DESCRIPTION OF THE CHAIRMAN’S MARK 

OF THE 

“HABITAT AND LAND CONSERVATION ACT OF 2007” 

Scheduled for Markup 

by the 

SENATE COMMITTEE ON FINANCE 

on September 20, 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

September 18, 2007 

JCX-75-07 
i 

CONTENTS 

Page

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

A. Make Permanent the Special Rule Encouraging Contribution of Capital Gain Real 

Property for Conservation Purposes ................................................................................... 2 

B. Provide Tax Credit for Recovery and Restoration of Endangered Species........................ 6 

C. Allow Deduction for Endangered Species Recovery Expenditures ................................. 10 

D. Provide Exclusion for Certain Payments and Programs Relating to Fish and Wildlife ... 11 

E. Extend Expensing of Brownfields Remediation Costs..................................................... 13 

F. Allowance of Section 1031 Treatment for Exchanges Involving Certain Mutual 

Ditch, Reservoir, or Irrigation Company Stock................................................................ 15 

G. Modification of Effective Date of Leasing Provisions of the American Jobs Creation 

Act of 2004 ....................................................................................................................... 16 
1 

INTRODUCTION 

The Senate Committee on Finance has scheduled a markup of the “Habitat and Land 

Conservation Act of 2007.” This document,1 prepared by the staff of the Joint Committee on 

Taxation, provides a description of the Chairman’s Mark. 

 1

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

Chairman’s Mark of the “Habitat and Land Conservation Act of 2007,” September 18, 2007, 

(JCX-75-07). This document can also be found on our website at www.house.gov/jct. 
2 

A. Make Permanent the Special Rule Encouraging Contribution 

of Capital Gain Real Property for Conservation Purposes 

Present Law

Charitable contributions generally

In general, a deduction is permitted for charitable contributions, subject to certain 

limitations that depend on the type of taxpayer, the property contributed, and the donee 

organization. The amount of deduction generally equals the fair market value of the contributed 

property on the date of the contribution. Charitable deductions are provided for income, estate, 

and gift tax purposes.2

In general, in any taxable year, charitable contributions by a corporation are not 

deductible to the extent the aggregate contributions exceed 10 percent of the corporation’s 

taxable income computed without regard to net operating or capital loss carrybacks. For 

individuals, the amount deductible is a percentage of the taxpayer’s contribution base, which is 

the taxpayer’s adjusted gross income computed without regard to any net operating loss 

carryback. The applicable percentage of the contribution base varies depending on the type of 

donee organization and property contributed. Cash contributions of an individual taxpayer to 

public charities, private operating foundations, and certain types of private nonoperating 

foundations may not exceed 50 percent of the taxpayer’s contribution base. Cash contributions 

to private foundations and certain other organizations generally may be deducted up to 30 

percent of the taxpayer’s contribution base. 

In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if 

the donor transfers an interest in property to a charity while also either retaining an interest in 

that property or transferring an interest in that property to a noncharity for less than full and 

adequate consideration. Exceptions to this general rule are provided for, among other interests, 

remainder interests in charitable remainder annuity trusts, charitable remainder unitrusts, and 

pooled income funds, present interests in the form of a guaranteed annuity or a fixed percentage 

of the annual value of the property, and qualified conservation contributions. 

Capital gain property

Capital gain property means any capital asset or property used in the taxpayer’s trade or 

business the sale of which at its fair market value, at the time of contribution, would have 

resulted in gain that would have been long-term capital gain. Contributions of capital gain 

property to a qualified charity are deductible at fair market value within certain limitations. 

Contributions of capital gain property to charitable organizations described in section 

170(b)(1)(A) (e.g., public charities, private foundations other than private non-operating 

foundations, and certain governmental units) generally are deductible up to 30 percent of the 

taxpayer’s contribution base. An individual may elect, however, to bring all these contributions 

 2

 Secs. 170, 2055, and 2522, respectively. Unless otherwise provided, all section references are 

to the Internal Revenue Code of 1986, as amended (the “Code”). 
3 

of capital gain property for a taxable year within the 50-percent limitation category by reducing 

the amount of the contribution deduction by the amount of the appreciation in the capital gain 

property. Contributions of capital gain property to charitable organizations described in section 

170(b)(1)(B) (e.g., private non-operating foundations) are deductible up to 20 percent of the 

taxpayer’s contribution base. 

