DESCRIPTION OF THE

"TAX TECHNICAL CORRECTIONS ACT OF 2003”

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

December 9, 2003

JCX-104-03
i

CONTENTS

Page

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

Tax Technical Corrections.............................................................................................................. 2

Amendments Related to the the Job Creation and Worker Assistance Act of 2002................... 3

Amendments Related to the Economic Growth and Tax Relief Reconciliation Act of 2001 .... 5

Amendment Related to the Victims of Terrorism Tax Relief Act of 2001................................. 6

Amendment Related to the Community Renewal Tax Relief Act of 2000 ................................ 7

Amendments Related to the Taxpayer Relief Act of 1997......................................................... 7

Amendment Related to the Small Business Job Protection Act of 1996.................................... 8

Clerical amendments................................................................................................................... 9
1

INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a 

description of the "Tax Technical Corrections Act of 2003.” The bill was introduced on 

December 8, 2003, as H.R. 3654 in the House of Representatives, and on December 9, 2003, as 

S. 1984 in the Senate.

 

1

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

the "Tax Technical Corrections Act of 2003” (JCX-104-03), December 9, 2003.
2

TAX TECHNICAL CORRECTIONS

Except as otherwise provided, the technical corrections contained in the bill generally are 

effective as if included in the originally enacted related legislation.

Amendments Related to the Jobs and Growth Tax Relief Reconciliation Act of 2003

Dividends taxed at capital gain rates.--Section 302 of the Jobs and Growth Tax Relief 

Act of 2003 generally provides that qualified dividend income of taxpayers other than 

corporations is taxed at the same tax rates as net capital gain. The bill makes the following 

corrections to section 302 of the Act:

The provision clarifies that the determination of net capital gain (under section 

1(h)(1)(D)(i)), for purposes of determining the amount taxed at the 25-percent rate, is made 

without regard to qualified dividend income. 

The provision clarifies that the extraordinary dividend rule applies to trusts and estates as 

well as individuals.

The provision rewrites portions of the provisions relating to the treatment of dividends 

received from a regulated investment company (“RIC”) or a real estate investment trust 

(“REIT”) to set forth the rules directly rather than be reference to rules applicable to dividends 

received by corporate shareholders.

The provision provides that distributions by a RIC or REIT of earnings and profits 

accumulated prior to becoming a RIC or REIT that are made in order to qualify the corporation 

as a RIC or REIT may be treated as qualified dividend income to the shareholders.

The provision extends the 60-day period for notifying shareholders of the amount of the 

qualified dividend income distributed by a RIC or REIT for taxable years ending on or before 

November 30, 2003, to the date the 1099-DIV for 2003 is required.

The provision provides that, in the case of partnerships, S corporations, common trust 

funds, trusts, and estates, section 302 of the Act applies to taxable years ending after December 

31, 2002, except that dividends received by the entity prior to January 1, 2003, are not treated as 

qualified dividend income. The Act provided a similar rule in the case of RICs and REITs.

Satisfaction of certain holding period requirements if stock is acquired on the day 

before ex-dividend date.--Under several similar holding period requirements relating to the tax 

consequences of receiving dividends, a taxpayer who acquires stock the day before the exdividend date cannot satisfy these holding period requirements with respect to the dividend. The 

bill modifies the stock holding period requirements to permit taxpayers to satisfy the 

requirements when they acquire stock on the day before the ex-dividend date of the stock. 

Specifically, section 7(d) of the bill modifies the holding period requirement for the dividendsreceived deduction under Code section 246(c) (as modified by section 1015 of the Taxpayer 

Relief Act of 1997) by changing from 90 days to 91 days (and from 180 days to 181 days in the 

case of certain dividends on preferred stock) the period within which a taxpayer may satisfy the 

requirement. In addition, section 7(f) of the bill modifies the holding period requirement for 
3

foreign tax credits with respect to dividends under Code section 901(k) (enacted in section 1053 

of the Taxpayer Relief Act of 1997) by changing from 30 days to 31 days (and from 90 days to 

91 days in the case of certain dividends on preferred stock) the period within which a taxpayer 

may satisfy the requirement. Section 2(a)(2) of the bill modifies the holding period requirement 

for dividends to be taxed at the tax rates applicable to capital gain under Code section 1(h)(11) 

(enacted in section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 2003) by 

changing from 120 days to 121 days (and from 180 days to 181 days in the case of certain 

dividends on preferred stock, under section 7(d) of the bill) the period within which a taxpayer 

may satisfy the requirement. Each part of the provision is effective as if included in the 

underlying related legislation (i.e., sections 1015 and 1053 of the Taxpayer Relief Act of 1997 

and section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 2003, respectively).

