer’s tax liability. Furthermore, the 

information returns to which section 6501(c)(8) applies do not include some of the information 

returns the IRS requires in order to enforce the tax law with respect to foreign entities and 

accounts, including certain newly proposed information returns. The generally applicable threeyear statute of limitations also does not always allow sufficient time for the IRS to determine a 

taxpayer’s tax liability if a violation of record maintenance obligations under section 6038A has 

occurred. 

Proposal

The proposal would extend the period during which the statute of limitations provided by section 

6501(c)(8) does not expire to six years after the taxpayer furnishes the information required to be 

reported. The information returns with respect to which section 6501(c)(8) applies would be 

broadened to include the information returns filed by qualifying electing funds pursuant to 

regulations under section 1295(b) of the Code, the proposed tax return disclosure of FBAR 

information, and the information returns proposed to be required of U.S. individuals with respect 

to certain transfers of money or property to and receipts from certain foreign bank, brokerage, or 

other financial accounts. The extended statute of limitations provided by section 6501(c)(8) 

would also apply in the case of failure to furnish information or maintain records as required by 

section 6038A(a). The section 6501(c)(8) exception to the general statute of limitations would 

be made applicable to the entire income tax return. The Treasury Department would receive 

regulatory authority to provide exceptions to these rules. 

54
The proposal would be effective for returns due to be filed after the date of enactment.

55
DOUBLE ACCURACY-RELATED PENALTIES ON UNDERSTATEMENTS 

INVOLVING UNDISCLOSED FOREIGN ACCOUNTS 

Current Law

Current law imposes a 20-percent accuracy-related penalty on (i) a substantial understatement of 

income tax, (ii) an understatement resulting from negligence or disregard of rules or regulations, 

and (iii) an understatement related to a reportable transaction. The 20-percent accuracy-related 

penalty increases to 30 percent in the case of an understatement from a reportable transaction 

that was not properly disclosed. The accuracy-related penalty is not imposed when the taxpayer 

demonstrates “reasonable cause” for the position and acted in good faith. In the case of a 

reportable transaction, the reasonable cause exception to the imposition of penalties only applies 

if the taxpayer disclosed the reportable transaction as required by law and certain other 

requirements are met. 

Individual taxpayers must indicate on their income tax returns whether they had an interest in or 

signature or other authority over a financial account in a foreign country during the year to which 

the tax return relates. If the taxpayer had a foreign financial account, the income tax return 

instructs the taxpayer to refer to the Report of Foreign Bank and Financial Accounts (FBAR), 

which requires the taxpayer to disclose information regarding certain foreign accounts. 

Reason for Change

United States persons may seek to evade U.S. tax liability by transferring assets to foreign 

accounts. Increasing the penalties on understatements from transactions that involve undisclosed 

foreign accounts would encourage proper disclosure of such accounts and deter the use of 

foreign accounts to evade U.S. tax liability. 

Proposal

The 20-percent accuracy-related penalty imposed on (i) substantial understatements of income 

tax, (ii) understatements resulting from negligence or disregard of rules or regulations, or (iii) a 

reportable transaction understatement, would be doubled to 40 percent when the understatement 

arises from a transaction involving a foreign account that the taxpayer failed to disclose properly 

under the proposed requirement that taxpayers disclose FBAR-related information on their 

income tax returns. In addition, in the case of a reportable transaction understatement, the 

reasonable cause exception would not be available with respect to this increased penalty. 

The proposal would be effective for taxable years beginning after December 31 of the year of 

enactment.

56
IMPROVE THE FOREIGN TRUST REPORTING PENALTY 

Current Law

Certain information must be reported to the IRS with respect to certain foreign trusts. A civil 

penalty applies to persons who fail to file a timely return as required or who file an incomplete or 

incorrect return. Generally, the penalty is equal to 35 percent of the “gross reportable amount,” 

which is defined as the gross value of property involved in a reportable event such as a gratuitous 

transfer to the trust, the gross value of the portion of the trust’s assets at the close of the year that 

is treated as owned by a United States person, or the gross amount of distributions received from 

the trust. In the case of a failure to report that continues for more than 90 days after the IRS 

mails notice of such failure, the penalty (in addition to the 35 percent penalty) is $10,000 for 

each 30-day period (or fraction thereof) during which the failure continues. The total penalty 

with respect to any failure may not exceed the gross reportable amount. 

Reasons for Change

In many instances, the IRS obtains information relating to the creation of a foreign trust from 

third parties, or the IRS discovers funding of a foreign trust from public records. Without the 

cooperation of persons actually involved with the trust, however, it is often difficult for the IRS 

to determine the gross reportable amount. If the IRS cannot determine the gross reportable 

amount, the IRS may not be able to assess the penalties, including the $10,000 penalty for 

continued failure to report. The current penalty regime therefore may create an incentive for 

persons subject to the reporting requirement not to report or cooperate with the IRS in the hope 

that the IRS will not be able to determine the gross reportable amount, which is essential to 

presenting a prima facie case sufficient to meet the Code section 7491(c) burden of production to 

support the penalty. 

Proposal

The penalty provision would be amended to impose an initial penalty of the greater of $10,000 or 

35 percent of the gross reportable amount (if the gross reportable amount is known). The 

additional $10,000 penalty for continued failure to report would remain unchanged. Thus, even 

if the gross reportable amount is not known, the IRS may impose a $10,000 penalty on a person 

who fails to report timely or correctly as required, and may impose a $10,000 penalty for each 

30-day period (or fraction thereof) that the failure to report continues. If the person subsequently 

provides enough information for the IRS to determine the gross reportable amount, the total 

penalties would be capped at that amount and any excess penalty already paid would be 

refunded. Accordingly, a person can stop the compounding of penalties by cooperating with the 

IRS so that it can determine the gross reportable amount. 

The proposal would be effective for information reports required to be filed after December 31 

of the year of enactment. 

57
REQUIRE INFORMATION REPORTING FOR RENTAL PROPERTY EXPENSE 

PAYMENTS 

Current Law

Generally, a taxpayer making payments in the course of a trade or business to a noncorporate 

recipient aggregating to $600 or more for services or determinable gains in a calendar year is 

required to send an information return to the IRS setting forth the amount, as well as name and 

address of the recipient of the payment (generally on Form 1099). If the taxpayer making 

payments is not engaged in a trade or business, such information reporting is not required. 

At present, there is limited third-party information reporting related to rental real estate expenses 

because only taxpayers whose rental real estate activity is considered a trade or business are 

required to report payments. Additionally, whether a taxpayer’s rental real estate activity should 

be considered a trade or business requires a case-by-case analysis that depends on the facts and 

circumstances of each taxpayer. 

Reasons for Change

Information reporting requirements generally improve taxpayer compliance. Requiring 

information reporting by taxpayers receiving rental income and deducting expenses on rental 

activities would improve the reporting compliance by taxpayers providing services to those 

rental activities. In addition, increased third-party reporting of major rental expenses is likely to 

improve reporting compliance on rental real estate income. 

Proposal

The proposal would, in general, subject recipients of rental income from real estate would, in 

general, be subject to the same information reporting requirements as are taxpayers engaging in a 

trade or business. In particular, rental income recipients making payments of $600 or more to a 

service provider (such as a plumber, painter, or accountant) in the course of earning rental 

income would be required to send an information return, generally a Form 1099-MISC, to the 

IRS and to the service provider. Exceptions to the reporting requirement would be made for 

particularly burdensome situations, such as for taxpayers (including members of the military) 

who rent their principal residence on a temporary basis, or for those who receive only small 

amounts of rental income. 

The proposal would be effective for tax years beginning after December 31, 2009. 

58
Eliminate Oil and Gas Company Preferences 

LEVY TAX ON CERTAIN OFFSHORE OIL AND GAS PRODUCTION 

Current Law 

No Federal tax is imposed on the production of oil and gas on the Outer Continental Shelf 

(OCS). 

Reasons for Change 

According to the Government Accountability Office, the return to the taxpayer from OCS 

production is among the lowest in the world, despite other factors that make the United States a 

comparatively good place to invest in oil and gas development. An excise tax on OCS 

production would advance important policy objectives, such as providing a more level playing 

field among producers, raising the return to the taxpayer, and encouraging sustainable domestic 

oil and gas production. 

Proposal 

The Administration is developing a proposal to impose an excise tax on certain oil and gas 

produced offshore in the future. The Administration will work with Congress to develop the 

details of this proposal. 

59
REPEAL CREDIT FOR ENHANCED OIL RECOVERY (EOR) PROJECTS 

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 2008, because the reference price ($66.52) exceeded the inflation 

adjusted threshold ($41.06) by more than $6. 

 

Reasons for Change

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. To the extent the credit encourages overproduction of oil, it is detrimental to 

long-term energy security and is also inconsistent with the Administration’s policy of reducing 

carbon emissions and encouraging the use of renewable energy sources through a cap-and-trade 

program. Moreover, the credit must ultimately be financed with taxes that result in 

underinvestment in other, potentially more productive, areas of the economy. 