For purposes of determining whether a taxpayer’s aggregate charitable contributions in a 

taxable year exceed the applicable percentage limitation, contributions of capital gain property 

are taken into account after other charitable contributions. Contributions of capital gain property 

that exceed the percentage limitation may be carried forward for five years. 

Qualified conservation contributions

Qualified conservation contributions are not subject to the “partial interest” rule, which 

generally bars deductions for charitable contributions of partial interests in property. A qualified 

conservation contribution is a contribution of a qualified real property interest to a qualified 

organization exclusively for conservation purposes. A qualified real property interest is defined 

as: (1) the entire interest of the donor other than a qualified mineral interest; (2) a remainder 

interest; or (3) a restriction (granted in perpetuity) on the use that may be made of the real 

property. Qualified organizations include certain governmental units, public charities that meet 

certain public support tests, and certain supporting organizations. Conservation purposes 

include: (1) the preservation of land areas for outdoor recreation by, or for the education of, the 

general public; (2) the protection of a relatively natural habitat of fish, wildlife, or plants, or 

similar ecosystem; (3) the preservation of open space (including farmland and forest land) where 

such preservation will yield a significant public benefit and is either for the scenic enjoyment of 

the general public or pursuant to a clearly delineated Federal, State, or local governmental 

conservation policy; and (4) the preservation of an historically important land area or a certified 

historic structure. 

Qualified conservation contributions of capital gain property are subject to the same 

limitations and carryover rules of other charitable contributions of capital gain property. 

Special rule regarding contributions of capital gain real property for conservation 

purposes

In general

Under a temporary provision that is effective for contributions made in taxable years 

beginning after December 31, 2005,3

 the 30-percent contribution base limitation on contributions 

of capital gain property by individuals does not apply to qualified conservation contributions (as 

defined under present law). Instead, individuals may deduct the fair market value of any 

qualified conservation contribution to an organization described in section 170(b)(1)(A) to the 

extent of the excess of 50 percent of the contribution base over the amount of all other allowable 

 3

 Sec. 170(b)(1)(E). 
4 

charitable contributions. These contributions are not taken into account in determining the 

amount of other allowable charitable contributions. 

Individuals are allowed to carryover any qualified conservation contributions that exceed 

the 50-percent limitation for up to 15 years. 

For example, assume an individual with a contribution base of $100 makes a qualified 

conservation contribution of property with a fair market value of $80 and makes other charitable 

contributions subject to the 50-percent limitation of $60. The individual is allowed a deduction 

of $50 in the current taxable year for the non-conservation contributions (50 percent of the $100 

contribution base) and is allowed to carryover the excess $10 for up to 5 years. No current 

deduction is allowed for the qualified conservation contribution, but the entire $80 qualified 

conservation contribution may be carried forward for up to 15 years. 

Farmers and ranchers

In the case of an individual who is a qualified farmer or rancher for the taxable year in 

which the contribution is made, a qualified conservation contribution is allowable up to 100 

percent of the excess of the taxpayer’s contribution base over the amount of all other allowable 

charitable contributions. 

In the above example, if the individual is a qualified farmer or rancher, in addition to the 

$50 deduction for non-conservation contributions, an additional $50 for the qualified 

conservation contribution is allowed and $30 may be carried forward for up to 15 years as a 

contribution subject to the 100-percent limitation. 

In the case of a corporation (other than a publicly traded corporation) that is a qualified 

farmer or rancher for the taxable year in which the contribution is made, any qualified 

conservation contribution is allowable up to 100 percent of the excess of the corporation’s 

taxable income (as computed under section 170(b)(2)) over the amount of all other allowable 

charitable contributions. Any excess may be carried forward for up to 15 years as a contribution 

subject to the 100-percent limitation.4

As an additional condition of eligibility for the 100 percent limitation, with respect to any 

contribution of property in agriculture or livestock production, or that is available for such 

production, by a qualified farmer or rancher, the qualified real property interest must include a 

restriction that the property remain generally available for such production. (There is no 

requirement as to any specific use in agriculture or farming, or necessarily that the property be 

used for such purposes, merely that the property remain available for such purposes.) Such 

additional condition does not apply to contributions made on or before August 17, 2006. 

