DESCRIPTION OF 

THE HOUSING ASSISTANCE TAX ACT OF 2008 

Scheduled for Markup 

By the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on April 9, 2008 

 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

 

April 8, 2008 

JCX-27-08
i 

CONTENTS 

Page

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

I. BENEFITS FOR MULTI-FAMILY LOW-INCOME HOUSING..................................... 2 

A. Low-Income Housing Credit ........................................................................................ 2 

1. Temporary increase in the low-income housing credit volume limits.................... 2 

2. Determination of credit rate.................................................................................... 2 

3. Modifications to definition of eligible basis ........................................................... 4 

4. Other simplification and reform of low-income housing tax incentives ................ 8 

B. Modifications to Tax-Exempt Housing Bond Rules................................................... 12 

1. Refunding treatment for certain multifamily housing bonds................................ 12 

2. Coordination of certain rules applicable to the low-income housing credit 

and qualified residential rental project exempt facility bonds.............................. 13 

C. Reforms Related to the Low-Income Housing Credit and Tax-Exempt Housing 

Bonds .......................................................................................................................... 16 

1. Hold harmless for reductions in area median gross income ................................. 16 

2. Exception from the annual recertification requirement for projects which 

are entirely low-income use.................................................................................. 17 

II. BENEFITS FOR SINGLE FAMILY HOUSING............................................................. 20 

A. First-Time Homebuyer Credit..................................................................................... 20 

B. Additional Standard Deduction for State and Local Property Taxes for 

Non-Itemizers ............................................................................................................. 22 

III. GENERAL HOUSING PROVISIONS ............................................................................ 23 

A. Modifications to Qualified Private Activity Bond Rules for Housing ....................... 23 

B. Repeal of Alternative Minimum Tax Limitation on Low-Income Housing Credit 

and Rehabilitation Credit ............................................................................................ 25 

C. Alternative Minimum Tax Treatment of Interest on Certain Bonds........................... 26 

D. Bonds Guaranteed by Federal Home Loan Banks Eligible for Treatment as 

Tax-Exempt Bonds ..................................................................................................... 27 

E. Modification of Rules Pertaining to FIRPTA Nonforeign Affidavits ........................ 28 

F. Modify Rehabilitation Credit Tax-Exempt Use Safe Harbor ..................................... 31 

IV. REAL ESTATE INVESTMENT TRUST (“REIT”) MODIFICATIONS ....................... 32 

V. REVENUE PROVISIONS ............................................................................................... 41 

A. Broker Reporting of Customer’s Basis in Securities Transactions............................. 41 

B. Delay Implementation of Worldwide Interest Allocation .......................................... 48 

C. Modifications to Corporate Estimated Tax Payments ................................................ 52 
1 

INTRODUCTION 

The House Committee on Ways and Means has scheduled a markup on April 9, 2008. 

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

of the Housing Assistance Tax Act of 2008. 

 

 1

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

Housing Assistance Tax Act of 2008, (JCX-27-08), April 8, 2008. This document can also be found on 

our website at www.house.gov/jct. 
2 

I. BENEFITS FOR MULTI-FAMILY LOW-INCOME HOUSING 

A. Low-Income Housing Credit 

1. Temporary increase in the low-income housing credit volume limits 

Present Law

In general

The low-income housing credit may be claimed over a 10-year period by owners of 

certain residential rental property for the cost of rental housing occupied by tenants having 

incomes below specified levels (sec. 42). The amount of the credit for any taxable year in the 

credit period is the applicable percentage of the qualified basis of each qualified low-income 

building. The qualified basis of any qualified low-income building for any taxable year equals 

the applicable fraction of the eligible basis of the building. 

Volume limits

A low-income housing credit is allowable only if the owner of a qualified building 

receives a housing credit allocation from the State or local housing credit agency. Generally, the 

aggregate credit authority provided annually to each State for calendar year 2008 is $2.00 per 

resident, with a minimum annual cap of $2,325,000 for certain small population States (Rev. 

Proc. 2007-66). These amounts are indexed for inflation. Projects that also receive financing 

with proceeds of tax-exempt bonds issued subject to the private activity bond volume limit do 

not require an allocation of the low-income housing credit. 

Description of Proposal

The proposal increases from $2.00 per resident to $2.20 per resident the allocation 

authority provided annually to each State for calendar years 2008 and 2009. In 2010 the volume 

limit will return to the prescribed levels had this proposal not been enacted. 

Effective Date

The proposal is effective for low-income credit allocations made for calendar years after 

2007. 

2. Determination of credit rate 

(a) Modifications to the applicable percentage

Present Law

In general

The low-income housing credit may be claimed over a 10-year credit period after each 

low-income building is placed-in-service. The amount of the credit for any taxable year in the 
3 

credit period is the applicable percentage of the qualified basis of each qualified low-income 

building. 