Amendments Related to the Job Creation and Worker Assistance Act of 2002

Bonus depreciation.-- Section 101 of the Job Creation and Worker Assistance Act of 

2002 provides generally for 30-percent additional first-year depreciation, and provides a binding 

contract rule in determining property that qualifies for it. The requirements that must be satisfied 

in order for property to qualify include that (1) the original use of the property must commence 

with the taxpayer on or after September 11, 2001, (2) the taxpayer must purchase the property 

after September 10, 2001, and before September 11, 2004, and (3) no binding written contract 

for the acquisition of the property is in effect before September 11, 2001 (or, in the case of selfconstructed property, manufacture, construction, or production of the property does not begin 

before September 11, 2001). In addition, the Act provides a special rule in the case of certain 

leased property. In the case of any property that is originally placed in service by a person and 

that is sold to the taxpayer and leased back to such person by the taxpayer within three months 

after the date that the property was placed in service, the property is treated as originally placed 

in service by the taxpayer not earlier than the date that the property is used under the leaseback. 

The Act did not specifically address the syndication of a lease by the lessor. 

The provision clarifies that property qualifying for additional first-year depreciation does 

not include any property if the user or a related party to the user or owner of such property had a 

written binding contract in effect for the acquisition of the property at any time before September 

11, 2001 (or, in the case of self-constructed property, the manufacture, construction, or 

production of the property began before September 11, 2001). For example, if a taxpayer sells to 

a related party property that was under construction prior to September 11, 2001, the property 

does not qualify for the additional first-year depreciation deduction. Similarly, if a taxpayer sells 

to a related party property that was subject to a binding written contract prior to September 11, 

2001, the property does not qualify for the additional first-year depreciation deduction. As a 

further example, if a taxpayer sells property and leases the property back in a sale-leaseback 

arrangement, and the lessee had a binding written contract in effect for the acquisition of such 

property prior to September 11, 2001, then the lessor is not entitled to the additional first-year 

depreciation deduction. 

In addition, the provision provides that if property is originally placed in service by a 

lessor (including by operation of section Code 168(k)(2)(D)(i)), such property is sold within 

three months after the date that the property was placed in service, and the user of such property 
4

does not change, then the property is treated as originally placed in service by the taxpayer not 

earlier than the date of such sale.

Five-year carryback of net operating losses ("NOLs").-- Section 102 of the Job 

Creation and Worker Assistance Act of 2002 temporarily extends the NOL carryback period to 

five years (from two years, or three years in certain cases) for NOLs arising in taxable years 

ending in 2001 and 2002. The Act was enacted in March 2002, after some taxpayers had filed 

returns for 2001. 

The provision (1) clarifies that only the NOLs arising in taxable years ending in 2001 and 

2002 qualify for the 5-year period, and (2) provides that any election to forego any carrybacks of 

NOLs arising in 2001 or 2002 can be revoked prior to November 1, 2002. The provision also 

allows taxpayers until November 1, 2002, to use the tentative carryback adjustment procedures 

of section 6411 for NOLs arising in 2001 and 2002 (without regard to the 12-month limitation in 

section 6411). In addition, the provision clarifies that an election to disregard the 5-year 

carryback for certain NOLs is treated as timely made if made before November 1, 2002 

(notwithstanding that section 172(j) requires the election to be made by the due date (including 

extensions) for filing the taxpayer's return for the year of the loss). The corrections are consistent 

with the April 15, 2002, letter sent by the Chairman and Ranking Member of the House Ways 

and Means Committee and Senate Finance Committee, as well as the guidance issued by the IRS 

pursuant to the Congressional letter (Rev. Proc. 2002-40, 2002-23 I.R.B. 1, May 22, 2002).

The provision also makes several clerical changes to the NOL provisions relating to the 

alternative minimum tax.

