49–006 

109TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 109–304 

TAX RELIEF EXTENSION RECONCILIATION ACT OF 2005 

NOVEMBER 17, 2005.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. THOMAS, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 4297] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 4297) to provide for reconciliation pursuant to section 

201(b) of the concurrent resolution on the budget for fiscal year 

2006, having considered the same, report favorably thereon with an 

amendment and recommend that the bill as amended do pass. 

CONTENTS 

Page 

I. The Amendment ............................................................................................. 3 

II. Summary and Background ........................................................................... 10 

III. Explanation of the Bill .................................................................................. 12 

Title I—Extensions of Certain Provisions Through 2006 .............................. 12 

A. Allowance of Nonrefundable Personal Credits Against Regular 

and Alternative Minimum Tax Liability (sec. 101 of the bill 

and sec. 26 of the Code) ................................................................. 12 

B. Tax Incentives for Business Activities on Indian Reservations .... 13 

1. Indian employment tax credit (sec. 102(a) of the bill and 

sec. 45A of the Code) ............................................................... 13 

2. Accelerated depreciation for business property on Indian 

reservations (sec. 102(b) of the bill and sec. 168(j) of the 

Code) ......................................................................................... 14 

C. Work Opportunity Tax Credit (sec. 103 of the bill and sec. 

51 of the Code) ................................................................................ 15 

D. Welfare-To-Work Tax Credit (sec. 104 of the bill and sec. 51A 

of the Code) ..................................................................................... 17 

2 

E. Deduction for Corporate Donations of Computer Technology and 

Equipment (sec. 105 of the bill and sec. 170 of the Code) .......... 19 

F. Availability of Archer Medical Savings Accounts (sec. 106 of 

the bill and sec. 220 of the Code) .................................................. 20 

G. Fifteen-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements and Qualified Restaurant Improvements 

(secs. 107 and 108 of the bill and sec. 168(e)(3)(E) of the 

Code) ................................................................................................ 22 

H. Taxable Income Limit on Percentage Depletion for Oil and 

Natural Gas Produced from Marginal Properties (sec. 109 of 

the bill and sec. 613A(c)(6)(H) of the Code) .................................. 24 

I. Tax Incentives for Investment in the District of Columbia (sec. 

110 of the bill and secs. 1400, 1400A, 1400B, and 1400C of 

the Code) ......................................................................................... 25 

J. Possession Tax Credit with Respect to American Samoa (sec. 

111 of the bill and sec. 936 of the Code) ....................................... 28 

K. Parity in the Application of Certain Limits to Mental Health 

Benefits (sec. 112 of the bill and sec. 9812 of the Code) ............. 30 

L. Research Credit (sec. 113 of the bill and sec. 41 of the Code) ....... 31 

M. Qualified Zone Academy Bonds (sec. 114 of the bill and sec. 

1397E of the Code) ......................................................................... 35 

N. Above-the-Line Deduction for Certain Expenses of Elementary 

and Secondary School Teachers (sec. 115 of the bill and sec. 

62 of the Code) ................................................................................ 36 

O. Above-the-Line Deduction for Higher Education Expenses (sec. 

116 of the bill and sec. 222 of the Code) ....................................... 37 

P. Deduction of State and Local General Sales Taxes (sec. 117 

of the bill and sec. 164 of the Code) .............................................. 38 

Title II—Extensions of Certain Provisions for Two Years, and Other 

Modifications .............................................................................................. 40 

A. Extension and Expansion to Petroleum Products of Expensing 

for Environmental Remediation Costs (sec. 201 of the bill and 

sec. 198 of the Code) ....................................................................... 40 

B. Controlled Foreign Corporations ..................................................... 42 

1. Subpart F exception for active financing (sec. 202(a) of the 

bill and secs. 953 and 954 of the Code) ................................. 42 

2. Look-through treatment of payments between related controlled foreign corporations under foreign personal holding 

company income rules (sec. 202(b) of the bill and sec. 

954(c) of the Code) ................................................................... 45 

C. Reduced Rates for Capital Gains and Dividends of Individuals 

(sec. 203 of the bill and sec. 1(h) of the Code) .............................. 46 

D. Credit for Elective Deferrals and IRA Contributions (the ‘‘Saver’s Credit’’) (sec. 204 of the bill and sec. 25B of the Code) ........ 49 

E. Extension of Increased Expensing for Small Business (sec. 205 

of the bill and sec. 179 of the Code) .............................................. 51 

Title III—Other Provisions ........................................................................... 52 

A. Taxation of Certain Settlement Funds (sec. 301 of the bill and 

sec. 468B of the Code) .................................................................... 52 

B. Modification of Active Business Definition Under Section 355 

(sec. 302 of the bill and sec. 355 of the Code) .............................. 53 

C. Qualified Veteran’s Mortgage Bonds (sec. 303 of the bill and 

sec. 143 of the Code) ....................................................................... 55 

D. Capital Gains Treatment for Certain Self-Created Musical 

Works (sec. 304 of the bill and sec. 1221 of the Code) ................ 56 

E. Decrease Minimum Vessel Tonnage Limit to 6,000 Deadweight 

Tons (sec. 305 of the bill and sec. 1355 of the Code) ................... 57 

F. Modification of Special Arbitrage Rule for Certain Funds (sec. 

306 of the bill) ................................................................................. 59 

IV. Votes of the Committee ................................................................................. 60 

V. Budget Effects of the Bill .............................................................................. 64 

VI. Other Matters To Be Discussed Under the Rules of the House ................ 72 

VII. Changes in Existing Law Made by the Bill, as Reported ........................... 76 

VIII. Dissenting Views ........................................................................................... 95 

3 

THE AMENDMENT

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE, ETC. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Tax Relief Extension Reconciliation Act of 2005’’. 

(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment 

to, or repeal of, a section or other provision, the reference shall be considered to be 

made to a section or other provision of the Internal Revenue Code of 1986. 

(c) TABLE OF CONTENTS.—The table of contents for this Act is as follows: 

Sec. 1. Short title, etc. 

TITLE I—EXTENSIONS OF CERTAIN PROVISIONS THROUGH 2006 

Sec. 101. Allowance of nonrefundable personal credits against regular and minimum tax liability. 

Sec. 102. Tax incentives for business activities on Indian reservations. 

Sec. 103. Work opportunity credit. 

Sec. 104. Welfare-to-work credit. 

Sec. 105. Deduction for corporate donations of computer technology and equipment. 

Sec. 106. Availability of medical savings accounts. 

Sec. 107. 15-year cost recovery for leasehold improvements. 

Sec. 108. 15-year cost recovery for restaurant improvements. 

Sec. 109. Taxable income limit on percentage depletion for oil and natural gas produced from marginal properties. 

Sec. 110. District of Columbia Enterprise Zone. 

Sec. 111. Possession tax credit with respect to American Samoa. 

Sec. 112. Parity in the application of certain limits to mental health benefits. 

Sec. 113. Research credit. 

Sec. 114. Qualified Zone Academy Bonds. 

Sec. 115. Certain expenses of elementary and secondary school teachers. 

Sec. 116. Qualified tuition and related expenses. 

Sec. 117. State and local general sales taxes. 

TITLE II—EXTENSIONS OF CERTAIN PROVISIONS FOR 2 ADDITIONAL YEARS AND OTHER 

MODIFICATIONS 

Sec. 201. Expensing of environmental remediation costs. 

Sec. 202. Controlled foreign corporations. 

Sec. 203. Capital gains and dividends rates. 

Sec. 204. Saver’s credit. 

Sec. 205. Increased expensing for small business. 

TITLE III—OTHER PROVISIONS 

Sec. 301. Clarification of taxation of certain settlement funds. 

Sec. 302. Modification of active business definition under section 355. 

Sec. 303. Veterans’ mortgage bonds. 

Sec. 304. Capital gains treatment for certain self-created musical works. 

Sec. 305. Vessel tonnage limit. 

Sec. 306. Modification of special arbitrage rule for certain funds. 

TITLE I—EXTENSIONS OF CERTAIN 

PROVISIONS THROUGH 2006 

SEC. 101. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST REGULAR AND 

MINIMUM TAX LIABILITY. 

(a) IN GENERAL.—Paragraph (2) of section 26(a) (relating to special rule for taxable years 2000 through 2005) is amended—

(1) in the text by striking ‘‘or 2005’’ and inserting ‘‘2005, or 2006’’, and 

(2) in the heading by striking ‘‘2005’’ and inserting ‘‘2006’’. 

(b) CONFORMING PROVISIONS.—

(1) Subsection (i) of section 904 (relating to coordination with nonrefundable 

personal credits) is amended by striking ‘‘or 2005’’ and inserting ‘‘2005, or 

2006’’. 

(2) The amendments made by sections 201(b), 202(f), and 618(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to taxable years beginning during 2006. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2005. 

SEC. 102. TAX INCENTIVES FOR BUSINESS ACTIVITIES ON INDIAN RESERVATIONS. 

(a) INDIAN EMPLOYMENT TAX CREDIT.—

(1) IN GENERAL.—Subsection (f) of section 45A (relating to termination) is 

amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 2006’’. 

4 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

taxable years beginning after December 31, 2005. 

(b) ACCELERATED DEPRECIATION FOR BUSINESS PROPERTY ON INDIAN RESERVATIONS.—

(1) IN GENERAL.—Paragraph (8) of section 168(j) (relating to termination) is 

amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 2006’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply 

with respect to property placed in service after December 31, 2005. 

SEC. 103. WORK OPPORTUNITY CREDIT. 

(a) IN GENERAL.—Subparagraph (B) of section 51(c)(4) (relating to termination) is 

amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 2006’’. 

(b) INCREASE IN AGE LIMIT FOR FOOD STAMP RECIPIENTS.—Clause (i) of section 

51(d)(8)(A) (relating to qualified food stamp recipient) is amended by striking ‘‘25’’

and inserting ‘‘35’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to individuals who begin work for the employer after December 31, 2005. 

SEC. 104. WELFARE-TO-WORK CREDIT. 

(a) IN GENERAL.—Subsection (f) of section 51A (relating to termination) is amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 2006’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to individuals who begin work for the employer after December 31, 2005. 

SEC. 105. DEDUCTION FOR CORPORATE DONATIONS OF COMPUTER TECHNOLOGY AND 

EQUIPMENT. 

(a) IN GENERAL.—Subparagraph (G) of section 170(e)(6) (relating to termination) 

is amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 2006’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to contributions made in taxable years beginning after December 31, 2005. 

SEC. 106. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 

(a) IN GENERAL.—Paragraphs (2) and (3)(B) of section 220(i) (defining cut-off year) 

are each amended by striking ‘‘2005’’ each place it appears in the text and headings 

and inserting ‘‘2006’’. 

(b) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 220(j) is amended—

(A) in the text by striking ‘‘or 2004’’ each place it appears and inserting 

‘‘2004, or 2005’’, and 

(B) in the heading by striking ‘‘OR 2004’’ and inserting ‘‘2004, OR 2005’’. 

(2) Subparagraph (A) of section 220(j)(4) is amended by striking ‘‘and 2004’’

and inserting ‘‘2004, and 2005’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall take effect on 

the date of the enactment of this Act. 

(d) TIME FOR FILING REPORTS, ETC.—

(1) The report required by section 220(j)(4) of the Internal Revenue Code of 

1986 to be made on August 1, 2005, shall be treated as timely if made before 

the close of the 90-day period beginning on the date of the enactment of this 

Act. 

(2) The determination and publication required by section 220(j)(5) of such 

Code with respect to calendar year 2005 shall be treated as timely if made before the close of the 120-day period beginning on the date of the enactment of 

this Act. If the determination under the preceding sentence is that 2005 is a 

cut-off year under section 220(i) of such Code, the cut-off date under such section 220(i) shall be the last day of such 120-day period. 

SEC. 107. 15-YEAR COST RECOVERY FOR LEASEHOLD IMPROVEMENTS. 

(a) IN GENERAL.—Clause (iv) of section 168(e)(3)(E) (relating to 15-year property) 

is amended by striking ‘‘January 1, 2006’’ and inserting ‘‘January 1, 2007’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to property placed in service after December 31, 2005. 

SEC. 108. 15-YEAR COST RECOVERY FOR RESTAURANT IMPROVEMENTS. 

(a) IN GENERAL.—Clause (v) of section 168(e)(3)(E) (relating to 15-year property) 

is amended by striking ‘‘January 1, 2006’’ and inserting ‘‘January 1, 2007’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to property placed in service after December 31, 2005. 

5 

SEC. 109. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR OIL AND NATURAL GAS 

PRODUCED FROM MARGINAL PROPERTIES. 

(a) IN GENERAL.—Subparagraph (H) of section 613A(c)(6) (relating to oil and natural gas produced from marginal properties) is amended by striking ‘‘January 1, 

2006’’ and inserting ‘‘January 1, 2007’’. (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2005. 

SEC. 110. DISTRICT OF COLUMBIA ENTERPRISE ZONE. 

(a) PERIOD FOR WHICH DESIGNATION APPLICABLE.—Subsection (f) of section 1400 

(relating to time for which designation applicable) is amended by striking ‘‘December 31, 2005’’ both places it appears and inserting ‘‘December 31, 2006’’. (b) TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.—Subsection (b) of section 

1400A (relating to period of applicability) is amended by striking ‘‘December 31, 

2005’’ and inserting ‘‘December 31, 2006’’. (c) ZERO PERCENT CAPITAL GAINS RATE.— (1) IN GENERAL.—Subsection (b) of section 1400B (relating to DC Zone Asset) 

is amended by striking ‘‘January 1, 2006’’ each place it appears and inserting ‘‘January 1, 2007’’. (2) CONFORMING AMENDMENTS.— (A) Paragraph (2) of section 1400B(e) (relating to gain before 1998 and 

after 2010 not qualified) is amended— (i) by striking ‘‘December 31, 2010’’ and inserting ‘‘December 31, 

2011’’, and 

(ii) by striking ‘‘2010’’ in the heading and inserting ‘‘2011’’. (B) Paragraph (2) of section 1400B(g) (relating to sales and exchanges of 

interests in partnerships and S corporations which are DC Zone businesses) 

is amended by striking ‘‘December 31, 2010’’ and inserting ‘‘December 31, 

2011’’. (C) Subsection (d) of section 1400F (relating to certain rules to apply) is 

amended by striking ‘‘December 31, 2010’’ and inserting ‘‘December 31, 

2011’’. (d) FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA.—Subsection (i) of 

section 1400C (relating to application of section) is amended by striking ‘‘January 

1, 2006’’ and inserting ‘‘January 1, 2007’’. (e) EFFECTIVE DATES.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall take effect on January 1, 2006. 

(2) TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.—The amendment made by 

subsection (b) shall apply to obligations issued after the date of the enactment 

of this Act. 

SEC. 111. POSSESSION TAX CREDIT WITH RESPECT TO AMERICAN SAMOA. 

(a) IN GENERAL.—Subparagraph (A) of section 936(j)(8) (relating to special rules 

for certain possessions) is amended by inserting before the period at the end the following: ‘‘(before January 1, 2007, in the case of American Samoa)’’. (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2005. 

SEC. 112. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH BENEFITS. 

(a) IN GENERAL.—Paragraph (3) of section 9812(f) (relating to application of section) is amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 

2006’’. (b) EFFECTIVE DATES.—The amendment made by subsection (a) shall take effect 

on the date of the enactment of this Act. 

SEC. 113. RESEARCH CREDIT. 

(a) EXTENSION.—

(1) IN GENERAL.—Subparagraph (B) of section 41(h)(1) (relating to termination) is amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 

31, 2006’’. 

(2) CONFORMING AMENDMENT.—Subparagraph (D) of section 45C(b)(1) (relating to special rule) is amended by striking ‘‘December 31, 2005’’ and inserting 

‘‘December 31, 2006’’. 

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to amounts paid or incurred after December 31, 2005. 

(b) INCREASE IN RATES OF ALTERNATIVE INCREMENTAL CREDIT.—

(1) IN GENERAL.—Subparagraph (A) of section 41(c)(4) (relating to election of 

alternative incremental credit) is amended—

(A) by striking ‘‘2.65 percent’’ and inserting ‘‘3 percent’’, 

(B) by striking ‘‘3.2 percent’’ and inserting ‘‘4 percent’’, and 

6 

(C) by striking ‘‘3.75 percent’’ and inserting ‘‘5 percent’’. (2) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to taxable years ending after the date of the enactment of this Act. 

(c) ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH EXPENSES.— (1) IN GENERAL.—Subsection (c) of section 41 (relating to base amount) is 

amended by redesignating paragraphs (5) and (6) as paragraphs (6) and (7), respectively, and by inserting after paragraph (4) the following new paragraph: ‘‘(5) ELECTION OF ALTERNATIVE SIMPLIFIED CREDIT.— ‘‘(A) IN GENERAL.—At the election of the taxpayer, the credit determined 

under subsection (a)(1) shall be equal to 12 percent of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined. 

‘‘(B) SPECIAL RULE IN CASE OF NO QUALIFIED RESEARCH EXPENSES IN ANY

OF 3 PRECEDING TAXABLE YEARS.—

‘‘(i) TAXPAYERS TO WHICH SUBPARAGRAPH APPLIES.—The credit under 

this paragraph shall be determined under this subparagraph if the taxpayer has no qualified research expenses in any one of the 3 taxable 

years preceding the taxable year for which the credit is being determined. 

‘‘(ii) CREDIT RATE.—The credit determined under this subparagraph 

shall be equal to 6 percent of the qualified research expenses for the 

taxable year. 

‘‘(C) ELECTION.—An election under this paragraph shall apply to the taxable year for which made and all succeeding taxable years unless revoked 

with the consent of the Secretary. An election under this paragraph may 

not be made for any taxable year to which an election under paragraph (4) 

applies.’’. 

(2) COORDINATION WITH ELECTION OF ALTERNATIVE INCREMENTAL CREDIT.—

(A) IN GENERAL.—Section 41(c)(4)(B) (relating to election) is amended by 

adding at the end the following: ‘‘An election under this paragraph may not 

be made for any taxable year to which an election under paragraph (5) applies.’’. 

(B) TRANSITION RULE.—In the case of an election under section 41(c)(4) 

of the Internal Revenue Code of 1986 which applies to the taxable year 

which includes the date of the enactment of this Act, such election shall be 

treated as revoked with the consent of the Secretary of the Treasury if the 

taxpayer makes an election under section 41(c)(5) of such Code (as added 

by subsection (a)) for such year. 

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to taxable years ending after the date of the enactment of this Act. 

SEC. 114. QUALIFIED ZONE ACADEMY BONDS. 

(a) IN GENERAL.—Paragraph (1) of section 1397E(e) (relating to national limit) is 

amended by striking ‘‘and 2005’’ and inserting ‘‘2005, and 2006’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to obligations issued after December 31, 2005. 

SEC. 115. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS. 

(a) IN GENERAL.—Subparagraph (D) of section 62(a)(2) (relating to certain expenses of elementary and secondary school teachers) is amended by striking ‘‘or 

2005’’ and inserting ‘‘2005, or 2006’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to expenses paid or incurred in taxable years beginning after December 31, 2005. 

SEC. 116. QUALIFIED TUITION AND RELATED EXPENSES. 

(a) IN GENERAL.—Subsection (e) of section 222 (relating to termination) is amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 31, 2006’’. 

(b) LIMITATIONS.—Paragraph (2) of section 222(b) (relating to applicable dollar 

limit) is amended by striking subparagraphs (A) and (B), by redesignating subparagraph (C) as subparagraph (B), and by inserting before subparagraph (B) (as so redesignated) the following: 

‘‘(A) 2006.—In the case of a taxable year beginning in 2006, the applicable dollar amount shall be equal to—

‘‘(i) in the case of a taxpayer whose adjusted gross income for the taxable year does not exceed $65,000 ($130,000 in the case of a joint return), $4,000, 

‘‘(ii) in the case of a taxpayer not described in clause (i) whose adjusted gross income for the taxable year does not exceed $80,000 

($160,000 in the case of a joint return), $2,000, and 

7 

‘‘(iii) in the case of any other taxpayer, zero.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to payments made in taxable years beginning after December 31, 2005. 

SEC. 117. STATE AND LOCAL GENERAL SALES TAXES. 

(a) IN GENERAL.—Subparagraph (I) of section 164(b)(5) (relating to application of 

paragraph) is amended by striking ‘‘January 1, 2006’’ and inserting ‘‘January 1, 

2007’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2005. 

TITLE II—EXTENSIONS OF CERTAIN PROVISIONS FOR 2 ADDITIONAL YEARS AND 

OTHER MODIFICATIONS 

SEC. 201. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS. 

(a) EXTENSION OF TERMINATION DATE.—Subsection (h) of section 198 (relating to 

termination) is amended by striking ‘‘December 31, 2005’’ and inserting ‘‘December 

31, 2007’’. 

(b) PETROLEUM PRODUCTS TREATED AS HAZARDOUS SUBSTANCE.—Paragraph (1) of 

section 198(d) (relating to hazardous substance) is amended by striking ‘‘and’’ at the 

end of subparagraph (A), by striking the period at the end of subparagraph (B) and 

inserting ‘‘, and’’, and by adding at the end the following new subparagraph: 

‘‘(C) any petroleum product (as defined in section 4612(a)(3)).’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to expenditures paid or incurred after December 31, 2005. 

SEC. 202. CONTROLLED FOREIGN CORPORATIONS. 

(a) SUBPART F EXCEPTION FOR ACTIVE FINANCING.—

(1) EXEMPT INSURANCE INCOME.—Paragraph (10) of section 953(e) (relating to 

application) is amended—

(A) by striking ‘‘January 1, 2007’’ and inserting ‘‘January 1, 2009’’, and 

(B) by striking ‘‘December 31, 2006’’ and inserting ‘‘December 31, 2008’’. 

(2) EXCEPTION TO TREATMENT AS FOREIGN PERSONAL HOLDING COMPANY INCOME.—Paragraph (9) of section 954(h) (relating to application) is amended by 

striking ‘‘January 1, 2007’’ and inserting ‘‘January 1, 2009’’. 

(b) LOOK-THROUGH TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED

FOREIGN CORPORATIONS UNDER THE FOREIGN PERSONAL HOLDING COMPANY

RULES.—Subsection (c) of section 954 (relating to foreign personal holding company 

income) is amended by adding at the end the following new paragraph: 

‘‘(6) LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN CORPORATIONS.—

‘‘(A) IN GENERAL.—For purposes of this subsection, dividends, interest, 

rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is not subpart F income. For purposes of this subparagraph, interest shall include factoring income which is treated as income equivalent to interest for purposes of paragraph (1)(E). The Secretary shall prescribe such regulations as may be appropriate to prevent the abuse of the purposes of this paragraph. 

‘‘(B) APPLICATION.—Subparagraph (A) shall apply to taxable years of foreign corporations beginning after December 31, 2005, and before January 

1, 2009, and to taxable years of United States shareholders with or within 

which such taxable years of foreign corporations end.’’. 

SEC. 203. CAPITAL GAINS AND DIVIDENDS RATES. 

Section 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 is 

amended by striking ‘‘December 31, 2008’’ and inserting ‘‘December 31, 2010’’. 

SEC. 204. SAVER’S CREDIT. 

Subsection (h) of section 25B (relating to elective deferrals and IRA contributions 

by certain individuals) is amended by striking ‘‘December 31, 2006’’ and inserting 

‘‘December 31, 2008’’. 

8 

SEC. 205. INCREASED EXPENSING FOR SMALL BUSINESS. 

Subsections (b)(1), (b)(2), (b)(5), (c)(2), and (d)(1)(A)(ii) of section 179(b) (relating 

to election to expense certain depreciable business assets) are each amended by 

striking ‘‘2008’’ and inserting ‘‘2010’’. 

TITLE III—OTHER PROVISIONS 

SEC. 301. CLARIFICATION OF TAXATION OF CERTAIN SETTLEMENT FUNDS. 

(a) IN GENERAL.—Subsection (g) of section 468B (relating to clarification of taxation of certain funds) is amended to read as follows: ‘‘(g) CLARIFICATION OF TAXATION OF CERTAIN FUNDS.— ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), nothing in any provision of law shall be construed as providing that an escrow account, settlement 

fund, or similar fund is not subject to current income tax. The Secretary shall 

prescribe regulations providing for the taxation of any such account or fund 

whether as a grantor trust or otherwise. ‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SETTLEMENT FUNDS.—An escrow account, settlement fund, or similar fund shall be treated as beneficially owned 

by the United States and shall be exempt from taxation under this subtitle if— ‘‘(A) it is established pursuant to a consent decree entered by a judge of 

a United States District Court, ‘‘(B) it is created for the receipt of settlement payments as directed by a 

government entity for the sole purpose of resolving or satisfying one or 

more claims asserting liability under the Comprehensive Environmental 

Response, Compensation, and Liability Act of 1980, ‘‘(C) the authority and control over the expenditure of funds therein (including the expenditure of contributions thereto and any net earnings 

thereon) is with such government entity, and ‘‘(D) upon termination, any remaining funds will be disbursed to such 

government entity for use in accordance with applicable law. 

For purposes of this paragraph, the term ‘government entity’ means the United 

States, any State or political subdivision thereof, the District of Columbia, any 

possession of the United States, and any agency or instrumentality of any of 

the foregoing. 

‘‘(3) TERMINATION.—Paragraph (2) shall not apply to accounts and funds established after December 31, 2010.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to accounts and funds established after the date of the enactment of this Act. 

SEC. 302. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER SECTION 355. 

Subsection (b) of section 355 (defining active conduct of a trade or business) is 

amended by adding at the end the following new paragraph: 

‘‘(3) SPECIAL RULE RELATING TO ACTIVE BUSINESS REQUIREMENT.—

‘‘(A) IN GENERAL.—In the case of any distribution made after the date of 

the enactment of this paragraph and before December 31, 2010, a corporation shall be treated as meeting the requirement of paragraph (2)(A) if and 

only if such corporation is engaged in the active conduct of a trade or business. 