Present value credit 

The calculation of the applicable percentage is designed to produce a credit equal to: (1) 

70 percent of the present value of the building’s qualified basis in the case of newly constructed 

or substantially rehabilitated housing that is not Federally subsidized (the “70-percent credit”); or 

(2) 30 percent of the present value of the building’s qualified basis in the case of newly 

constructed or substantially rehabilitated housing that is Federally subsidized and existing 

housing that is substantially rehabilitated (the “30-percent credit”). Where existing housing is 

substantially rehabilitated, the existing housing is eligible for the 30-percent credit and the 

qualified rehabilitation expenses (if not Federally subsidized) are eligible for the 70-percent 

credit. 

Calculation of the applicable percentage

The credit percentage for a low-income building is set for the earlier of: (1) the month the 

building is placed in service; or (2) at the election of the taxpayer, (a) the month the taxpayer and 

the housing credit agency enter into a binding agreement with respect to such building for a 

credit allocation, or (b) in the case of a tax-exempt bond-financed project for which no credit 

allocation is required, the month in which the tax-exempt bonds are issued. 

These credit percentages (used for the 70-percent credit and 30-percent credit) are 

adjusted monthly by the IRS on a discounted after-tax basis (assuming a 28-percent tax rate) 

based on the average of the Applicable Federal Rates for mid-term and long-term obligations for 

the month the building is placed in service. The discounting formula assumes that each credit is 

received on the last day of each year and that the present value is computed on the last day of the 

first year. In a project consisting of two or more buildings placed in service in different months, 

a separate credit percentage may apply to each building. 

Description of Proposal

The proposal expands the class of low-income buildings eligible for the 70-percent credit 

and provides a floor on the applicable credit percentages for non-Federally subsidized buildings. 

The proposal extends the 70-percent credit to non-Federally subsidized existing housing 

that is substantially rehabilitated (i.e., in the case of an existing building which is substantially 

rehabilitated, both the qualified basis of the existing building and the qualified rehabilitation 

expenses are eligible for the 70-percent credit as long as the building is not Federallysubsidized.) 

Also, the proposal provides a floor on the applicable percentage for non-Federally 

subsidized buildings at 9 percent. 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 
4 

(b) Modification to the definition of a Federally subsidized building

Present Law

If any portion of the eligible basis of a building is Federally subsidized, then the building 

is ineligible for the 70-percent credit. A Federal subsidy is defined as: (1) any obligation the 

interest of which is tax exempt from tax under section 103; (2) a direct or indirect Federal loan if 

the interest rate is less than the applicable Federal rate; or (3) assistance provided under the 

HOME Investments Partnership Act or the Native American Housing Assistance and Self 

Determination Act of 1996. 

Description of Proposal

The proposal limits the definition of a Federal subsidy for these purposes to any 

obligation the interest of which is tax exempt from tax under section 103. Therefore additional 

buildings may become eligible for the 70-percent credit. 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 

3. Modifications to definition of eligible basis 

(a) Modification to the enhanced credit for buildings in high cost areas

Present Law

Generally, buildings located in high cost areas (i.e., qualified census tracts and difficult 

development areas) are eligible for an enhanced credit. Under the enhanced credit, the 70-

percent and 30-percent credits are increased to a 91-percent and 39-percent credit, respectively. 

The mechanism for this increase is through an increase from 100 to 130 percent of the otherwise 

applicable eligible basis of a new building or the rehabilitation expenditures of an existing 

building. A further requirement for the enhanced credit is that the portions of each metropolitan 

statistical area or nonmetropolitan statistical area designated as difficult to develop areas cannot 

exceed an aggregate area having 20 percent of the population of such statistical area. 

Description of Proposal

The proposal adds a third type of high-cost area eligible for an enhanced credit. The third 

type is defined as any building designated by the State housing credit agency as requiring the 

enhanced credit in order for such building to be financially feasible. This new type of high-cost 

area is not subject to the present-law limitation limiting high cost areas to 20 percent of the 

population of each metropolitan statistical area or nonmetropolitan statistical area. 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 
5 

(b) Modification to the substantial rehabilitation requirement

Present Law

Rehabilitation expenditures2 paid or incurred by a taxpayer with respect to a low-income 

building are treated as a separate building and may be eligible for the 70-percent credit if they 

satisfy the otherwise applicable credit rules.3 To qualify for the credit, the rehabilitation 

expenditures must equal the greater of an amount that is (1) at least 10 percent of the adjusted 

basis of the building being rehabbed; or (2) at least $3,000 per low-income unit in the building 

being rehabbed. 