New York Liberty Zone bonus depreciation.-- Section 301 of the Job Creation and 

Worker Assistance Act of 2002 provides tax benefits for the area of New York City damaged in 

terrorist attacks on September 11, 2001 (an area defined in the provision and named the New 

York Liberty Zone). Under these rules, an additional first-year depreciation deduction is allowed 

equal to 30 percent of the adjusted basis of qualified New York Liberty Zone ("Liberty Zone") 

property. A taxpayer is allowed to elect out of the additional first-year depreciation for any class 

of property for any taxable year. In addition, the Act provides a special rule in the case of certain 

leased property. In the case of any property that is originally placed in service by a person and 

that is sold to the taxpayer and leased back to such person by the taxpayer within three months 

after the date that the property was placed in service, the property would be treated as originally 

placed in service by the taxpayer not earlier than the date that the property is used under the 

leaseback. The Act did not specifically address the syndication of a lease by the lessor.

The provision clarifies that property qualifying for additional first-year depreciation does 

not include any property if the user or a related party to the user or owner of such property had a 

written binding contract in effect for the acquisition of the property at any time before September 

11, 2001 (or in the case of self constructed property the manufacture, construction, or production 

of the property began before September 11, 2001). In addition, the provision provides that if 

property is originally placed in service by a lessor (including by operation of section 

168(k)(2)(D)(i)), such property is sold within three months after the date that the property was 

placed in service, and the user of such property does not change, then the property is treated as 

originally placed in service by the taxpayer not earlier than the date of such sale.
5

New York Liberty Zone expensing.-- Section 301 of the Job Creation and Worker 

Assistance Act of 2002 increases the amount a taxpayer may expense under section 179 to the 

lesser of $35,000 or the amount of Liberty Zone property placed in service for the year. In 

addition, section 301(a) of the Act states that if property qualifies for both the general additional 

first-year depreciation and Liberty Zone additional first-year depreciation, it is deemed to be 

eligible for the general additional first-year depreciation and is not considered Liberty Zone 

property (i.e., only one 30-percent additional first-year depreciation deduction is allowed). 

Because only Liberty Zone property is eligible for the increased section 179 expensing amount, 

this rule has the unintended consequence of denying the increased section 179 expensing to 

Liberty Zone property. The provision corrects this unintended result (such that qualifying 

Liberty Zone property qualifies for both the 30-percent additional first-year depreciation and the 

additional section 179 expensing). 

Provide election out of Liberty Zone five-year depreciation for leasehold 

improvements.--Code section 1400L(c), as added by section 301 of the Job Creation and 

Worker Assistance Act of 2002, provides for a 5-year recovery period for depreciation of 

qualified New York Liberty Zone leasehold improvement property that is placed in service after 

September 10, 2001, and before January 1, 2007 (and meets certain other requirements). Unlike 

the rules relating to bonus depreciation and to Liberty Zone bonus depreciation property (see 

Code sections 168(k)(2)(C)(iii) and 1400L(b)(2)(C)(iv)), which permit a taxpayer to elect out, 

this 5-year depreciation rule is not elective. The provision adds a rule permitting taxpayers to 

elect out of the 5-year recovery period.

Interest rate for defined benefit plan funding requirements.--Section 405(c) of the 

Job Creation and Worker Assistance Act of 2002 increases the interest rate used in determining 

the amount of unfunded vested benefits for PBGC variable rate premium purposes from 85 

percent to 100 percent of the interest rate on 30-year Treasury securities for the month preceding 

the month in which the applicable plan year begins. The provision makes conforming changes 

so that this rule applies for purposes of notices and reporting required under Title IV of ERISA 

with respect to underfunded plans.

Exclusion for employer-provided adoption assistance.--The provision corrects an 

incorrect reference in a technical correction to a provision relating to the exclusion for employerprovided adoption assistance.

Amendments Related to the Economic Growth and Tax Relief Reconciliation Act of 2001

Coverdell education savings accounts.--The provision corrects the application of a 

conforming change to the rule coordinating Coverdell education savings accounts with Hope and 

Lifetime Learning credits and qualified tuition programs. The conforming change was made in 

connection with the expansion of Coverdell education savings accounts to elementary and 

secondary education expenses in section 401 of the Economic Growth and Tax Relief 

Reconciliation Act of 2001.