‘‘(B) AFFILIATED GROUP RULE.—For purposes of subparagraph (A), all 

members of such corporation’s separate affiliated group shall be treated as 

one corporation. For purposes of the preceding sentence, a corporation’s separate affiliated group is the affiliated group which would be determined 

under section 1504(a) if such corporation were the common parent and section 1504(b) did not apply. 

‘‘(C) TRANSITION RULE.—Subparagraph (A) shall not apply to any distribution pursuant to a transaction which is—

‘‘(i) made pursuant to an agreement which was binding on the date 

of the enactment of this paragraph and at all times thereafter, 

‘‘(ii) described in a ruling request submitted to the Internal Revenue 

Service on or before such date, or 

‘‘(iii) described on or before such date in a public announcement or 

in a filing with the Securities and Exchange Commission. 

The preceding sentence shall not apply if the distributing corporation elects 

not to have such sentence apply to distributions of such corporation. Any 

such election, once made, shall be irrevocable. 

‘‘(D) SPECIAL RULE FOR CERTAIN PRE-ENACTMENT DISTRIBUTIONS.—For 

purposes of determining the continued qualification under paragraph (2)(A) 

of distributions made before the date of the enactment of this paragraph 

9 

as a result of an acquisition, disposition, or other restructuring after such 

date and before December 31, 2010, such distribution shall be treated as 

made after the date of the enactment of this paragraph for purposes of applying subparagraphs (A) through (C) of this paragraph.’’. 

SEC. 303. VETERANS’ MORTGAGE BONDS. 

(a) ALL VETERANS ELIGIBLE FOR STATE HOME LOAN PROGRAMS FUNDED BY QUALIFIED VETERANS’ MORTGAGE BONDS.—

(1) IN GENERAL.—Paragraph (4) of section 143(l) (defining qualified veteran) 

is amended—

(A) by striking ‘‘at some time before January 1, 1977’’ in subparagraph 

(A), and 

(B) by striking subparagraph (B) and inserting the following: 

‘‘(B) who applied for the financing before the date 25 years after the last 

date on which such veteran left active service.’’. 

(2) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to financing provided after the date of the enactment of this Act. 

(b) REVISION OF STATE VETERANS LIMIT.—

(1) IN GENERAL.—Subparagraph (B) of section 143(l)(3) (relating to volume 

limitation) is amended to read as follows: 

‘‘(B) STATE VETERANS LIMIT.—

‘‘(i) IN GENERAL.—A State veterans limit for any calendar year is the 

amount equal to—

‘‘(I) $53,750,000 for the State of Texas, 

‘‘(II) $66,250,000 for the State of California, 

‘‘(III) $25,000,000 for the State of Oregon, 

‘‘(IV) $25,000,000 for the State of Wisconsin, and 

‘‘(V) $25,000,000 for the State of Alaska. 

‘‘(ii) PHASEIN.—In the case of calendar years beginning before 2010, 

clause (i) shall be applied by substituting for each of the dollar amounts 

therein by the applicable percentage. For purposes of the preceding 

sentence, the applicable percentage shall be determined in accordance 

with the following table: 

‘‘Calendar Year: Applicable percentage is: 

2006 ..................................................................................... 20 percent

2007 ..................................................................................... 40 percent

2008 ..................................................................................... 60 percent

2009 ..................................................................................... 80 percent. 

‘‘(iii) TERMINATION.—The State veterans limit for any calendar year 

after 2010 is zero.’’. 

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to 

bonds issued after December 31, 2005. 

SEC. 304. CAPITAL GAINS TREATMENT FOR CERTAIN SELF-CREATED MUSICAL WORKS. 

(a) IN GENERAL.—Subsection (b) of section 1221 (relating to capital asset defined) 

is amended by redesignating paragraph (3) as paragraph (4) and by inserting after 

paragraph (2) the following new paragraph: 

‘‘(3) SALE OR EXCHANGE OF SELF-CREATED MUSICAL WORKS.—At the election of 

the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply with respect to any sale or exchange before January 1, 2011, of musical compositions 

or copyrights in musical works by a taxpayer described in subsection (a)(3).’’. 

(b) LIMITATION ON CHARITABLE CONTRIBUTIONS.—Subparagraph (A) of section 

170(e)(1) is amended by inserting ‘‘(determined without regard to section 

1221(b)(3))’’ after ‘‘long-term capital gain’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to sales 

and exchanges in taxable years beginning after the date of the enactment of this 

Act. 

SEC. 305. VESSEL TONNAGE LIMIT. 

(a) IN GENERAL.—Paragraph (4) of section 1355(a) (relating to qualifying vessel) 

is amended by inserting ‘‘(6,000, in the case of taxable years beginning after December 31, 2005, and ending before January 1, 2011)’’ after ‘‘10,000’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2005. 

10 

SEC. 306. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN FUNDS. 

In the case of bonds issued after the date of the enactment of this Act and before 

August 31, 2009—

(1) the requirement of paragraph (1) of section 648 of the Deficit Reduction 

Act of 1984 (98 Stat. 941) shall be treated as met with respect to the securities 

or obligations referred to in such section if such securities or obligations are 

held in a fund the annual distributions from which cannot exceed 7 percent of 

the average fair market value of the assets held in such fund except to the extent distributions are necessary to pay debt service on the bond issue, and 

(2) paragraph (3) of such section shall be applied by substituting ‘‘distributions from’’ for ‘‘the investment earnings of’’ both places it appears. 

II. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill, H.R. 4297, as amended, provides for reconciliation pursuant to section 201(b) of the concurrent resolution on the budget 

for fiscal year 2006. The bill: (1) extends certain expiring provisions 

through 2006; (2) extends certain provisions for two additional 

years, and other modifications; and (3) makes other modifications 

to the tax laws. 

Extension of certain expiring provisions through 2006 

The bill extends for one year, through December 31, 2006, the 

following provisions: • allowance of nonrefundable personal credits against the alternative minimum tax; 

• tax incentives for business activities on Indian reservations; 

• the work opportunity tax credit (and increases the age 

limit for food stamp recipients from 25 to 35); 

• the welfare-to-work tax credit; 

• the enhanced deduction for corporate donations of computer technology and equipment; 

• the availability of Archer medical savings accounts; 

• fifteen-year cost recovery for leasehold improvements; 

• fifteen-year cost recovery for restaurant improvements; 

• suspension of taxable income limit on percentage depletion 

for oil and natural gas produced from marginal wells; 

• tax incentives for the District of Columbia Enterprise 

Zone; 

• possession tax credit with respect to American Samoa; 

• excise tax provisions relating to mental health parity 

rules; 

• an expanded research and experimentation credit; 

• authority to issue qualified zone academy bonds; 

• the deduction for teacher classroom expenses; 

• the deduction for qualified tuition and related expenses; 

and 

• the deduction for State and local sales taxes. 

Extension of certain provisions for two additional years and other 

modifications 

The bill extends and modifies certain other provisions, as follows: • Expensing of ‘‘brownfield’’ environmental clean up costs is 

extended for two years through 2007 (and expanded to include 

sites contaminated by petroleum products); 

11 

• The subpart F active financing exception is extended for 

two years, though 2008; 

• Look-through treatment is provided (through 2008) under 

the subpart F foreign personal holding company income rules 

for certain payments between related foreign subsidiaries; 

• The zero- and 15-percent rates on capital gains and dividend income are extended for two years, through 2010; 

• The saver’s credit is extended for two years, though December 31, 2008; and 

• Enhanced section 179 expensing for small businesses is extended for two years, through 2009. 

Other provisions 

The bill contains other provisions, as follows: 

• Certain settlement funds established after the date of enactment and on or before December 31, 2010, for the cleanup 

of hazardous waste sites are not subject to Federal income tax; 

• The active business definition under section 355 is modified; 

• The qualified veterans’ mortgage bond program is expanded to include more recent veterans, effective for financing 

provided after the date of enactment. In addition, new volume 

caps are provided for veteran’s mortgage bonds for States eligible to issue such bonds, effective for bonds issued after December 31, 2005; 

• Capital gain treatment is provided to songwriters’ sales of 

their musical compositions or copyrights in those compositions. 

This treatment applies to sales or exchanges (1) in taxable 

years beginning after the date of enactment and (2) before January 1, 2011; 

• The minimum weight for vessels eligible for the tonnage 

tax regime is decreased to 6,000 deadweight tons through December 31, 2010; and 

• The modification of a special arbitrage rule for a certain 

fund is extended through August 31, 2009. 

B. BACKGROUND AND NEED FOR LEGISLATION

Under the Concurrent Resolution on the Budget for Fiscal Year 

2006, the Committee on Ways and Means was instructed to report 

revenue reconciliation provisions sufficient to reduce revenues by 

not more than $11 billion for fiscal year 2006 and by not more than 

$70 billion for the period of fiscal years 2006 through 2010. The instructions further provide that revenues are not to be reduced by 

more than $60 billion for the period of fiscal years 2006 through 

2010 prior to action on the spending reconciliation provisions. The 

reconciliation provisions approved by the Committee reflect the 

need to avoid tax increases on families and business as a result of 

provisions that would otherwise expire, as well as other purposes. 

C. LEGISLATIVE HISTORY

The Committee marked up the bill on November 15, 2005, and 

ordered the bill, as amended, favorably reported. 

The Committee held the following hearings relating to the bill: 

12 

• Hearing on the President’s fiscal year 2006 budget with 

OMB Director Bolton (Feb. 9, 2005); and • Hearing on the President’s fiscal year 2006 budget with 

Treasury Secretary Snow (Feb. 8, 2005). 

III. EXPLANATION OF THE BILL 

TITLE I—EXTENSIONS OF CERTAIN PROVISIONS THROUGH 

2006 

A. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST

REGULAR AND ALTERNATIVE MINIMUM TAX LIABILITY

(sec. 101 of the bill and sec. 26 of the Code) 

PRESENT LAW

Present law provides for certain nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and 

disabled, the adoption credit, the child tax credit, the credit for interest on certain home mortgages, the HOPE Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain 

nonbusiness energy property, the credit for residential energy efficient property, and the D.C. first-time homebuyer credit). 

For taxable years beginning in 2005, the nonrefundable personal 

credits are allowed to the extent of the full amount of the individual’s regular tax and alternative minimum tax. 

For taxable years beginning after 2005, the nonrefundable personal credits (other than the adoption credit, child credit and saver’s credit) are allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, determined without regard to the minimum tax foreign 

tax credit. The adoption credit, child credit, and saver’s credit are 

allowed to the full extent of the individual’s regular tax and alternative minimum tax. 

The alternative minimum tax is the amount by which the tentative minimum tax exceeds the regular income tax. An individual’s tentative minimum tax is the sum of (1) 26 percent of so 

much of the taxable excess as does not exceed $175,000 ($87,500 

in the case of a married individual filing a separate return) and (2) 

28 percent of the remaining taxable excess. The taxable excess is 

so much of the alternative minimum taxable income (‘‘AMTI’’) as 

exceeds the exemption amount. The maximum tax rates on net capital gain and dividends used in computing the regular tax are used 

in computing the tentative minimum tax. AMTI is the individual’s 

taxable income adjusted to take account of specified preferences 

and adjustments. 

The exemption amount is: (1) $45,000 ($58,000 for taxable years 

beginning before 2006) in the case of married individuals filing a 

joint return and surviving spouses; (2) $33,750 ($40,250 for taxable 

years beginning before 2006) in the case of other unmarried individuals; (3) $22,500 ($29,000 for taxable years beginning before 

2006) in the case of married individuals filing a separate return; 

and (4) $22,500 in the case of an estate or trust. The exemption 

amount is phased out by an amount equal to 25 percent of the 

amount by which the individual’s AMTI exceeds (1) $150,000 in the 

case of married individuals filing a joint return and surviving 

13 

spouses, (2) $112,500 in the case of other unmarried individuals, 

and (3) $75,000 in the case of married individuals filing separate 

returns, an estate, or a trust. These amounts are not indexed for 

inflation. 

REASONS FOR CHANGE

The Committee believes that the nonrefundable personal credits 

should be useable without limitation by reason of the alternative 

minimum tax. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law provision allowing nonrefundable personal credits to the full extent of the individual’s regular tax and alternative minimum tax (through taxable 

years beginning on or before December 31, 2006). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2005. 

B. TAX INCENTIVES FOR BUSINESS ACTIVITIES ON INDIAN

RESERVATIONS

1. Indian employment tax credit (sec. 102(a) of the bill and sec. 45A 

of the Code) 

PRESENT LAW

In general, a credit against income tax liability is allowed to employers for the first $20,000 of qualified wages and qualified employee health insurance costs paid or incurred by the employer 

with respect to certain employees (sec. 45A). The credit is equal to 

20 percent of the excess of eligible employee qualified wages and 

health insurance costs during the current year over the amount of 

such wages and costs incurred by the employer during 1993. The 

credit is an incremental credit, such that an employer’s currentyear qualified wages and qualified employee health insurance costs 

(up to $20,000 per employee) are eligible for the credit only to the 

extent that the sum of such costs exceeds the sum of comparable 

costs paid during 1993. No deduction is allowed for the portion of 

the wages equal to the amount of the credit. 

Qualified wages means wages paid or incurred by an employer 

for services performed by a qualified employee. A qualified employee means any employee who is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe, 

who performs substantially all of the services within an Indian reservation, and whose principal place of abode while performing such 

services is on or near the reservation in which the services are performed. An ‘‘Indian reservation’’ is a reservation as defined in section 3(d) of the Indian Financing Act of 1974 or section 4(1) of the 

Indian Child Welfare Act of 1978. For purposes of the preceding 

sentence, section 3(d) is applied by treating ‘‘former Indian reservations in Oklahoma’’ as including only lands that are (1) within the 

jurisdictional area of an Oklahoma Indian tribe as determined by 

the Secretary of the Interior, and (2) recognized by such Secretary 

14 

as an area eligible for trust land status under 25 C.F.R. Part 151 

(as in effect on August 5, 1997). 

An employee is not treated as a qualified employee for any taxable year of the employer if the total amount of wages paid or incurred by the employer with respect to such employee during the 

taxable year exceeds an amount determined at an annual rate of 

$30,000 (which after adjusted for inflation after 1993 is currently 

$35,000). In addition, an employee will not be treated as a qualified 

employee under certain specific circumstances, such as where the 

employee is related to the employer (in the case of an individual 

employer) or to one of the employer’s shareholders, partners, or 

grantors. Similarly, an employee will not be treated as a qualified 

employee where the employee has more than a 5 percent ownership 

interest in the employer. Finally, an employee will not be considered a qualified employee to the extent the employee’s services relate to gaming activities or are performed in a building housing 

such activities. 

The wage credit is available for wages paid or incurred on or 

after January 1, 1994, in taxable years that begin before January 

1, 2006. 

REASONS FOR CHANGE

The Committee believes that extending the wage credit tax incentive will expand employment opportunities for members of Indian tribes. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law employment 

credit provision (through taxable years beginning on or before December 31, 2006). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005. 

2. Accelerated depreciation for business property on Indian reservations (sec. 102(b) of the bill and sec. 168(j) of the Code) 

PRESENT LAW

With respect to certain property used in connection with the conduct of a trade or business within an Indian reservation, depreciation deductions under section 168(j) are determined using the following recovery periods: 

Years 

3-year property ....................................................................................... 2 

5-year property ....................................................................................... 3 

7-year property ....................................................................................... 4 

10-year property ..................................................................................... 6 

15-year property ..................................................................................... 9 

20-year property ..................................................................................... 12 

Nonresidential real property ................................................................. 22 

‘‘Qualified Indian reservation property’’ eligible for accelerated 

depreciation includes property which is (1) used by the taxpayer 

predominantly in the active conduct of a trade or business within 

an Indian reservation, (2) not used or located outside the reservaVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
15 

tion on a regular basis, (3) not acquired (directly or indirectly) by 

the taxpayer from a person who is related to the taxpayer (within 

the meaning of section 465(b)(3)(C)), and (4) described in the recovery-period table above. In addition, property is not ‘‘qualified Indian reservation property’’ if it is placed in service for purposes of 

conducting gaming activities. Certain ‘‘qualified infrastructure 

property’’ may be eligible for the accelerated depreciation even if located outside an Indian reservation, provided that the purpose of 

such property is to connect with qualified infrastructure property 

located within the reservation (e.g., roads, power lines, water systems, railroad spurs, and communications facilities). 

An ‘‘Indian reservation’’ means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 or section 4(1) of the 

Indian Child Welfare Act of 1978. For purposes of the preceding 

sentence, section 3(d) is applied by treating ‘‘former Indian reservations in Oklahoma’’ as including only lands that are (1) within the 

jurisdictional area of an Oklahoma Indian tribe as determined by 

the Secretary of the Interior, and (2) recognized by such Secretary 

as an area eligible for trust land status under 25 C.F.R. Part 151 

(as in effect on August 5, 1997). 

The depreciation deduction allowed for regular tax purposes is 

also allowed for purposes of the alternative minimum tax. The accelerated depreciation for Indian reservations is available with respect to property placed in service on or after January 1, 1994, and 

before January 1, 2006. 

REASONS FOR CHANGE

The Committee believes that extending the depreciation incentive will encourage economic development within Indian reservations and expand employment opportunities on such reservations. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law incentive relating to depreciation of qualified Indian reservation property (to 

apply to property placed in service through December 31, 2006). 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2005. 

C. WORK OPPORTUNITY TAX CREDIT

(sec. 103 of the bill and sec. 51 of the Code) 

PRESENT LAW

Work opportunity tax credit 

Targeted groups eligible for the credit 

The work opportunity tax credit is available on an elective basis 

for employers hiring individuals from one or more of eight targeted 

groups. The eight targeted groups are: (1) certain families eligible 

to receive benefits under the Temporary Assistance for Needy Families Program; (2) high-risk youth; (3) qualified ex-felons; (4) vocational rehabilitation referrals; (5) qualified summer youth employees; (6) qualified veterans; (7) families receiving food stamps; and 

16 

(8) persons receiving certain Supplemental Security Income (SSI) 

benefits. 

A high-risk youth is an individual aged at least 18 but aged 

under 25 on the hiring date who is certified by a designated local 

agency as having a principal place of abode within an empowerment zone, enterprise community, or renewal community. The credit is not available if the youth’s principal place of abode ceases to 

be within an empowerment zone, enterprise community, or renewal 

community. 

A qualified ex-felon is an individual certified by a designated 

local agency as: (1) having been convicted of a felony under State 

or Federal law; (2) being a member of an economically disadvantaged family; and (3) having a hiring date within one year of release from prison or conviction. 

A food stamp recipient is an individual aged at least 18 but aged 

under 25 on the hiring date certified by a designated local agency 

as being a member of a family either currently or recently receiving 

assistance under an eligible food stamp program. 

Qualified wages 

Generally, qualified wages are defined as cash wages paid by the 

employer to a member of a targeted group. The employer’s deduction for wages is reduced by the amount of the credit. 

Calculation of the credit 

The credit equals 40 percent (25 percent for employment of 400 

hours or less) of qualified first-year wages. Generally, qualified 

first-year wages are qualified wages (not in excess of $6,000) attributable to service rendered by a member of a targeted group during 

the one-year period beginning with the day the individual began 

work for the employer. Therefore, the maximum credit per employee is $2,400 (40 percent of the first $6,000 of qualified firstyear wages). With respect to qualified summer youth employees, 

the maximum credit is $1,200 (40 percent of the first $3,000 of 

qualified first-year wages). 

Minimum employment period 

No credit is allowed for qualified wages paid to employees who 

work less than 120 hours in the first year of employment. 

Coordination of the work opportunity tax credit and the welfare-to-work tax credit 

An employer cannot claim the work opportunity tax credit with 

respect to wages of any employee on which the employer claims the 

welfare-to-work tax credit. 

Other rules 

The work opportunity tax credit is not allowed for wages paid to 

a relative or dependent of the taxpayer. Similarity wages paid to 

replacement workers during a strike or lockout are not eligible for 

the work opportunity tax credit. Wages paid to any employee during any period for which the employer received on-the-job training 

program payments with respect to that employee are not eligible 

for the work opportunity tax credit. The work opportunity tax credit generally is not allowed for wages paid to individuals who had 

17 

previously been employed by the employer. In addition, many other 

technical rules apply. 

Expiration 

The work opportunity tax credit is not available for individuals 

who begin work for an employer after December 31, 2005. 

REASONS FOR CHANGE

The Committee believes that the extension will continue to lower 

barriers to employment for the enumerated disadvantaged target 

groups while at the same time provide Congress and the Treasury 

Department and Labor Department with an opportunity to study 

the efficacy, the operation, and the effectiveness of the credit. 

EXPLANATION OF PROVISION

In general 

The bill extends the work opportunity credit for one year 

(through December 31, 2006). 

Targeted groups eligible for the combined credit 

The bill raises the maximum age limit for the food stamp recipient category to include individuals who are at least age 18 but 

under age 35 on the hiring date. 

EFFECTIVE DATE

The provision is effective for wages paid or incurred to a qualified individual who begins work for an employer after December 

31, 2005, and before January 1, 2007. 

D. WELFARE-TO-WORK TAX CREDIT

(sec. 104 of the bill and sec. 51A of the Code) 

PRESENT LAW

Welfare-to-work tax credit 

Targeted group eligible for the credit 

The welfare-to-work tax credit is available on an elective basis to 

employers of qualified long-term family assistance recipients. 

Qualified long-term family assistance recipients are: (1) members of 

a family that has received family assistance for at least 18 consecutive months ending on the hiring date; (2) members of a family that 

has received such family assistance for a total of at least 18 months 

(whether or not consecutive) after August 5, 1997 (the date of enactment of the welfare-to-work tax credit) if they are hired within 

two years after the date that the 18-month total is reached; and 

(3) members of a family who are no longer eligible for family assistance because of either Federal or State time limits, if they are 

hired within two years after the Federal or State time limits made 

the family ineligible for family assistance. 

Qualified wages 

Qualified wages for purposes of the welfare-to-work tax credit are 

defined more broadly than the work opportunity tax credit. Unlike 

18 

the definition of wages for the work opportunity tax credit which 

includes simply cash wages, the definition of wages for the welfareto-work tax credit includes cash wages paid to an employee plus 

amounts paid by the employer for: (1) educational assistance excludable under a section 127 program (or that would be excludable 

but for the expiration of sec. 127); (2) health plan coverage for the 

employee, but not more than the applicable premium defined under 

section 4980B(f)(4); and (3) dependent care assistance excludable 

under section 129. The employer’s deduction for wages is reduced 

by the amount of the credit. 

Calculation of the credit 

The welfare-to-work tax credit is available on an elective basis to 

employers of qualified long-term family assistance recipients during the first two years of employment. The maximum credit is 35 

percent of the first $10,000 of qualified first-year wages and 50 percent of the first $10,000 of qualified second-year wages. Qualified 

first-year wages are defined as qualified wages (not in excess of 

$10,000) attributable to service rendered by a member of the targeted group during the one-year period beginning with the day the 

individual began work for the employer. Qualified second-year 

wages are defined as qualified wages (not in excess of $10,000) attributable to service rendered by a member of the targeted group 

during the one-year period beginning immediately after the first 

year of that individual’s employment for the employer. The maximum credit is $8,500 per qualified employee. 

Minimum employment period 

No credit is allowed for qualified wages paid to a member of the 

targeted group unless they work at least 400 hours or 180 days in 

the first year of employment. 

Coordination of the work opportunity tax credit and the welfare-to-work tax credit 

An employer cannot claim the work opportunity tax credit with 

respect to wages of any employee on which the employer claims the 

welfare-to-work tax credit. 

Other rules 

The welfare-to-work tax credit incorporates directly or by reference many of the other rules contained on the work opportunity 

tax credit. 

Expiration 

The welfare-to-work credit is not available for individuals who 

begin work for an employer after December 31, 2005. 

REASONS FOR CHANGE

The Committee believes that the extension will continue to lower 

barriers to employment for the enumerated disadvantaged target 

groups while at the same time provide Congress and the Treasury 

Department and Labor Department with an opportunity to study 

the efficacy, the operation, and the effectiveness of the credit. 

19 

EXPLANATION OF PROVISION

The bill extends the welfare-to-work tax credit for one year 

(through December 31, 2006). 

EFFECTIVE DATE

The provision is effective for wages paid or incurred to a qualified individual who begins work for an employer after December 

31, 2005, and before January 1, 2007. 

E. DEDUCTION FOR CORPORATE DONATIONS OF COMPUTER

TECHNOLOGY AND EQUIPMENT

(sec. 105 of the bill and sec. 170 of the Code) 

PRESENT LAW

In the case of a charitable contribution of inventory or other ordinary-income or short-term capital gain property, the amount of the 

charitable deduction generally is limited to the taxpayer’s basis in 

the property. In the case of a charitable contribution of tangible 

personal property, the deduction is limited to the taxpayer’s basis 

in such property if the use by the recipient charitable organization 

is unrelated to the organization’s tax-exempt purpose. In cases involving contributions to a private foundation (other than certain 

private operating foundations), the amount of the deduction is limited to the taxpayer’s basis in the property. 

Under present law, a taxpayer’s deduction for charitable contributions of computer technology and equipment generally is limited to the taxpayer’s basis (typically, cost) in the property. However, certain corporations may claim a deduction in excess of basis 

for a ‘‘qualified computer contribution.’’ This enhanced deduction is 

equal to the lesser of (1) basis plus one-half of the item’s appreciation (i.e., basis plus one half of fair market value minus basis) or 

(2) two times basis. The enhanced deduction for qualified computer 

contributions expires for any contribution made during any taxable 

year beginning after December 31, 2005. 

A qualified computer contribution means a charitable contribution of any computer technology or equipment, which meets standards of functionality and suitability as established by the Secretary 

of the Treasury. The contribution must be to certain educational organizations or public libraries and made not later than three years 

after the taxpayer acquired the property or, if the taxpayer constructed the property, not later than the date construction of the 

property is substantially completed. The original use of the property must be by the donor or the donee, and in the case of the 

donee, must be used substantially for educational purposes related 

to the function or purpose of the donee. The property must fit productively into the donee’s education plan. The donee may not transfer the property in exchange for money, other property, or services, 

except for shipping, installation, and transfer costs. To determine 

whether property is constructed by the taxpayer, the rules applicable to qualified research contributions apply. That is, property is 

considered constructed by the taxpayer only if the cost of the parts 

used in the construction of the property (other than parts manufactured by the taxpayer or a related person) does not exceed 50 perVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00019 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
20 

cent of the taxpayer’s basis in the property. Contributions may be 

made to private foundations under certain conditions. 