Proposal

The investment tax credit for enhanced oil recovery projects would be repealed for taxable years 

beginning after December 31, 2010. 

60
REPEAL CREDIT FOR PRODUCTION 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 $0.50 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 $0.33 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. Unlike other 

components of the general business credit, the marginal well credit can be carried back up to five 

years. 

 

Reasons for Change

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. To the extent the credit encourages overproduction of oil, it is detrimental to 

long-term energy security and is also inconsistent with the Administration’s policy of reducing 

carbon emissions and encouraging the use of renewable energy sources through a cap-and-trade 

program. Moreover, the credit must ultimately be financed with taxes that result in 

underinvestment in other, potentially more productive, areas of the economy. 

Proposal

The production tax credit for oil and gas from marginal wells would be repealed for production 

in taxable years beginning after December 31, 2010. 

61
REPEAL EXPENSING OF INTANGIBLE DRILLING 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 to intangible drilling and development costs (IDCs). IDCs include all 

expenditures made by an operator for wages, fuel, repairs, hauling, supplies, etc., 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 

62
provision. This allows the taxpayer to reduce or eliminate IDC adjustments or preferences under 

the AMT. 

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 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. To the extent expensing encourages overproduction of oil and gas, it is 

detrimental to long-term energy security and is also inconsistent with the Administration’s policy 

of reducing carbon emissions and encouraging the use of renewable energy sources through a 

cap-and-trade program. 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 them on a cost recovery system similar to that 

employed by other industries and reduce economic distortions. 

Proposal

Expensing of intangible drilling costs and 60-month amortization of capitalized intangible 

drilling costs would not be allowed. 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, 2010. 

63
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 injectant 

(other than recoverable hydrocarbon injectants) that is used as a part of a tertiary recovery 

method. The deduction is treated as an amortization deduction in determining the amount 

subject to recapture upon disposition of the property. 

Reasons for Change

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. To the extent expensing encourages overproduction of 

oil and gas, it is detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of reducing carbon emissions and encouraging the use of renewable 

energy sources through a cap-and-trade program. 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 them on a 

cost recovery system similar to that employed by other industries and reduce economic 

distortions. 

Proposal

The deduction for qualified tertiary injectant expenses would not be allowed for amounts paid or 

incurred after December 31, 2010. 

64
REPEAL PASSIVE LOSS EXCEPTION FOR WORKING INTERESTS IN OIL AND 

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 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. To the extent 

this special treatment encourages overproduction of oil and gas, it is detrimental to long-term 

energy security and is also inconsistent with the Administration’s policy of reducing carbon 

emissions and encouraging the use of renewable energy sources through a cap-and-trade 

program. 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 exception from the passive loss rules for working interests in oil and gas properties would be 

repealed for taxable years beginning after December 31, 2010. 

65
REPEAL PERCENTAGE DEPLETION 

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 (as contrasted 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 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 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 by 

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 in 2009. 

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

Percentage depletion 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 

66
occur under a neutral system. To the extent the lower tax rate encourages overproduction of oil 

and gas, it is detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of reducing carbon emissions and encouraging the use of renewable 

energy sources through a cap-and-trade program. 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

Percentage depletion would not be allowed 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, 2010. 

67
REPEAL DOMESTIC MANUFACTURING DEDUCTION FOR OIL AND GAS 

PRODUCTION 

Current Law

A deduction is allowed with respect to income attributable to domestic production activities (the 

manufacturing deduction). For taxable years beginning in 2009, the manufacturing deduction is 

equal to 6 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. For taxable years beginning after 2009, the deduction is computed at a 9 

percent rate, except that the deduction for income 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 U.S.; any qualified film 

produced by the taxpayer; or electricity, natural gas, or potable water produced by the taxpayer 

in the U.S.) 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 produced in the United States. 

Reasons for Change

The manufacturing deduction 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. To the extent the lower tax rate encourages 

overproduction of oil and gas, it is detrimental to long-term energy security and is also 

inconsistent with the Administration’s policy of reducing carbon emissions and encouraging the 

use of renewable energy sources through a cap-and-trade program. 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 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, 2010. 

68
INCREASE THE AMORTIZATION PERIOD FOR GEOLOGICAL AND 

GEOPHYSICAL COSTS 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 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. To the extent accelerated amortization encourages overproduction of oil 

and gas, it is actually detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of reducing carbon emissions and encouraging the use of renewable 

energy sources through a cap-and-trade program. 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, 2010. 

69
ELIMINATE THE ADVANCED EARNED INCOME TAX CREDIT 

Current Law

Under current law, low- and moderate-income individuals may be eligible for the refundable 

EITC. The amount of EITC an eligible individual may claim is a function of income and 

earnings, the number of children in the household, and filing status. In 2009, families with one 

child are eligible for a maximum EITC of $3,043. Eligible individuals with more children 

receive a larger credit. 

Since 1978, most eligible individuals have had the option of requesting advance payments of the 

EITC from their employers throughout the year. Self-employed and childless individuals are not 

eligible. Under current law, the advance payment is limited to 60 percent of the maximum credit 

to which a worker with one child would be entitled. In 2009, the maximum advance payment is 

$1,826. 

Employers offset the costs of the advance payments by reducing their payments of withheld 

income and employment taxes. During the year, employers periodically notify the IRS of the 

aggregate amount of advance payments withheld from tax payments. After the tax year is over, 

the employer notifies the IRS of employees’ receipts of advance payments. The information is 

also provided to the employees. Upon filing their tax returns, individuals must reconcile any 

advance payments received during the year with the amount of EITC for which they actually 

were eligible. If they received too little, they can obtain the remaining amount; conversely, if 

they received too much, they must repay the overpayment with their tax return. Individuals who 

have received an advance payment are required to file a tax return, even if their income is below 

the filing threshold. In view of the risk of overpayments, the advance payment is limited to 60 

percent of the one-child maximum credit. 

Reason for Change

The advance payment option provides a mechanism for individuals to receive payments on a 

timely basis, instead of as a single payment during the filing season. Advance payments could 

help cash-constrained households meet their daily needs. However, advance payments have 

been extremely unpopular among eligible taxpayers – at most, 3 percent of eligible individuals 

participate, and IRS’ efforts to increase participation have not had a meaningful impact. 

Furthermore, recent research shows evidence of significant non-compliance by employers and 

workers. As a consequence, repealing the advance payment option would affect adversely few 

individuals who are eligible for this benefit. 

Proposal

The proposal would repeal the advance payment option of the EITC. Workers would no longer 

be able to receive an advance against their expected EITC through their employer. (Individuals 

with positive tax liability would still be able to receive any non-refundable portion of the EITC 

during the year through adjustments in their withholding.) 

70
The proposal would be effective for taxable years beginning after December 31, 2009. 

71
 UPPER-INCOME TAX PROVISIONS DEDICATED TO DEFICIT REDUCTION 

REINSTATE THE 39.6-PERCENT RATE 

Current Law

Prior to the enactment of EGTRRA, the highest individual income tax rate was 39.6-percent. 

EGTRRA reduced the 39.6-percent tax rate temporarily to 35 percent, with the reduction phased 

in over several years. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) 

accelerated the reduction, and since 2003, the highest statutory individual income tax rate has 

been 35 percent. For 2009, it applies to taxable income over $372,950 ($186,475 if married 

filing separately). The 35-percent tax rate sunsets after 2010. 

Reason for Change

Increasing the income tax liability of wealthy taxpayers would make the income tax system more 

progressive and would distribute the cost of government more fairly among taxpayers of various 

income levels. 

Proposal

The Administration’s tax receipts baseline would permanently extend the EGTRRA tax rates. 

This proposal would permit the EGTRRA reduction in the highest income tax rate to sunset after 

2010. Thus, beginning in 2011, the highest income tax rate would be 39.6 percent. The taxable 

income levels at which this rate begins to apply would vary by filing status and would be 

indexed annually for inflation. 

73
REINSTATE THE 36-PERCENT RATE FOR TAXPAYERS WITH INCOME OVER 

$250,000 (MARRIED FILING A JOINT RETURN) AND $200,000 (SINGLE) 

Current Law

Prior to the enactment of EGTRRA, the second highest individual income tax rate was 36 

percent. EGTRRA reduced the 36-percent tax rate temporarily to 33 percent, with the reduction 

phased in over several years. JGTRRA accelerated the reduction, and since 2003, the second 

highest statutory individual income tax rate has been 33 percent. In 2009, it applies to taxable 

income over $208,850 if married filing jointly ($171,550 if single). The 33-percent tax rate 

sunsets after 2010. 

Reason for Change

Increasing the income tax liability of wealthy taxpayers would make the income tax system more 

progressive and would distribute the cost of government more fairly among taxpayers of various 

income levels. 

Proposal

The Administration’s tax receipts baseline would permanently extend the EGTRRA tax rates. 

This proposal would permit the EGTRRA reduction in the second highest income tax rate to 

sunset after 2010. Thus, beginning in 2011, the second highest tax rate would be 36 percent. 