A qualified farmer or rancher means a taxpayer whose gross income from the trade or 

business of farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the 

taxpayer’s gross income for the taxable year. 

 4

 Sec. 170(b)(2)(B). 
5 

Termination

The special rule regarding contributions of capital gain real property for conservation 

purposes does not apply to contributions made in taxable years beginning after December 31, 

2007. 

Description of Proposal

The proposal makes permanent the special rule regarding contributions of capital gain 

real property for conservation purposes. 

Effective Date

The proposal is effective for contributions made in taxable years beginning after 

December 31, 2007. 
6 

B. Provide Tax Credit for Recovery and Restoration of Endangered Species 

Present Law

Present law does not provide an income tax credit for endangered species recovery 

expenditures. 

Description of Proposal

In general

For eligible taxpayers, the proposal establishes a credit against income taxes for: (1) 

costs paid or incurred by an eligible taxpayer for the taxable year (reduced by the amount of 

government financing for conservation of a qualified species, and not including costs required by 

a Federal, State, or local government) pursuant to a habitat management plan entered into under 

certain qualified habitat protection agreements (“habitat restoration credit”) and (2) a percentage 

of the loss in value to real property attributable to an easement placed on the property pursuant to 

such agreements (less any amount received in connection with the easement) (“habitat protection 

easement credit”). The allowable credit amount is 100 percent of costs paid or incurred and the 

loss in value to property pursuant to qualified perpetual habitat protection agreements; 75 percent 

of costs paid or incurred and the loss in value to property pursuant to qualified 30-year habitat 

protection agreements; and 50 percent of costs paid or incurred pursuant to a qualified habitat 

protection agreement. 

For purposes of the habitat protection easement credit, the loss in value is the difference 

between the fair market value of the real property subject to the agreement determined on the day 

before the agreement is entered into less the fair market value of such property determined one 

day after the agreement is entered into. To claim such credit, the eligible taxpayer must include 

on the tax return for the taxable year a qualified appraisal (within the meaning of section 

170(f)(11)(E)) of the real property. The taxpayer's basis in such property is reduced by the 

amount of the credit allowed. 

The habitat restoration credit is taken into account after other credits (sections 27, 30, 

30B, and 30C) and may not offset the alternative minimum tax. The habitat protection easement 

credit is taken into account after other credits (sections 27, 30, 30B, and 30C) and such credit 

may offset the alternative minimum tax. Amounts allowed but in excess of either limitation may 

be carried forward to the succeeding taxable year. No deduction is allowed for any amount with 

respect to which a credit is allowed. The Secretary of the Treasury shall by regulations provide 

for the recapture of the credit if such Secretary, in consultation with the appropriate Secretary, 

determines that the eligible taxpayer has failed to carry out the duties required by the qualified 

agreement and there are no other available means to remediate such failure. 

The sum of the two credits may not exceed the amount allocated to the eligible taxpayer 

by the Secretary of the Treasury, in consultation with the Secretary of the Interior and the 

Secretary of Commerce, for the calendar year in which the taxpayer's taxable year ends. If the 

amount allowed as a credit exceeds the amount allocated for such year, the excess may be carried 

forward to the next taxable year for which the taxpayer has received an allocation. If the amount 

allocated to a taxpayer for a calendar year exceeds the amount allowed as a credit for such year, 
7 

the difference may be carried forward to the next taxable year and treated as allocated to the 

taxpayer for use in such year. No credit is allowed unless the appropriate Secretary certifies that 

a qualified agreement will contribute to the recovery of a qualified species. 

The aggregate amount allocated by the Secretary of the Treasury may not exceed in each 

year 2008 through 2012: $290,000,000 with respect to qualified perpetual habitat protection 

agreements, $55,000,000 with respect to qualified 30-year habitat protection agreements, and 

$35,000,000 with respect to qualified habitat protection agreements. No allocation is allowed 

after 2012, except that unallocated amounts with respect to any calendar year are carried forward 

to the allowable allocation for the next calendar year. 