At the election of the taxpayer, a special rule applies allowing the 30-percent credit to 

both existing buildings and rehabilitation expenditures if the second prong (i.e., at least $3,000 of 

rehabilitation expenditures per low-income unit) of the rehabilitation expenditures test is 

satisfied. This special rule applies only in the case where the taxpayer acquired the building and 

immediately prior to that acquisition the building was owned by or on behalf of a government 

unit. 

Description of Proposal 

The proposal increases the minimum expenditure requirements. Under the proposal, the 

rehabilitation expenditures must equal the greater of an amount that is (1) at least 20 percent of 

the adjusted basis of the building being rehabbed; or (2) at least $6,000 per low-income unit in 

the building being rehabbed. The proposal also indexes the $6,000 amount for inflation. The 

other present-law rules apply.4 

The proposal retains the taxpayer election allowing the 30-percent credit to both existing 

building and the rehabilitation expenditures if the second prong (i.e., at least $3,000 of 

rehabilitation expenditures per low-income unit) of the rehabilitation expenditures test is 

satisfied. 

 2

 Rehabilitation expenditures are amounts chargeable to a capital account and incurred for 

property (or additions or improvements to property) of a character subject to the allowance for 

depreciation in connection with the rehabilitation of a building. Such term does not include the cost of 

acquiring the building (or any interest therein). Other rules apply. 

3

 The credit period for an existing building does not begin before the credit period for the 

rehabilitation expenditures. 

4

 A present-law rule reduces the $3,000 amount to $2,000 for any building substantially assisted, 

financed, or operated under Housing and Urban Development (“HUD”) section 8, section 221(d)(3), or 

section 236 programs, or under the USDA Rural Development section 515 program where an assignment 

of the mortgage secured by the property in the project to HUD or the USDA Rural Development 

otherwise would occur or when a claim against a Federal mortgage insurance fund would occur. A 

conforming change is made by the proposal so that that the $2,000 amount will be increased to two-thirds 

of the $6,000 amount as indexed. 
6 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 

(c) Community service facility eligibility for the credit

Present Law

In general, the qualified basis of a low-income building is limited to that portion of the 

building dedicated to qualified low-income use (either living space or certain common areas). 

However certain “community service facilities” used by non-tenants of the low-income building 

may be included in the qualified basis of the low-income building if certain requirements are 

satisfied. For this purpose, a community service facility: (1) means any facility to serve 

primarily individuals whose income is 60 percent or less of area median income; and (2) may not 

exceed 10 percent of the eligible basis of the qualified low-income housing credit project of 

which it is a part. 

Description of Proposal 

The proposal expands the size of the community service facility with respect to which the 

low-income housing credit may be claimed. Under the proposal the size of the community 

service facility may not exceed the sum of: (1) 15 percent of so much of the eligible basis of the 

qualified low-income housing credit project of which it is a part as does not exceed $5,000,000; 

and (2) 10 percent of any excess over $5,000,000 of the eligible basis of the qualified lowincome housing credit project of which it is a part. 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 

(d) Clarification of the treatment of Federal grants

Present Law

The compliance period for any low-income credit building is the period of fifteen taxable 

years beginning with the taxable year in which the building is placed in service, or at the election 

of the taxpayer the succeeding taxable year. If during any year of the compliance period, a grant 

is made with respect to any building or the operation thereof and any portion of the grant is 

funded with Federal funds, the eligible basis of the building must be reduced by the portion of 

the grant that is Federally-funded. This basis reduction must be made for the taxable year in 

which the grant is made and all succeeding taxable years. 

Description of Proposal

The proposal clarifies the basis reduction rule to apply to Federally-funded grants 

received before the compliance period. It also provides that no basis reduction is required for 

Federally-funded grants received during the compliance period if those grants do not otherwise 

increase the taxpayer’s eligible basis in the building. 
7 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 

(e) Modification to the definition of related persons 

Present Law

With certain exceptions,5 the eligible basis of an existing building is zero for low-income 

housing credit purposes unless: (1) the building was acquired by purchase; (2) there has been a 

period of at least 10 years between the acquisition by purchase and the later of the date the 

building was last placed in service or the date of the most recent nonqualified substantial 

improvement of the building (e.g., improvements equaling at least 25 percent of the adjusted 

basis of the building before such improvements); and (3) the building was not previously placedin-service by the taxpayer or a related person (sec. 42(d)(2)(B)). In order for a building to be 

acquired by purchase, it may not be acquired from a related party. 

The definition of related persons for purposes of these rules is the same as the definition 

used in sections 267(b) and 707(b)(1) (relating to the disallowance of losses) with one 

modification.6 Under the modification, in determining whether two persons are related, “10 

percent” is substituted for “50 percent” in determining the threshold level of ownership in certain 

partnerships and corporations. For example, under the low-income credit provision, two 

partnerships are related if the same persons own more than ten percent of the capital interests or 

profits interest in each partnership. 