The taxable income levels at which that rate begins to apply would vary by filing status and 

would be indexed annually for inflation. The 36-percent tax rate would apply to taxable income 

above the following amounts but less than the income levels at which the 39.6-percent rate 

would apply: $250,000 less the standard deduction and two personal exemptions, indexed from 

2009, for married taxpayers filing jointly; $200,000 less the standard deduction and one personal 

exemption, indexed from 2009, for single filers. The 28-percent tax rate bracket would be 

expanded so that taxpayers earning less than these amounts would not see their taxes rise as a 

result of the increased tax rate brackets. 

 

74
REINSTATE THE LIMITATION ON ITEMIZED DEDUCTIONS FOR TAXPAYERS 

WITH INCOME OVER $250,000 (MARRIED FILING A JOINT RETURN) AND 

$200,000 (SINGLE) 

Current Law

Individual taxpayers may elect to itemize their deductions instead of claiming a standard 

deduction. In general, itemized deductions include medical and dental expenses (in excess of 7.5 

percent of AGI), state and local property taxes and either income or sales taxes, interest paid, 

gifts to charities, casualty and theft losses (in excess of 10 percent of AGI), job expenses and 

certain miscellaneous expenses (some only in excess of 2 percent of AGI). 

Prior to the enactment of EGTRRA, otherwise allowable itemized deductions (other than 

medical expenses, investment interest, theft and casualty losses, and gambling losses) were 

reduced by 3 percent of the amount by which AGI exceeded a statutory floor that was indexed 

annually for inflation, 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 to be completely 

eliminated. However, beginning in 2011, the full itemized deduction reduction of 3 percent of 

AGI exceeding the floor is scheduled to be reinstated. 

For 2009, the AGI floor is $166,800 ($83,400 if married filing separately). 

Reason for Change

By limiting the tax benefit of higher-income taxpayers’ itemized deductions, the income tax 

system would be made more progressive and the cost of government would be shared more fairly 

by taxpayers in all levels of income. 

Proposal

The Administration’s tax receipts baseline would permanently extend the EGTRRA repeal of the 

limitation on itemized deductions. This proposal would allow the elimination of the limitation 

on itemized deduction enacted in EGTRRA to sunset after 2010. Thus, itemized deductions 

(other than medical expenses, investment interest, theft and casualty losses, and gambling losses) 

would be reduced by 3 percent of the amount by which AGI exceeds statutory floors which are 

higher than under current law, but not by more than 80 percent of the otherwise allowable 

deductions. The floors would be indexed annually for inflation. For 2011, the AGI floors would 

be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing 

jointly and $200,000 in 2009 for single taxpayers. 

75
REINSTATE THE PERSONAL EXEMPTION PHASE-OUT (PEP) FOR TAXPAYERS 

WITH INCOME OVER $250,000 (MARRIED FILING A JOINT RETURN) AND 

$200,000 (SINGLE) 

Current Law

Individual taxpayers generally are entitled to a personal exemption for the taxpayer and for each 

dependent. The amount of each personal exemption is $3,650 for 2009 and is indexed annually 

for inflation. 

Prior to the enactment of EGTRRA, all personal exemptions were reduced or completely phased 

out simultaneously for higher-income taxpayers. For a taxpayer with AGI in excess of the 

threshold amount for the taxpayer’s filing status, the amount of each personal exemption was 

reduced by 2 percent of the exemption amount for that year for each $2,500 ($1,250 if married 

filing separately) or fraction thereof by which AGI exceeded that threshold. EGTRRA reduced 

the otherwise applicable reduction of personal exemptions by one-third for 2006 and 2007, by 

two-thirds for 2008 and 2009, and eliminated it completely for 2010. However, beginning in 

2011, the full personal exemption phase-out is scheduled to be reinstated. 

For 2009, personal exemptions are reduced by 0.6667 percentage points for each $2,500 ($1,250 

if married filing separately) or fraction thereof by which AGI exceeds the threshold, but not by 

more than one-third of the unreduced exemption amount. Thus, even the highest-income 

taxpayers are entitled to claim $2,433.33 for each personal exemption. For 2009, the thresholds 

at which personal exemptions begin to be reduced if AGI exceeds these amounts are $166,800 

for single taxpayers, $208,500 for heads of household, $250,200 for married taxpayers filing 

jointly, and $125,100 for married taxpayers filing separately. 

Reason for Change

By limiting the tax benefit of higher-income taxpayers’ personal exemptions, the income tax 

system would be made more progressive, and the cost of government would be shared more 

fairly by taxpayers in all levels of income. 

Proposal

The Administration’s tax receipts baseline would permanently extend the EGTRRA repeal of the 

personal exemption phase-out. This proposal would allow the elimination of the personal 

exemption phase-out enacted in EGTRRA to sunset after 2010. The AGI levels at which the 

phase-out begins would be adjusted. For 2011, the AGI floors would be adjusted for inflation 

starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing 

separately) and $200,000 in 2009 for single taxpayers. 

76
IMPOSE A 20-PERCENT RATE ON DIVIDENDS AND CAPITAL GAINS FOR 

TAXPAYERS WITH INCOME OVER $250,000 (MARRIED FILING A JOINT 

RETURN) AND $200,000 (SINGLE) 

Current Law

A separate rate structure applies to long-term capital gains and dividends. Under current law, the 

maximum rate of tax on the adjusted net capital gain of an individual is 15 percent. In addition, 

any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a zero-percent 

rate. These rates apply for purposes of both the regular tax and the AMT. Qualified dividends 

generally are taxed at the same rate as capital gains. 

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 in each year. Any 

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

The zero- and 15-percent rates for dividends and capital gains are scheduled to sunset for taxable 

years beginning after December 31, 2010. In 2011, the maximum rate on capital gains would 

increase to 20 percent, while the tax rates for dividends would go back to the higher ordinary tax 

rates of up to 39.6 percent. 

Reasons for Change

The Administration supports keeping income tax rates low on corporate dividends and capital 

gains (including sales and exchanges of corporate stock). Lower- and middle-income taxpayers 

should be protected from the tax increase that would otherwise occur in 2011. Allowing the 15-

percent rate to expire for high-income taxpayers who are most able to absorb it would still keep 

the top rate at historically low levels. The 20-percent maximum rate on capital gains would be 

the same as the maximum capital gains rate enacted in 1987, and is the same as the top rate 

enacted in 1981. Taxing qualified dividends at the same low rate as capital gains reduces the tax 

bias against equity investment and helps promote more efficient allocation of capital since 

investors can choose to reallocate their dividends to the most productive investments. 

Proposal

The Administration’s tax receipts baseline would permanently extend the zero- and 15-percent 

tax rates for dividends and capital gains. The zero- and 15-percent tax rates for capital gains and 

qualified dividends would be extended permanently for taxpayers with incomes up to $250,000 

for joint returns and $200,000 for single taxpayers. The 20-percent tax rate on long-term capital 

gains and qualified dividends would apply for married taxpayers filing jointly with income over 

$250,000 less the standard deduction and two personal exemptions (indexed from 2009) and for 

single taxpayers with income over $200,000 less the standard deduction and one personal 

exemption (indexed from 2009). The reduced rates on gains on assets held over 5 years would be 

repealed. 

77
This proposal is effective on the date of enactment for taxable years beginning after December 

31, 2010. 

78
USER FEES 

PRESERVE COST-SHARING OF INLAND WATERWAYS CAPITAL COSTS 

Current Law 

The Inland Waterways 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 any inland or intracoastal waterway of the United States (1) in 

the business of transporting property for compensation or hire or (2) 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 for the users’ 50-percent share of the 

capital costs of the locks and dams that make barge transportation possible on inland and 

intracoastal waterways. Moreover, the tax is not the most efficient method for financing 

expenditures on those waterways. Adequate funding for inland and intracoastal waterways 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 

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. The tax rate would be reduced to 

10 cents per gallon beginning January 1, 2012. The tax would be repealed for periods after 

December 31, 2013. The fee system based on lock usage would be phased in beginning on 

January 1, 2010. For calendar year 2014 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. 

79
OTHER INITIATIVES 

IMPLEMENT UNEMPLOYMENT INSURANCE INTEGRITY LEGISLATION 

 

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. Generally, these 

funds support the administrative costs of the unemployment insurance 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 also impose an 

unemployment tax on employers. A State’s unemployment insurance taxes are first placed in the 

State’s own clearing account and then deposited into its Federal unemployment insurance trust 

fund account from which the State pays unemployment benefits. State recoveries of 

overpayments of unemployment insurance benefits must be similarly deposited and used 

exclusively to pay unemployment benefits. 

 

While States may assess penalties for overpayments of benefits, amounts collected as penalties 

or interest on benefit overpayments may be treated as general receipts by the States. 

 

Reasons for Change 

 

States’ abilities to reduce benefit overpayments and increase overpayment recoveries are limited 

by funding. The mandatory redeposit of the collection of all unemployment benefits 

overpayments prevents States from redirecting some of these amounts to future recovery 

activity. Although States might use penalties or interest on overpayments to increase collections, 

there is no requirement that such amounts be directed for additional enforcement activities. 