Not later than 180 days after the date of enactment, the Secretary of the Treasury, in 

consultation with the Secretary of the Interior and the Secretary of Commerce, shall by 

regulation establish a program to process applications from eligible taxpayers and to determine 

how best to allocate the credit. In allocating the credit, priority shall be given to taxpayers with 

agreements (1) relating to habitats that will significantly increase the likelihood of recovering 

and delisting a species as an endangered species or a threatened species (as defined under section 

2 of the Endangered Species Act of 1973), (2) that are cost-effective and maximize the benefits 

to a qualified species per dollar expended, (3) relating to habitats of species that have a Federally 

approved recovery plan pursuant to section 4 of the Endangered Species Act of 1973, (4) relating 

to habitats with the potential to contribute significantly to the improvement of the status of a 

qualified species, (5) relating to habitats with the potential to contribute significantly to the 

eradication or control of invasive species that are imperiling a qualified species, (6) with habitat 

management plans that will manage multiple qualified species, (7) with habitat management 

plans that will create adjacent or proximate habitat for the recovery of a qualified species, (8) 

relating to habitats for qualified species with an urgent need for protection, (9) with habitat 

management plans that assist in preventing the listing of a species as endangered or threatened 

under the Endangered Species Act of 1973 or a similar State law, (10) with habitat management 

plans that may resolve conflicts between the protection of qualified species and otherwise lawful 

human activities, and (11) with habitat management plans that may resolve conflicts between the 

protection of a qualified species and military training or other military operation. 

The Secretary of the Treasury shall request that the appropriate Secretary consider 

whether to authorize under the Endangered Species Act of 1973 takings by an eligible taxpayer 

of a qualified species to which a qualified agreement relates if the takings are incidental to (1) 

the restoration, enhancement, or management of the habitat pursuant to the habitat management 

plan under the agreement or (2) the use of the property to which the agreement pertains at any 

time after the expiration of the easement (or specified period of time pursuant to a qualified 

habitat protection agreement), but only if such use will leave the qualified species at least as well 

off on the property as it was before the agreement was made. 

The Comptroller General of the United States shall undertake a study on the effectiveness 

of the credits. Such study shall evaluate the effectiveness of the credits in encouraging 

landowners to enter into agreements for the protection of the habitats of endangered and 

threatened species, and the degree to which such agreements are effective in preserving the 

habitats of such species and assisting in the recovery of such species, and shall include 

recommendations for improving the effectiveness of the credits. The Comptroller General shall 
8 

issue an interim report based on such study within three years of the date of enactment and a 

final report within five years of such date. 

Definitions

Eligible taxpayer

An eligible taxpayer is (1) a taxpayer who owns real property that contains habitat of a 

qualified species and enters into a qualified perpetual habitat protection agreement, a qualified 

30-year habitat protection agreement, or a qualified habitat protection agreement with the 

appropriate Secretary with respect to such real property, and (2) a taxpayer who is a party to a 

qualified perpetual habitat protection agreement, a qualified 30-year habitat protection 

agreement, or a qualified habitat protection agreement and, as part of any such agreement, agrees 

to assume responsibility for costs paid or incurred as a result of implementing such agreement. 

Qualified agreements

A qualified perpetual habitat protection agreement is an agreement under which an 

easement is granted to the appropriate Secretary, the Secretary of Agriculture, the Secretary of 

Defense, or a State to protect the habitat of a qualified species in perpetuity. A qualified 30-year 

habitat protection agreement is an agreement under which an easement is granted to the 

appropriate Secretary, the Secretary of Agriculture, the Secretary of Defense, or a State to protect 

the habitat of a qualified species for a period of not less than 30 years and less than perpetuity. A 

qualified habitat protection agreement requires agreement with the appropriate Secretary, the 

Secretary of Agriculture, the Secretary of Defense, or a State to protect the habitat of a qualified 

species for a specified period of time. 