REASONS FOR CHANGE

The Committee believes that educational organizations and public libraries continue to have a need for computer equipment and 

that it is appropriate to extend the enhanced deduction for contributions of such equipment to such institutions. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law provision relating to qualified computer contributions (to apply to contributions 

made in taxable years beginning on or before December 31, 2006). 

EFFECTIVE DATE

The provision applies to contributions made in taxable years beginning after December 31, 2005. 

F. AVAILABILITY OF ARCHER MEDICAL SAVINGS ACCOUNTS

(sec. 106 of the bill and sec. 220 of the Code) 

PRESENT LAW

Archer medical savings accounts 

In general 

Within limits, contributions to an Archer medical savings account (‘‘Archer MSA’’) are deductible in determining adjusted gross 

income if made by an eligible individual and are excludable from 

gross income and wages for employment tax purposes if made by 

the employer of an eligible individual. Earnings on amounts in an 

Archer MSA are not currently taxable. Distributions from an Archer MSA for medical expenses are not includible in gross income. 

Distributions not used for medical expenses are includible in gross 

income. In addition, distributions not used for medical expenses are 

subject to an additional 15-percent tax unless the distribution is 

made after age 65, death, or disability. 

Eligible individuals 

Archer MSAs are available to employees covered under an employer-sponsored high deductible plan of a small employer and selfemployed individuals covered under a high deductible health plan. 

An employer is a small employer if it employed, on average, no 

more than 50 employees on business days during either the preceding or the second preceding year. An individual is not eligible 

for an Archer MSA if he or she is covered under any other health 

plan in addition to the high deductible plan. 

Tax treatment of and limits on contributions 

Individual contributions to an Archer MSA are deductible (within 

limits) in determining adjusted gross income (i.e., ‘‘above-the-line’’). 

In addition, employer contributions are excludable from gross income and wages for employment tax purposes (within the same 

limits), except that this exclusion does not apply to contributions 

made through a cafeteria plan. In the case of an employee, conVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
21 

tributions can be made to an Archer MSA either by the individual 

or by the individual’s employer. 

The maximum annual contribution that can be made to an Archer MSA for a year is 65 percent of the deductible under the high 

deductible plan in the case of individual coverage and 75 percent 

of the deductible in the case of family coverage. 

Definition of high deductible plan 

A high deductible plan is a health plan with an annual deduct- ible of at least $1,750 and no more than $2,650 in the case of individual coverage and at least $3,500 and no more than $5,250 in the 

case of family coverage (for 2005). In addition, the maximum outof-pocket expenses with respect to allowed costs (including the deductible) must be no more than $3,500 in the case of individual 

coverage and no more than $6,450 in the case of family coverage 

(for 2005). A plan does not fail to qualify as a high deductible plan 

merely because it does not have a deductible for preventive care as 

required by State law. A plan does not qualify as a high deductible 

health plan if substantially all of the coverage under the plan is 

for certain permitted coverage. In the case of a self-insured plan, 

the plan must in fact be insurance (e.g., there must be appropriate 

risk shifting) and not merely a reimbursement arrangement. 

Cap on taxpayers utilizing Archer MSAs and expiration of 

pilot program 

The number of taxpayers benefiting annually from an Archer 

MSA contribution is limited to a threshold level (generally 750,000 

taxpayers). The number of Archer MSAs established has not exceeded the threshold level. 

After 2005, no new contributions may be made to Archer MSAs 

except by or on behalf of individuals who previously made (or had 

made on their behalf) Archer MSA contributions and employees 

who are employed by a participating employer. 

Trustees of Archer MSAs are generally required to make reports 

to the Treasury by August 1 regarding Archer MSAs established by 

July 1 of that year. If the threshold level is reached in a year, the 

Secretary is required to make and publish such determination by 

October 1 of such year. 

Health savings accounts 

Health savings accounts (‘‘HSAs’’) were enacted by the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003. 

Like Archer MSAs, an HSA is a tax-exempt trust or custodial account to which tax-deductible contributions may be made by individuals with a high deductible health plan. HSAs provide tax benefits similar to, but more favorable than, those provide by Archer 

MSAs. HSAs were established on a permanent basis. 

REASONS FOR CHANGE

The Committee believes that individuals should be encouraged to 

save for future medical care expenses and that individuals should 

be allowed to save for such expenses on a tax-favored basis. The 

Committee believes that consumers who spend their own savings 

on health care will make cost-conscious decisions, thus reducing 

the rising cost of health care. The Committee believes that Archer 

22 

1Sec. 168. 

MSAs have been an important tool in allowing certain individuals 

to save for future medical expenses on a tax-favored basis. 

The Committee is aware that recently enacted health savings accounts (HSAs) offer more advantageous tax treatment than Archer 

MSAs and that amounts can be rolled over into a health savings 

account from an Archer MSA on a tax-free basis. The Committee 

recognizes that the transition from MSAs to HSAs is still in 

progress and thus believes an extension of MSAs is appropriate. 

The Committee is also aware that taxpayers in some States cannot take advantage of MSAs or HSAs because some State law bars 

offering high deductible plans and in other cases, State tax law 

may undermine the advantages of such accounts for many savers. 

Such barriers limit consumer acceptance of these health care savings vehicles, which now have over one million participants, many 

of whom either had no insurance or worked for small businesses 

unable to offer health coverage. Because of the potential benefits 

of these savings vehicles and particularly those of HSAs, the Committee would encourage States to reconsider prohibitions on high 

deductible plans and State tax policies so that more Americans 

would have the option of preparing for health care needs through 

a savings plan. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law Archer MSA 

provisions (through December 31, 2006). 

The report required by Archer MSA trustees is treated as timely 

filed if made before the close of the 90–day period beginning on the 

date of enactment. The determination and publication whether the 

threshold level has been exceeded is treated as timely if made before the close of the 120-day period beginning on the date of enactment. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

G. FIFTEEN-YEAR STRAIGHT-LINE COST RECOVERY FOR QUALIFIED

LEASEHOLD IMPROVEMENTS AND QUALIFIED RESTAURANT IM- PROVEMENTS

(secs. 107 and 108 of the bill and sec. 168(e)(3)(E) of the Code) 

PRESENT LAW

In general 

A taxpayer generally must capitalize the cost of property used in 

a trade or business and recover such cost over time through annual 

deductions for depreciation or amortization. Tangible property generally is depreciated under the modified accelerated cost recovery 

system (‘‘MACRS’’), which determines depreciation by applying specific recovery periods, placed-inservice conventions, and depreciation methods to the cost of various types of depreciable property.1

The cost of nonresidential real property is recovered using the 

straight-line method of depreciation and a recovery period of 39 

years. Nonresidential real property is subject to the mid-month 

23 

placed-in-service convention. Under the mid-month convention, the 

depreciation allowance for the first year property is placed in service is based on the number of months the property was in service, 

and property placed in service at any time during a month is treated as having been placed in service in the middle of the month. 

Depreciation of leasehold improvements 

Generally, depreciation allowances for improvements made on 

leased property are determined under MACRS, even if the MACRS 

recovery period assigned to the property is longer than the term of 

the lease. This rule applies regardless of whether the lessor or the 

lessee places the leasehold improvements in service. If a leasehold 

improvement constitutes an addition or improvement to nonresidential real property already placed in service, the improvement 

generally is depreciated using the straight-line method over a 39- 

year recovery period, beginning in the month the addition or improvement was placed in service. However, exceptions exist for certain qualified leasehold improvements and certain qualified restaurant property. 

Qualified leasehold improvement property 

Section 168(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified leasehold improvement property placed in service 

before January 1, 2006. Qualified leasehold improvement property 

is recovered using the straight-line method. Leasehold improvements placed in service in 2006 and later will be subject to the general rules described above. 

Qualified leasehold improvement property is any improvement to 

an interior portion of a building that is nonresidential real property, provided certain requirements are met. The improvement 

must be made under or pursuant to a lease either by the lessee (or 

sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The improvement 

must be placed in service more than three years after the date the 

building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common 

area, or the internal structural framework of the building. However, if a lessor makes an improvement that qualifies as qualified 

leasehold improvement property, such improvement does not qualify as qualified leasehold improvement property to any subsequent 

owner of such improvement. An exception to the rule applies in the 

case of death and certain transfers of property that qualify for nonrecognition treatment. 

Qualified restaurant property 

Section 168(e)(3)(E)(v) provides a statutory 15-year recovery period for qualified restaurant property placed in service before January 1, 2006. For purposes of the provision, qualified restaurant 

property means any improvement to a building if such improvement is placed in service more than three years after the date such 

building was first placed in service and more than 50 percent of the 

building’s square footage is devoted to the preparation of, and seatVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00023 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
24 

ing for on-premises consumption of, prepared meals. Qualified restaurant property is recovered using the straight-line method. 

REASONS FOR CHANGE

Although lease terms differ, the Committee believes that lease 

terms for commercial real estate typically are shorter than a 39- 

year recovery period. In the interests of simplicity and administrability, a uniform period for recovery of leasehold improvements is 

desirable. The Committee bill therefore extends the present-law 

provision allowing taxpayers to use a recovery period for leasehold 

improvements of a more realistic 15 years. 

The Committee also believes that restaurant buildings generally 

are more specialized structures than other commercial buildings. 

The Committee believes that the present-law provision allowing 

taxpayers to use a 15-year recovery period for improvements made 

to restaurant buildings more accurately reflects the economic life of 

the properties than a 39-year recovery period. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law provisions 

providing a 15-year recovery period for qualified leasehold improvement property and for qualified restaurant property (to apply to 

property placed in service through December 31, 2006). 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2005. 

H. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR OIL

AND NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES

(sec. 109 of the bill and sec. 613A(c)(6)(H) of the Code) 

Present Law 

The Code permits taxpayers to recover their investments in oil 

and gas wells through depletion deductions. Two methods of depletion are currently allowable under the Code: (1) the cost depletion 

method, and (2) the percentage depletion method. Under the cost 

depletion method, the taxpayer deducts that portion of the adjusted 

basis of the depletable property which is equal to the ratio of units 

sold from that property during the taxable year to the number of 

units remaining as of the end of the taxable year plus the number 

of units sold during the taxable year. Thus, the amount recovered 

under cost depletion may never exceed the taxpayer’s basis in the 

property. 

The Code generally limits the percentage depletion method for oil 

and gas properties to independent producers and royalty owners. 

Generally, under the percentage depletion method, 15 percent of 

the taxpayer’s gross income from an oil- or gas-producing property 

is allowed as a deduction in each taxable year. The amount deducted generally may not exceed 100 percent of the taxable income 

from that property in any year. For marginal production, the 100- 

percent taxable income limitation has been suspended for taxable 

years beginning after December 31, 1997, and before January 1, 

2006. 

25 

Marginal production is defined as domestic crude oil and natural 

gas production from stripper well property or from property substantially all of the production from which during the calendar year 

is heavy oil. Stripper well property is property from which the average daily production is 15 barrel equivalents or less, determined 

by dividing the average daily production of domestic crude oil and 

domestic natural gas from producing wells on the property for the 

calendar year by the number of wells. Heavy oil is domestic crude 

oil with a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit). 

REASONS FOR CHANGE

Domestic production from marginal wells is an appropriate part 

of establishing national energy security and reducing dependence 

on foreign oil. The Committee believes the suspension of the 100- 

percent taxable income limitation for marginal wells should be extended to encourage continued operation of such wells. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law taxable income limitation suspension provision for marginal production 

(through taxable years beginning on or before December 31, 2006). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2005. 

I. TAX INCENTIVES FOR INVESTMENT IN THE DISTRICT OF COLUMBIA

(sec. 110 of the bill and secs. 1400, 1400A, 1400B, and 1400C of 

the Code) 

PRESENT LAW IN GENERAL

The Taxpayer Relief Act of 1997 designated certain economically 

depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone (the ‘‘D.C. Zone’’), within which 

businesses and individual residents are eligible for special tax incentives. The census tracts that compose the D.C. Zone are (1) all 

census tracts that presently are part of the D.C. enterprise community designated under section 1391 (i.e., portions of Anacostia, Mt. 

Pleasant, Chinatown, and the easternmost part of the District), and 

(2) all additional census tracts within the District of Columbia 

where the poverty rate is not less than 20 percent. The D.C. Zone 

designation remains in effect for the period from January 1, 1998, 

through December 31, 2005. In general, the tax incentives available in connection with the D.C. Zone are a 20-percent wage credit, 

an additional $35,000 of section 179 expensing for qualified zone 

property, expanded tax-exempt financing for certain zone facilities, 

and a zero-percent capital gains rate from the sale of certain qualified D.C. zone assets. 

Wage credit 

A 20-percent wage credit is available to employers for the first 

$15,000 of qualified wages paid to each employee (i.e., a maximum 

credit of $3,000 with respect to each qualified employee) who (1) is 

26 

2 However, the wage credit is not available for wages paid in connection with certain business 

activities described in section 144(c)(6)(B) or certain farming activities. In addition, wages are 

not eligible for the wage credit if paid to (1) a person who owns more than five percent of the 

stock (or capital or profits interests) of the employer, (2) certain relatives of the employer, or 

(3) if the employer is a corporation or partnership, certain relatives of a person who owns more 

than 50 percent of the business. 3Sec. 280C(a). 

4Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2). 

5Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2). 

6Sec. 38(c)(2). 

7Sec. 1397A. 

8Sec. 1397D. 

9Sec. 1400A. 

a resident of the D.C. Zone, and (2) performs substantially all employment services within the D.C. Zone in a trade or business of 

the employer. Wages paid to a qualified employee who earns more than $15,000 are eligible for the wage credit (although only the first $15,000 of 

wages is eligible for the credit). The wage credit is available with 

respect to a qualified full-time or part-time employee (employed for 

at least 90 days), regardless of the number of other employees who 

work for the employer. In general, any taxable business carrying 

out activities in the D.C. Zone may claim the wage credit, regardless of whether the employer meets the definition of a ‘‘D.C. Zone 

business.’’ 2

An employer’s deduction otherwise allowed for wages paid is reduced by the amount of wage credit claimed for that taxable year.3

Wages are not to be taken into account for purposes of the wage 

credit if taken into account in determining the employer’s work opportunity tax credit under section 51 or the welfare-to-work credit 

under section 51A.4 In addition, the $15,000 cap is reduced by any 

wages taken into account in computing the work opportunity tax 

credit or the welfare-to-work credit.5 The wage credit may be used 

to offset up to 25 percent of alternative minimum tax liability.6

Section 179 expensing 

In general, a D.C. Zone business is allowed an additional $35,000 

of section 179 expensing for qualifying property placed in service 

by a D.C. Zone business.7 The section 179 expensing allowed to a 

taxpayer is phased out by the amount by which 50 percent of the 

cost of qualified zone property placed in service during the year by 

the taxpayer exceeds $200,000 ($400,000 for taxable years beginning after 2002 and before 2008). The term ‘‘qualified zone property’’ is defined as depreciable tangible property (including buildings), provided that (1) the property is acquired by the taxpayer 

(from an unrelated party) after the designation took effect, (2) the 

original use of the property in the D.C. Zone commences with the 

taxpayer, and (3) substantially all of the use of the property is in 

the D.C. Zone in the active conduct of a trade or business by the 

taxpayer.8 Special rules are provided in the case of property that 

is substantially renovated by the taxpayer. 

Tax-exempt financing 

A qualified D.C. Zone business is permitted to borrow proceeds 

from tax-exempt qualified enterprise zone facility bonds (as defined 

in section 1394) issued by the District of Columbia.9 Generally, 

qualified enterprise zone facility bonds for the District of Columbia 

are bonds 95 percent or more of the net proceeds of which are used 

27 

10Sec. 1400B. 11 However, sole proprietorships and other taxpayers selling assets directly cannot claim the 

zero-percent rate on capital gain from the sale of any intangible property (i.e., the integrally 

related test does not apply). 12Sec. 1400C(i). 

to finance certain facilities within the D.C. Zone. The aggregate 

face amount of all outstanding qualified enterprise zone facility 

bonds per qualified D.C. Zone business may not exceed $15 million 

and may be issued only while the D.C. Zone designation is in effect. 

Zero-percent capital gains 

A zero-percent capital gains rate applies to capital gains from the 

sale of certain qualified D.C. Zone assets held for more than five 

years.10 In general, a qualified ‘‘D.C. Zone asset’’ means stock or 

partnership interests held in, or tangible property held by, a D.C. 

Zone business. For purposes of the zero-percent capital gains rate, 

the D.C. Enterprise Zone is defined to include all census tracts 

within the District of Columbia where the poverty rate is not less 

than 10 percent. 

In general, gain eligible for the zero-percent tax rate means gain 

from the sale or exchange of a qualified D.C. Zone asset that is (1) 

a capital asset or property used in the trade or business as defined 

in section 1231(b), and (2) acquired before January 1, 2006. Gain 

that is attributable to real property, or to intangible assets, qualifies for the zero-percent rate, provided that such real property or 

intangible asset is an integral part of a qualified D.C. Zone business.11 However, no gain attributable to periods before January 1, 

1998, and after December 31, 2010, is qualified capital gain. 

District of Columbia homebuyer tax credit 

First-time homebuyers of a principal residence in the District of 

Columbia are eligible for a nonrefundable tax credit of up to $5,000 

of the amount of the purchase price. The $5,000 maximum credit 

applies both to individuals and married couples. Married individuals filing separately can claim a maximum credit of $2,500 each. 

The credit phases out for individual taxpayers with adjusted gross 

income between $70,000 and $90,000 ($110,000-$130,000 for joint 

filers). For purposes of eligibility, ‘‘first-time homebuyer’’ means 

any individual if such individual did not have a present ownership 

interest in a principal residence in the District of Columbia in the 

one-year period ending on the date of the purchase of the residence 

to which the credit applies. The credit is scheduled to expire for 

residences purchased after December 31, 2005.12

REASONS FOR CHANGE

The Committee believes that the D.C. Zone incentives should 

temporarily be extended to provide the Congress and the Treasury 

Department a better opportunity to continue to assess the overall 

operation and effectiveness of the tax incentives to revitalize the 

D.C. Zone and to promote homeownership therein. 

EXPLANATION OF PROVISION

The provision extends the designation of the D.C. Zone (through 

December 31, 2006), thus extending the wage credit and section 

179 expensing. 

28 

13Secs. 27(b), 936. 14Domestic corporations with activities in Puerto Rico are eligible for the section 30A economic activity credit. That credit is calculated under the rules set forth in section 936. 

The provision extends the tax-exempt financing for one year, applying to bonds issued during the period beginning on January 1, 

1998, and ending on December 31, 2006. 

The provision extends the zero-percent capital gains rate applicable to capital gains from the sale or exchange of certain qualified 

D.C. Zone assets to gain recognized before January 1, 2011, from 

the sale of assets acquired before January 1, 2007. 

The provision extends the first-time homebuyer credit for one 

year, through December 31, 2006. 

EFFECTIVE DATE

The provision generally is effective on January 1, 2006. The extension of tax-exempt financing is effective for obligations issued 

after the date of enactment. 

J. POSSESSION TAX CREDIT WITH RESPECT TO AMERICAN SAMOA

(sec. 111 of the bill and sec. 936 of the Code) 

PRESENT LAW

In general 

Certain domestic corporations with business operations in the 

U.S. possessions are eligible for the possession tax credit.13 This 

credit offsets the U.S. tax imposed on certain income related to operations in the U.S. possessions.14 For purposes of the section 936 

credit, possessions include, among other places, American Samoa. 

Income eligible for the section 936 credit includes non-U.S. source 

income from (1) the active conduct of a trade or business within a 

U.S. possession, (2) the sale or exchange of substantially all of the 

assets that were used in such a trade or business, or (3) certain 

possessions investments. The section 936 credit expires for taxable 

years beginning after December 31, 2005. 

To qualify for the possession tax credit for a taxable year, a domestic corporation must satisfy two conditions. First, the corporation must derive at least 80 percent of its gross income for the 

three-year period immediately preceding the close of the taxable 

year from sources within a possession. Second, the corporation 

must derive at least 75 percent of its gross income for that same 

period from the active conduct of a possession business. A domestic 

corporation that has elected the possession tax credit and that satisfies these two conditions for a taxable year generally is entitled 

to a credit against the U.S. tax attributable to the taxpayer’s income that is eligible for the section 936 credit. 

The possession tax credit applies only to a corporation that qualifies as an existing credit claimant. The determination of whether 

a corporation is an existing credit claimant is made separately for 

each possession. The possession tax credit is computed separately 

for each possession with respect to which the corporation is an existing credit claimant, and the credit is subject to either an economic activity-based limitation or an income-based limit. 

29 

15 A corporation will qualify as an existing credit claimant if it acquired all the assets of a 

trade or business of a corporation that (1) actively conducted that trade or business in a possession on October 13, 1995, and (2) had elected the benefits of the possession tax credit in an election in effect for the taxable year that included October 13, 1995. 16 2002 Statistical Yearbook of American Samoa, p. xiii; The World Factbook 2005 (Central 

Intelligence Agency). 

Qualification as existing credit claimant 

A corporation is an existing credit claimant with respect to a possession if (1) the corporation was engaged in the active conduct of 

a trade or business within the possession on October 13, 1995, and 

(2) the corporation elected the benefits of the possession tax credit 

in an election in effect for its taxable year that included October 

13, 1995.15 A corporation that adds a substantial new line of business (other than in a qualifying acquisition of all the assets of a 

trade or business of an existing credit claimant) ceases to be an existing credit claimant as of the close of the taxable year ending before the date on which that new line of business is added. 

Economic activity-based limit 

Under the economic activity-based limit, the amount of the credit 

determined under the rules described above may not exceed an 

amount equal to the sum of (1) 60 percent of the taxpayer’s qualifying possession wage and fringe benefit expenses, (2) 15 percent 

of depreciation allowances with respect to short-life qualifying tangible property, plus 40 percent of depreciation allowances with respect to medium-life qualifying tangible property, plus 65 percent 

of depreciation allowances with respect to long-life tangible property, and (3) in certain cases, a portion of the taxpayer’s possession 

income taxes. 

Income-based limit 

As an alternative to the economic activity-based limit, a taxpayer 

may elect to apply a limit equal to the applicable percentage of the 

credit that would otherwise be allowable with respect to possession 

business income; the applicable percentage currently is 40 percent. 

Repeal and phase out 

In 1996, the section 936 credit was repealed for new claimants 

for taxable years beginning after 1995 and was phased out for existing credit claimants over a period including taxable years beginning before 2006. The amount of the available credit during the 

phaseout period generally is reduced by special limitation rules. 

These phaseout period limitation rules do not apply to the credit 

available to existing credit claimants for income from activities in 

Guam, American Samoa, and the Northern Mariana Islands. The 

section 936 credit is repealed for all possessions, including Guam, 

American Samoa, and the Northern Mariana Islands, for all taxable years beginning after 2005. 

REASONS FOR CHANGE

The Committee understands that the tuna canning industry is 

the largest employer in American Samoa16 and is the primary beneficiary of the section 936 credit in American Samoa. The Committee believes that the expiration of the section 936 credit would 

negatively impact the economy of American Samoa and that the 

30 

credit therefore should be extended for an additional year to provide time for the development of a comprehensive long-term policy 

with respect to American Samoa. 

The Committee is aware that the Government Accountability Office and the staff of the Joint Committee on Taxation are in the 

process of preparing reports regarding the impact of U.S. Federal 

tax policy on Puerto Rico, including an analysis of the tax and economic policy implications of proposed legislative options and the 

revenue costs of those options. The Governor of Puerto Rico has expressed support for the extension of the section 936 credit to American Samoa while awaiting these reports concerning Puerto Rico. 

Pending completion of these reports, the Committee believes it is 

appropriate to extend the section 936 credit to American Samoa in 

recognition of the conditions facing that territory. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law section 936 

credit as applied to American Samoa; it thus allows existing credit 

claimants to claim the credit for income from activities in American 

Samoa in taxable years beginning on or before December 31, 2006. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005. 

K. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL

HEALTH BENEFITS

(sec. 112 of the bill and sec. 9812 of the Code) 

PRESENT LAW

The Code, the Employee Retirement Income Security Act of 1974 

(‘‘ERISA’’) and the Public Health Service Act (‘‘PHSA’’) contain provisions under which group health plans that provide both medical 

and surgical benefits and mental health benefits cannot impose aggregate lifetime or annual dollar limits on mental health benefits 

that are not imposed on substantially all medical and surgical benefits (‘‘mental health parity requirements’’). In the case of a group 

health plan which provides benefits for mental health, the mental 

health parity requirements do not affect the terms and conditions 

(including cost sharing, limits on numbers of visits or days of coverage, and requirements relating to medical necessity) relating to 

the amount, duration, or scope of mental health benefits under the 

plan, except as specifically provided in regard to parity in the imposition of aggregate lifetime limits and annual limits. 

The Code imposes an excise tax on group health plans which fail 

to meet the mental health parity requirements. The excise tax is 

equal to $100 per day during the period of noncompliance and is 

generally imposed on the employer sponsoring the plan if the plan 

fails to meet the requirements. The maximum tax that can be imposed during a taxable year cannot exceed the lesser of 10 percent 

of the employer’s group health plan expenses for the prior year or 

$500,000. No tax is imposed if the Secretary determines that the 

employer did not know, and in exercising reasonable diligence 

would not have known, that the failure existed. 

31 

The mental health parity requirements do not apply to group 

health plans of small employers nor do they apply if their application results in an increase in the cost under a group health plan 

of at least one percent. Further, the mental health parity requirements do not require group health plans to provide mental health 

benefits. 

The Code, ERISA and PHSA mental health parity requirements 

are scheduled to expire with respect to benefits for services furnished after December 31, 2005. 