 

Proposal 

 

The proposal would increase resources for the recovery of State unemployment benefit 

overpayments and delinquent employer taxes. The proposal would allow States to redirect up to 

5 percent of overpayment recoveries to additional enforcement activity. The proposal would 

require States to impose a penalty of at least 15 percent on recipients of fraudulent 

overpayments, and penalty revenue would be used exclusively for additional enforcement 

activity. The proposal would expand the ability to collect benefit overpayments due to a State 

from income tax refunds owed to a benefit recipient. The proposal would allow States to deposit 

up to 5 percent of moneys recovered in the course of an unemployment insurance tax 

investigation into a special fund dedicated to implementing the State Unemployment Tax Act 

(SUTA) Dumping Prevention Act of 2004 or enforcing State laws relating to employer fraud or 

tax evasion. The proposal would require employers to report a “start work date” to the National 

Directory of New Hires for all new hires. 

The proposal would be effective upon the date of enactment. 

 

81
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.3

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 is placed 

in service. Qualified nonresidential real property and residential rental property must be 

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. The provision is no longer applicable for other property. 

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, 2010. 

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. 

 

3

 The Working Families Tax Relief Act of 2004 amended certain of the New York Liberty Zone provisions relating 

to tax-exempt bonds. 

82
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 179.4

 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 some of the existing tax incentive provisions. 

Proposal 

The proposal would sunset certain existing New York Liberty Zone tax benefits and provide in 

their place 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 

2010 to 2019, 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 2019. 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 

 

4

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

deduct up to $125,000 of the cost of section 179 property placed in service each year. In general, section 179 

property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade 

or business. 

83
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. 

Repeal Certain New York City Liberty Zone Incentives 

The special depreciation allowance for qualified New York Liberty Zone property that is either 

nonresidential real property or residential rental property would be terminated as of the date of 

enactment. Property placed in service after the date of enactment would be ineligible for this 

incentive unless a binding written contract is in effect on the date of enactment and the property 

is placed in service before the original sunset dates set forth in the Act. 

84
Levy Payments to Federal Contractors with Delinquent Tax Debt 

IMPROVE DEBT COLLECTION ADMINSTRATIVE PROCEDURES 

Current Law

Before the IRS can issue a levy for an unpaid federal tax liability, it must give the taxpayer an 

opportunity for an administrative collection due process (CDP) hearing. As exceptions to this 

general rule, a CDP hearing is not required prior to the IRS issuing a levy for liabilities that arise 

from either a state tax refund or federal employment taxes. When these exceptions apply, the 

CDP hearing takes place within a reasonable time after the levy. 

Prior to making a disbursement to federal contractors, an automated check for federal tax 

liabilities generally occurs using the Federal Payment Levy Program (FPLP). When a tax 

liability is identified, the IRS issues a CDP notice to the federal contractor, but cannot levy the 

payment until the CDP requirements are complete.

Reason for Change

When the FPLP identifies a federal contractor as having federal tax liabilities, the opportunity to 

levy payments to the contractor may be lost because the CDP requirements cannot be completed 

before the payment is made. 

Proposal

The proposal would allow the IRS to issue levies prior to a CDP hearing for federal tax liabilities 

of federal contractors identified under the FPLP. When a levy is issued prior to a CDP hearing 

under this proposal, the taxpayer would have an opportunity for a CDP hearing within a 

reasonable time after the levy. 

The proposal would be effective for levies issued after December 31, 2009. 

85
 INCREASE LEVY AUTHORITY TO 100 PERCENT FOR VENDOR PAYMENTS 

Current Law

If a federal vendor has an unpaid tax liability, the 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 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 proposal’s date of enactment. 

86
REVENUES DEDICATED TO THE HEALTH REFORM RESERVE FUND 

LIMIT THE TAX RATE AT WHICH ITEMIZED DEDUCTIONS REDUCE TAX 

LIABILITY TO 28 PERCENT 

Current Law

Current law permits the allowable portion of an individual taxpayer’s itemized deductions to 

reduce the amount of taxable income. This, in effect, applies those deductions first to the taxable 

income in the highest tax bracket, and then to the next lower tax brackets in descending order. 

Individual taxpayers may elect to itemize their deductions instead of claiming a standard 

deduction. In general, itemized deductions include medical and dental expenses (in excess of 7.5 

percent of AGI), state and local property taxes and either income or sales taxes, 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) are reduced if AGI 

exceeds a statutory floor that is indexed annually for inflation. Prior to the enactment of 

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 to be completely eliminated. However, beginning 

in 2011, the full itemized deduction reduction of 3 percent of AGI exceeding the floor, but not by 

more than 80 percent, is scheduled to be reinstated. 

For 2009, the AGI floor is $166,800 ($83,400 if married filing separately). 

A separate Budget proposal would adjust the 2011 income thresholds beyond which itemized 

deductions are reduced to $250,000 (indexed for inflation from 2009) for married taxpayers 

filing jointly and $200,000 (indexed from 2009) for single taxpayers. Thereafter, the thresholds 

would be indexed for inflation annually. 

Reason for Change

Many itemized deductions reflect social policies of encouraging taxpayers to engage in certain 

activities by reducing the after-tax cost of those activities. Many worthwhile activities compete 

for the resources that are available. The Administration believes that limiting the benefits from 

certain itemized deductions to not more than 28 percent of the taxpayer’s outlays would provide 

some of the resources necessary to fund important reforms to the medical care and medical 

insurance systems. 

Proposal

87
The proposal would limit the value of all itemized deductions by limiting the tax value of those 

deductions to 28 percent whenever they would otherwise reduce taxable income in the 36 or 39.6 

percent tax brackets. A similar limitation also would apply under the AMT. 

This proposal would apply to itemized deductions after they have been reduced under a separate 

budget proposal that would reinstate the pre-EGTRRA limitation on certain itemized deductions, 

but with adjusted AGI thresholds in 2011 of $250,000 (indexed from 2009) for married 

taxpayers filing jointly and $200,000 (indexed from 2009) for other taxpayers. After 2011, these 

thresholds would be indexed. 

The proposal is effective for taxable years beginning after December 31, 2010.

88
REDUCE THE TAX GAP AND MAKE REFORMS 

Expand Information Reporting 

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 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, 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 owned policies whose cash values, in the aggregate, represented at least 10 percent of 

the value of the separate account. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

89
REQUIRE INFORMATION REPORTING ON PAYMENTS TO CORPORATIONS 

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 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 are certain exceptions for payments to corporations, as well as tax-exempt and government 

entities. 

Reasons for Change 

Generally, compliance increases significantly for payments that a third party reports to the IRS. 

In the case of 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. Although the exception for information reporting to corporations is set forth in existing 

regulations, because it has been in place for many years and because Congress, during that time 

period, has made numerous changes to the information reporting rules, elimination of the 

exception should be made by legislative change. 

Proposal 

A business would be required to file an information return for payments aggregating to $600 or 

more in a calendar year to a corporation (except a tax-exempt corporation). 

The proposal would be effective for payments made to corporations after December 31, 2009. 

90
REQUIRE A CERTIFIED TAXPAYER IDENTIFICATION NUMBER 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 IRS 

setting forth the amount, as well as name, address, and taxpayer identification number (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 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 

A contractor receiving payments of $600 or more in a calendar year from a particular business 

would be required 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, 2009. 

91
REQUIRE INCREASED INFORMATION REPORTING FOR CERTAIN 

GOVERNMENT PAYMENTS FOR PROPERTY AND SERVICES 

Current Law 

Businesses, governments, and other taxpayers are subject to a number of information reporting 

and withholding requirements. Generally, a taxpayer making payments 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 IRS (except if the recipient is a corporation) setting 

forth the amount, as well as the name and address of the recipient of the payment (generally on 

Form 1099). In addition, any service recipient engaged in a trade or business is required to file an 

information return if the aggregate of payments for services is $600 or more in a calendar year. 

This requirement specifically applies to government agencies, even if the service provider is a 

corporation. Moreover, Federal agencies must file information returns with respect to 

contractors, generally on Form 8596 (Information Return for Federal Contracts) and Form 

8596A (Quarterly Transmittal of Information Returns for Federal Contracts). Under recently 

enacted legislation that will take effect in 2012, Federal, State and local government agencies 

generally must withhold 3 percent of payments for goods or services. Exceptions apply to certain 

payments such as those actually subjected to backup withholding, wages and public assistance. 

Reasons for Change 

Generally, compliance increases significantly for payments that a third party reports to the IRS. 

Some government vendors fail to meet their tax filing and payment obligations. 

Proposal 

The IRS and Treasury Department would be authorized to promulgate regulations requiring 

information reporting on all non-wage payments by Federal, State and local governments to 

procure property or services. It is expected that certain categories of payments would be 

excluded from the new information reporting requirements, including payments of interest, 

payments for real property, payments to tax-exempt entities or foreign governments, 

intergovernmental payments, and payments made pursuant to a classified or confidential 

contract. 

The proposal would be effective for payments made after December 31, 2009. 