Base period for cost-of-living adjustments to Indian employment credit rule.--The 

Indian employment credit is not available with respect to an employee whose wages exceed 

$30,000 (Code sec. 45A). For years after 1994, this $30,000 amount is adjusted for cost-of-
6

living increases at the same time and in the same manner as cost-of-living adjustments to the 

dollar limits on qualified retirement plan benefits and contributions under Code section 415. 

Section 611 of the Economic Growth and Tax Relief Reconciliation Act of 2001 increases the 

dollar limits under Code section 415 and adds a new base period for making cost-of-living 

adjustments. The provision clarifies that the pre-existing base period applies for purposes of the 

Indian employment credit.

Rounding rule for retirement plan benefit and contribution limits.--Section 611 of 

the Economic Growth and Tax Relief Reconciliation Act of 2001 increases the dollar limits on 

qualified retirement plan benefits and contributions under Code section 415, and adds a new 

rounding rule for cost-of-living adjustments to the dollar limit on annual additions to defined 

contribution plans. This new rounding rule is in addition to a pre-existing rounding rule that 

applies to benefits payable under defined benefit plans. The provision clarifies that the preexisting rounding rule applies for purposes of other Code provisions that refer to Code section 

415 and do not contain a specific rounding rule.

Excise tax on nondeductible contributions.--Under section 614 of the Economic 

Growth and Tax Relief Reconciliation Act of 2001, the limits on deductions for employer 

contributions to qualified retirement plans do not apply to elective deferrals, and elective 

deferrals are not taken into account in applying the deduction limits to other contributions. The 

provision makes a conforming change to the Code provision that applies an excise tax to 

nondeductible contributions.

SIMPLE plan contributions for domestic or similar workers.-- Section 637 of the 

Economic Growth and Tax Relief Reconciliation Act of 2001 provides an exception to the 

application of the excise tax on nondeductible retirement plan contributions in the case of 

contributions to a SIMPLE IRA or SIMPLE section 401(k) plan that are nondeductible solely 

because they are not made in connection with a trade or business of the employer (e.g., 

contributions on behalf of a domestic worker). Section 637 of that Act did not specifically 

modify the present-law requirement that compensation for purposes of determining contributions 

to a SIMPLE plan must be wages subject to income tax withholding, even though wages paid to 

domestic workers are not subject to income tax withholding. The provision revises the definition 

of compensation for purposes of determining contributions to a SIMPLE plan to include wages 

paid to domestic workers, even though such amounts are not subject to income tax withholding.

Rollovers among various types of retirement plans.--Section 641 of the Economic 

Growth and Tax Relief Reconciliation Act of 2001 expanded the rollover rules to allow rollovers

among various types of tax-favored retirement plans. The provision makes a conforming change 

to the cross-reference to the rollovers rules in the Code provision relating to qualified retirement 

annuities.

Amendment Related to the Victims of Terrorism Tax Relief Act of 2001

Disclosure of return information in connection with terrorist incident.--Section 201 

of the Victims of Terrorism Tax Relief Act of 2001 permits the IRS to disclose return 

information (other than taxpayer return information) to law enforcement agencies engaged in the 

response to or investigation of any terrorist incident, threat, or activity (sec. 6103(i)(7)(A) of the 
7

Code). If the taxpayer's identity (name, address, and taxpayer identification number) was 

provided by the taxpayer or his representative, for example, on a tax return, that information is 

taxpayer return information. As a result, the IRS could not identify the person about whom 

information is being submitted because the identity would be taxpayer return information.

The provision clarifies Code section 6103(i)(7)(A) to permit the disclosure of taxpayer 

identity in a manner similar to 6103(i)(7)(B)(iv), which permits the disclosure of identity to 

intelligence agencies as part of the information available to such agencies regarding terrorist 

activities.

Amendment Related to the Community Renewal Tax Relief Act of 2000

Tax treatment of options and securities futures contracts.-- The provision clarifies 

that the Secretary of the Treasury has the authority to prescribe regulations regarding the status 

of an option or a contract the value of which is determined directly or indirectly by reference to 

an index which becomes (or ceases to be) a narrow-based security index (as defined in Code 

section 1256(g)(6)). This authority includes, but is not limited to, regulations that provide for 

preserving the status of such an option or contract as appropriate.