REASONS FOR CHANGE

The Committee recognizes that the Code provisions relating to 

mental health parity are important to carrying out the purposes of 

the Mental Health Parity Act. Thus, the Committee believes that 

extending the Code provisions relating to mental health parity is 

warranted. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law Code excise 

tax for failure to comply with the mental health parity requirements (through December 31, 2006). 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

L. RESEARCH CREDIT

(sec. 113 of the bill and sec. 41 of the Code) 

PRESENT LAW

General rule 

Generally, a taxpayer may claim a research credit equal to 20 

percent of the amount by which the taxpayer’s qualified research 

expenses for a taxable year exceed its base amount for that year. 

(sec. 41). Thus, the research credit is generally available with respect to incremental increases in qualified research. 

The research credit also applies to the excess of (1) 100 percent 

of corporate cash expenses (including grants or contributions) paid 

for basic research conducted by universities (and certain nonprofit 

scientific research organizations) over (2) the sum of (a) the greater 

of two minimum basic research floors plus (b) an amount reflecting 

any decrease in nonresearch giving to universities by the corporation as compared to such giving during a fixed-base period, as adjusted for inflation. This separate credit computation is commonly 

referred to as the university basic research credit (see sec. 41(e)). 

The research credit applies to a taxpayer’s expenditures on research undertaken by an energy research consortium. This separate credit computation is commonly referred to as energy research 

credit. Unlike the general research credit, the energy research 

credit applies to all qualified expenditures, not just those in excess 

of a base amount. 

The research credit (including the university basic research credit and the energy research credit) is scheduled to expire and genVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00031 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
32 

erally will not apply to amounts paid or incurred after December 

31, 2005. 

Computation of allowable credit 

Except for energy research payments and certain university basic 

research payments made by corporations, the research credit applies only to the extent that the taxpayer’s qualified research expenses for the current taxable year exceed its base amount. The 

base amount for the current year generally is computed by multiplying the taxpayer’s fixed-base percentage by the average amount 

of the taxpayer’s gross receipts for the four preceding years. If a 

taxpayer both incurred qualified research expenses and had gross 

receipts during each of at least three years from 1984 through 

1988, then its fixed-base percentage is the ratio that its total qualified research expenses for the 1984–1988 period bears to its total 

gross receipts for that period (subject to a maximum fixed-base percentage of 16 percent). All other taxpayers (so-called ‘‘start-up 

firms’’) are assigned a fixed-base percentage of three percent. 

In computing the credit, a taxpayer’s base amount may not be 

less than 50 percent of its current-year qualified research expenses. 

To prevent artificial increases in research expenditures by shifting expenditures among commonly controlled or otherwise related 

entities, a special aggregation rule provides that all members of the 

same controlled group of corporations are treated as a single taxpayer (sec. 41(f)(1)). Under regulations prescribed by the Secretary, 

special rules apply for computing the credit when a major portion 

of a trade or business (or unit thereof) changes hands, under which 

qualified research expenses and gross receipts for periods prior to 

the change of ownership of a trade or business are treated as transferred with the trade or business that gave rise to those expenses 

and receipts for purposes of recomputing a taxpayer’s fixed-base 

percentage (sec. 41(f)(3)). 

Alternative incremental research credit regime 

Taxpayers are allowed to elect an alternative incremental research credit regime. If a taxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tiered fixed-base 

percentage (that is lower than the fixed-base percentage otherwise 

applicable under present law) and the credit rate likewise is reduced. Under the alternative incremental credit regime, a credit 

rate of 2.65 percent applies to the extent that a taxpayer’s currentyear research expenses exceed a base amount computed by using 

a fixed-base percentage of one percent (i.e., the base amount equals 

one percent of the taxpayer’s average gross receipts for the four 

preceding years) but do not exceed a base amount computed by 

using a fixed-base percentage of 1.5 percent. A credit rate of 3.2 

percent applies to the extent that a taxpayer’s current-year research expenses exceed a base amount computed by using a fixedbase percentage of 1.5 percent but do not exceed a base amount 

computed by using a fixed-base percentage of two percent. A credit 

rate of 3.75 percent applies to the extent that a taxpayer’s currentyear research expenses exceed a base amount computed by using 

a fixed-base percentage of two percent. An election to be subject to 

this alternative incremental credit regime may be made for any 

taxable year beginning after June 30, 1996, and such an election 

33 

applies to that taxable year and all subsequent years unless revoked with the consent of the Secretary of the Treasury. 

Eligible expenses 

Generally, qualified research expenses eligible for the research 

credit consist of: (1) in-house expenses of the taxpayer for wages 

and supplies attributable to qualified research; (2) certain timesharing costs for computer use in qualified research; and (3) 65 percent of amounts paid or incurred by the taxpayer to certain other 

persons for qualified research conducted on the taxpayer’s behalf 

(so-called ‘‘contract research expenses’’). Notwithstanding the limitation for contract research expenses, qualified research expenses 

include 100 percent of amounts paid or incurred by the taxpayer 

to an eligible small business, university, or Federal laboratory for 

qualified energy research. 

To be eligible for the credit, the research must not only satisfy 

the requirements of present-law section 174 (described below) but 

must be undertaken for the purpose of discovering information that 

is technological in nature, the application of which is intended to 

be useful in the development of a new or improved business component of the taxpayer, and substantially all of the activities of which 

must constitute elements of a process of experimentation for functional aspects, performance, reliability, or quality of a business 

component. Research does not qualify for the credit if substantially 

all of the activities relate to style, taste, cosmetic, or seasonal design factors (sec. 41(d)(3)). In addition, research does not qualify for 

the credit: (1) if conducted after the beginning of commercial production of the business component; (2) if related to the adaptation 

of an existing business component to a particular customer’s requirements; (3) if related to the duplication of an existing business 

component from a physical examination of the component itself or 

certain other information; or (4) if related to certain efficiency surveys, management function or technique, market research, market 

testing, or market development, routine data collection or routine 

quality control (sec. 41(d)(4)). Research does not qualify for the 

credit if it is conducted outside the United States, Puerto Rico, or 

any U.S. possession. 

Relation to deduction 

Under section 174, taxpayers may elect to deduct currently the 

amount of certain research or experimental expenditures paid or 

incurred in connection with a trade or business, notwithstanding 

the general rule that business expenses to develop or create an 

asset that has a useful life extending beyond the current year must 

be capitalized. However, deductions allowed to a taxpayer under 

section 174 (or any other section) are reduced by an amount equal 

to 100 percent of the taxpayer’s research credit determined for the 

taxable year (Sec. 280C(c)). Taxpayers may alternatively elect to 

claim a reduced research credit amount under section 41 in lieu of 

reducing deductions otherwise allowed (sec. 280C(c)(3)). 

REASONS FOR CHANGE

The Committee acknowledges that research is important to the 

economy. Research is the basis of new products, new services, new 

industries, and new jobs for the domestic economy. Therefore the 

34 

Committee believes it is appropriate to extend the present-law research credit. In addition, the Committee is concerned that a number of U.S. companies that engage in research activities are unable 

to use the current research credit. To encourage these companies 

to continue and expand their research activities, the Committee believes that the rate of the alternative incremental credit should be 

increased and that a new alternative simplified credit should be 

available. 

EXPLANATION OF PROVISION

The provision extends for one year and modifies the present-law 

research credit provision (for amounts paid or incurred through December 31, 2006). 

The provision increases the rates of the alternative incremental 

credit: (1) a credit rate of three percent (rather than 2.65 percent) 

applies to the extent that a taxpayer’s current-year research expenses exceed a base amount computed by using a fixed-base percentage of one percent (i.e., the base amount equals one percent of 

the taxpayer’s average gross receipts for the four preceding years) 

but do not exceed a base amount computed by using a fixed-base 

percentage of 1.5 percent; (2) a credit rate of four percent (rather 

than 3.2 percent) applies to the extent that a taxpayer’s currentyear research expenses exceed a base amount computed by using 

a fixed-base percentage of 1.5 percent but do not exceed a base 

amount computed by using a fixed-base percentage of two percent; 

and (3) a credit rate of five percent (rather than 3.75 percent) applies to the extent that a taxpayer’s current-year research expenses 

exceed a base amount computed by using a fixed-base percentage 

of two percent. 

The provision also creates, at the election of the taxpayer, an alternative simplified credit for qualified research expenses. The alternative simplified research is equal to 12 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. The rate is 

reduced to 6 percent if a taxpayer has no qualified research expenses in any one or more of the three preceding taxable years. 

An election to use the alternative simplified credit applies to all 

succeeding taxable years unless revoked with the consent of the 

Secretary. An election to use the alternative simplified credit may 

not be made for any taxable year for which an election to use the 

alternative incremental credit is in effect. A special transition rule 

applies which permits a taxpayer to elect to use the alternative 

simplified credit in lieu of the alternative incremental credit if such 

election is made during the taxable year which includes the date 

of enactment of the provision. The transition rule only applies to 

the taxable year which includes the date of enactment. 

EFFECTIVE DATE

The extension of the research credit applies to amounts paid or 

incurred after December 31, 2005. The modification of the alternative incremental credit and the creation of the alternative simplified credit are effective for taxable years ending after date of enactment. 

35 

M. QUALIFIED ZONE ACADEMY BONDS

(sec. 114 of the bill and sec. 1397E of the Code) 

PRESENT LAW

Tax-exempt bonds 

Interest on State and local governmental bonds generally is excluded from gross income for Federal income tax purposes if the 

proceeds of the bonds are used to finance direct activities of these 

governmental units or if the bonds are repaid with revenues of the 

governmental units. Activities that can be financed with these taxexempt bonds include the financing of public schools (sec. 103). 

Qualified zone academy bonds 

As an alternative to traditional tax-exempt bonds, States and 

local governments are given the authority to issue ‘‘qualified zone 

academy bonds’’ (sec. 1397E). A total of $400 million of qualified 

zone academy bonds may be issued annually in calendar years 

1998 through 2005. The $400 million aggregate bond cap is allocated each year to the States according to their respective populations of individuals below the poverty line. Each State, in turn, 

allocates the credit authority to qualified zone academies within 

such State. 

Financial institutions that hold qualified zone academy bonds are 

entitled to a nonrefundable tax credit in an amount equal to a credit rate multiplied by the face amount of the bond. A taxpayer holding a qualified zone academy bond on the credit allowance date is 

entitled to a credit. The credit is includable in gross income (as if 

it were a taxable interest payment on the bond), and may be 

claimed against regular income tax and AMT liability. 

The Treasury Department sets the credit rate at a rate estimated 

to allow issuance of qualified zone academy bonds without discount 

and without interest cost to the issuer. The maximum term of the 

bond is determined by the Treasury Department, so that the 

present value of the obligation to repay the bond is 50 percent of 

the face value of the bond. 

‘‘Qualified zone academy bonds’’ are defined as any bond issued 

by a State or local government, provided that: (1) at least 95 percent of the proceeds are used for the purpose of renovating, providing equipment to, developing course materials for use at, or 

training teachers and other school personnel in a ‘‘qualified zone 

academy’’, and (2) private entities have promised to contribute to 

the qualified zone academy certain equipment, technical assistance 

or training, employee services, or other property or services with a 

value equal to at least 10 percent of the bond proceeds. 

A school is a ‘‘qualified zone academy’’ if: (1) the school is a public school that provides education and training below the college 

level, (2) the school operates a special academic program in cooperation with businesses to enhance the academic curriculum and 

increase graduation and employment rates, and (3) either (a) the 

school is located in an empowerment zone or enterprise community 

designated under the Code, or (b) it is reasonably expected that at 

least 35 percent of the students at the school will be eligible for 

free or reduced-cost lunches under the school lunch program established under the National School Lunch Act. 

36 

REASONS FOR CHANGE

The Committee believes that the extension of authority to issue 

qualified zone academy bonds is appropriate in light of the educational needs that exist today. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law provision relating to qualified zone academy bonds (through December 31, 

2006). 

EFFECTIVE DATE

The provision applies to bonds issued after December 31, 2005. 

N. ABOVE-THE-LINE DEDUCTION FOR CERTAIN EXPENSES OF

ELEMENTARY AND SECONDARY SCHOOL TEACHERS

(sec. 115 of the bill and sec. 62 of the Code) 

PRESENT LAW

In general, ordinary and necessary business expenses are deductible (sec. 162). However, in general, unreimbursed employee business expenses are deductible only as an itemized deduction and 

only to the extent that the individual’s total miscellaneous deductions (including employee business expenses) exceed two percent of 

adjusted gross income. An individual’s otherwise allowable itemized 

deductions may be further limited by the overall limitation on 

itemized deductions, which reduces itemized deductions for taxpayers with adjusted gross income in excess of $145,950 (for 2005). 

In addition, miscellaneous itemized deductions are not allowable 

under the alternative minimum tax. 

Certain expenses of eligible educators are allowed an above-theline deduction. Specifically, for taxable years beginning prior to 

January 1, 2006, an above-the-line deduction is allowed for up to 

$250 annually of expenses paid or incurred by an eligible educator 

for books, supplies (other than nonathletic supplies for courses of 

instruction in health or physical education), computer equipment 

(including related software and services) and other equipment, and 

supplementary materials used by the eligible educator in the classroom. To be eligible for this deduction, the expenses must be otherwise deductible under section 162 as a trade or business expense. 

A deduction is allowed only to the extent the amount of expenses 

exceeds the amount excludable from income under section 135 (relating to education savings bonds), section 529(c)(1) (relating to 

qualified tuition programs), and section 530(d)(2) (relating to 

Coverdell education savings accounts). 

An eligible educator is a kindergarten through grade 12 teacher, 

instructor, counselor, principal, or aide in a school for at least 900 

hours during a school year. A school means any school which provides elementary education or secondary education, as determined 

under State law. 

The above-the-line deduction for eligible educators is not allowed 

for taxable years beginning after December 31, 2005. 

37 

REASONS FOR CHANGE

The Committee recognizes that elementary and secondary educators often incur substantial unreimbursed expenses in the course 

of their teaching duties, and believes that an extension of the deduction of such expenses is warranted to continue to provide tax 

relief to educators who incur such expenses on behalf of their students. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law deduction for 

expenses of eligible educators (through taxable years beginning on 

or before December 31, 2006). 

EFFECTIVE DATE

The provision is effective for expenses paid or incurred in taxable 

years beginning after December 31, 2005. 

O. ABOVE-THE-LINE DEDUCTION FOR HIGHER EDUCATION EXPENSES

(sec. 116 of the bill and sec. 222 of the Code) 

PRESENT LAW

An individual is allowed an above-the-line deduction for qualified 

tuition and related expenses for higher education paid by the individual during the taxable year. Qualified tuition and related expenses include tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse, or any dependent 

of the taxpayer with respect to whom the taxpayer may claim a 

personal exemption, at an eligible institution of higher education 

for courses of instruction of such individual at such institution. 

Charges and fees associated with meals, lodging, insurance, transportation, and similar personal, living, or family expenses are not 

eligible for the deduction. The expenses of education involving 

sports, games, or hobbies are not qualified tuition and related expenses unless this education is part of the student’s degree program. 

The amount of qualified tuition and related expenses must be reduced by certain scholarships, educational assistance allowances, 

and other amounts paid for the benefit of such individual, and by 

the amount of such expenses taken into account for purposes of determining any exclusion from gross income of: (1) income from certain United States Savings Bonds used to pay higher education tuition and fees; and (2) income from a Coverdell education savings 

account. Additionally, such expenses must be reduced by the earnings portion (but not the return of principal) of distributions from 

a qualified tuition program if an exclusion under section 529 is 

claimed with respect to expenses eligible for exclusion under section 222. No deduction is allowed for any expense for which a deduction is otherwise allowed or with respect to an individual for 

whom a Hope credit or Lifetime Learning credit is elected for such 

taxable year. 

The expenses must be in connection with enrollment at an institution of higher education during the taxable year, or with an academic term beginning during the taxable year or during the first 

38 

three months of the next taxable year. The deduction is not available for tuition and related expenses paid for elementary or secondary education. 

For taxable years beginning in 2004 and 2005, the maximum de- duction is $4,000 for an individual whose adjusted gross income for 

the taxable year does not exceed $65,000 ($130,000 in the case of 

a joint return), or $2,000 for other individuals whose adjusted gross 

income does not exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose adjusted 

gross income exceeds the relevant adjusted gross income limitations, for a married individual who does not file a joint return, or 

for an individual with respect to whom a personal exemption deduction may be claimed by another taxpayer for the taxable year. 

The deduction is not available for taxable years beginning after December 31, 2005. 

REASONS FOR CHANGE

The Committee recognizes that in some cases a deduction for 

education expenses may provide greater tax relief than the presentlaw education tax credits. In order to provide families with a range 

of options for education, the Committee believes that extending the 

deduction for higher education expenses is warranted. 

EXPLANATION OF PROVISION

The provision extends the present-law tuition deduction for one 

year (through taxable years beginning on or before December 31, 

2006). 

EFFECTIVE DATE

The provision is effective for payments made in taxable years beginning after December 31, 2005. 

P. DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

(sec. 117 of the bill and sec. 164 of the Code) 

PRESENT LAW

For purposes of determining regular tax liability, an itemized deduction is permitted for certain State and local taxes paid, including individual income taxes, real property taxes, and personal property taxes. The itemized deduction is not permitted for purposes of 

determining a taxpayer’s alternative minimum taxable income. For 

taxable years beginning in 2004 and 2005, at the election of the 

taxpayer, an itemized deduction may be taken for State and local 

general sales taxes in lieu of the itemized deduction provided under 

present law for State and local income taxes. As is the case for 

State and local income taxes, the itemized deduction for State and 

local general sales taxes is not permitted for purposes of determining a taxpayer’s alternative minimum taxable income. Taxpayers have two options with respect to the determination of the 

sales tax deduction amount. Taxpayers may deduct the total 

amount of general State and local sales taxes paid by accumulating 

receipts showing general sales taxes paid. Alternatively, taxpayers 

may use tables created by the Secretary of the Treasury that show 

the allowable deduction. The tables are based on average consumpVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00038 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
39 

tion by taxpayers on a State-by-State basis taking into account filing status, number of dependents, adjusted gross income and rates 

of State and local general sales taxation. Taxpayers who use the tables created by the Secretary may, in addition to the table 

amounts, deduct eligible general sales taxes paid with respect to 

the purchase of motor vehicles, boats and other items specified by 

the Secretary. Sales taxes for items that may be added to the tables are not reflected in the tables themselves. 

The term ‘‘general sales tax’’ means a tax imposed at one rate 

with respect to the sale at retail of a broad range of classes of 

items. However, in the case of items of food, clothing, medical supplies, and motor vehicles, the fact that the tax does not apply with 

respect to some or all of such items is not taken into account in 

determining whether the tax applies with respect to a broad range 

of classes of items, and the fact that the rate of tax applicable with 

respect to some or all of such items is lower than the general rate 

of tax is not taken into account in determining whether the tax is 

imposed at one rate. Except in the case of a lower rate of tax applicable with respect to food, clothing, medical supplies, or motor vehicles, no deduction is allowed for any general sales tax imposed with 

respect to an item at a rate other than the general rate of tax. 

However, in the case of motor vehicles, if the rate of tax exceeds 

the general rate, such excess shall be disregarded and the general 

rate is treated as the rate of tax. 

A compensating use tax with respect to an item is treated as a 

general sales tax, provided such tax is complimentary to a general 

sales tax and a deduction for sales taxes is allowable with respect 

to items sold at retail in the taxing jurisdiction that are similar to 

such item. 

REASONS FOR CHANGE

The Committee recognizes that not all States rely on income 

taxes as a primary source of revenue, and that allowing a deduction for State and local income taxes, but not sales taxes, may create inequities across States and may also create bias in the types 

of taxes that States and localities choose to impose. The Committee 

believes that the provision of an itemized deduction for State and 

local general sales taxes in lieu of the deduction for State and local 

income taxes provides more equitable Federal tax treatment across 

States, and will cause the Federal tax laws to have a more neutral 

effect on the types of taxes that State and local governments utilize. For these reasons, the Committee believes the extension of 

this provision is warranted. 

EXPLANATION OF PROVISION

The provision extends for one year the present-law provision allowing taxpayers to elect to deduct State and local sales taxes in 

lieu of State and local income taxes (through taxable years beginning on or before December 31, 2006). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2005. 

40 

17Sec. 162. 18Sec. 198. 19 418 U.S. 1 (1974). 

TITLE II—EXTENSIONS OF CERTAIN PROVISIONS FOR TWO 

YEARS, AND OTHER MODIFICATIONS 

A. EXTENSION AND EXPANSION TO PETROLEUM PRODUCTS OF

EXPENSING FOR ENVIRONMENTAL REMEDIATION COSTS

(sec. 201 of the bill and sec. 198 of the Code) 

PRESENT LAW

Present law allows a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business.17

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.18 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.19 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’’) 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 

41 

20Section 101(14) of CERCLA specifically excludes ‘‘petroleum, including crude oil or any fraction thereof which is not otherwise specifically listed or designated as a hazardous substance 

under subparagraphs (A) through (F) of this paragraph,’’ from the definition of ‘‘hazardous substance.’’ 21The present law exceptions for sites on the national priorities list under CERCLA, and for 

substances with respect to which a removal or remediation is not permitted under section 104 

of CERCLA by reason of subsection (a)(3) thereof, would continue to apply to all hazardous substances (including petroleum products). 

deterioration through ordinary use. Petroleum products generally 

are not regarded as hazardous substances for purposes of section 

198.20

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, 2006. 

REASONS FOR CHANGE

The Committee observes that by lowering the net capital cost of 

a development project, the expensing of brownfields remediation 

costs promotes the goal of environmental remediation and promotes 

new investment and employment opportunities. In addition, the 

Committee believes that the increased investment in the qualifying 

areas has spillover effects that are beneficial to the neighboring 

communities. Finally, the Committee recognizes that similar principles apply with respect to contamination by petroleum products. 

Therefore, the Committee believes it is appropriate to extend the 

present-law provision permitting the expensing of environmental 

remediation costs, and to expand the scope of the present-law provision to include petroleum products. 

EXPLANATION OF PROVISION

The provision extends for two years the present-law provisions 

relating to environmental remediation expenditures (through December 31, 2007). 

In addition, the provision expands the definition of hazardous 

substance to include petroleum products. Under the proposal, petroleum products are defined by reference to section 4612(a)(3), and 

thus include crude oil, crude oil condensates and natural gasoline.21

EFFECTIVE DATE

The provision applies to expenditures paid or incurred after December 31, 2005. 

42 

22Prop. Treas. Reg. sec. 1.953–1(a). 23Temporary exceptions from the subpart F provisions for certain active financing income applied only for taxable years beginning in 1998. Those exceptions were modified and extended 

for one year, applicable only for taxable years beginning in 1999. The Tax Relief Extension Act 

of 1999 (Pub. L. No. 106–170) clarified and extended the temporary exceptions for two years, 

applicable only for taxable years beginning after 1999 and before 2002. The Job Creation and 

Worker Assistance Act of 2002 (Pub. L. No. 107–147) modified and extended the temporary exceptions for five years, for taxable years beginning after 2001 and before 2007. 

B. CONTROLLED FOREIGN CORPORATIONS

1. Subpart F exception for active financing (sec. 202(a) of the bill 

and secs. 953 and 954 of the Code) 

PRESENT LAW

Under the subpart F rules, 10-percent U.S. shareholders of a controlled foreign corporation (‘‘CFC’’) are subject to U.S. tax currently 

on certain income earned by the CFC, whether or not such income 

is distributed to the shareholders. The income subject to current inclusion under the subpart F rules includes, among other things, insurance income and foreign base company income. Foreign base 

company income includes, among other things, foreign personal 

holding company income and foreign base company services income 

(i.e., income derived from services performed for or on behalf of a 

related person outside the country in which the CFC is organized). 

Foreign personal holding company income generally consists of 

the following: (1) dividends, interest, royalties, rents, and annuities; (2) net gains from the sale or exchange of (a) property that 

gives rise to the preceding types of income, (b) property that does 

not give rise to income, and (c) interests in trusts, partnerships, 

and REMICs; (3) net gains from commodities transactions; (4) net 

gains from certain foreign currency transactions; (5) income that is 

equivalent to interest; (6) income from notional principal contracts; 

(7) payments in lieu of dividends; and (8) amounts received under 

personal service contracts. 

Insurance income subject to current inclusion under the subpart 

F rules includes any income of a CFC attributable to the issuing 

or reinsuring of any insurance or annuity contract in connection 

with risks located in a country other than the CFC’s country of organization. Subpart F insurance income also includes income attributable to an insurance contract in connection with risks located 

within the CFC’s country of organization, as the result of an arrangement under which another corporation receives a substantially equal amount of consideration for insurance of other country 

risks. Investment income of a CFC that is allocable to any insurance or annuity contract related to risks located outside the CFC’s 

country of organization is taxable as subpart F insurance income.22

Temporary exceptions from foreign personal holding company income, foreign base company services income, and insurance income 

apply for subpart F purposes for certain income that is derived in 

the active conduct of a banking, financing, or similar business, or 

in the conduct of an insurance business (so-called ‘‘active financing 

income’’).23

With respect to income derived in the active conduct of a banking, financing, or similar business, a CFC is required to be predominantly engaged in such business and to conduct substantial 

activity with respect to such business in order to qualify for the exVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00042 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
43 

ceptions. In addition, certain nexus requirements apply, which provide that income derived by a CFC or a qualified business unit 

(‘‘QBU’’) of a CFC from transactions with customers is eligible for 

the exceptions if, among other things, substantially all of the activities in connection with such transactions are conducted directly by 

the CFC or QBU in its home country, and such income is treated 

as earned by the CFC or QBU in its home country for purposes of 

such country’s tax laws. Moreover, the exceptions apply to income 

derived from certain cross border transactions, provided that certain requirements are met. Additional exceptions from foreign personal holding company income apply for certain income derived by 

a securities dealer within the meaning of section 475 and for gain 

from the sale of active financing assets. 