In addition, each of the three types of qualified agreement must meet the following 

requirements: (1) the agreement must be consistent with any recovery plan that is applicable and 

that has been approved for a qualified species under section 4 of the Endangered Species Act of 

1973; (2) the appropriate Secretary and the eligible taxpayer must enter into a habitat 

management plan that is designed to restore or enhance the habitat of a qualified species or 

reduce threats to a qualified species through the management of the habitat; and (3) the 

appropriate Secretary must ensure that the eligible taxpayer is provided with technical assistance 

in carrying out the duties of the taxpayer under the terms of the agreement. 

Habitat management plan

A habitat management plan means, with respect to any habitat, a plan that identifies one 

or more qualified species to which the plan applies, describes the management practices to be 

undertaken by the taxpayer, describes the technical assistance to be provided to the taxpayer and 

identifies the entity that will provide such assistance, provides a schedule of deadlines for 

undertaking such management practices, and requires monitoring of the management practices 

and the status of the qualified species. 
9 

Qualified species

A qualified species is any species listed as an endangered species or threatened species 

under the Endangered Species Act of 1973 or any species for which a finding has been made 

under section 4(b)(3) of the Endangered Species Act of 1973 that listing under such Act may be 

warranted. 

Taking

A taking has the meaning given to such term under the Endangered Species Act of 1973. 

Appropriate Secretary

Appropriate Secretary has the meaning given to the term "Secretary" under section 3(15) 

of the Endangered Species Act of 1973. 

Effective Date

The proposal is effective for taxable years beginning after December 31, 2007. 
10 

C. Allow Deduction for Endangered Species Recovery Expenditures 

Present Law

Under present law, a taxpayer engaged in the business of farming may treat expenditures 

that are paid or incurred by him during the taxable year for the purpose of soil or water 

conservation in respect of land used in farming, or for the prevention or erosion of land used in 

farming, as expenses that are not chargeable to capital account. Such expenditures are allowed 

as a deduction, not to exceed 25 percent of the gross income derived from farming during the 

taxable year.5 Any excess above such percentage is deductible for succeeding taxable years, not 

to exceed 25 percent of the gross income derived from farming during such succeeding taxable 

year. 

Description of Proposal

The proposal provides that expenditures paid or incurred by a taxpayer engaged in the 

business of farming for the purpose of achieving site-specific management actions pursuant to 

the Endangered Species Act of 19736

 to be treated the same as expenditures for the purpose of 

soil or water conservation in respect of land used in farming, or for the prevention or erosion of 

land used in farming, i.e., such expenditures are treated as not chargeable to capital account and 

are deductible subject to the limitation that the deduction may not exceed 25 percent of the 

farmer's gross income derived from farming during the taxable year. 

Effective Date

The proposal is effective for expenditures paid or incurred after the date of enactment. 

 5

 Sec. 175. 

6

 16 U.S.C. 1533(f)(B). 
11 

D. Provide Exclusion for Certain Payments and Programs 

Relating to Fish and Wildlife 

Present Law

Under present law, gross income does not include the excludable portion of payments 

made to taxpayers by the Federal and State governments for a share of the cost of improvements 

to property under certain conservation programs.7

 

The excludable portion is the portion (or all) of a payment made under such programs 

that is determined by the Secretary of Agriculture to be made primarily for the purpose of 

conserving soil and water resources, protecting or restoring the environment, improving forests, 

or providing a habitat for wildlife, and is determined by the Secretary of the Treasury as not 

increasing substantially the annual income derived from the property. The excludable portion 

does not include that portion of any payment that is properly associated with an amount that is 

allowable as a deduction for the taxable year in which such amount is paid or incurred. 