92
INCREASE INFORMATION RETURN PENALTIES 

Current Law 

There are a number of information reporting requirements under the Code. When these 

requirements are not followed, penalties may apply based on whether and when a correct 

information return is filed. If a person subject to the information reporting requirements files a 

correct information return after the prescribed filing date, but on or before the date that is thirty 

days after the prescribed filing date, the amount of the penalty is $15 per return (the “first-tier 

penalty”), not to exceed $75,000 per calendar year. If such a person files a correct information 

return more than thirty days after the prescribed filing date but on or before August 1, the amount 

of the penalty is $30 per return (the “second-tier penalty”), not to exceed $150,000 per calendar 

year. If such a person does not file a correct information return on or before August 1, the 

amount of the penalty is $50 per return (the “third-tier penalty”), not to exceed $250,000 in a 

calendar year. For certain small filers whose average annual gross receipts do not exceed 

$5,000,000, the maximum calendar year limit is $25,000 (instead of $75,000) for the first-tier 

penalty, $50,000 (instead of $150,000) for the second-tier penalty, and $100,000 (instead of 

$250,000) for the third-tier penalty. If a failure is due to intentional disregard of a filing 

requirement, the minimum penalty for each failure is $100, with no calendar year limit. 

Reasons for Change 

Generally, compliance increases significantly with respect to amounts reported on information 

returns. In some cases, filers may have failed to comply with existing information reporting 

requirements because the amount of the potentially applicable penalties is too small to 

discourage non-compliance. Increasing the penalty amounts, which were established in 1989 and 

have not been increased, will help to ensure the timely filing of accurate information returns. 

Proposal 

The first-tier penalty would be increased from $15 to $30, and the calendar year maximum 

would be increased from $75,000 to $250,000. The second-tier penalty would be increased from 

$30 to $60, and the calendar year maximum would be increased from $150,000 to $500,000. The 

third-tier penalty would be increased from $50 to $100, and the calendar year maximum would 

be increased from $250,000 to $1,500,000. For small filers, the calendar year maximum would 

be increased from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the 

second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum 

penalty for each failure due to intentional disregard would be increased from $100 to $250. The 

proposal would also provide that every five years the penalty amounts would be adjusted to 

account for inflation. 

The proposal would be effective for information returns required to be filed after December 31, 

2010. 

93
Improve Compliance by Business 

REQUIRE E-FILING BY CERTAIN LARGE ORGANIZATIONS 

Current Law 

Effective for tax years ending on or after December 31, 2005, 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). Effective for tax 

years ending on or after December 31, 2006, 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 for tax years ending on or after December 31, 2006. 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 for tax years ending 

on or after December 31, 2006, 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 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 

94
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. 

In the case of a large business, adopting the same standard for electronic filing as for filing 

Schedule M-3 provides simplification benefits. 

Proposal 

All corporations and partnerships required to file Schedule M-3 would be required 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. 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 tax years ending after December 31, 2009. 

95
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) and 

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 

96
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, 2009. 

 

97
Strengthen Tax Administration 

ALLOW ASSESSMENT OF CRIMINAL RESTITUTION AS TAX 

Current Law

In criminal tax cases, a District Court may issue an order requiring the defendant to pay 

restitution of existing tax liabilities. The District Court has authority to order restitution under 

the criminal provisions of Title 18, not the Internal Revenue Code (Code). Because the 

assessment procedures under the Code apply only to taxes imposed by the Code, those 

procedures do not apply to restitution orders issued under Title 18, even if the restitution order 

relates to an existing tax liability. 

Reasons for Change

Because court-ordered restitution in criminal tax cases cannot be assessed as a tax, the IRS 

cannot use its existing assessment systems to collect and enforce the restitution obligation. This 

leads to unnecessary duplication of efforts, delays, and confusion in the administration of courtordered restitution. 

Proposal

The proposal would allow the IRS and the Treasury Department to immediately assess, without 

issuing a statutory notice of deficiency, and collect as a tax debt court-ordered restitution. The 

taxpayer would not be able to collaterally attack the amount of restitution ordered by the court, 

but would retain the ability to challenge the method of collection. 

The proposal would be effective after December 31, 2010. 

98
REVISE OFFER-IN-COMPROMISE APPLICATION RULES 

Current Law

Current law provides that the 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 for offers-in-compromise submitted after the date of enactment. 

99
EXPAND 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 

(HHS) maintains the National Directory of New Hires (NDNH), which is a database that 

contains newly-hired employee data from Form W-4, quarterly wage data from State and Federal 

employment security agencies, and unemployment benefit data from State unemployment 

insurance agencies. 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 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 Social Security Act would be amended 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. 

100
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 

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, 2009. 

101
FACILITATE TAX COMPLIANCE WITH LOCAL JURISDICTIONS 

Current Law 

Although Federal tax returns and return information (FTI) generally are confidential, the 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 

ITGs that impose alcohol, tobacco, or fuel excise or income or wage taxes would be treated as 

States for purposes of information sharing 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. 

102
EXTENSION OF STATUTE OF LIMITATIONS WHERE STATE TAX 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 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. The Code contains exceptions to the general statute 

of limitations. 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. 

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 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 

103
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. 

The proposal would be effective for returns required to be filed after December 31, 2009.

104
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 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 taxpayer privacy law would be clarified by stating that it 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 disclosure made after enactment. 

 

105
EXPAND REQUIRED ELECTRONIC FILING BY TAX RETURN PREPARERS 

Current Law

The Department of the Treasury currently may issue regulations regarding when tax returns must 

be filed electronically on magnetic media or in other machine-readable form. But the regulations 

may not require individuals, estates, or trusts to file their tax returns electronically. In addition, 

the regulations may not require any person to file electronically unless the person files at least 

250 tax returns during the calendar year. 

Reasons for Change

Electronic filing benefits taxpayers and the IRS because it decreases processing errors, expedites 

processing and payment of tax refunds, and allows the IRS to efficiently maintain up-to-date 

taxpayer records. 

Proposal

The proposal generally would maintain the current rule that regulations may not require any 

person to file electronically unless the person files at least 250 tax returns during the calendar 

year. But the proposal also would provide an exception to this rule under which regulations may 

require electronic filing by tax return preparers (as currently defined in the Internal Revenue 

Code) who file more than 100 tax returns in a calendar year. The proposal also would allow 

regulations requiring tax return preparers who file more than 100 returns (or any other person 

who files more than 250 returns) to file electronically tax returns for individuals, estates, or 

trusts. 

The proposal would be effective for tax returns required to be filed after December 31, 2010.

106
Expand Penalties 

CLARIFY THAT THE BAD CHECK PENALTY APPLIES TO ELECTRONIC CHECKS 

AND OTHER PAYMENT FORMS 

Current Law

The Code imposes a penalty on any taxpayer who attempts to satisfy a tax liability with a check 

or money that is not duly paid. The penalty is 2 percent of the amount of the bad check or 

money order. If the bad check or money order is for less than $1,250, the penalty is the lesser of 

$25 or the amount of the check or money order. 

Reasons for Change

Taxpayers use a variety of commercially acceptable instruments to pay tax liabilities, but only 

two types of instruments are covered by the Code’s bad check penalty: checks and money 

orders. 

Proposal

The proposal would expand the bad check penalty to cover all commercially acceptable 

instruments of payment that are not duly paid. 

The proposal would be effective for returns required to be filed after December 31, 2009. 

107
IMPOSE 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 on 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 in 

the tax Code 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 IRS 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 would be established 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, 

2010. 

108
MAKE REFORMS TO CLOSE TAX LOOPHOLES 

Financial Institutions and Products 

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 stock 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, while, 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 the deferred 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, 2010. 

109
REQUIRE ORDINARY TREATMENT FOR CERTAIN DEALERS OF EQUITY 

OPTIONS AND COMMODITIES 

Current Law

Under current law, 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)), treat the income from certain of their day-to-day dealer activities as giving 

rise to capital gain. Under section 1256, these dealers treat 60 percent of their income (or loss) 

from their dealer activities as long-term capital gain (or loss) and 40 percent of their income (or 

loss) from their 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 giving rise to 

ordinary income. 

Reasons for Change

There is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in 

securities and dealers in equity options differently than dealers in other types of property. 

Dealers earn their income from their day-to-day dealing activities and should be taxed at 

ordinary rates. 

Proposal

The proposal would require commodities derivatives dealers, dealers in securities and dealers in 

equity options and commodities and to treat the income from their day-to-day dealer activities as 

ordinary in character, not capital. 

The proposal would be effective for taxable years beginning after the date of enactment. 

110
MODIFY DEFINITION OF CONTROL FOR PURPOSES OF THE SECTION 249 

DEDUCTION LIMIT 

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 resulted in 

situations in which the limitation in section 249 is 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

Under the proposal, the definition of “control” in section 249(b)(2) would be amended to 

incorporate indirect control relationships, of the nature described in section 1563(a)(1). 

The proposal would be effective on the date of enactment. 

111
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 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 $1 million 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 for taxable years beginning after December 31, 2010. 