In the case of insurance, in addition to a temporary exception 

from foreign personal holding company income for certain income 

of a qualifying insurance company with respect to risks located 

within the CFC’s country of creation or organization, certain temporary exceptions from insurance income and from foreign personal 

holding company income apply for certain income of a qualifying 

branch of a qualifying insurance company with respect to risks located within the home country of the branch, provided certain requirements are met under each of the exceptions. Further, additional temporary exceptions from insurance income and from foreign personal holding company income apply for certain income of 

certain CFCs or branches with respect to risks located in a country 

other than the United States, provided that the requirements for 

these exceptions are met. 

In the case of a life insurance or annuity contract, reserves for 

such contracts are determined as follows for purposes of these provisions. The reserves equal the greater of: (1) the net surrender 

value of the contract (as defined in section 807(e)(1)(A)), including 

in the case of pension plan contracts; or (2) the amount determined 

by applying the tax reserve method that would apply if the qualifying life insurance company were subject to tax under Subchapter 

L of the Code, with the following modifications. First, there is substituted for the applicable Federal interest rate an interest rate determined for the functional currency of the qualifying insurance 

company’s home country, calculated (except as provided by the 

Treasury Secretary in order to address insufficient data and similar problems) in the same manner as the mid-term applicable Federal interest rate (within the meaning of section 1274(d)). Second, 

there is substituted for the prevailing State assumed rate the highest assumed interest rate permitted to be used for purposes of determining statement reserves in the foreign country for the contract. Third, in lieu of U.S. mortality and morbidity tables, mortality and morbidity tables are applied that reasonably reflect the 

current mortality and morbidity risks in the foreign country. 

Fourth, the Treasury Secretary may provide that the interest rate 

and mortality and morbidity tables of a qualifying insurance company may be used for one or more of its branches when appropriate. In no event may the reserve for any contract at any time 

exceed the foreign statement reserve for the contract, reduced by 

any catastrophe, equalization, or deficiency reserve or any similar 

reserve. 

44 

24The President canceled this provision in 1997 pursuant to the Line Item Veto Act. On June 

25, 1998, the Supreme Court held that the cancellation procedures set forth in the Line Item 

Veto Act are unconstitutional. Clinton v. City of New York, 524 U.S. 417 (1998). 25The Tax and Trade Relief Extension Act of 1998, Division J, Making Omnibus Consolidated 

and Emergency Supplemental Appropriations for Fiscal Year 1999, Pub. L. No. 105–277, sec. 

1005 (1998), provided a one-year extension, with modifications. The Tax Relief Extension Act 

of 1999, Pub.L. No. 106–170, sec. 503 (1999), provided an additional two-year extension, with 

a clarification. The Job Creation and Worker Assistance Act of 2002 (Pub. L. No. 107–147, sec. 

614) provided an additional five-year extension and provided that in certain circumstances an 

insurance company may establish reserves taking into account foreign statement reserves. The 

House bill, H.R. 3090, the ‘‘Economic Security and Recovery Act of 2001,’’ had provided for a 

permanent extension (H. R. Rep. No. 107–251 at 50 (2001)), while the Senate bill, the ‘‘Economic 

Recovery and Assistance for American Workers Act of 2001,’’ had provided for a one-year extension. See S. Prt. No. 107–49 at 58–60 (2001). 

Present law permits a taxpayer in certain circumstances, subject 

to approval by the IRS through the ruling process or in published 

guidance, to establish that the reserve of a life insurance company 

for life insurance and annuity contracts is the amount taken into 

account in determining the foreign statement reserve for the contract (reduced by catastrophe, equalization, or deficiency reserve or 

any similar reserve). IRS approval is to be based on whether the 

method, the interest rate, the mortality and morbidity assumptions, and any other factors taken into account in determining foreign statement reserves (taken together or separately) provide an 

appropriate means of measuring income for Federal income tax 

purposes. In seeking a ruling, the taxpayer is required to provide 

the IRS with necessary and appropriate information as to the 

method, interest rate, mortality and morbidity assumptions and 

other assumptions under the foreign reserve rules so that a comparison can be made to the reserve amount determined by applying 

the tax reserve method that would apply if the qualifying insurance 

company were subject to tax under Subchapter L of the Code (with 

the modifications provided under present law for purposes of these 

exceptions). The IRS also may issue published guidance indicating 

its approval. Present law continues to apply with respect to reserves for any life insurance or annuity contract for which the IRS 

has not approved the use of the foreign statement reserve. An IRS 

ruling request under this provision is subject to the present-law 

provisions relating to IRS user fees. 

REASONS FOR CHANGE

In the Taxpayer Relief Act of 1997, one-year temporary exceptions from foreign personal holding company income were enacted 

for income from the active conduct of an insurance, banking, financing, or similar business.24 In 1998, 1999, and 2002, the provisions were extended, and in some cases, modified.25 The Committee 

believes that it is appropriate to extend the temporary provisions, 

as modified by the previous legislation, for an additional two years. 

EXPLANATION OF PROVISION

The provision extends for two years (for taxable years beginning 

before 2009) the present-law temporary exceptions from subpart F 

foreign personal holding company income, foreign base company 

services income, and insurance income for certain income that is 

derived in the active conduct of a banking, financing, or similar 

business, or in the conduct of an insurance business. 

45 

26 Interest for this purpose includes factoring income which is treated as equivalent to interest 

under sec. 954(c)(1)(E). 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2006, and before January 1, 2009, 

and for taxable years of U.S. shareholders with or within which 

such taxable years of such foreign corporations end. 

2. Look-through treatment of payments between related controlled 

foreign corporations under foreign personal holding company 

income rules (sec. 202(b) of the bill and sec. 954(c) of the Code) 

PRESENT LAW

In general, the rules of subpart F (secs. 951–964) require U.S. 

shareholders with a 10-percent or greater interest in a controlled 

foreign corporation (‘‘CFC’’) to include certain income of the CFC 

(referred to as ‘‘subpart F income’’) on a current basis for U.S. tax 

purposes, regardless of whether the income is distributed to the 

shareholders. 

Subpart F income includes foreign base company income. One 

category of foreign base company income is foreign personal holding company income. For subpart F purposes, foreign personal 

holding company income generally includes dividends, interest, 

rents, and royalties, among other types of income. However, foreign 

personal holding company income does not include dividends and 

interest received by a CFC from a related corporation organized 

and operating in the same foreign country in which the CFC is organized, or rents and royalties received by a CFC from a related 

corporation for the use of property within the country in which the 

CFC is organized. Interest, rent, and royalty payments do not qualify for this exclusion to the extent that such payments reduce the 

subpart F income of the payor. 

REASONS FOR CHANGE

Most countries allow their companies to redeploy active foreign 

earnings with no additional tax burden. The Committee believes 

that this provision will make U.S. companies and U.S. workers 

more competitive with respect to such countries. By allowing U.S. 

companies to reinvest their active foreign earnings where they are 

most needed without incurring the immediate additional tax that 

companies based in many other countries never incur, the Committee believes that the provision will enable U.S. companies to 

make more sales overseas, and thus produce more goods in the 

United States. 

EXPLANATION OF PROVISION

Under the provision, for taxable years beginning after 2005 and 

before 2009, dividends, interest,26 rents, and royalties received by 

one CFC from a related CFC are not treated as foreign personal 

holding company income to the extent attributable or properly allocable to non-subpart-F income of the payor. For this purpose, a related CFC is a CFC that controls or is controlled by the other CFC, 

or a CFC that is controlled by the same person or persons that control the other CFC. Ownership of more than 50 percent of the 

46 

CFC’s stock (by vote or value) constitutes control for these purposes. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2005 but before January 1, 2009, and 

for taxable years of U.S. shareholders with or within which such 

taxable years of such foreign corporations end. 

C. REDUCED RATES FOR CAPITAL GAINS AND DIVIDENDS OF

INDIVIDUALS

(sec. 203 of the bill and sec. 1(h) of the Code) 

PRESENT LAW

Capital gains 

In general 

In general, gain or loss reflected in the value of an asset is not 

recognized for income tax purposes until a taxpayer disposes of the 

asset. On the sale or exchange of a capital asset, any gain generally 

is included in income. Any net capital gain of an individual is taxed 

at maximum rates lower than the rates applicable to ordinary income. Net capital gain is the excess of the net long-term capital 

gain for the taxable year over the net short-term capital loss for 

the year. Gain or loss is treated as long-term if the asset is held 

for more than one year. 

Capital losses generally are deductible in full against capital 

gains. In addition, individual taxpayers may deduct capital losses 

against up to $3,000 of ordinary income in each year. Any remaining unused capital losses may be carried forward indefinitely to another taxable year. 

A capital asset generally means any property except (1) inventory, stock in trade, or property held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, 

(2) depreciable or real property used in the taxpayer’s trade or 

business, (3) specified literary or artistic property, (4) business accounts or notes receivable, (5) certain U.S. publications, (6) certain 

commodity derivative financial instruments, (7) hedging transactions, and (8) business supplies. In addition, the net gain from 

the disposition of certain property used in the taxpayer’s trade or 

business is treated as long-term capital gain. Gain from the disposition of depreciable personal property is not treated as capital 

gain to the extent of all previous depreciation allowances. Gain 

from the disposition of depreciable real property is generally not 

treated as capital gain to the extent of the depreciation allowances 

in excess of the allowances that would have been available under 

the straight-line method of depreciation. 

Tax rates before 2009 

Under present law, for taxable years beginning before January 1, 

2009, the maximum rate of tax on the adjusted net capital gain of 

an individual is 15 percent. Any adjusted net capital gain which 

otherwise would be taxed at a 10- or 15-percent rate is taxed at a 

five-percent rate (zero for taxable years beginning after 2007). 

47 

These rates apply for purposes of both the regular tax and the alternative minimum tax. 

Under present law, the ‘‘adjusted net capital gain’’ of an individual is the net capital gain reduced (but not below zero) by the 

sum of the 28-percent rate gain and the unrecaptured section 1250 

gain. The net capital gain is reduced by the amount of gain that 

the individual treats as investment income for purposes of determining the investment interest limitation under section 163(d). 

The term ‘‘28-percent rate gain’’ means the amount of net gain 

attributable to long-term capital gains and losses from the sale or 

exchange of collectibles (as defined in section 408(m) without regard to paragraph (3) thereof), an amount of gain equal to the 

amount of gain excluded from gross income under section 1202 (relating to certain small business stock), the net short-term capital 

loss for the taxable year, and any long-term capital loss carryover 

to the taxable year. 

‘‘Unrecaptured section 1250 gain’’ means any long-term capital 

gain from the sale or exchange of section 1250 property (i.e., depreciable real estate) held more than one year to the extent of the gain 

that would have been treated as ordinary income if section 1250 

applied to all depreciation, reduced by the net loss (if any) attributable to the items taken into account in computing 28-percent rate 

gain. The amount of unrecaptured section 1250 gain (before the reduction for the net loss) attributable to the disposition of property 

to which section 1231 (relating to certain property used in a trade 

or business) applies may not exceed the net section 1231 gain for 

the year. 

An individual’s unrecaptured section 1250 gain is taxed at a 

maximum rate of 25 percent, and the 28-percent rate gain is taxed 

at a maximum rate of 28 percent. Any amount of unrecaptured section 1250 gain or 28-percent rate gain otherwise taxed at a 10- or 

15-percent rate is taxed at the otherwise applicable rate. 

Tax rates after 2008 

For taxable years beginning after December 31, 2008, the maximum rate of tax on the adjusted net capital gain of an individual 

is 20 percent. Any adjusted net capital gain which otherwise would 

be taxed at a 10- or 15-percent rate is taxed at a 10-percent rate. 

In addition, any gain from the sale or exchange of property held 

more than five years that would otherwise have been taxed at the 

10-percent rate is taxed at an eight-percent rate. Any gain from the 

sale or exchange of property held more than five years and the 

holding period for which began after December 31, 2000, that 

would otherwise have been taxed at a 20-percent rate is taxed at 

an 18-percent rate. 

The tax rates on 28-percent gain and unrecaptured section 1250 

gain are the same as for taxable years beginning before 2009. 

Dividends 

In general 

A dividend is the distribution of property made by a corporation 

to its shareholders out of its after-tax earnings and profits. 

48 

Tax rates before 2009 

Under present law, dividends received by an individual from domestic corporations and qualified foreign corporations are taxed at 

the same rates that apply to capital gains. This treatment applies 

for purposes of both the regular tax and the alternative minimum 

tax. Thus, for taxable years beginning before 2009, dividends received by an individual are taxed at rates of five (zero for taxable 

years beginning after 2007) and 15 percent. 

If a shareholder does not hold a share of stock for more than 60 

days during the 121-day period beginning 60 days before the exdividend date (as measured under section 246(c)), dividends received on the stock are not eligible for the reduced rates. Also, the 

reduced rates are not available for dividends to the extent that the 

taxpayer is obligated to make related payments with respect to positions in substantially similar or related property. 

Qualified dividend income includes otherwise qualified dividends 

received from qualified foreign corporations. The term ‘‘qualified 

foreign corporation’’ includes a foreign corporation that is eligible 

for the benefits of a comprehensive income tax treaty with the 

United States which the Treasury Department determines to be 

satisfactory and which includes an exchange of information program. In addition, a foreign corporation is treated as a qualified 

foreign corporation with respect to any dividend paid by the corporation with respect to stock that is readily tradable on an established securities market in the United States. 

Dividends received from a corporation that is a passive foreign 

investment company (as defined in section 1297) in either the taxable year of the distribution, or the preceding taxable year, are not 

qualified dividends. 

Special rules apply in determining a taxpayer’s foreign tax credit 

limitation under section 904 in the case of qualified dividend income. For these purposes, rules similar to the rules of section 

904(b)(2)(B) concerning adjustments to the foreign tax credit limitation to reflect any capital gain rate differential will apply to any 

qualified dividend income. 

If a taxpayer receives an extraordinary dividend (within the 

meaning of section 1059(c)) eligible for the reduced rates with respect to any share of stock, any loss on the sale of the stock is 

treated as a long-term capital loss to the extent of the dividend. 

A dividend is treated as investment income for purposes of determining the amount of deductible investment interest only if the 

taxpayer elects to treat the dividend as not eligible for the reduced 

rates. 

The amount of dividends qualifying for reduced rates that may 

be paid by a regulated investment company (‘‘RIC’’) for any taxable 

year in which the qualified dividend income received by the company is less than 95 percent of its gross income (as specially computed) may not exceed the sum of (i) the qualified dividend income 

of the RIC for the taxable year and (ii) the amount of earnings and 

profits accumulated in a non-RIC taxable year that were distributed by the RIC during the taxable year. 

The amount of dividends qualifying for reduced rates that may 

be paid by a real estate investment trust (‘‘REIT’’) for any taxable 

year may not exceed the sum of (i) the qualified dividend income 

of the REIT for the taxable year, (ii) an amount equal to the excess 

49 

27 In addition, for taxable years beginning before 2009, amounts treated as ordinary income 

on the disposition of certain preferred stock (sec. 306) are treated as dividends for purposes of 

applying the reduced rates; the tax rate for the accumulated earnings tax (sec. 531) and the 

personal holding company tax (sec. 541) is reduced to 15 percent; and the collapsible corporation 

rules (sec. 341) are repealed. 

of the income subject to the taxes imposed by section 857(b)(1) and 

the regulations prescribed under section 337(d) for the preceding 

taxable year over the amount of these taxes for the preceding taxable year, and (iii) the amount of earnings and profits accumulated 

in a non-REIT taxable year that were distributed by the REIT during the taxable year. 

The reduced rates do not apply to dividends received from an organization that was exempt from tax under section 501 or was a 

tax-exempt farmers’ cooperative in either the taxable year of the 

distribution or the preceding taxable year; dividends received from 

a mutual savings bank that received a deduction under section 591; 

or deductible dividends paid on employer securities.27

Tax rates after 2008 

For taxable years beginning after 2008, dividends received by an 

individual are taxed as ordinary income at rates of up to 35 percent. 

REASONS FOR CHANGE

The Committee believes that the lower capital gain and dividend 

rates have had a positive effect on the economy and should be extended to continue to promote economic growth by increasing the 

after-tax return to saving and investment. The Committee further 

believes that the extension will encourage the payment of dividends 

by corporations. 

EXPLANATION OF PROVISION

The bill extends for two years the present-law provisions relating 

to lower capital gain and dividend tax rates (through taxable years 

beginning on or before December 31, 2010). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2008. 

D. CREDIT FOR ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS (THE

‘‘SAVER’S CREDIT’’) 

(sec. 204 of the bill and sec. 25B of the Code) 

PRESENT LAW

Present law provides a temporary nonrefundable tax credit for eligible taxpayers for qualified retirement savings contributions, referred to as the ‘‘saver’s credit.’’ The maximum annual contribution 

eligible for the credit is $2,000. The credit rate depends on the adjusted gross income (‘‘AGI’’) of the taxpayer. Taxpayers filing joint 

returns with AGI of $50,000 or less, head of household returns of 

$37,500 or less, and single returns of $25,000 or less are eligible 

for the credit. The AGI limits applicable to single taxpayers apply 

to married taxpayers filing separate returns. The credit is in addiVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00049 Fmt 6659 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
50 

28The saver’s credit was enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (‘‘EGTRRA’’), Pub. L. No. 107–16. The provisions of EGTRRA generally do not 

apply for years beginning after December 31, 2010. 

tion to any deduction or exclusion that would otherwise apply with 

respect to the contribution. The credit offsets minimum tax liability 

as well as regular tax liability. The credit is available to individuals who are 18 or over, 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: (1) elective deferrals to a 

qualified cash or deferred arrangement (a ‘‘section 401(k) plan’’), a 

tax-sheltered annuity (a ‘‘section 403(b)’’ annuity), an eligible deferred compensation arrangement of a State or local government (a 

‘‘governmental section 457 plan’’), a SIMPLE plan, or a simplified 

employee pension (‘‘SEP’’); (2) contributions to a traditional or Roth 

IRA; and (3) voluntary after-tax employee contributions to a taxsheltered annuity or qualified retirement plan. 

The amount of any contribution eligible for the credit is generally 

reduced by distributions received by the taxpayer (or by the taxpayer’s spouse if the taxpayer filed a joint return with the spouse) 

from any plan or IRA to which eligible contributions can be made 

during the taxable year for which the credit is claimed, the two 

taxable years prior to the year the credit is claimed, and during the 

period after the end of the taxable year for which the credit is 

claimed and prior to the due date for filing the taxpayer’s return 

for the year. Distributions that are rolled over to another retirement plan do not affect the credit. 

The credit rates based on AGI are provided in the table below. 

TABLE 1.—CREDIT RATES FOR SAVER’S CREDIT 

Joint filers Heads of households All other filers Credit rate 

(percent) 

$0–$30,000 ......................................................................................... $0–$22,500 $0–$15,000 50 

30,001–32,500 .................................................................................... 22,501–24,375 15,001–16,250 20

32,501–50,000 .................................................................................... 24,376–37,500 16,251–25,000 10

Over 50,000 ........................................................................................ Over 37,500 Over 25,000 0 

The credit does not apply to taxable years beginning after December 31, 2006.28

REASONS FOR CHANGE

Many low- and middle-income individuals have inadequate savings for retirement. The Committee believes that the saver’s credit 

provides an incentive for low- and middle-income individuals to 

save for retirement. The Committee believes that the credit should 

be extended to provide a more consistent savings incentive. 

EXPLANATION OF PROVISION

The provision extends the saver’s credit for two years (through 

taxable years beginning on or before December 31, 2008). 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

51 

29 Additional section 179 incentives are provided with respect to a qualified property used by 

a business in the New York Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 1397A), 

or a renewal community (sec. 1400J). 30Sec. 179(c)(1). Under Treas. Reg. sec. 179–5, applicable to property placed in service in taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an 

election under section 179 without the consent of the Commissioner on an amended Federal tax 

return for that taxable year. This amended return must be filed within the time prescribed by 

law for filing an amended return for the taxable year. T.D. 9209, July 12, 2005. 31Sec. 179(c)(2). 

E. EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS

(sec. 205 of the bill and sec. 179 of the Code) 

PRESENT LAW

In lieu of depreciation, a taxpayer with a sufficiently small 

amount of annual investment may elect to deduct (or ‘‘expense’’) 

such costs. Present law provides that the maximum amount a taxpayer may expense, for taxable years beginning in 2003 through 

2007, is $100,000 of the cost of qualifying property placed in service 

for the taxable year.29 In general, qualifying property is defined as 

depreciable tangible personal property that is purchased for use in 

the active conduct of a trade or business. Off-the-shelf computer 

software placed in service in taxable years beginning before 2008 

is treated as qualifying property. The $100,000 amount is reduced 

(but not below zero) by the amount by which the cost of qualifying 

property placed in service during the taxable year exceeds 

$400,000. The $100,000 and $400,000 amounts are indexed for inflation for taxable years beginning after 2003 and before 2008. 

The amount eligible to be expensed for a taxable year may not 

exceed the taxable income for a taxable year that is derived from 

the active conduct of a trade or business (determined without regard to this provision). Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years (subject to similar limitations). 

No general business credit under section 38 is allowed with respect 

to any amount for which a deduction is allowed under section 179. 

An expensing election is made under rules prescribed by the Secretary.30

For taxable years beginning in 2008 and thereafter (or before 

2003), the following rules apply. A taxpayer with a sufficiently 

small amount of annual investment may elect to deduct up to 

$25,000 of the cost of qualifying property placed in service for the 

taxable year. The $25,000 amount is reduced (but not below zero) 

by the amount by which the cost of qualifying property placed in 

service during the taxable year exceeds $200,000. The $25,000 and 

$200,000 amounts are not indexed. In general, qualifying property 

is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business (not including off the-shelf computer software). An expensing election may 

be revoked only with consent of the Commissioner.31

REASONS FOR CHANGE

The Committee believes that section 179 expensing provides two 

important benefits for small businesses. First, it lowers the cost of 

capital for property used in a trade or business. With a lower cost 

of capital, the Committee believes small businesses will invest in 

more equipment and employ more workers. Second, it eliminates 

52 

depreciation recordkeeping requirements with respect to expensed 

property. In 2004, Congress acted to increase the value of these 

benefits and to increase the number of taxpayers eligible for taxable years through 2007. The Committee believes that the changes 

to section 179 expensing will continue to provide important benefits 

if extended, and the bill therefore extends these changes for an additional two years. 

EXPLANATION OF PROVISION

The provision extends for two years the increased amount that 

a taxpayer may deduct and the other section 179 rules applicable 

in taxable years beginning before 2008. Thus, under the provision, 

these present-law rules continue in effect for taxable years beginning after 2007 and before 2010. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after 2007 

and before 2010. 

TITLE III—OTHER PROVISIONS 

A. TAXATION OF CERTAIN SETTLEMENT FUNDS

(sec. 301 of the bill and sec. 468B of the Code) 

PRESENT LAW

Present law provides that if a taxpayer makes a payment to a 

designated settlement fund pursuant to a court order, the deduction timing rules that require economic performance generally are 

deemed to be met as the payments are made by the taxpayer to 

the fund. A designated settlement fund means a fund which: is established pursuant to a court order; extinguishes completely the 

taxpayer’s tort liability arising out of personal injury, death or 

property damage; is administered by persons a majority of whom 

are independent of the taxpayer; and under the terms of the fund 

the taxpayer (or any related person) may not hold any beneficial 

interest in the income or corpus of the fund. 

Generally, a designated or qualified settlement fund is taxed as 

a separate entity at the maximum trust rate on its modified income. Modified income is generally gross income less deductions for 

administrative costs and other incidental expenses incurred in connection with the operation of the settlement fund. 

The cleanup of hazardous waste sites is sometimes funded by environmental ‘‘settlement funds’’ or escrow accounts. These escrow 

accounts are established in consent decrees between the Environmental Protection Agency (‘‘EPA’’) and the settling parties under 

the jurisdiction of a Federal district court. The EPA uses these accounts to resolve claims against private parties under Comprehensive Environmental Response, Compensation and Liability Act of 

1980 (‘‘CERCLA’’). 

Present law provides that nothing in any provision of law is to 

be construed as providing that an escrow account, settlement fund, 

or similar fund is not subject to current income tax. 

53 

REASONS FOR CHANGE

The Committee believes that environmental escrow accounts established under court consent decrees are essential for the EPA to 

resolve or satisfy claims under the CERCLA. The tax treatment of 

these settlement funds may prevent taxpayers from entering into 

prompt settlements with the EPA for the cleanup of Superfund 

hazardous waste sites and reduce the ultimate amount of funds 

available for the sites’ cleanup. Because these settlement funds are 

controlled by the government and, upon termination, any remaining funds belong to the government, the Committee believes it is 

appropriate to establish that these funds are to be treated as beneficially owned by the United States. 

EXPLANATION OF PROVISION

The provision provides that certain settlement funds established 

in consent decrees for the sole purpose of resolving claims under 

CERCLA are to be treated as beneficially owned by the United 

States government and therefore, not subject to Federal income 

tax. 

To qualify the settlement fund must be: (1) established pursuant 

to a consent decree entered by a judge of a United States District 

Court; (2) created for the receipt of settlement payments for the 

sole purpose of resolving claims under CERCLA; (3) controlled (in 

terms of expenditures of contributions and earnings thereon) by the 

government or an agency or instrumentality thereof; and (4) upon 

termination, any remaining funds will be disbursed to such government entity and used in accordance with applicable law. For purposes of the provision, a government entity means the United 

States, any State of political subdivision thereof, the District of Columbia, any possession of the United States, and any agency or instrumentality of the foregoing. 

The provision does not apply to accounts or funds established 

after December 31, 2010. 

EFFECTIVE DATE

The provision is effective for accounts and funds established after 

the date of enactment. 

B. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER SECTION

355 

(sec. 302 of the bill and sec. 355 of the Code) 

PRESENT LAW

A corporation generally is required to recognize gain on the distribution of property (including stock of a subsidiary) to its shareholders as if such property had been sold for its fair market value. 

An exception to this rule applies if the distribution of the stock of 

a controlled corporation satisfies the requirements of section 355 of 

the Code. To qualify for tax-free treatment under section 355, both 

the distributing corporation and the controlled corporation must be 

engaged immediately after the distribution in the active conduct of 

a trade or business that has been conducted for at least five years 

54 

32Section 355(b). 33Section 355(b)(2)(A). 34 Rev. Proc. 2003–3, sec. 4.01(30), 2003–1 I.R.B. 113. 35 Rev. Proc. 2003–48, 2003–29 I.R.B. 86. 36 Rev. Proc. 96–30, sec. 4.03(5), 1996–1 C.B. 696; Rev. Proc. 77–37, sec. 3.04, 1977–2 C.B. 