Applicable conservation programs include (1) the rural clean water program authorized 

by section 208(j) of the Federal Water Pollution Control Act, (2) the rural abandoned mine 

program authorized by section 406 of the Surface Mining Control and Reclamation Act of 1977, 

(3) the water bank program authorized by the Water Bank Act, (4) the emergency conservation 

measures program authorized by title IV of the Agricultural Credit Act of 1978, (5) the 

agriculture conservation program authorized by the Soil Conservation and Domestic Allotment 

Act, (6) the great plains conservation program authorized by section 16 of the Soil Conservation 

and Domestic Policy Act, (7) the resource conservation and development program authorized by 

the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act, 

(8) the forestry incentives program authorized by section 4 of the Cooperative Forestry 

Assistance Act of 1978, (9) any small watershed program administered by the Secretary of 

Agriculture which is determined by the Secretary of the Treasury or his delegate to be 

substantially similar to the type of programs described in items (1) through (8), and (10) any 

program of a State, possession of the United States, a political subdivision of any of the 

foregoing, or the District of Columbia under which payments are made to individuals primarily 

for the purpose of conserving soil, protecting or restoring the environment, improving forests, or 

providing a habitat for wildlife. 

Description of Proposal

The proposal expands the exclusion for the excludable portion of certain payments to 

include the excludable portion of payments made under the Partners for Fish and Wildlife 

Program authorized by the Partners for Fish and Wildlife Act, the Landowner Incentive Program, 

the State Wildlife Grants Program, and the Private Stewardship Grants Program authorized by 

the Fish and Wildlife Act of 1956. 

 7

 Sec. 126. 
12 

Effective Date

The proposal is effective for payments received after the date of enactment. 
13 

E. Extend Expensing of Brownfields Remediation Costs 

Present Law

Present law allows a deduction for ordinary and necessary expenses paid or incurred in 

carrying on any trade or business.8

 Treasury regulations provide that the cost of incidental 

repairs that neither materially add to the value of property nor appreciably prolong its life, but 

keep it in an ordinarily efficient operating condition, may be deducted currently as a business 

expense. Section 263(a)(1) limits the scope of section 162 by prohibiting a current deduction for 

certain capital expenditures. Treasury regulations define “capital expenditures” as amounts paid 

or incurred to materially add to the value, or substantially prolong the useful life, of property 

owned by the taxpayer, or to adapt property to a new or different use. Amounts paid for repairs 

and maintenance do not constitute capital expenditures. The determination of whether an 

expense is deductible or capitalizable is based on the facts and circumstances of each case. 

Taxpayers may elect to treat certain environmental remediation expenditures that would 

otherwise be chargeable to capital account as deductible in the year paid or incurred.9

 The 

deduction applies for both regular and alternative minimum tax purposes. The expenditure must 

be incurred in connection with the abatement or control of hazardous substances at a qualified 

contaminated site. In general, any expenditure for the acquisition of depreciable property used in 

connection with the abatement or control of hazardous substances at a qualified contaminated 

site does not constitute a qualified environmental remediation expenditure. However, 

depreciation deductions allowable for such property, which would otherwise be allocated to the 

site under the principles set forth in Commissioner v. Idaho Power Co.10 and section 263A, are 

treated as qualified environmental remediation expenditures. 

A “qualified contaminated site” (a so-called “brownfield”) generally is any property that 

is held for use in a trade or business, for the production of income, or as inventory and is 

certified by the appropriate State environmental agency to be an area at or on which there has 

been a release (or threat of release) or disposal of a hazardous substance. Both urban and rural 

property may qualify. However, sites that are identified on the national priorities list under the 

Comprehensive Environmental Response, Compensation, and Liability Act of 1980 

(“CERCLA”)11 cannot qualify as targeted areas. Hazardous substances generally are defined by 

reference to sections 101(14) and 102 of CERCLA, subject to additional limitations applicable to 

asbestos and similar substances within buildings, certain naturally occurring substances such as 

radon, and certain other substances released into drinking water supplies due to deterioration 

through ordinary use, as well as petroleum products defined in section 4612(a)(3) of the Code. 

 8

 Sec. 162. 

9

 Sec. 198. 

10 418 U.S. 1 (1974). 

11 Pub. L. No. 96-510 (1980). 
14 

In the case of property to which a qualified environmental remediation expenditure 

otherwise would have been capitalized, any deduction allowed under section 198 is treated as a 

depreciation deduction and the property is treated as section 1245 property. Thus, deductions for 

qualified environmental remediation expenditures are subject to recapture as ordinary income 

upon a sale or other disposition of the property. In addition, sections 280B (demolition of 

structures) and 468 (special rules for mining and solid waste reclamation and closing costs) do 

not apply to amounts that are treated as expenses under this provision. 