Amendments Related to the Taxpayer Relief Act of 1997

Qualified tuition programs.--Section 211 of the Taxpayer Relief Act of 1997 modified 

Code section 529(c)(5), relating to gift tax rules for qualified tuition programs, but did not 

include in the statutory language the requirement that, upon a change in the designated 

beneficiary of the program, the new beneficiary must be a member of the family of the old 

beneficiary for gift taxes not to apply. The legislative history for the provision stated that the 

new beneficiary had to be of the same generation as the old beneficiary and a member of the 

family of the old beneficiary for gift taxes not to apply. The provision clarifies that the gift taxes 

apply unless the new beneficiary is of the same (or higher) generation than the old beneficiary 

and is a member of the family of the old beneficiary.

Coverdell education savings accounts.--The provision corrects section 

530(d)(4)(B)(iii), relating to Coverdell education savings accounts, by substituting for the 

undefined term "account holder" the defined term "designated beneficiary."

Constructive sale exception.--Section 1001(a) of the Taxpayer Relief Act of 1997 

provides an exception from constructive sale treatment for any transaction that is closed before 

the end of the thirtieth day after the close of the taxable year in which the transaction was entered 

into, provided certain requirements are met after closing the transaction (Code section 

1259(c)(3)). In the case of positions that are reestablished following a closed transaction but 

prior to satisfying the requirements for the exception from constructive sale treatment, the 

exception applies in a similar manner if the reestablished position itself is closed and similar 

requirements are met after closing the reestablished position. The provision clarifies that the 

exception applies in the same manner to all closed transactions, including reestablished positions 

that are closed.

Airline ticket tax.--Beginning with calendar year 2003, the domestic flight segment 

portion of the airline ticket tax is adjusted for inflation annually. The provision clarifies that, in 
8

the case of amounts paid for transportation before the beginning of the year in which the 

transportation is to occur, the rate of tax is the rate in effect for the calendar year in which the 

amount is paid. The provision is effective for flight segments beginning after December 31, 

2002.

Amendment Related to the Small Business Job Protection Act of 1996

S corporation post-termination transition period.--Shareholders of an S corporation 

whose status as an S corporation terminates are allowed a period of time after the termination 

(the post-termination transition period (“PTTP”)) to utilize certain of the benefits of S 

corporation status. The shareholders may claim losses and deductions previously suspended due 

to lack of stock or debt basis up to the amount of the stock basis as of the last day of the PTTP 

(sec. 1366(d)). Also, shareholders may receive cash distributions from the corporation during 

the PTTP that are treated as returns of capital to the extent of any balance in the S corporation’s 

accumulated adjustments account (“AAA”) (sec. 1371(e)).

The PTTP generally begins on the day after the last day of the corporation’s last tax year 

as an S corporation and ends on the later of the day which is one year after such last day or the 

due date for filing the return for such last year as an S corporation (including extensions). 

Section 1307 of the Small Business Job Protection Act of 1996 added a new 120-day PTTP 

following an audit of the corporation that adjusts an S corporation item of income, loss, or 

deduction arising during the most recent period while the corporation was an S corporation. This 

provision was enacted to allow the tax-free distribution of any additional income determined in 

the audit. 

As a result of the 1996 legislation, an S corporation shareholder might take the position 

that an audit adjustment allows the shareholder to utilize suspended losses and deductions in 

excess of the amount of the audit deficiency. For example, assume that, at the end of the oneyear PTTP following the termination of a corporation’s S corporation status, a shareholder has 

$1 million of suspended losses in the corporation. Later, the shareholder purchases additional 

stock in the corporation for $1 million. The corporation’s audit determines a $25,000 increase in 

the S corporation’s income. Although the $25,000 increase in income would allow $25,000 of 

suspended losses to be allowed, the shareholder might take the position that the entire 

$1,000,000 of suspended losses could be utilized during the 120-day PTTP following the end of 

the audit. Similarly, an S corporation that had failed to distribute the entire amount in its AAA 

during the one-year PTTP following the loss of S corporation status might argue that it could 

distribute that amount, in addition to the amount determined in the audit, during the 120-day 

period following the audit. 

The provision provides that the 120-day PTTP added by the 1996 Act does not apply for 

purposes of allowing suspended losses to be deducted (since the increased income determined in 

the audit can be offset with the losses), and allows tax-free distributions of money by the 

corporation during the 120-day period only to the extent of any increase in the AAA by reason of 

adjustments from the audit.
9

Clerical amendments

The bill makes a number of clerical and typographical amendments to the Code.