568. 

and was not acquired in a taxable transaction during that period.32

For this purpose, a corporation is engaged in the active conduct of 

a trade or business only if (1) the corporation is directly engaged 

in the active conduct of a trade or business, or (2) the corporation 

is not directly engaged in an active business, but substantially all 

of its assets consist of stock and securities of a corporation it controls that is engaged in the active conduct of a trade or business.33

In determining whether a corporation is directly engaged in an 

active trade or business that satisfies the requirement, old IRS 

guidelines for advance ruling purposes required that the value of 

the gross assets of the trade or business being relied on must ordinarily constitute at least five percent of the total fair market value 

of the gross assets of the corporation directly conducting the trade 

or business.34 More recently, the IRS has suspended this specific 

rule in connection with its general administrative practice of moving IRS resources away from advance rulings on factual aspects of 

section 355 transactions in general.35

If the distributing or controlled corporation is not directly engaged in an active trade or business, then the IRS takes the position that the ‘‘substantially all’’ test requires that at least 90 percent of the fair market value of the corporation’s gross assets consist of stock and securities of a controlled corporation that is engaged in the active conduct of a trade or business.36

REASONS FOR CHANGE

Prior to a spin-off under section 355 of the Code, corporate 

groups that have conducted business in separate corporate entities 

often must undergo elaborate restructurings to place active businesses in the proper entities to satisfy the five-year active business 

requirement. If the top-tier corporation of a chain that is being 

spun off or retained is a holding company, then the requirements 

regarding the activities of its subsidiaries are more stringent than 

if the top-tier corporation itself engaged in some active business. 

The Committee believes that it is appropriate to simplify planning 

for corporate groups that use a holding company structure to engage in distributions that qualify for tax-free treatment under section 355. 

EXPLANATION OF PROVISION

Under the bill, the active business test is determined by reference to the relevant affiliated group. For the distributing corporation, the relevant affiliated group consists of the distributing corporation as the common parent and all corporations affiliated with 

the distributing corporation through stock ownership described in 

section 1504(a)(1)(B) (regardless of whether the corporations are includible corporations under section 1504(b)), immediately after the 

distribution. The relevant affiliated group for a controlled corporation is determined in a similar manner (with the controlled corporation as the common parent). 

55 

37For example, a holding company taxpayer that had distributed a controlled corporation in 

a spin-off prior to the date of enactment, in which spin-off the taxpayer satisfied the ‘‘substantially all’’ active business stock test of present law section 355(b)(2)(A) immediately after the 

distribution, would not be deemed to have failed to satisfy any requirement that it continue that 

same qualified structure for any period of time after the distribution, solely because of a restructuring that occurs after the date of enactment and that would satisfy the requirements of new 

section 355(b)(2)(A). 

EFFECTIVE DATE

The bill applies to distributions after the date of enactment and 

before December 31, 2010, with three exceptions. The bill does not 

apply to distributions (1) made pursuant to an agreement which is 

binding on the date of enactment and at all times thereafter, (2) 

described in a ruling request submitted to the IRS on or before the 

date of enactment, or (3) described on or before the date of enactment in a public announcement or in a filing with the Securities 

and Exchange Commission. The distributing corporation may irrevocably elect not to have the exceptions described above apply. 

In the case of any distribution prior to the date of enactment, 

solely for the purpose of determining whether, after the date of enactment, the taxpayer continues to satisfy the requirements of section 355(b)(2)(A) as a result of an acquisition, disposition, or other 

restructuring after such date and before December 31, 2010, the 

provisions of the bill apply as if the distribution had occurred after 

the date of enactment.37

C. QUALIFIED VETERAN’S MORTGAGE BONDS

(sec. 303 of the bill and sec. 143 of the Code) 

PRESENT LAW

Qualified veterans’ mortgage bonds are private activity bonds the 

proceeds of which are used to make mortgage loans to certain veterans. Authority to issue qualified veterans’ mortgage bonds is limited to States that had issued such bonds before June 22, 1984. 

Qualified veterans’ mortgage bonds are not subject to the State volume limitations generally applicable to private activity bonds. Instead, annual issuance in each State is subject to a State volume 

limitation based on the volume of such bonds issued by the State 

before June 22, 1984. The five States eligible to issue these bonds 

are Alaska, California, Oregon, Texas, and Wisconsin. Loans financed with qualified veterans’ mortgage bonds can be made only 

with respect to principal residences and can not be made to acquire 

or replace existing mortgages. Mortgage loans made with the proceeds of these bonds can be made only to veterans who served on 

active duty before 1977 and who applied for the financing before 

the date 30 years after the last date on which such veteran left active service (the ‘‘eligibility period’’). 

REASONS FOR CHANGE

The Committee believes that the qualified veterans’ mortgage 

bond program should be expanded to more recent veterans including potentially the men and women serving on active duty today. 

The Committee also believes that such an expansion requires modified volume limits for these bonds. 

56 

EXPLANATION OF PROVISION

The bill repeals the requirement that veterans receiving loans financed with veterans’ bonds must have served before 1977. It also 

reduces the eligibility period to 25 years (rather than 30 years) following release from the military service. The bill provides new 

State volume limits for these bonds for the five eligible States. In 

2010, the new annual limit on the total volume of veterans’ bonds 

is $25 million for Alaska, $66.25 million for California, $25 million 

for Oregon, $53.75 million for Texas, and $25 million for Wisconsin. 

These volume limits are phased-in over the four-year period immediately preceding 2010 by allowing the applicable percentage of the 

2010 volume limits. The following table provides those percentages. 

Calendar year: Applicable 

percentage is: 

2006 ......................................................................................................... 20 percent 

2007 ......................................................................................................... 40 percent 

2008 ......................................................................................................... 60 percent 

2009 ......................................................................................................... 80 percent 

The volume limits are zero for 2011 and each year thereafter. 

Unused allocation cannot be carried forward to subsequent years. 

EFFECTIVE DATE

The provision generally applies to bonds issued after December 

31, 2005. The provision expanding the definition of eligible veterans applies to financing provided after June 30, 2005. 

D. CAPITAL GAINS TREATMENT FOR CERTAIN SELF-CREATED

MUSICAL WORKS

(sec. 304 of the bill and sec. 1221 of the Code) 

PRESENT LAW

Capital gains 

The maximum tax rate on the net capital gain income of an individual is 15 percent for taxable years beginning in 2005. By contrast, the maximum tax rate on an individual’s ordinary income is 

35 percent. The reduced 15-percent rate generally is available for 

gain from the sale or exchange of a capital asset for which the taxpayer has satisfied a holding-period requirement. Capital assets 

generally include all property held by a taxpayer with certain specified exclusions. 

An exclusion from the definition of a capital asset applies to inventory property or property held by a taxpayer primarily for sale 

to customers in the ordinary course of the taxpayer’s trade or business. Another exclusion from capital asset status applies to copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property held by a taxpayer whose personal efforts created the property (or held by a taxpayer whose basis in the 

property is determined by reference to the basis of the taxpayer 

whose personal efforts created the property). Consequently, when 

a taxpayer that owns copyrights in, for example, books, songs, or 

paintings that the taxpayer created (or when a taxpayer to which 

the copyrights have been transferred by the works’ creator in a 

substituted basis transaction) sells the copyrights, gain from the 

sale is treated as ordinary income, not capital gain. 

57 

Charitable contributions 

A taxpayer generally is allowed a deduction for the fair market 

value of property contributed to a charity. If a taxpayer makes a 

contribution of property that would have generated ordinary income (or short-term capital gain), the taxpayer’s charitable contribution deduction generally is limited to the property’s adjusted 

basis. 

REASONS FOR CHANGE

The Committee believes it is appropriate to allow taxpayers to 

treat as capital gain the income from a sale or exchange of musical 

compositions or copyrights in musical works the taxpayer created. 

EXPLANATION OF PROVISION

The provision provides that at the election of a taxpayer, the sale 

or exchange before January 1, 2011 of musical compositions or 

copyrights in musical works created by the taxpayer’s personal efforts (or having a basis determined by reference to the basis in the 

hands of the taxpayer whose personal efforts created the compositions or copyrights) is treated as the sale or exchange of a capital 

asset. The provision does not change the present law limitation on 

a taxpayer’s charitable deduction for the contribution of such compositions or copyrights. 

EFFECTIVE DATE

The provision is effective for sales or exchanges in taxable years 

beginning after the date of enactment. 

E. DECREASE MINIMUM VESSEL TONNAGE LIMIT TO 6,000 

DEADWEIGHT TONS

(sec. 305 of the bill and sec. 1355 of the Code) 

PRESENT LAW

The United States employs a ‘‘worldwide’’ tax system, under 

which domestic corporations generally are taxed on all income, including income from shipping operations, whether derived in the 

United States or abroad. In order to mitigate double taxation, a foreign tax credit for income taxes paid to foreign countries is provided to reduce or eliminate the U.S. tax owed on such income, 

subject to certain limitations. 

Generally, the United States taxes foreign corporations only on 

income that has a sufficient nexus to the United States. Thus, a 

foreign corporation is generally subject to U.S. tax only on income, 

including income from shipping operations, which is ‘‘effectively 

connected’’ with the conduct of a trade or business in the United 

States (sec. 882). Such ‘‘effectively connected income’’ generally is 

taxed in the same manner and at the same rates as the income of 

a U.S. corporation. 

The United States imposes a four percent tax on the amount of 

a foreign corporation’s U.S. source gross transportation income (sec. 

887). Transportation income includes income from the use (or hiring or leasing for use) of a vessel and income from services directly 

related to the use of a vessel. Fifty percent of the transportation 

58 

38Pub. L. No. 108–357, sec. 248. The tonnage tax regime is effective for taxable years beginning after the date of enactment of AJCA (October 22, 2004). 39Generally, a qualifying vessel operator is a corporation that (1) operates one or more qualifying vessels and (2) meets certain requirements with respect to its shipping activities. 40 An electing corporation’s notional shipping income for the taxable year is the product of the 

following amounts for each of the qualifying vessels it operates: (1) the daily notional shipping 

income from the operation of the qualifying vessel, and (2) the number of days during the taxable year that the electing corporation operated such vessel as a qualifying vessel in the United 

States foreign trade. The daily notional shipping income from the operation of a qualifying vessel is (1) 40 cents for each 100 tons of so much of the net tonnage of the vessel as does not 

exceed 25,000 net tons, and (2) 20 cents for each 100 tons of so much of the net tonnage of 

the vessel as exceeds 25,000 net tons. ‘‘United States foreign trade’’ means the transportation 

of goods or passengers between a place in the United States and a foreign place or between foreign places. The temporary use in the United States domestic trade (i.e., the transportation of 

goods or passengers between places in the United States) of any qualifying vessel or the temporary ceasing to use a qualifying vessel may be disregarded, under special rules. 41Deadweight measures the lifting capacity of a ship expressed in long tons (2,240 lbs.), including cargo, crew, and consumables such as fuel, lube oil, drinking water, and stores. It is 

the difference between the number of tons of water a vessel displaces without such items on 

board and the number of tons it displaces when fully loaded. 

income attributable to transportation that either begins or ends 

(but not both) in the United States is treated as U.S. source gross 

transportation income. The tax does not apply, however, to U.S. 

source gross transportation income that is treated as income effectively connected with the conduct of a U.S. trade or business. U.S. 

source gross transportation income is not treated as effectively connected income unless (1) the taxpayer has a fixed place of business 

in the United States involved in earning the income, and (2) substantially all the income is attributable to regularly scheduled 

transportation. 

The tax imposed by section 882 or 887 on income from shipping 

operations may be limited by an applicable U.S. income tax treaty 

or by an exemption of a foreign corporation’s international shipping 

operations income in instances where a foreign country grants an 

equivalent exemption (sec. 883). 

Notwithstanding the general rules described above, the American 

Jobs Creation Act of 2004 (‘‘AJCA’’) 38 generally allows corporations 

that are qualifying vessel operators 39 to elect a ‘‘tonnage tax’’ in 

lieu of the corporate income tax on taxable income from certain 

shipping activities. Accordingly, an electing corporation’s gross income does not include its income from qualifying shipping activities 

(and items of loss, deduction, or credit are disallowed with respect 

to such excluded income), and electing corporations are only subject 

to tax on these activities at the maximum corporate income tax 

rate on their notional shipping income, which is based on the net 

tonnage of the corporation’s qualifying vessels.40 No deductions are 

allowed against the notional shipping income of an electing corporation, and no credit is allowed against the notional tax imposed 

under the tonnage tax regime. In addition, special deferral rules 

apply to the gain on the sale of a qualifying vessel, if such vessel 

is replaced during a limited replacement period. 

Generally, a ‘‘qualifying vessel’’ is defined as a self-propelled (or 

a combination of self-propelled and non-self-propelled) U.S.-flag 

vessel of not less than 10,000 deadweight tons 41 that is used exclusively in the U.S. foreign trade. 

REASONS FOR CHANGE

The Committee believes that the tonnage tax regime provides operators of qualifying U.S.-flag vessels in the U.S. foreign trade the 

opportunity to be competitive with their tax-advantaged foreign 

59 

competitors. However, there are a number of U.S.-flag vessels that 

are operated in the U.S. foreign trade but which do not qualify for 

tonnage tax treatment because their carrying capacity is less than 

10,000 deadweight tons. The Committee believes that the expansion of the tonnage tax regime to smaller vessels will permit the 

operators of such vessels to be competitive with their foreign competitors as well as with their larger U.S.-flag competitors. 

EXPLANATION OF PROVISION

The provision expands the definition of ‘‘qualifying vessel’’ to include self-propelled (or a combination of self-propelled and non-selfpropelled) U.S. flag vessels of not less than 6,000 deadweight tons 

used exclusively in the United States foreign trade. The modified 

definition applies for taxable years beginning after December 31, 

2005 and ending before January 1, 2011. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2005 and ending before January 1, 2011. 

F. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN FUNDS

(sec. 306 of the bill) 

PRESENT LAW

In general, present-law tax-exempt bond arbitrage restrictions 

provide that interest on a State or local government bond is not eligible for tax-exemption if the proceeds are invested, directly or indirectly, in materially higher yielding investments or if the debt 

service on the bond is secured by or paid from (directly or indirectly) such investments. An exception to the arbitrage restrictions, 

enacted in 1984, provides that the pledge of income from investments in the Texas Permanent University Fund (the ‘‘Fund’’) as security for a limited amount of tax-exempt bonds will not cause interest on those bonds to be taxable. The terms of this exception are 

limited to State constitutional or statutory restrictions continuously 

in effect since October 9, 1969. In addition, the exception only applies to an amount of tax-exempt bonds that does not exceed 20 

percent of the value of the Fund. 

The Fund consists of certain State lands that were set aside for 

the benefit of higher education, the income from mineral rights to 

these lands, and certain other earnings on Fund assets. The Texas 

constitution directs that monies held in the Fund are to be invested 

in interest-bearing obligations and other securities. Income from 

the Fund is apportioned between two university systems operated 

by the State. Tax-exempt bonds issued by the university systems 

to finance buildings and other permanent improvements were secured by and payable from the income of the Fund. 

Prior to 1999, the constitution did not permit the expenditure or 

mortgage of the Fund for any purpose. In 1999, the State constitutional rules governing the Fund were modified with regard to the 

manner in which amounts in the Fund are distributed for the benefit of the two university systems. The State constitutional amendments allow for the possibility that in the event investment earnings are less than annual debt service on the bonds some of the 

60 

42 H.R. 2661. 

debt service could be considered as having been paid with the Fund 

corpus. The 1984 exception refers only to bonds secured by investment earnings on securities or obligations held by the Fund. Despite the constitutional amendments, the IRS has agreed to continue to apply the 1984 exception to the Fund through August 31, 

2007, if clarifying legislation is introduced in the 109th Congress 

prior to August 31, 2005. Clarifying legislation was introduced in 

the 109th Congress on May 26, 2005.42

REASONS FOR CHANGE

The Committee understands that the State constitutional amendments have the effect of permitting the Fund to make annual distributions in a manner similar to standard university endowment 

funds, rather than tying distributions to annual income performance, which can create a variable pattern of distributions. The 

Committee does not believe that the Fund should lose the benefits 

of the 1984 exception from the tax-exempt bond arbitrage restrictions by adopting a more modern approach to the management of 

Fund distributions. 

EXPLANATION OF PROVISION

The provision affirms and extends the IRS agreement through 

August 31, 2009. The 1984 exception is conformed to the State constitutional amendments to permit its continued applicability to 

bonds of the two university systems. The limitation on the aggregate amount of bonds which may benefit from the exception is not 

modified, and remains at 20 percent. The provision sunsets after 

August 31, 2009. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

IV. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statements are made concerning the vote of the Committee on Ways and Means in its consideration of H.R. 4297, to provide for reconciliation pursuant to 

section 201(b) of the concurrent resolution on the budget for fiscal 

year 2006. 

MOTION TO REPORT RECOMMENDATIONS

The Chairman’s Amendment in the Nature of a Substitute, as 

amended, was ordered favorably reported by a rollcall vote of 24 

yeas to 15 nays (with a quorum being present). The vote was as 

follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

61 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendments to the 

Chairman’s Amendment in the Nature of a Substitute. 

A substitute amendment by Mr. Neal was defeated by a rollcall 

vote of 15 yeas to 24 nays. The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

An amendment by Mr. Pomeroy, which would expand the child 

tax credit to include expenses paid to enforce child support obligations, was defeated by a rollcall vote of 15 yeas to 24 nays. The 

vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

62 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

An amendment by Messrs. Herger, Weller, Brady, and Beauprez, 

which would extend increased expensing for small businesses for 2 

years, was agreed to by a rollcall vote of 39 yeas to 0 nays. The 

vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

An amendment by Committee Members Camp, N. Johnson, 

Herger, McCrery, S. Johnson, English, Hayworth, Weller, Hulshof, 

and Brady, which would extend and expand the research and experimentation tax credit for 1 year, was agreed to by a rollcall vote 

of 39 yeas to 0 nays. The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

63 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

An amendment by Mr. Foley, which would extend the saver’s 

credit for 2 years, was agreed to by a rollcall vote of 39 yeas to 0 

nays. The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

VOTES ON PROCEDURAL MOTIONS

A motion by Mr. Shaw to limit debate for Republicans and Democrats to 6 minutes per side was agreed to by a rollcall vote of 24 

yeas to 15 nays. The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X Mr. Rangel ........................... X 

Mr. Shaw ............................... X Mr. Stark ..............................

Mrs. Johnson ......................... X Mr. Levin .............................. X 

Mr. Herger ............................. X Mr. Cardin ............................ X 

Mr. McCrery ........................... X Mr. McDermott ..................... X 

Mr. Camp .............................. X Mr. Lewis (GA) ..................... X 

Mr. Ramstad ......................... X Mr. Neal ............................... X 

64 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Nussle ............................. X Mr. McNulty ..........................

Mr. Johnson ........................... X Mr. Jefferson ........................ X 

Mr. English ........................... X Mr. Tanner ............................ X 

Mr. Hayworth ......................... X Mr. Becerra .......................... X 

Mr. Weller .............................. X Mr. Doggett .......................... X 

Mr. Hulshof ........................... X Mr. Pomeroy ......................... X 

Mr. Lewis (KY) ...................... X Ms. Tubbs Jones .................. X 

Mr. Foley ............................... X Mr. Thompson ...................... X 

Mr. Brady .............................. X Mr. Larson ............................ X 

Mr. Reynolds ......................... X Mr. Emanuel ......................... X 

Mr. Ryan ............................... X 

Mr. Cantor ............................. X 

Mr. Linder ............................. X 

Mr. Beauprez ......................... X 

Ms. Hart ................................ X 

Mr. Chocola ........................... X 

Mr. Nunes ............................. X 

V. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of the rule XIII of the Rules of 

the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the 

bill, H.R. 4297, as reported. 

The bill is estimated to have the following effects on budget receipts for fiscal years 2006–2010: 

65 


Insert graphic folio 89 HR304.001
66 


Insert graphic folio 90 HR304.002
67 


Insert graphic folio 91 HR304.003
68 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue reducing tax provisions involve increased tax expenditures and budget outlays. (See amounts in table 

in Part IV.A., above.) 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives requires a cost estimate prepared by the 

CBO, the following statement by CBO is provided. 

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, November 17, 2005. 

Hon. WILLIAM ‘‘BILL’’ M. THOMAS, 

Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: Based on a review of H.R. 4297, the Tax 

Relief Extension Reconciliation Act of 2005, as ordered reported by 

the Committee on Ways and Means on November 15, 2005, CBO 

and the Joint Committee on Taxation (JCT) estimate that enacting 

this legislation would reduce revenues by $56.1 billion over the 

2006–2010 period and by $80.5 billion over the 2006–2015 period. 

In addition, CBO estimates that this legislation would have no effect on federal spending. The estimated revenue effects are summarized below. A table with additional details is attached. 

69 

By fiscal year, in millions of dollars

—

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006–2010 2006–2015 

Estimated Revenues 1 ............................................................ ¥5,773 ¥11,237 ¥11,182 ¥21,394 ¥6,493 ¥7,048 ¥17,430 ¥207 129 102 ¥56,082 ¥80,535 

On-Budget ..................................................................... ¥5,772 ¥11,224 ¥11,179 ¥21,394 ¥6,493 ¥7,048 ¥17,430 ¥207 129 102 ¥56,065 ¥80,518 

Off-Budget ..................................................................... ¥1 ¥14 ¥3 0 0 0 0 0 0 0 ¥17 ¥17 

1 The estimates assume the bill will be enacted by December 1, 2005. 

Sources: CBO and the Joint Committee on Taxation. 

70 

Most of the reduction in revenues would result from extending 

the reduced tax rates for dividends and capital gains. Those provisions account for $50.8 billion of the estimated reduction in revenues over the 10-year period, JCT provided all of the revenue estimates with the exception of the estimate for the provision that extends increased limits for mental health parity. CBO estimates 

that the one-year extension of those increased limits would reduce 

revenues by $58 million over the 2006–2008 period. (Of that reduc- tion, $17 million would apply to off budget receipts.) 

JCT has reviewed H.R. 4297 and has determined that it contains 

no intergovernmental or private-sector mandates as defined in the 

Unfunded Mandates Reform Act. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Emily Schlect. 

Sincerely, 

ROBERT A. SUNSHINE

(For Douglas Holtz-Eakin, Director). 

Attachment. 

71 

ESTIMATED EFFECTS ON REVENUES FOR S.R. 4297 

By fiscal year, in millions of dollars

—

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 

CHANGES IN REVENUES 

Extension of the Reduced Tax Rates for Dividends ........................................................ 0 0 ¥860 ¥4,431 ¥8,008 ¥9,368 ¥6,326 ¥1,224 ¥450 ¥112 

Extension of the Reduced Tax Rates for Capital Gains ................................................. 0 0 ¥1,549 ¥8,375 2,672 ¥54 ¥12,698 * * 0 

Extension and Modification of the Research Credit ....................................................... ¥3,330 ¥3,219 ¥1,480 ¥1,097 ¥740 ¥192 0 0 0 0 

Extension of the Exception for Active Financing Income for Controlled Foreign Corporations ...................................................................................................................... 0 ¥775 ¥2,339 ¥1,682 0 0 0 0 0 0 

Extension of the Credit for Elective Deferrals and IRA Contributions ............................ 0 ¥481 ¥1,428 ¥903 ¥10 ¥11 ¥11 ¥11 ¥10 ¥10 

Extension of Non-refundable Personal Credits under the Alternative Minimum Tax ..... ¥565 ¥2,260 0 0 0 0 0 0 0 0 

Extension of the Deduction for State and Local Sales Taxes ......................................... ¥525 ¥1,574 0 0 0 0 0 0 0 0 Extension of the Deduction for Qualified Tuition ............................................................ ¥420 ¥1,260 0 0 0 0 0 0 0 0 Extension of Cost Recovery for, Qualified Leasehold Improvements .............................. ¥46 ¥138 ¥181 ¥177 ¥171 ¥155 ¥146 ¥155 ¥152 ¥150 

Extension of the Increase in Section 179 Expensing ...................................................... 0 0 ¥2,605 ¥4,459 ¥209 2,707 1,772 1,222 826 476 

All Other Provisions ......................................................................................................... ¥887 ¥1.530 ¥740 

—270 ¥27 25 ¥21, ¥39 ¥85 ¥102 

Total ................................................................................................................................. ¥5,773 ¥11,237 ¥11,182 ¥21,394 ¥6,493 ¥7,048 ¥17,430 ¥207 129 102 

On-Budget ............................................................................................................... ¥5,772 ¥11,224 ¥11,179 ¥21,394 ¥6,493 ¥7,048 ¥17,430 ¥207 129 102 

Off-Budget 1 ............................................................................................................ ¥1 ¥14 ¥3 0 0 0 0 0 0 0 

1 The provision that provides parity in the application of certain limits to mental health benefits, which is included in the estimate for all other provisions, affects both on- and off-budget revenues. 

Sources: CB0 and the Joint Committee on Taxation. Note: * = Loss of less than $500,000 

72 

D. MACROECONOMIC IMPACT ANALYSIS

In compliance with clause 3(h)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made by the 

Joint Committee on Taxation with respect to the provisions of the 

bill amending the Internal Revenue Code of 1986. In compliance 

with clause 3(h)(2) of rule XIII of the Rules of the House of Representatives, the following statement is made by the staff of the 

Joint Committee on Taxation with respect to the provisions of the 

bill amending the Internal Revenue Code of 1986. 

This bill contains provisions that would temporarily lower the 

after-tax cost of capital, providing incentives for additional investment in productive capital, which will likely result in a small increase in economic growth. They include the two-year extensions of 

reductions in the rate of taxation of dividends and realized capital 

gains, the two-year extension of the changes to section 179 expensing, and the one-year extension and revision of the tax credit for 

research and experimentation. These provisions represent small 

changes in the after-tax cost of capital. The temporary nature of 

these incentives increases the amount of uncertainty associated 

with modeling the effects of these proposals on the macro-economy. 