Eligible expenditures are those paid or incurred before January 1, 2008. 

The Gulf Opportunity Zone Act of 200512 added section 1400N(g) to the Code, which 

extended for two years (through December 31, 2007) the expensing of environmental 

remediation expenditures paid or incurred to abate contamination at qualified contaminated sites 

located in the Gulf Opportunity Zone. As a result of the extension of section 198 contained in 

the Tax Relief and Health Care Act of 2006,13 eligible expenditures covered under both section 

1400N(g) and section 198 must be paid or incurred prior to January 1, 2008. 

Description of Proposal

The proposal extends the present law expensing provision under section 198 for three 

years through December 31, 2010. 

Effective Date

The proposal is effective for expenditures paid or incurred after December 31, 2007.

 12 Pub. L. No. 109-135 (2005). 

13 Pub. L. No. 109-432 (2006). 
15 

F. Allowance of Section 1031 Treatment for Exchanges Involving 

Certain Mutual Ditch, Reservoir, or Irrigation Company Stock 

Present Law

An exchange of property, like a sale, generally is a taxable event. However, no gain or 

loss is recognized if property held for productive use in a trade or business or for investment is 

exchanged for property of a “like-kind” which is to be held for productive use in a trade or 

business or for investment.14 If section 1031 applies to an exchange of properties, the basis of 

the property received in the exchange is equal to the basis of the property transferred, decreased 

by any money received by the taxpayer, and further adjusted for any gain or loss recognized on 

the exchange. In general, section 1031 does not apply to any exchange of stock in trade or other 

property held primarily for sale; stocks, bonds or notes; other securities or evidences of 

indebtedness or interest; interests in a partnership; certificates of trust or beneficial interests; or 

choses in action.15

Description of Proposal

The proposal provides that the general exclusion from section 1031 treatment for stocks 

shall not apply to shares in a mutual ditch, reservoir, or irrigation company, if at the time of the 

exchange: (1) the company is an organization described in section 501(c)(12)(A) (determined 

without regard to the percentage of its income that is collected from its members for the purpose 

of meeting losses and expenses); and (2) the shares in the company have been recognized by the 

highest court of the State in which such company was organized or by applicable State statute as 

constituting or representing real property or an interest in real property. 

Effective Date

The proposal is effective for transfers after the date of enactment.

 14 Sec. 1031(a)(1). 

15 Sec. 1031(a)(2). 
16 

G. Modification of Effective Date of Leasing Provisions 

of the American Jobs Creation Act of 2004 

Present Law

Present law provides for the deferral of losses attributable to certain tax exempt use 

property, generally effective for leases entered into after March 12, 2004. The deferral provision 

does not apply to property located in the United States that is subject to a lease with respect to 

which a formal application: (1) was submitted for approval to the Federal Transit Administration 

(an agency of the Department of Transportation) after June 30, 2003, and before March 13, 2004; 

(2) is approved by the Federal Transit Administration before January 1, 2006; and (3) includes a 

description and the fair market value of such property (the “qualified transportation property 

exception”). 

Description of Proposal

The proposal changes the effective date of the loss deferral rules with respect to certain 

leases. Under the proposal, the loss deferral rules also apply to leases entered into on or before 

March 12, 2004, if the lessee is a foreign person or entity. With respect to such leases, losses are 

deferred starting in taxable years beginning after December 31, 2006. 

No inference is intended regarding the appropriate present-law tax treatment of 

transactions entered into prior to March 12, 2004, if the lessee is not a foreign person or entity. 

In addition, it is intended that the proposal shall not be construed as altering or supplanting the 

present-law tax rules providing that a taxpayer is treated as the owner of leased property only if 

the taxpayer acquires and retains significant and genuine attributes of an owner of the property, 

including the benefits and burdens of ownership. The proposal also is not intended to affect the 

scope of any other present-law tax rules or doctrines applicable to purported leasing transactions.

Effective Date

The proposal is effective as if included in the provisions of the American Jobs Creation 

Act of 2004 to which it relates.