112
MODIFY DIVIDENDS-RECEIVED DEDUCTION FOR LIFE INSURANCE COMPANY 

SEPARATE ACCOUNTS 

Current Law

Corporate taxpayers may generally qualify for a dividends-received deduction (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. 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. 

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. 

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. 

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 IRS. 

The purposes of the proration regime would be better served if the company's share bore a more 

direct relationship to the company's actual economic interest in the account. 

Proposal

As under current law, required interest under the proposal would equal an earnings rate times the 

mean of reserves. For a separate account, the earnings rate would equal a gross earnings rate 

(net investment income of the account, divided by the mean of the account's assets), minus a 

company-retained percentage (amounts retained by the company from the account’s net 

investment income, if any, divided by the mean of reserves). For this purpose, amounts retained 

by the company would be treated as funded proportionately by items included in net investment 

income and items not so included. It is intended that this formula would generally produce a 

113
company's share with regard to a separate account that approximates the ratio of the mean of the 

surplus attributable to the account to the mean of the account's assets. 

The proposal would be effective for taxable years beginning after December 31, 2010. 

114
EXPAND PRO RATA INTEREST EXPENSE DISALLOWANCE FOR CORPORATEOWNED LIFE INSURANCE (COLI) 

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 business 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. 

115
The proposal would apply to contracts entered into after the date of enactment. 

116
Tax Accounting Methods 

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

No deduction would be allowed 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, 2010. 

117
REPEAL LOWER-OF-COST-OR-MARKET 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 (“FIFO”) method, and the retail method. Taxpayers not 

using a LIFO method may write down the carrying values of their inventories by applying the 

lower-of-cost-or-market (“LCM”) method and may 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). Taxpayers using the retail method for tax currently are not 

required to use that method for financial statement reporting purposes. 

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, but need not 

increase an item’s inventory value if its replacement cost increases. 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 retail method would be allowed only if the taxpayer employs the method for 

purposes of financial accounting. The proposal would be treated as a change in the method of 

accounting for inventories, 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 12 months from the date of 

enactment. 

118
Modify Estate and Gift Tax Valuation Discounts and Make Other Reforms 

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 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 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 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 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 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 necessary information that will 

determine that recipient’s basis in the transferred property. 

Proposal

This proposal would require both consistency and a reporting requirement. The basis of property 

received by reason of death under section 1014 would have to equal the value of that property for 

estate tax purposes. The basis of property received by gift during the life of the donor would 

have to equal the donor’s basis determined under section 1015. This proposal would require 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 

119
lifetime gift to provide the necessary information to both the recipient and the IRS. 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. 

120
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 when the economic benefit to the beneficiaries is not reduced by these techniques. 

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 would otherwise support significant discounts for lack of marketability and 

control. 

Reasons for Change

Judicial decisions and the enactment of new statutes in most states have, in effect, made section 

2704(b) inapplicable in many situations, specifically, 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 identified in regulations. A disregarded restriction also would 

include any limitation on a transferee’s ability to be admitted as a full partner or holder of 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. 

121
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). 

122
REQUIRE 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. In this event, 

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 more 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 2 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 10 years.5

 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. 

 

 

5

 Cf. section 673 as applicable to a so-called Clifford trust created before or on March 1, 1986, with a 10-year 

minimum term. 

123
MODIFY ALTERNATIVE FUEL MIXTURE CREDIT 

Current Law 

The Code provides excise tax credits for alternative fuel and alternative fuel mixtures. 

Alternative fuel means liquefied petroleum gas, P Series fuels (as defined by the Secretary of 

Energy under 42 U.S.C. sec. 13211(2)), compressed or liquefied natural gas, liquefied hydrogen, 

certain liquid fuel derived from coal through the Fischer-Tropsch process, compressed or 

liquefied gas derived from biomass, and liquid fuel derived from biomass, but does not include 

ethanol, methanol, or biodiesel. The alternative fuel credit is 50 cents per gallon for liquid fuel 

and 50 cents per gasoline gallon equivalent for nonliquid fuel. The alternative fuel credit is 

available only for fuel sold by the taxpayer for use as a fuel in a motor vehicle or motorboat or so 

used by the taxpayer. The alternative fuel mixture credit is computed at the same rate on each 

gallon of alternative fuel used in producing a mixture of alternative fuel and taxable fuel for sale 

or use in the taxpayer’s trade or business. The mixture must be sold by its producer for use as a 

fuel or used as a fuel by the producer. Both credits are allowed against fuel excise tax liability. 

In addition, a person may file a claim for payment equal to the amount of the alternative fuel and 

alternative fuel mixture credits. Except in the case of liquefied hydrogen, the credits expire on 

December 31, 2009. 

Reasons for Change 

Alternative fuels include liquid byproducts derived from the processing of paper or pulp (known 

as "black liquor" when derived from the kraft process), which paper companies burn to produce 

energy in their mills. Certain paper companies, to take advantage of the alternative fuels mixture 

credit, have recently begun mixing diesel fuel with black liquor, burning the mixture, and 

claiming the alternative fuel mixture credit. This is resulting in substantial revenue losses and 

provides a windfall to the paper industry. 

Proposal 

The Administration proposes to limit the credit for mixtures containing alternative fuel derived 

from the processing of paper or pulp to mixtures that are sold for use or used as fuel in a motor 

vehicle or motorboat. Accordingly, black liquor mixtures used as a fuel in paper processing 

would no longer be eligible for the credit. 

The change would be effective after the date of enactment. 

124
APPENDIX: EXTENDING CURRENT POLICIES 

The first step in addressing the nation’s fiscal problems is to be upfront about them – and to 

establish an honest baseline that measures where we are before new policies are enacted. The 

Administration’s Budget does so by adjusting the Budget Enforcement Act (BEA) baseline to 

reflect the true cost of the current policy path. The BEA baseline, which is commonly used in 

budgeting and is defined in a now expired statute, with some exceptions reflects the projected 

receipts level under current law. But, under current law, relief from the AMT would expire at 

the end of this year, causing millions of Americans to begin paying this additional tax, and, 

furthermore, the 2001 and 2003 tax cuts would expire entirely at the end of 2010. These 

expirations were not written into law for policy reasons; instead, they reflect decisions made to 

artificially reduce the cost estimates of AMT relief and the 2001 and 2003 tax cuts to fit these 

policies within certain budget process rules. Because of this, the BEA’s “current law” baseline is 

not an accurate reflection of what it would mean to continue forward with current policies. The 

Administration’s Budget uses an adjusted tax baseline that continues AMT relief and the 2001 

and 2003 tax cuts, so as to project future receipts under current policy and to better measure the 

effects of the Administration’s proposed policy changes. 

Index to inflation the 2009 parameters of the AMT as enacted in the American Recovery and 

Reinvestment Act of 2009. The Administration’s baseline projection of current policy reflects 

annual indexation of the AMT exemption amounts in effect for taxable year 2009 ($46,700 for 

single taxpayers, $70,950 for married taxpayers filing a joint return and surviving spouses, and 

$35,475 for married taxpayers filing a separate return and for estates and trusts); the income 

thresholds for the 28-percent rate ($87,500 for married taxpayers filing a separate return and 

$175,000 for all other taxpayers); and the income thresholds for the phaseout of the exemption 

amounts ($150,000 for married taxpayers filing a joint return and surviving spouses, $112,500 

for single taxpayers, and $75,000 for married taxpayers filing a separate return). The baseline 

projection of current policy also extends AMT relief for nonrefundable personal credits. 

 

Continue the 2001 and 2003 tax cuts. Most of the tax reductions enacted in 2001 and 2003 

expire on December 31, 2010. The Administration’s baseline projection of current policy 

continues all of these expiring provisions except for repeal of estate and generation-skipping 

transfer taxes. Estate and gift taxes are assumed to be extended at parameters in effect for 

calendar year 2009 (a top rate of 45 percent and an exemption amount of $3.5 million). 