Modeling the effects of such proposals requires making assumptions about taxpayers’ expectations about the future of these proposals, as well as adjusting their responses in light of those assumptions. Empirical evidence on taxpayers’ expectations about future tax policy and likely response to temporary incentives is inconclusive. The expected effects of these provisions on timing of investment have been incorporated in the conventional revenue estimates 

for these proposals. While we estimate that these provisions would 

have a positive effect on economic growth, that effect is small relative to the amount of uncertainty associated with this estimate. 

In addition, this bill contains a number of provisions differentially affecting both corporate and non-corporate businesses as well 

as differentially affecting small sub-sectors of the economy. The resulting re-allocation of relative tax burden among these different 

business sectors could have positive or negative implications for 

economic efficiency, and hence, long-term growth. The size of these 

provisions is also small in relation to the U.S. economy. Finally, the 

net increase in the U.S. Federal government deficit is likely to 

crowd out some domestic investment in the long run. 

Thus, we estimate that the effects of the bill on economic activity 

are so small relative to the size of the economy and the degree of 

uncertainty associated with the estimate as to be incalculable within the context of a model of the aggregate economy. 

VI. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives (relating to oversight findings), the Committee advises that the bill was a result of the Committee’s budget 

reconciliation instructions. 

73 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the Rules of the 

House of Representatives (relating to Constitutional Authority), the 

Committee states that the Committee’s action in reporting this bill 

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts 

and Excises . . .’’), and from the 16th Amendment to the Constitution. 

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the revenue provisions of 

the bill do not contain Federal mandates on the private sector. The 

Committee has determined that the revenue provision of the bill do 

not impose a Federal intergovernmental mandate on State, local, or 

tribal governments. 

E. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not 

involve any Federal income tax rate increases within the meaning 

of the rule. 

F. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint 

Committee on Taxation (in consultation with the Internal Revenue 

Service (‘‘IRS’’) and the Department of the Treasury) to provide a 

tax complexity analysis. The complexity analysis is required for all 

legislation reported by the Senate Committee on Finance, the 

House Committee on Ways and Means, or any committee of conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code (the ‘‘Code’’) and has 

widespread applicability to individuals or small businesses. For 

each such provision identified by the staff of the Joint Committee 

on Taxation, a summary description of the provision is provided 

along with an estimate of the number and type of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues. 

74 

Following the analysis of the staff of the Joint Committee on 

Taxation are the comments of the IRS and Treasury regarding each 

of the provisions included in the complexity analysis. 

Capital gain and dividend rate reduction (sec. 203 of the bill) 

Summary description of proposal 

The bill extends the zero-and 15-percent capital gain and dividend rates to taxable years beginning in 2009 and 2010. 

Number of affected taxpayers 

It is estimated that the provision will affect 33 million individual 

tax returns. 

Discussion 

The extension of the provision means that for 2009 and 2010 individual taxpayers and the IRS will continue to use the same forms 

for capital gains and dividends. 

The extension of the lower rates for net capital gain will achieve 

simplification because the extension prevents the separate five-year 

holding periods from going into effect in 2009 and 2010. On the 

other hand, the extension of the lower rates for dividends will continue requiring dividends to be classified as qualified dividends and 

nonqualified dividends in 2009 and 2010 and will continue to require the tax to be computed using the capital gains forms. 

DEPARTMENT OF THE TREASURY, 

INTERNAL REVENUE SERVICE, 

Washington, DC. 

Mr. GEORGE K. YIN, 

Chief of Staff, Joint Committee on Taxation, 

Washington, DC. 

DEAR MR. YIN: Enclosed are the combined comments of the Internal Revenue Service and the Treasury Department on the provision 

extending the zero and 15-percent tax rates for capital gains and 

qualified dividends of individuals to taxable years beginning in 

2009 and 2010, from the Tax Relief Extension Act of 2005 (H.R. 

4297) approved by the House Committee on Ways and Means November 15, that you identified for complexity analysis in your letter 

of November 16. 

Our comments are based on the statutory language for that provision contained in H.R. 4297 and the description of that provision 

provided in your letter. Due to the short turnaround time, our comments are provisional and subject to change upon a more complete 

and in-depth analysis of the provision. 

Sincerely, 

MARK W. EVERSON, 

Commissioner. 

Enclosure. 

75 

COMPLEXITY ANALYSIS OF THE TAX RELIEF EXTENSION 

RECONCILIATION ACT OF 2005 (H.R. 4297) 

Extension of the Zero and 15-Percent Tax Rates for Adjusted Net 

Capital Gain 

Provision: Under present law, for taxable years beginning before 

2009, the maximum rate of tax on the adjusted net capital gain of 

an individual is 15%. Any adjusted net capital gain which otherwise would be taxed at a 10% or 15% rate is taxed at a 5% rate 

(zero for taxable years beginning after 2007). Qualified dividends 

received by an individual from domestic corporations and qualified 

foreign corporations are included in adjusted net capital gain and 

thus are also taxed at the 15%, 5%, or zero rates. These rates apply 

for purposes of both the regular tax and the alternative minimum 

tax. For taxable years beginning after 2008, the tax rates on adjusted net capital gain will be higher—20% or 10% for net capital 

gain and up to 35% for dividends. 

The provision extends the zero and 15% tax rates for adjusted 

net capital gain (including qualified dividends) of individuals for 

two years (to taxable years beginning in 2009 and 2010). 

IRS and Treasury comments 

• Filers of Forms 1040, 1040A, and 1040NR would have to continue to report qualified dividends on a separate line in 2009 and 

2010 that otherwise would have been eliminated. 

• Two lines used to increase net capital gain by the amount of 

qualified dividends would remain on the Qualified Dividends and 

Capital Gain Tax Worksheet and the Schedule D Tax Worksheet 

in the instructions for the 2009 and 2010 Forms 1040, 1040A, and 

1040NR. 

• Because the 8% and 18% capital gains tax rates on qualified 

5-year gain would not become effective until 2011, this provision 

would eliminate the need for: (a) a 12-line Qualified 5-Year Gain 

Worksheet to the Instructions for Schedule D (Form 1040) for 2009 

and 2010, (b) eight lines to the Qualified Dividends and Capital 

Gain Tax Worksheet, the Schedule D Tax Worksheet, and Form 

6251 for 2009 and 2010, (c) two lines to Schedule D (Form 1040) 

for 2009 and 2010, and (d) eight lines to Form 8801 for 2010 and 

2011. 

• Form 1099–DIV filers would have to continue to report qualified dividends in 2009 and 2010, thus requiring retention of a line 

that otherwise would have been eliminated. 

• Form 1099–DIV filers would not be required to report qualified 

5-year gain eligible for the 8% and 18% rates in 2009 or 2010. This 

would eliminate the need for two additional lines on Form 1099–

DIV for 2009 and 2010. 

• Form 1041 and its equivalent worksheets would be affected in 

a similar manner to that explained above for Form 1040. 

• The programming changes that IRS would have had to make 

to reflect the higher 2009 tax rates applicable to dividends and capital gains absent the provision would be deferred to 2011. 

76 

VII. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

In compliance with clause 3(e) of rule XIII of the Rule of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

INTERNAL REVENUE CODE OF 1986 

* * * * * * * 

Subtitle A—Income Taxes 

* * * * * * * 

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * * 

Subchapter A—Determination of Tax Liability 

* * * * * * * 

PART IV—CREDITS AGAINST TAX 

* * * * * * * 

Subpart A—Nonrefundable Personal Credits 

* * * * * * * 

SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN INDIVIDUALS. 

(a) * * * 

* * * * * * * 

(h) TERMINATION.—This section shall not apply to taxable years 

beginning after December 31, ø2006¿ 2008. 

SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX 

LIABILITY. 

(a) LIMITATION BASED ON AMOUNT OF TAX.—

(1) * * * 

(2) SPECIAL RULE FOR TAXABLE YEARS 2000 THROUGH ø2005¿ 

2006.—For purposes of any taxable year beginning during during 2000, 2001, 2002, 2003, 2004, øor 2005¿ 2005, or 2006, the 

aggregate amount of credits allowed by this subpart for the 

taxable year shall not exceed the sum of— (A) * * * 

* * * * * * * 

Subpart D—Business Related Credits 

* * * * * * * 

77 

SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES. 

(a) * * * 

* * * * * * * 

(c) BASE AMOUNT.—

(1) * * * 

* * * * * * * 

(4) ELECTION OF ALTERNATIVE INCREMENTAL CREDIT.—

(A) IN GENERAL.—At the election of the taxpayer, the 

credit determined under subsection (a)(1) shall be equal to 

the sum of—

(i) ø2.65¿ 3 percent of so much of the qualified research expenses for the taxable year as exceeds 1 percent of the average described in subsection (c)(1)(B) 

but does not exceed 1.5 percent of such average, 

(ii) ø3.2¿ 4 percent of so much of such expenses as 

exceeds 1.5 percent of such average but does not exceed 2 percent of such average, and 

(iii) ø3.75¿ 5 percent of so much of such expenses as 

exceeds 2 percent of such average. 

(B) ELECTION.—An election under this paragraph shall 

apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of 

the Secretary. An election under this paragraph may not be 

made for any taxable year to which an election under paragraph (5) applies. 

* * * * * * * 

(5) ELECTION OF ALTERNATIVE SIMPLIFIED CREDIT.— 

(A) IN GENERAL.—At the election of the taxpayer, the 

credit determined under subsection (a)(1) shall be equal to 

12 percent of so much of the qualified research expenses for 

the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the 

taxable year for which the credit is being determined. 

(B) SPECIAL RULE IN CASE OF NO QUALIFIED RESEARCH

EXPENSES IN ANY OF 3 PRECEDING TAXABLE YEARS.— 

(i) TAXPAYERS TO WHICH SUBPARAGRAPH APPLIES.— 

The credit under this paragraph shall be determined 

under this subparagraph if the taxpayer has no qualified research expenses in any one of the 3 taxable years 

preceding the taxable year for which the credit is being 

determined. 

(ii) CREDIT RATE.—The credit determined under this 

subparagraph shall be equal to 6 percent of the qualified research expenses for the taxable year. 

(C) ELECTION.—An election under this paragraph shall 

apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the 

Secretary. An election under this paragraph may not be 

made for any taxable year to which an election under paragraph (4) applies. 

ø(5)¿ (6) CONSISTENT TREATMENT OF EXPENSES REQUIRED.—

(A) * * * 

* * * * * * * 

78 

ø(6)¿ (7) GROSS RECEIPTS.—For purposes of this subsection, 

gross receipts for any taxable year shall be reduced by returns 

and allowances made during the taxable year. In the case of 

a foreign corporation, there shall be taken into account only 

gross receipts which are effectively connected with the conduct 

of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. 

* * * * * * * 

(h) TERMINATION.—

(1) IN GENERAL.—This section shall not apply to any amount 

paid or incurred—

(A) after June 30, 1995, and before July 1, 1996, or 

(B) after December 31, ø2005¿ 2006. 

* * * * * * * 

SEC. 45A. INDIAN EMPLOYMENT CREDIT. 

(a) * * * 

* * * * * * * 

(f) TERMINATION.—This section shall not apply to taxable years 

beginning after December 31, ø2005¿ 2006. 

* * * * * * * 

SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR 

RARE DISEASES OR CONDITIONS. 

(a) * * * 

(b) QUALIFIED CLINICAL TESTING EXPENSES.—For purposes of 

this section—

(1) QUALIFIED CLINICAL TESTING EXPENSES.—

(A) * * * 

* * * * * * * 

(D) SPECIAL RULE.—For purposes of this paragraph, section 41 shall be deemed to remain in effect for periods 

after June 30, 1995, and before July 1, 1996, and periods 

after December 31, ø2005¿ 2006. 

* * * * * * * 

Subpart F—Rules for Computing Work Opportunity Credit 

* * * * * * * 

SEC. 51. AMOUNT OF CREDIT. 

(a) * * * 

* * * * * * * 

(c) WAGES DEFINED.—For purposes of this subpart—

(1) * * * 

* * * * * * * 

(4) TERMINATION.—The term ‘‘wages’’ shall not include any 

amount paid or incurred to an individual who begins work for 

the employer—

(A) * * * 

(B) after December 31, ø2005¿ 2006. 

* * * * * * * 

79 

(d) MEMBERS OF TARGETED GROUPS.—For purposes of this subpart—

(1) * * * 

* * * * * * * 

(8) QUALIFIED FOOD STAMP RECIPIENT.—

(A) IN GENERAL.—The term ‘‘qualified food stamp recipient’’ means any individual who is certified by the designated local agency—

(i) as having attained age 18 but not age ø25¿ 35 on 

the hiring date, and 

* * * * * * * 

SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM 

FAMILY ASSISTANCE RECIPIENTS. 

(a) * * * 

* * * * * * * 

(f) TERMINATION.—This section shall not apply to individuals who 

begin work for the employer after December 31, ø2005¿ 2006. 

* * * * * * * 

Subchapter B—Computation of Taxable Income 

* * * * * * * 

PART I—DEFINITION OF GROSS INCOME, ADJUSTED 

GROSS INCOME, TAXABLE INCOME, ETC. 

* * * * * * * 

SEC. 62. ADJUSTED GROSS INCOME DEFINED. 

(a) GENERAL RULE.—For purposes of this subtitle, the term ‘‘adjusted gross income’’ means, in the case of an individual, gross income minus the following deductions: 

(1) * * * 

(2) CERTAIN TRADE AND BUSINESS DEDUCTIONS OF EMPLOYEES.—

(A) * * * 

* * * * * * * 

(D) CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY

SCHOOL TEACHERS.—In the case of taxable years beginning 

during 2002 , 2003, 2004, øor 2005¿ 2005, or 2006, the deductions allowed by section 162 which consist of expenses, 

not in excess of $250, paid or incurred by an eligible educator in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or 

physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the 

classroom. 

* * * * * * * 

80 

PART IV—TAX EXEMPTION REQUIREMENTS FOR STATE 

AND LOCAL BONDS 

* * * * * * * 

Subpart A—Private Activity Bonds 

* * * * * * * 

SEC. 143. MORTGAGE REVENUE BONDS: QUALIFIED MORTGAGE BOND 

AND QUALIFIED VETERANS’ MORTGAGE BOND. 

(a) * * * 

* * * * * * * 

(l) ADDITIONAL REQUIREMENTS FOR QUALIFIED VETERANS’ MORTGAGE BONDS.—An issue meets the requirements of this subsection 

only if it meets the requirements of paragraphs (1), (2), and (3). 

(1) * * * 

* * * * * * * 

(3) VOLUME LIMITATION.— (A) * * * 

ø(B) STATE VETERANS LIMIT.—A State veterans limit for 

any calendar year is the amount equal to— ø(i) the aggregate amount of qualified veterans 

bonds issued by such State during the period beginning on January 1, 1979, and ending on June 22, 1984 

(not including the amount of any qualified veterans 

bond issued by such State during the calendar year (or 

portion thereof) in such period for which the amount 

of such bonds so issued was the lowest), divided by 

ø(ii) the number (not to exceed 5) of calendar years 

after 1979 and before 1985 during which the State 

issued qualified veterans bonds (determined by only 

taking into account bonds issued on or before June 22, 

1984).¿ 

(B) STATE VETERANS LIMIT.—

(i) IN GENERAL.—A State veterans limit for any calendar year is the amount equal to—

(I) $53,750,000 for the State of Texas, 

(II) $66,250,000 for the State of California, 

(III) $25,000,000 for the State of Oregon, 

(IV) $25,000,000 for the State of Wisconsin, and 

(V) $25,000,000 for the State of Alaska. 

(ii) PHASEIN.—In the case of calendar years beginning before 2010, clause (i) shall be applied by substituting for each of the dollar amounts therein by the 

applicable percentage. For purposes of the preceding 

sentence, the applicable percentage shall be determined 

in accordance with the following table: 

Calendar Year: Applicable percentage is: 

2006 ..................................................................................... 20 percent

2007 ..................................................................................... 40 percent

2008 ..................................................................................... 60 percent

2009 ..................................................................................... 80 percent. 

81 

(iii) TERMINATION.—The State veterans limit for any 

calendar year after 2010 is zero. 

(4) QUALIFIED VETERAN.—For purposes of this subsection, the 

term ‘‘qualified veteran’’ means any veteran— (A) who served on active duty øat some time before January 1, 1977¿, and 

ø(B) who applied for the financing before the later of— ø(i) the date 30 years after the last date on which 

such veteran left active service, or 

ø(ii) January 31, 1985.¿ 

(B) who applied for the financing before the date 25 years 

after the last date on which such veteran left active service. 

* * * * * * * 

PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS 

AND CORPORATIONS 

* * * * * * * 

SEC. 164. TAXES. 

(a) * * * 

(b) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— (1) * * * 

* * * * * * * 

(5) GENERAL SALES TAX.—For purposes of subsection (a)—

(A) * * * 

* * * * * * * 

(I) APPLICATION OF PARAGRAPH.—This paragraph shall apply to taxable years beginning after 

December 31, 2003, and before January 1, ø2006¿ 

2007. 

* * * * * * * 

SEC. 168. ACCELERATED COST RECOVERY SYSTEM 

(a) * * * 

* * * * * * * 

(e) CLASSIFICATION OF PROPERTY.—For purposes of this section— (1) * * * 

* * * * * * * 

(3) CLASSIFICATION OF CERTAIN PROPERTY.— (A) * * * 

* * * * * * * 

(E) 15-YEAR PROPERTY.—The term ‘‘15-year property’’ includes—

(i) * * * 

* * * * * * * 

(iv) any qualified leasehold improvement property 

placed in service before January 1, ø2006¿ 2007, 

(v) any qualified restaurant property placed in service before January 1, ø2006¿ 2007, 

* * * * * * * 

82 

(j) PROPERTY ON INDIAN RESERVATIONS.— (1) * * * 

* * * * * * * 

(8) TERMINATION.—This subsection shall not apply to property placed in service after December 31, ø2005¿ 2006. 

* * * * * * * 

SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. 

(a) * * * 

* * * * * * * 

(e) CERTAIN CONTRIBUTIONS OF ORDINARY INCOME AND CAPITAL

GAIN PROPERTY.—

(1) GENERAL RULE.—The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of—

(A) the amount of gain which would not have been longterm capital gain (determined without regard to section 

1221(b)(3)) if the property contributed had been sold by the 

taxpayer at its fair market value (determined at the time 

of such contribution), and 

* * * * * * * 

(6) SPECIAL RULE FOR CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT FOR EDUCATIONAL PURPOSES.—

(A) * * * 

* * * * * * * 

(G) TERMINATION.—This paragraph shall not apply to 

any contribution made during any taxable year beginning 

after December 31, ø2005¿ 2006. 

* * * * * * * 

SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS 

ASSETS. 

(a) * * * 

(b) LIMITATIONS.—

(1) DOLLAR LIMITATION.—The aggregate cost which may be 

taken into account under subsection (a) for any taxable year 

shall not exceed $25,000 ($100,000 in the case of taxable years 

beginning after 2002 and before ø2008¿ 2010). 

(2) REDUCTION IN LIMITATION.—The limitation under paragraph (1) for any taxable year shall be reduced (but not below 

zero) by the amount by which the cost of section 179 property 

placed in service during such taxable year exceeds $200,000 

($400,000 in the case of taxable years beginning after 2002 and 

before ø2008¿ 2010). 

* * * * * * * 

(5) INFLATION ADJUSTMENTS.— (A) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2003 and before ø2008¿ 2010, 

the $100,000 and $400,000 amounts in paragraphs (1) and 

(2) shall each be increased by an amount equal to—

(i) * * * 

* * * * * * * 

83 

(c) ELECTION.— (1) * * * 

(2) ELECTION IRREVOCABLE.—Any election made under this 

section, and any specification contained in any such election, 

may not be revoked except with the consent of the Secretary. 

Any such election or specification with respect to any taxable 

year beginning after 2002 and before ø2008¿ 2010 may be revoked by the taxpayer with respect to any property, and such 

revocation, once made, shall be irrevocable. 

(d) DEFINITIONS AND SPECIAL RULES.— (1) SECTION 179 PROPERTY.—For purposes of this section, the 

term ‘‘section 179 property’’ means property— (A) which is— (i) * * * 

(ii) computer software (as defined in section 

197(e)(3)(B)) which is described in section 

197(e)(3)(A)(i), to which section 167 applies, and which 

is placed in service in a taxable year beginning after 

2002 and before ø2008¿ 2010, 

* * * * * * * 

PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS 

AND CORPORATIONS 

* * * * * * * 

SEC. 198. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS. 

(a) * * * 

* * * * * * * 

(d) HAZARDOUS SUBSTANCE.—For purposes of this section—

(1) IN GENERAL.—The term ‘‘hazardous substance’’ means—

(A) any substance which is a hazardous substance as defined in section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 

øand¿ 

(B) any substance which is designated as a hazardous 

substance under section 102 of such Actø.¿, and 

(C) any petroleum product (as defined in section 

4612(a)(3)). 

* * * * * * * 

(h) TERMINATION.—This section shall not apply to expenditures 

paid or incurred after December 31, ø2005¿ 2007. 

* * * * * * * 

PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR 

INDIVIDUALS 

* * * * * * * 

SEC. 220. ARCHER MSAS. 

(a) * * * 

* * * * * * * 

(i) LIMITATION ON NUMBER OF TAXPAYERS HAVING ARCHER

MSAS.—

(1) * * * 

84 

(2) CUT-OFF YEAR.—For purposes of paragraph (1), the term ‘‘cut-off year’’ means the earlier of 

(A) calendar year ø2005¿ 2006, or 

(B) the first calendar year before ø2005¿ 2006 for which 

the Secretary determines under subsection (j) that the numerical limitation for such year has been exceeded. 

(3) ACTIVE MSA PARTICIPANT.—For purposes of this subsection—

(A) * * * 

(B) SPECIAL RULE FOR CUT-OFF YEARS BEFORE ø2005¿ 

2006.—In the case of a cut-off year before ø2005¿ 2006— (i) * * * 

* * * * * * * 

(j) DETERMINATION OF WHETHER NUMERICAL LIMITS ARE EXCEEDED.—

(1) * * * 

(2) DETERMINATION OF WHETHER LIMIT EXCEEDED FOR 1998, 

1999, 2001, 2002, øOR 2004¿ 2004, OR 2005.—

(A) IN GENERAL.—The numerical limitation for 1998, 

1999, 2001, 2002, øor 2004¿ 2004, or 2005 is exceeded if 

the sum of—

(i) * * * 

* * * * * * * 

(B) ALTERNATIVE COMPUTATION OF LIMITATION.—The numerical limitation for 1998, 1999, 2001, 2002, øor 2004¿ 

2004, or 2005 is also exceeded if the sum of—

(i) * * * 

* * * * * * * 

(4) REPORTING BY MSA TRUSTEES.— (A) IN GENERAL.—Not later than August 1 of 1997, 1998, 

1999, 2001, 2002, øand 2004¿ 2004, and 2005 each person 

who is the trustee of an Archer MSA established before 

July 1 of such calendar year shall make a report to the 

Secretary (in such form and manner as the Secretary shall 

specify) which specifies—

(i) * * * 

* * * * * * * 

SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES. 

(a) * * * 

(b) DOLLAR LIMITATIONS.—

(1) * * * 

(2) APPLICABLE DOLLAR LIMIT.—

ø(A) 2002 AND 2003.—In the case of a taxable year beginning in 2002 or 2003, the applicable dollar limit shall be 

equal to—

ø(i) in the case of a taxpayer whose adjusted gross income for the taxable year does not exceed $65,000 

($130,000 in the case of a joint return), $3,000, and— ø(ii) in the case of any other taxpayer, zero. 

ø(B) 2004 AND 2005.—In the case of a taxable year beginning in 2004 or 2005, the applicable dollar amount shall 

be equal to—

85 

ø(i) in the case of a taxpayer whose adjusted gross income for the taxable year does not exceed $65,000 

($130,000 in the case of a joint return), $4,000, 

ø(ii) in the case of a taxpayer not described in clause 

(i) whose adjusted gross income for the taxable year 

does not exceed $80,000 ($160,000 in the case of a 

joint return), $2,000, and 

ø(iii) in the case of any other taxpayer, zero.¿ 

(A) 2006.—In the case of a taxable year beginning in 

2006, the applicable dollar amount shall be equal to— (i) in the case of a taxpayer whose adjusted gross in- come for the taxable year does not exceed $65,000 

($130,000 in the case of a joint return), $4,000, 

(ii) in the case of a taxpayer not described in clause 

(i) whose adjusted gross income for the taxable year 

does not exceed $80,000 ($160,000 in the case of a joint 

return), $2,000, and 

(iii) in the case of any other taxpayer, zero. 

ø(C)¿ (B) ADJUSTED GROSS INCOME.—For purposes of 

this paragraph, adjusted gross income shall be determined—

(i) * * * 

* * * * * * * 

(e) TERMINATION.—This section shall not apply to taxable years 

beginning after December 31, ø2005¿ 2006. 

* * * * * * * 

Subchapter C—Corporate Distributions and 

Adjustments 

* * * * * * * 

PART III—CORPORATE ORGANIZATIONS AND 

REORGANIZATIONS 

* * * * * * * 

Subpart B—Effects on Shareholders and Security Holders 

* * * * * * * 

SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED CORPORATION. 

(a) * * * 

(b) REQUIREMENTS AS TO ACTIVE BUSINESS.—

(1) * * * 

* * * * * * * 

(3) SPECIAL RULE RELATING TO ACTIVE BUSINESS REQUIREMENT.—

(A) IN GENERAL.—In the case of any distribution made 

after the date of the enactment of this paragraph and before 

December 31, 2010, a corporation shall be treated as meeting the requirement of paragraph (2)(A) if and only if such 

corporation is engaged in the active conduct of a trade or 

business. 