125
127

TABLES OF REVENUE ESTIMATES 

Revenue estimates begin on next page. 
Table 1: Revenue Estimates of FY 2010 Budget Proposals 1/ 2/

Fiscal Years

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 

(in millions of dollars)

Tax Cuts for Families and Individuals:

Provide the making work pay tax credit 3/ ............................................................... 0 0 -31,080 -61,668 -61,949 -62,233 -62,658 -63,256 -63,626 -64,052 

Expand the earned income tax credit 3/ .................................................................. 0 0 -17 -2,666 -2,601 -2,575 -2,610 -2,659 -2,708 -2,762 

Expand the refundability of the child tax credit 3/ ...................................................... 0 0 0 -8,822 -8,707 -8,674 -8,766 -8,859 -8,944 -9,039 

Expand the saver's credit and provide for automatic enrollment in IRAs 3/ ..................... 0 0 -232 -3,153 -5,054 -6,366 -7,451 -8,363 -9,083 -9,689 

Provide the American opportunity tax credit 3/ ......................................................... 0 0 -594 -4,350 -4,931 -5,526 -5,879 -6,316 -6,689 -6,985 

 Subtotal, tax cuts for families and individuals ................................................... 0 0 -31,923 -80,659 -83,242 -85,374 -87,364 -89,453 -91,050 -92,527 

Tax Cuts for Businesses:

Eliminate capital gains taxation on investments in small business stock ........................ 00000 -134 -344 -700 -1,187 -1,562 

Make the research & experimentation tax credit permanent .......................................... 0 -3,111 -5,486 -6,142 -6,785 -7,384 -7,960 -8,530 -9,103 -9,680 

Expand net operating loss carryback ........................................................................ -27,800 -35,700 10,700 10,200 7,900 5,600 3,900 2,700 1,800 1,300 

 Subtotal, tax cuts for businesses ..................................................................... -27,800 -38,811 5,214 4,058 1,115 -1,918 -4,404 -6,530 -8,490 -9,942 

Modify Federal Aviation Administration Financing ................................................... 0 0 -7,225 -7,599 -7,980 -8,260 -8,559 -8,869 -9,190 -9,527 

Continue Certain Expiring Provisions Through Calendar Year 2010 3/ ........................ -28 -6,402 -5,449 -668 -593 -617 -782 -860 -588 -595 

Other Revenue Changes and Loophole Closers:

Reinstate Superfund excise taxes ........................................................................... 0 0 754 1,024 1,130 1,196 1,247 1,297 1,352 1,419 

Reinstate Superfund environmental income tax ......................................................... 0 0 443 608 625 638 658 682 704 730 

Tax carried (profit) interests as ordinary income ......................................................... 0 0 2,585 3,811 3,860 3,463 2,899 2,345 1,869 1,479 

Codify economic substance doctrine ........................................................................ 5 58 112 202 308 426 546 642 724 809 

Repeal LIFO method of accounting for inventories ...................................................... 0 0 0 2,992 6,748 8,082 8,431 8,590 8,545 8,630 

Reform U.S. international tax system:

 Reform business entity classification rules for foreign entities .................................... 0 0 4,932 8,556 9,147 9,597 9,917 10,267 10,741 11,352  Defer deduction of expenses, except R&E expenses, related to deferred income ............ 0 0 3,754 6,321 6,434 6,545 6,731 6,992 7,311 7,732 

 Reform foreign tax credit: Determine the foreign tax credit on a pooling basis ............... 0 0 1,531 2,578 2,624 2,669 2,745 2,852 2,982 3,154 

 Reform foreign tax credit: Prevent splitting of foreign income and foreign taxes ............ 0 0 999 1,792 1,968 2,095 2,194 2,277 2,348 2,408 

 Limit shifting of income through intangible property transfers .................................... 0 0 37 102 169 240 314 391 471 556 

 Limit earnings stripping by expatriated entities ......................................................... 0 0 70 120 126 132 139 146 153 161 

 Prevent repatriation of earnings in certain cross-border reorganizations ........................ 0 0 19 31 32 33 34 35 36 38 

 Repeal 80/20 company rules .............................................................................. 0 0 86 121 129 135 139 144 151 160 

 Prevent the avoidance of dividend withholding taxes ............................................... 0 0 373 281 126 99 100 101 104 109 

 Modify tax rules for dual capacity taxpayers ............................................................ 0 0 260 449 471 492 515 538 562 588 

 Combat under-reporting of income through use of accounts and entities in offshore jurisdictions .................................................................................... 0 2,482 1,617 -53 -115 449 769 843 876 914 

 subtotal, reform U.S. international tax system ................................................ 0 2,482 13,678 20,298 21,111 22,486 23,597 24,586 25,735 27,172 

Require information reporting for rental property expense payments .............................. 0 175 265 280 290 305 315 330 340 360 

Eliminate oil and gas company preferences: Levy tax on certain offshore oil and gas production ................................................... 0 0 500 500 500 600 600 600 600 700  Repeal credit for enhanced oil recovery projects 4/ ................................................ 0000000000 Repeal credit for production from marginal wells 4/ ................................................ 0000000000 Repeal expensing of intangible drilling costs ......................................................... 0 0 347 595 526 395 269 226 237 266 

 Repeal deduction for tertiary injectants .................................................................. 0 0 5 9 9 8 7 6 6 6 

 Repeal passive loss exemption for working interests in oil and gas properties ............... 0 0 2 5 6 6 6 6 6 6 

 Repeal percentage depletion ................................................................................ 0 0 316 752 925 960 996 1,033 1,065 1,091 

 Repeal domestic manufacturing deduction for oil and gas production .......................... 0 0 757 1,310 1,392 1,464 1,531 1,600 1,670 1,745 

 Increase the amortization period for geological and geophysical costs to seven years...... 0 0 41 154 240 233 187 140 91 56 

 subtotal, eliminate oil and gas company preferences .................................... 0 0 1,968 3,325 3,598 3,666 3,596 3,611 3,675 3,870 

Eliminate the advanced earned income tax credit 3/ ................................................... 0 125 76 77 78 81 83 85 87 89 

 Subtotal, other revenue changes and loophole closers ..................................... 5 2,840 19,881 32,617 37,748 40,343 41,372 42,168 43,031 44,558 

128
2009 2010 2011 2012 2013 2014

Fiscal Years

2015 2016 2017 201

Upper-Income Tax Provisions Dedicated to Deficit Reduction:

Reinstate the 39.6% rate .......................................................................................

Reinstate the 36% rate for taxpayers with income over $250,000 (married) and $200,000 (single) .............................................................................................Reinstate the limitation on itemized deductions for taxpayers with income over $250,000 (married) and $200,000 (single) ..............................................................Reinstate the personal exemption phaseout (PEP) for taxpayers with income over $250,000 (married) and $200,000 (single) ............................................................Impose a 20% rate on dividends and capital gains for taxpayers with income over $250,000 (married) and $200,000 (single) ............................................................ Subtotal, upper-income tax provisions dedicated to deficit reduction ..................

User Fees:

Preserve cost-sharing of inland waterways capital costs .............................................

Trade Proposals:

Promote trade ...................................................................................................

Other Initiatives:

Implement unemployment insurance integrity legislation .............................................

Restructure assistance to New York City: Provide tax incentives for transportation infrastructure .............................................

Revise terrorism risk insurance program ..................................................................Levy payments to Federal contractors with delinquent tax debt: Improve debt collection administrative procedures ................................................... Increase levy authority to 100% for vendor payments ................................................

 subtotal, levy payments to Federal contractors with delinquent tax debt ............ Subtotal, other initiatives ..............................................................................Total Effect of FY 2010 Budget Tax Proposals Relative to Current Policy ..................

000

0

-182

-182

0

0

00000

0

0

-28,005

000

0

600600

75

0

0

-200

0

7761

138

-62

-41,760

12,939

1,6455,334

1,624

6,641

28,183

100

-2

34

-200

-39

115

87

202

-3

8,776

25,003

2,622

11,659

3,582

3,672

46,538

68

-5

29

-200

-493

119

86

205

-459

-6,109

27,869

2,929

13,308

4,120

7,412

55,638

79

-9

-20

-200

-150

124

90

214

-156

2,600

(in millions of dollars)

30,537 32,941 36,007

3,232 3,548 3,305

14,568 15,736 16,914

4,533 4,946 5,350

12,060 14,832 15,970

64,930 72,003 77,546

89 156 155

-13 -18 -25

-4 -166 -168

-200 -200 -200

-317 -511 -576

109 113 118

78 82 85

187 195 203

-334 -682 -741

8,846 11,722 13,391

38,571

3,795

18,094

5,756

17,495

83,711

183

-30

-174

-200

-522

122

88

210

-686

16,891

41,01

4,49

19,24

6,18

18,87

89,80

18

-3

-1,02

-20

-41

12

9

21

-1,42

20,50

Department of the TreasuryNotes:

1 / Presentation in this table does not reflect the order in which these proposals were estimated.2 / Appendix B details the budgetary impact of extending tax policies currently in effect relative to curren3 / This provision affects both receipts and outlays. The combined effects are shown here. The outlay 4 / This provision is estimated to have zero receipt effect under the Administration's current projections 

t law. Thes

effects inclu

for energy prices..

e extensions

ded in these

 are estimat

 estimates a

ed before th

re detailed i

e other policy proposals that follow i

n Appendix C.

n this table.

129
Appendix A: Revenue Estimates of Proposals Dedicated to the Health Reform Reserve Fund 1/

Fiscal Years

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 

(in millions of dollars)

Limit the tax rate at which itemized deductions reduce tax liability to 28% ........................

... 0 0 9,241 24,945 27,687 29,647 31,386 33,091 34,911 36,873 

Reduce the tax gap and make reforms:Expand information reporting: Require information reporting for private separate accounts of life insurance companies ...

... 0 0 2 5 4 3 2 1 1 1 

 Require information reporting on payments to corporations .......................................... 0 84 612 777 924 983 1,040 1,095 1,152 1,212  Require a certified Taxpayer Identification Number from contractors .............................. 0 17 44 63 72 76 79 83 86 90  Require increased information reporting for certain government payments .....................

... 0 18 66 68 19 10 10 0 0 0 

 Increase information return penalties .....................................................................