86 

(B) AFFILIATED GROUP RULE.—For purposes of subparagraph (A), all members of such corporation’s separate affiliated group shall be treated as one corporation. For purposes of the preceding sentence, a corporation’s separate affiliated group is the affiliated group which would be determined under section 1504(a) if such corporation were the 

common parent and section 1504(b) did not apply. 

(C) TRANSITION RULE.—Subparagraph (A) shall not 

apply to any distribution pursuant to a transaction which 

is— (i) made pursuant to an agreement which was binding on the date of the enactment of this paragraph and 

at all times thereafter, 

(ii) described in a ruling request submitted to the Internal Revenue Service on or before such date, or 

(iii) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission. 

The preceding sentence shall not apply if the distributing 

corporation elects not to have such sentence apply to distributions of such corporation. Any such election, once 

made, shall be irrevocable. 

(D) SPECIAL RULE FOR CERTAIN PRE-ENACTMENT DIS- TRIBUTIONS.—For purposes of determining the continued 

qualification under paragraph (2)(A) of distributions made 

before the date of the enactment of this paragraph as a result of an acquisition, disposition, or other restructuring 

after such date and before December 31, 2010, such distribution shall be treated as made after the date of the enactment of this paragraph for purposes of applying subparagraphs (A) through (C) of this paragraph. 

* * * * * * * 

Subchapter E—Accounting Periods and Methods 

of Accounting 

* * * * * * * 

PART II—METHODS OF ACCOUNTING 

* * * * * * * 

Subpart C—Taxable Year for Which Deductions Taken 

* * * * * * * 

SEC. 468B. SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS. 

(a) * * * 

* * * * * * * 

ø(g) CLARIFICATION OF TAXATION OF CERTAIN FUNDS.—Nothing 

in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax. The Secretary shall prescribe regulations providing for the taxation of any such account or fund whether as a 

grantor trust or otherwise.¿ 

(g) CLARIFICATION OF TAXATION OF CERTAIN FUNDS.—

87 

(1) IN GENERAL.—Except as provided in paragraph (2), nothing in any provision of law shall be construed as providing that 

an escrow account, settlement fund, or similar fund is not subject to current income tax. The Secretary shall prescribe regulations providing for the taxation of any such account or fund 

whether as a grantor trust or otherwise. 

(2) EXEMPTION FROM TAX FOR CERTAIN SETTLEMENT FUNDS.— An escrow account, settlement fund, or similar fund shall be 

treated as beneficially owned by the United States and shall be 

exempt from taxation under this subtitle if— (A) it is established pursuant to a consent decree entered 

by a judge of a United States District Court, 

(B) it is created for the receipt of settlement payments as 

directed by a government entity for the sole purpose of resolving or satisfying one or more claims asserting liability 

under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 

(C) the authority and control over the expenditure of 

funds therein (including the expenditure of contributions 

thereto and any net earnings thereon) is with such government entity, and 

(D) upon termination, any remaining funds will be disbursed to such government entity for use in accordance 

with applicable law. 

For purposes of this paragraph, the term ‘‘government entity’’ means the United States, any State or political subdivision 

thereof, the District of Columbia, any possession of the United 

States, and any agency or instrumentality of any of the foregoing. 

(3) TERMINATION.—Paragraph (2) shall not apply to accounts 

and funds established after December 31, 2010. 

* * * * * * * 

Subchapter I—Natural Resources 

* * * * * * * 

PART I—DEDUCTIONS 

* * * * * * * 

SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL 

AND GAS WELLS. 

(a) * * * 

* * * * * * * 

(c) EXEMPTION FOR INDEPENDENT PRODUCERS AND ROYALTY OWNERS.—

(1) * * * 

* * * * * * * 

(6) OIL AND NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES.—

(A) * * * 

* * * * * * * 

88 

(H) TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT

WITH RESPECT TO MARGINAL PRODUCTION.—The second sentence of subsection (a) of section 613 shall not apply to so 

much of the allowance for depletion as is determined 

under subparagraph (A) for any taxable year beginning 

after December 31, 1997, and before January 1, ø2006¿ 

2007. 

* * * * * * * 

Subchapter N—Tax Based on Income from 

Sources Within or Without the United States 

* * * * * * * 

PART III—INCOME FROM SOURCES WITHOUT THE 

UNITED STATES 

* * * * * * * 

Subpart A—Foreign Tax Credit 

* * * * * * * 

SEC. 904. LIMITATION ON CREDIT. 

(a) * * * 

* * * * * * * 

(i) COORDINATION WITH NONREFUNDABLE PERSONAL CREDITS.—In 

the case of an individual, for purposes of subsection (a), the tax 

against which the credit is taken is such tax reduced by the sum 

of the credits allowable under subpart A of part IV of subchapter 

A of this chapter (other than sections 23, 24, and 25B). This subsection shall not apply to taxable years beginning during 2000, 

2001, 2002, 2003, 2004, øor 2005¿ 2005, or 2006. 

* * * * * * * 

Subpart D—Possessions of the United States 

* * * * * * * 

SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT. 

(a) * * * 

* * * * * * * 

(j) TERMINATION.— (1) * * * 

* * * * * * * 

(8) SPECIAL RULES FOR CERTAIN POSSESSIONS.—

(A) IN GENERAL.—In the case of an existing credit claimant with respect to an applicable possession, this section 

(other than the preceding paragraphs of this subsection) 

shall apply to such claimant with respect to such applicable possession for taxable years beginning after December 

31, 1995, and before January 1, 2006 (before January 1, 

2007, in the case of American Samoa). 

* * * * * * * 

89 

Subpart F—Controlled Foreign Corporations 

* * * * * * * 

SEC. 953. INSURANCE INCOME. 

(a) * * * 

* * * * * * * 

(e) EXEMPT INSURANCE INCOME.—For purposes of this section—

(1) * * * 

* * * * * * * 

(10) APPLICATION.—This subsection and section 954(i) shall 

apply only to taxable years of a foreign corporation beginning 

after December 31, 1998, and before øJanuary 1, 2007¿ January 1, 2009, and to taxable years of United States shareholders 

with or within which any such taxable year of such foreign corporation ends. If this subsection does not apply to a taxable 

year of a foreign corporation beginning after øDecember 31, 

2006¿ December 31, 2008 (and taxable years of United States 

shareholders ending with or within such taxable year), then, 

notwithstanding the preceding sentence, subsection (a) shall be 

applied to such taxable years in the same manner as it would 

if the taxable year of the foreign corporation began in 1998. 

* * * * * * * 

SEC. 954. FOREIGN BASE COMPANY INCOME. 

(a) * * * 

* * * * * * * 

(c) FOREIGN PERSONAL HOLDING COMPANY INCOME.—

(1) * * * 

* * * * * * * 

(6) LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN

CORPORATIONS.—

(A) IN GENERAL.—For purposes of this subsection, dividends, interest, rents, and royalties received or accrued 

from a controlled foreign corporation which is a related 

person shall not be treated as foreign personal holding 

company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of 

the related person which is not subpart F income. For purposes of this subparagraph, interest shall include factoring 

income which is treated as income equivalent to interest for 

purposes of paragraph (1)(E). The Secretary shall prescribe 

such regulations as may be appropriate to prevent the 

abuse of the purposes of this paragraph. 

(B) APPLICATION.—Subparagraph (A) shall apply to taxable years of foreign corporations beginning after December 

31, 2005, and before January 1, 2009, and to taxable years 

of United States shareholders with or within which such 

taxable years of foreign corporations end. 

* * * * * * * 

(h) SPECIAL RULE FOR INCOME DERIVED IN THE ACTIVE CONDUCT

OF BANKING, FINANCING, OR SIMILAR BUSINESSES.—

90 

(1) * * * 

* * * * * * * 

(9) APPLICATION.—This subsection, subsection (c)(2)(C)(ii), 

and the last sentence of subsection (e)(2) shall apply only to 

taxable years of a foreign corporation beginning after December 31, 1998, and before øJanuary 1, 2007¿ January 1, 2009, 

and to taxable years of United States shareholders with or 

within which any such taxable year of such foreign corporation 

ends. 

* * * * * * * 

Subchapter P—Capital Gains and Losses 

* * * * * * * 

PART III—GENERAL RULES FOR DETERMINING 

CAPITAL GAINS AND LOSSES 

* * * * * * * 

SEC. 1221. CAPITAL ASSET DEFINED. 

(a) * * * 

(b) DEFINITIONS AND SPECIAL RULES.—

(1) * * * 

* * * * * * * 

(3) SALE OR EXCHANGE OF SELF-CREATED MUSICAL WORKS.—

At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply with respect to any sale or exchange 

before January 1, 2011, of musical compositions or copyrights 

in musical works by a taxpayer described in subsection (a)(3). 

ø(3)¿ (4) REGULATIONS.—The Secretary shall prescribe such 

regulations as are appropriate to carry out the purposes of 

paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties. 

* * * * * * * 

Subchapter R—Election To Determine Corporate 

Tax on Certain International Shipping Activities Using Per Ton Rate 

* * * * * * * 

SEC. 1355. DEFINITIONS AND SPECIAL RULES. 

(a) DEFINITIONS.—For purposes of this subchapter—

(1) * * * 

* * * * * * * 

(4) QUALIFYING VESSEL.—The term ‘‘qualifying vessel’’ means 

a self- propelled (or a combination self-propelled and non-selfpropelled) United States flag vessel of not less than 10,000 

(6,000, in the case of taxable years beginning after December 31, 

2005, and ending before January 1, 2011) deadweight tons 

91 

used exclusively in the United States foreign trade during the 

period that the election under this subchapter is in effect. 

* * * * * * * 

Subchapter U—Designation and Treatment of Empowerment Zones, Enterprise Communities, and 

Rural Development Investment Areas 

* * * * * * * 

PART IV—INCENTIVES FOR EDUCATION ZONES 

* * * * * * * 

SEC. 1397E. CREDIT TO HOLDERS OF QUALIFIED ZONE ACADEMY 

BONDS. 

(a) * * * 

* * * * * * * 

(e) LIMITATION ON AMOUNT OF BONDS DESIGNATED.— (1) NATIONAL LIMITATION.—There is a national zone academy 

bond limitation for each calendar year. Such limitation is 

$400,000,000 for 1998, 1999, 2000, 2001, 2002, 2003, 2004, 

øand 2005¿ 2005, and 2006 and, except as provided in paragraph (4), zero thereafter. 

* * * * * * * 

Subchapter W—District of Columbia Enterprise 

Zone 

* * * * * * * 

SEC. 1400. ESTABLISHMENT OF DC ZONE. 

(a) * * * 

* * * * * * * 

(f) TIME FOR WHICH DESIGNATION APPLICABLE.— (1) IN GENERAL.—The designation made by subsection (a) 

shall apply for the period beginning on January 1, 1998, and 

ending on øDecember 31, 2005¿ December 31, 2006. (2) COORDINATION WITH DC ENTERPRISE COMMUNITY DESIGNATED UNDER SUBCHAPTER U.—The designation under subchapter U of the census tracts referred to in subsection (b)(1) 

as an enterprise community shall terminate on øDecember 31, 

2005¿ December 31, 2006. 

* * * * * * * 

SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS. 

(a) * * * 

(b) PERIOD OF APPLICABILITY.—This section shall apply to bonds 

issued during the period beginning on January 1, 1998, and ending 

on øDecember 31, 2005¿ December 31, 2006. 

SEC. 1400B. ZERO PERCENT CAPITAL GAINS RATE. 

(a) * * * 

(b) DC ZONE ASSET.—For purposes of this section—

(1) * * * 

92 

(2) DC ZONE BUSINESS STOCK.—

(A) IN GENERAL.—The term ‘‘DC Zone business stock’’

means any stock in a domestic corporation which is originally issued after December 31, 1997, if—

(i) such stock is acquired by the taxpayer, before 

øJanuary 1, 2006¿ January 1, 2007, at its original 

issue (directly or through an underwriter) solely in exchange for cash, 

* * * * * * * 

(3) DC ZONE PARTNERSHIP INTEREST.—The term ‘‘DC Zone 

partnership interest’’ means any capital or profits interest in 

a domestic partnership which is originally issued after December 31, 1997, if—

(A) such interest is acquired by the taxpayer, before 

øJanuary 1, 2006¿ January 1, 2007, from the partnership 

solely in exchange for cash, 

* * * * * * * 

(4) DC ZONE BUSINESS PROPERTY.—

(A) IN GENERAL.—The term ‘‘DC Zone business property’’

means tangible property if—

(i) such property was acquired by the taxpayer by 

purchase (as defined in section 179(d)(2) after December 31, 1997, and before øJanuary 1, 2006¿ January 

1, 2007, 

* * * * * * * 

(B) SPECIAL RULE FOR BUILDINGS WHICH ARE SUBSTANTIALLY IMPROVED.—

(i) IN GENERAL.—The requirements of clauses (i) and 

(ii) of subparagraph (A) shall be treated as met with 

respect to—

(I) property which is substantially improved by 

the taxpayer before øJanuary 1, 2006¿ January 1, 

2007, and 

* * * * * * * 

(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 

this section—

(1) * * * 

(2) GAIN BEFORE 1998 OR AFTER ø2010¿ 2011 NOT QUALIFIED.—

The term ‘‘qualified capital gain’’ shall not include any gain attributable to periods before January 1, 1998, or after øDecember 31, 2010¿ December 31, 2011. 

* * * * * * * 

(g) SALES AND EXCHANGES OF INTERESTS IN PARTNERSHIPS AND

S CORPORATIONS WHICH ARE DC ZONE BUSINESSES.—In the case of 

the sale or exchange of an interest in a partnership, or of stock in 

an S corporation, which was a DC Zone business during substantially all of the period the taxpayer held such interest or stock, the 

amount of qualified capital gain shall be determined without regard to—

(1) * * * 

93 

(2) any gain attributable to periods before January 1, 1998, 

or after øDecember 31, 2010¿ December 31, 2011. 

* * * * * * * 

SEC. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA. 

(a) * * * 

* * * * * * * 

(i) APPLICATION OF SECTION.—This section shall apply to property purchased after August 4, 1997, and before øJanuary 1, 2006¿ 

January 1, 2007. 

* * * * * * * 

PART II—RENEWAL COMMUNITY CAPITAL GAIN; 

RENEWAL COMMUNITY BUSINESS 

* * * * * * * 

SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN. 

(a) * * * 

* * * * * * * 

(d) CERTAIN RULES TO APPLY.—For purposes of this section, rules 

similar to the rules of paragraphs (5), (6), and (7) of subsection (b), 

and subsections (f) and (g), of section 1400B shall apply; except 

that for such purposes section 1400B(g)(2) shall be applied by substituting ‘‘January 1, 2002’’ for ‘‘January 1, 1998’’ and ‘‘December 

31, 2014’’ for ‘‘øDecember 31, 2010¿ December 31, 2011’’. 

* * * * * * * 

Subtitle K—Group Health Plan 

Requirements 

* * * * * * * 

CHAPTER 100—GROUP HEALTH PLAN 

REQUIREMENTS 

* * * * * * * 

Subchapter B—Other Requirements 

* * * * * * * 

SEC. 9812. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH BENEFITS. 

(a) * * * 

* * * * * * * 

(f) APPLICATION OF SECTION.—This section shall not apply to benefits for services furnished—

(1) * * * 

* * * * * * * 

94 

(3) after øDecember 31, 2005¿ December 31, 2006. 

* * * * * * * 

SECTION 303 OF THE JOBS AND GROWTH TAX RELIEF 

RECONCILIATION ACT OF 2003 

SEC. 303. SUNSET OF TITLE. 

All provisions of, and amendments made by, this title shall not 

apply to taxable years beginning after øDecember 31, 2008¿ December 31, 2010, and the Internal Revenue Code of 1986 shall be applied and administered to such years as if such provisions and 

amendments had never been enacted. 

(95) 

VIII. DISSENTING VIEWS 

Several months ago, Hurricane Katrina forced America to see 

poverty and its consequences every night on the evening news. For 

many in New Orleans, poverty was the difference between the ability to escape the disaster and being left behind to face the consequences of the Hurricane with little or no assistance from the 

Federal government. 

The failure of the Federal government to react quickly and effectively to the Hurricane forced President Bush to respond. He made 

a stirring speech vowing to rebuild New Orleans regardless of the 

cost. His speech also expressed concern about the growing divide 

in this country between the rich and the poor. 

Both before and after that speech, Americans have been exposed 

to the real plight of poverty in this country. The number of people 

in poverty has increased by 5.4 million under Republican policies 

between 2000 and 2004. The number of children alone in poverty 

increased by 1.5 million. The Census Bureau reported that the 

number of Americans in poverty increased by 1.1 million in 2004, 

and the poverty rate increased to 12.7%. Today a total of 37 million 

Americans live in poverty. 

Watching the chilling footage of Hurricane Katrina brought home 

a reality that is all too real to poor people in America: poverty can 

be a death sentence. Poor children are more likely to suffer chronic 

health problems, lower cognitive scores, and lower school achievement. The real tragedy is that those who are left to fend for themselves in the most dire conditions become trapped in a cycle of poverty—children who experience persistent poverty are more likely to 

be poor as adults. 

President Bush’s speech and the evidence of increasing poverty 

gave hope that at long last the American people would see the compassionate side of President Bush’s ‘‘compassionate conservative’’ agenda. But a decent interval has passed. President Bush and his 

Republican supporters in the Congress have returned to their true 

agenda of cutting programs protecting the most vulnerable in our 

society and reducing taxes on the most fortunate. 

Even in light of the fact that the number of Americans in poverty 

has grown by millions over the last four years, Congress will soon 

vote on a budget bill that cuts health coverage, food assistance, and 

student aid to needy Americans. Other programs, including Temporary Assistance for Needy Families (TANF), the Child Care and 

Development Block Grant, and the Social Services Block Grant will 

not be allowed to keep pace with inflation, so they too will decline 

in real terms. There is no compassion in the Republican agenda for 

the most vulnerable Americans. 

This nation also is involved in a war in Iraq. This will be the 

first war in our country’s history where only those in the military 

and the poor will be forced to sacrifice. This will be the only time 

96 

when we will cut taxes for wealthy individuals during a war. The 

Congressional Research Service (CRS) recently estimated the total 

cost of military activities in Iraq, Afghanistan, and for enhanced 

base security since September 11, 2001. The October 3, 2005, CRS 

report shows a total budget authority of $311.7 billion for FY2001– FY2005, and $214.6 billion for Iraq operations alone. This country 

faces a costly war, yet this Republican Congress sees fit to shield 

the wealthy from those costs, and even reward them with increased 

tax cuts. The sense of shared sacrifice that has characterized our 

history is missing. 

The fact that these are not normal times makes it very easy to 

oppose the Committee bill that provides tax reductions disproportionately benefitting the truly wealthy. But even in normal times, 

it would be very easy to oppose the Committee bill. • The Committee bill is another in a series of reckless tax cuts 

that continue to leave this country facing enormous deficits. The 

largest unfunded responsibility faced by this country is not Social 

Security or Medicare, it is interest on the national debt. Increasingly, we are ceding control of our future to foreign investors who 

have financed our recent deficits. • The Committee bill also demonstrates that the many budgetary gimmicks used by the Republicans to hide the cost of their 

tax cuts have finally come home to roost. Even the Republicans 

now recognize that they cannot afford all of the tax cuts that they 

have promised in the big print of their bills. The Committee Republicans were faced with a choice. They could extend a tax cut for investors (a tax cut which does not expire until 2009 and over 50% 

of which will be enjoyed by individuals with annual incomes of over 

$1 million) or they could avoid a tax increase (of up to $3,380) on 

15 million American families next year. Even we were surprised by 

their choice. • A prime example of the flawed Republican priorities concerns 

our military. Some of our military serving in combat in Iraq will 

face tax increases next year because one of the few temporary tax 

benefits not extended by the Committee bill is a provision that provides a larger earned income tax credit to low-income families with 

a mother or father serving in Iraq. During the markup, the Committee Republicans refused to extend that tax benefit, hiding behind arcane Senate Budget rules which do not even apply in the 

House. But the excuse of those arcane Senate rules did not prevent 

the Committee Republicans from adopting other tax benefits to 

benefit a variety of other interests. 

EXPLODING DEFICIT

When President Bush took office in January 2001, the projected 

ten-year (FY2002–11) budget surplus was $5.6 trillion. Under Bush 

Administration policies, the budget outlook has deteriorated into a 

deficit of $3.5 trillion (over the same period)—a swing of $9.1 trillion. 

The Congressional Budget Office (CBO) now estimates that the 

ten-year total budget deficit for FY2006–15 will reach more than 

$2.1 trillion, and the on-budget deficit (excluding the temporary 

sound security surpluses) nearly $4.6 trillion, based on current law 

(the required CBO baseline assumption). In addition, CBO estiVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00096 Fmt 6604 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
97 

mates that the cost of making the tax cuts permanent would raise 

the ten-year deficit by nearly $1.9 trillion, to $4.0 trillion. If the 

higher exemption level in the AMT were also extended, with no offsetting provision, the ten-year deficit would increase by $775 billion 

more. 

The current federal debt limit (a gross debt measure) is $8.184 trillion, and we are now less than $200 billion away from that 

limit. Since President Bush took office, the limit has been raised 

by more than $2.2 trillion. To make room for the President’s current budget proposals, the Republican fiscal plan will raise the debt 

limit by another $781 billion—for a total increase in the debt of 

around $3 trillion. 

Republicans repeatedly claim that the problem has been ‘‘runaway domestic spending,’’ but the fact is that most of the deterioration in the fiscal outlook has been due to the drop in revenues. Revenues fell from nearly 20.9 percent of GDP in 2000 to just 16.3 percent in 2004, while outlays increased from 18.4 percent to 19.8 percent (the bulk of which went to the costs of the war). Revenues had 

not been that low in 45 years. 

One consequence of this out of control, borrow-and-spend budgeting is the rapid increase in the amount of U.S. Treasury securities sold to foreign interests. Currently, foreign investors own more 

than $2 trillion in U.S. bonds and notes. Furthermore, more than 

half of that amount is owned by foreign central banks. 

Since 2001, foreign investors purchased close to 90% of the new 

debt held by the public. Clearly, foreign ownership of our publicly 

held debt has created a financial vulnerability with national security implications. A country cannot be the world’s leading economic 

and military power if its government financing is dependent on 

funds from foreign countries, many of which oppose our policies. 

Instead of ignoring this threat to our nation, we need decisive action, and that will not be possible without a bipartisan agreement. 

Therefore, the President and Congressional leaders need to stop 

discounting this crisis and come together to confront our fiscal 

problems. We owe it to the American people to act responsibly by 

sitting-down together and devising a serious plan to keep America 

from going even deeper into debt. 

TAX INCREASE ON 15 MILLION FAMILIES

In recent years, the Congress has used a variety of budget gimmicks to hide the true cost of the tax reductions that are boldly 

promised in the big print of their tax cut legislation. Those gimmicks include phase-ins, sunsets, temporary provisions, and the alternative minimum tax (AMT). 

The AMT is probably the largest and the most consequential of 

those budget gimmicks. According to the Joint Committee on Taxation, the 2001 and 2003 tax cuts almost tripled the size of the 

AMT problem, from $400 billion over 10 years under prior law to 

$1.139 trillion today. Again, according to the Joint Committee on 

Taxation, the individual AMT will deny $739 billion of tax relief 

over the next ten years that was promised in the big print of the 

2001 and 2003 tax cuts. 

The individual AMT also dramatically changed the distribution 

of the 2001 and 2003 tax cuts. The AMT will limit the tax cuts proVerDate Aug 31 2005 07:29 Nov 18, 2005 Jkt 023914 PO 00000 Frm 00097 Fmt 6604 Sfmt 6602 E:\HR\OC\HR304.XXX HR304
98 

vided to middle-income and moderately wealthy taxpayers while 

taking away relatively little of the tax cuts given to the very 

wealthy. In 2010, the AMT will take back only 9.2 percent of the 

promised tax cuts from individuals making more than $1 million 

per year. In contrast, individuals with incomes between $75,000 

and $100,000 will lose 21 percent of the tax cuts, and individuals 

between $100,000 and $200,000 will lose 47 percent of the tax cuts. 

Even without the AMT, the recent tax cuts would disproportionately benefit upper income taxpayers. With the AMT, they will disproportionately benefit the super wealthy, those making more than 

$1 million per year. 

Next year, under the Committee bill, approximately 19 million 

families will be affected by the minimum tax, an increase from approximately 3.5 million this year. As a result, over 15 million families will face a tax increase next year compared to their liability in 

2005. The size of the tax increase could be as much as $3,380. 

Even as millions of Americans face a tax increase due to a provision of law that expires in little more than six weeks, the Committee’s bill instead concentrates on two provisions that do not expire 

until 2009. 

President Bush and his Republican Congressional allies vow to 

make the Bush tax cuts permanent. But they ignore the fact that 

the AMT will repeal all or a portion of the Bush tax cuts for approximately 19 million families next year because of the choices 

made by the Committee bill. 

There was another alternative. The Democratic substitute would 

have totally eliminated the AMT for all families with incomes 

under $200,000. If that substitute had been adopted, the number 

of AMT taxpayers would drop next year from 19 million under the 

Committee bill to approximately 3 million. The substitute would 

have eliminated the Republican tax increase on 15 million American families. 

99 

CONCLUSION

The Committee bill ignores the reality facing millions of Americans, and instead chooses to focus on the nation’s most wealthy. 

The struggles of those in poverty fall into the shadows of giant tax 

cuts skewed to the richest of the rich Americans. The Republicans 

on this Committee have failed in their job to legislate responsibly 

in the interest of all Americans, especially those who have been left 

behind to fend for themselves by conservative Republican policies 

that offer no compassion. 

CHARLES B. RANGEL. XAVIER BECERRA. PETE STARK. WILLIAM J. JEFFERSON. JOHN LEWIS. SANDER LEVIN. JOHN S. TANNER. MIKE THOMPSON. JIM MCDERMOTT. RAHM EMANUEL. EARL POMEROY. JOHN B. LARSON. STEPHANIE TUBBS JONES. RICHARD E. NEAL. BEN CARDIN. LLOYD DOGGETT. MICHAEL R. MCNULTY. 

Æ