... 0 20 34 35 35 36 42 43 43 44 

 subtotal, expand information reporting .........................................................

... 0 139 758 948 1,054 1,108 1,173 1,222 1,282 1,347 

Improve compliance by businesses: Require E-filing by certain large organizations ........................................................... No Revenue Effect Implement standards clarifying when employee leasing companies can be held liable for their clients' Federal employment taxes ...................................................

... 0 3 5 5 5 6 6 6 7 7 

 subtotal, improve compliance by businesses ................................................

... 0 3 5 5 5 6 6 6 7 7 

Strengthen tax administration: Allow assessment of criminal restitution as tax .........................................................

... 0 0 2 3 4 4 4 4 4 4 

 Revise offer-in-compromise application rules ............................................................ 0 3 3 3 3 3 3 3 3 3 

 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 

 Facilitate tax compliance with local jurisdictions ......................................................... 0000001111 Extension of statute of limitations where state adjustment affects federal tax liability ......... 0 5 8 8 8 8 9 10 10 10 

 Improve investigative disclosure statute ..................................................................

... 0 0 0 1 1 1 1 1 2 2 

 Expand required electronic filing by tax preparers ...................................................

... No Revenue Effect

 subtotal, strengthen tax administration .........................................................

... 0 8 13 15 17 17 19 20 22 22 

Expand penalties: Clarify that bad check penalty applies to electronic checks and other payment forms ......

... 0 1 2 2 2 3 3 3 3 4 

 Impose a penalty on failure to comply with electronic filing requirements ........................

... 0 0 0 0 0 1 1 1 2 2 

 subtotal, expand penalties ........................................................................

... 0 1 2 2 2 4 4 4 5 6 

 Subtotal, reduce the tax gap and make reforms ................................................

... 0 151 778 970 1,078 1,135 1,202 1,252 1,316 1,382 

Make reforms to close tax loopholes:Financial institutions and products: Require accrual of income on forward sale of corporate stock ....................................

... 0 0 2 7 13 20 28 33 36 38 

 Require ordinary treatment for certain dealers of equity options and commodities ............

... 47 192 267 214 226 240 254 270 286 303 

 Modify the definition of control for purposes of section 249 deduction limit .....................

... 12 62 114 120 128 135 143 152 161 171 

 subtotal, financial products ........................................................................

... 59 254 383 341 367 395 425 455 483 512 

Insurance companies and products: Modify rules that apply to sales of life insurance contracts ..........................................

... 0 0 24 74 80 88 94 101 108 116 

 Modify dividends-received deduction for life insurance company separate accounts .........

... 0 0 115 296 331 385 419 439 463 485 

 Expand pro rata interest expense disallowance for corporate-owned life insurance .........

... 0 318 619 786 891 897 909 952 995 1,037 

 subtotal, insurance companies and products ................................................

... 0 318 758 1,156 1,302 1,370 1,422 1,492 1,566 1,638 

Tax accounting methods: Deny deduction for punitive damages .....................................................................

... 0 0 27 34 32 33 34 35 36 38 

 Repeal lower-of-cost-or-market inventory accounting method ....................................... 0 0 0 950 1,882 1,163 1,173 233 243 254  subtotal, tax accounting methods ...............................................................

... 0 0 27 984 1,914 1,196 1,207 268 279 292 

Modify estate and gift tax valuation discounts and make other reforms: Require consistenci in value for transfer and income tax purposes ...............................

... 0 40 135 171 182 192 204 216 229 243 

 Modify rules on valuation discounts ........................................................................

... 0 667 1,419 1,543 1,692 1,848 2,012 2,184 2,364 2,555 

 Require a minimum term for grantor retained annuity trusts (GRATs) ...........................

... 0 29 61 123 191 263 340 422 510 605 

 subtotal, modify estate and gift tax valuation discounts and make other reforms ...

... 0 736 1,615 1,837 2,065 2,303 2,556 2,822 3,103 3,403 

 Subtotal, make reforms to close tax loopholes ...................................................

... 59 1,308 2,783 4,318 5,648 5,264 5,610 5,037 5,431 5,845 

Modify alternative fuel mixture credit ........................................................................

... 533 702 0 0 0 0 0 0 0 0 

Total Effect Proposals Dedicated to the Health Reform Reserve Fund ........................ 592 2,161 12,802 30,233 34,413 36,046 38,198 39,380 41,658 44,100 Department of the Treasury

Note:

 1 / Appendix B details the budgetary impact of extending tax policies currently in effect relative to current law. These extensions are estimated before the other policy proposals that follow in this table and Table 1.

130
Appendix B: Bridge from Budget Enforcement Act Baseline to Current Policy Baseline 1/

Fiscal Years

2009 2010 2011 2012 2013 2014 2015 2016 2017 201

(in millions of dollars)

Adjustments to provisions to reflect current policy baseline:

Alternative minimum tax .....................................................................

... 0 -14,056 -69,054 -33,944 -39,361 -46,408 -54,626 -63,500 -73,289 -84,68

Estate tax .......................................................................................

... -483 3,071 1,095 -13,549 -16,940 -19,947 -21,709 -23,420 -24,891 -26,48

Tax rates on dividends ......................................................................

... 316 -5,458 -27,801 -6,568 -18,264 -30,886 -38,127 -39,573 -41,116 -42,71

Tax rates on capital gains ..................................................................

... 0 -1,958 -8,863 -3,016 -5,777 -9,063 -11,054 -12,106 -13,349 -14,16

Expensing for small business ...............................................................

... 0 0 -2,505 -5,428 -4,277 -3,529 -2,998 -2,599 -2,154 -1,832 

Marginal individual income tax rates 0 0 -84,563 -129,915 -140,605 -148,877 -157,523 -166,428 -175,576 -185,17Pease cutback of itemized deductions ...................................................

... 0 0 -4,730 -10,034 -11,173 -12,205 -13,181 -14,177 -15,174 -16,18

Personal exemption phase out ............................................................

... 0 0 -1,568 -3,324 -3,700 -4,055 -4,431 -4,794 -5,166 -5,60

Child tax credit 2/ ..............................................................................

... 0 0 -3,305 -27,619 -27,761 -27,859 -28,004 -28,250 -28,359 -28,53

15% income tax bracket for married taxpayers .......................................

... 0 0 -13,718 -20,408 -21,733 -22,836 -23,702 -24,742 -25,742 -26,66

Standard deduction for married taxpayers .............................................

... 0 0 -2,823 -5,812 -6,232 -6,558 -6,877 -7,128 -7,391 -7,82

EITC marriage penalty relief and simplification 2/ ....................................

... 0 0 659 -1,958 -1,851 -1,781 -1,769 -1,772 -1,772 -1,774 

Tax incentives for higher education ......................................................

... 0 3 -736 -1,347 -1,419 -1,489 -1,561 -1,636 -1,716 -1,80

Employer-provided child care credit ......................................................

... 0 6 -13 -18 -19 -20 -21 -22 -23 -24 

Child dependent care tax credit ............................................................

... 0 0 -247 -624 -637 -651 -664 -677 -689 -702 

Federal income tax benefits for adoption ................................................

... 0 0 -238 -382 -398 -414 -429 -447 -464 -48

 Total Adjustments to BEA Baseline ...........................................

... -167 -18,392 -218,410 -263,946 -300,147 -336,578 -366,676 -391,271 -416,871 -444,65

Department of the Treasury

Notes:

 1 / Proposals in this table are estimated before the proposals in Table 1 and Appendix A. 2 / This provision affects both receipts and outlays. The combined effects are shown here. The outlay effects included in these estimates are detailed in Appendix C.

Appendix C: Outlay Effects Included in Revenue Estimates

Fiscal Years

2009 2010 2011 2012 2013 2014 2015 2016 2017 201

(in millions of dollars)

Make permanent the expansion of the child tax credit ................................

... 0 0 45 14,518 14,430 14,359 14,434 14,629 14,670 14,81

Modify the EITC: Provide marriage penalty relief and simplify ..................... 0 0 -583 1,986 1,884 1,822 1,813 1,819 1,819 1,82Provide the making work pay tax credit ................................................... 0 0 703 20,749 20,448 20,214 20,194 20,267 20,204 20,23Expand the earned income tax credit ...................................................... 0 0 0 2,599 2,536 2,510 2,547 2,596 2,644 2,69Expand the refundability of the child tax credit .......................................... 0 0 0 8,822 8,707 8,674 8,766 8,859 8,944 9,03Expand the saver's credit and provide for automatic enrollment in IRAs ......... 0 0 89 748 835 837 859 890 913 932 Provide the American opportunity tax credit ............................................. 0 0 0 1,860 1,939 2,018 2,162 2,335 2,434 2,48Continue certain expiring provisions through calendar year 2010 ...............

... 0 62 21 0 0 0 0 0 0 0 

Eliminate the advanced earned income tax credit ....................................

... 0 -125 -76 -77 -78 -81 -83 -85 -87 -8

 Total Outlay Effect ..................................................................

... 0 -63 199 51,205 50,701 50,353 50,692 51,310 51,541 51,94

Department of the Treasury

131