Description of Proposal

The proposal repeals the ten-percent attribution rule used to determine whether parties are 

related for purposes of determining whether an existing building qualifies for the low-income 

housing credit. Under the proposal, two persons are related for this purpose if they bear a 

relationship to each other specified in section 267(b) or 707(b)(1). 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 

 5

 The Internal Revenue Service may waive the 10-year requirement for any building substantially 

assisted, financed, or operated under Housing and Urban Development (“HUD”) section 8, section 

221(d)(3), or section 236 programs, or under the Farmers’ Home Administration section 515 program 

where an assignment of the mortgage secured by the property in the project to HUD or the Farmers’ 

Home Administration otherwise would occur or when a claim against a Federal mortgage insurance fund 

would occur. 

6

 In addition, certain businesses under common control are related persons for purposes of these 

rules. 
8 

4. Other simplification and reform of low-income housing tax incentives 

(a) Repeal prohibition of the credit for buildings receiving HUD moderate rehabilitation 

assistance 

Present Law

Generally, the low-income housing credit is available to otherwise qualifying buildings 

which also receive direct assistance under HUD Section 8 programs. No credit is allowed to any 

building with respect to which moderate rehabilitation assistance is provided at any time during 

the compliance period, under section 8(e)(2) of the United States Housing Act of 1937 (other 

than assistance under the Stewart B. McKinney Homeless Assistance Act). 

Description of Proposal

The proposal eliminates the present-law prohibition against providing the low-income 

housing credit to buildings receiving moderate rehabilitation assistance under section 8(e)(2) of 

the United States Housing Act of 1937. 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 

(b) Carryover allocation rule 

Present Law

In general, the allocation of the low-income housing credit must be made not later than 

the close of the calendar year in which the building is placed in service. One exception to this 

rule is a carryover allocation. In a carryover allocation, an allocation may be made to a building 

that has not yet been placed in service, provided that: (1) more than 10 percent of the taxpayer’s 

reasonably expected basis in the project (as of the close of the second calendar year following the 

calendar year of the allocation) is incurred as of the later of six months after the allocation is 

made or the end of the calendar year in which the allocation is made; and (2) the building is 

placed in service not later than the close of the second calendar year following the calendar year 

of the allocation. 

Description of Proposal

The proposal modifies the first prong of the carryover allocation rule. Under this 

modification such an allocation will satisfy the first prong provided that more than 10 percent of 

the taxpayer’s reasonably expected basis in the project (as of the close of the second calendar 

year following the calendar year of the allocation) is incurred as of 12 months after the allocation 

is made. The second prong of the carryover allocation rules is unchanged. 

Effective Date

The proposal is effective for buildings placed in service after the date of enactment. 
9 

(c) Modification of bond posting requirement 

Present Law

The compliance period for any building is the period beginning on the first day of the 

first taxable year of the credit period of such building and ending 15 years from such date. 

The penalty for any building subject to the 15-year compliance period failing to remain 

part of a qualified low-income project (due, for example, to noncompliance with the minimum 

set aside requirement, or the gross rent requirement, or other requirements with respect to the 

units comprising the set aside) is recapture of the accelerated portion of the credit, with interest, 

for all prior years. 

Generally, any change in ownership by a taxpayer of a building subject to the compliance 

period is also a recapture event. An exception is provided if the seller satisfies certain bond 

posting requirements (in an amount and manner prescribed by Treasury), and if it can reasonably 

be expected that such building will continue to be operated as a qualified low-income building 

for the remainder of the compliance period. 

Description of Proposal

The proposal eliminates the bond posting requirement. In its place the proposal extends 

the otherwise applicable statute of limitation until three years after the Secretary of the Treasury 

is notified of noncompliance with the low-income housing credit rules. 

Effective Date

The proposal applies with respect to dispositions of interests in buildings after the date of 

enactment. 

Also, at the election of the taxpayer, the proposal applies with respect to dispositions of 

interests in a building on or before the date of enactment if it is reasonably expected that such 

building will continue to be a qualified low-income building for the remaining compliance 

period. 

(d) Treatment of individuals who previously received foster care assistance 

Present Law

In general, student housing does not qualify for the low-income housing credit. Two 

exceptions are provided from this general rule.7 There two exceptions are units occupied by an 

individual: (1) who is a student and receiving assistance under title IV of the Social Security Act 

(Temporary Assistance for Needy Families); or (2) enrolled in a job training program receiving 

 7

 See also the discussion of the full-time student rule in item I.B.2., above. 
10 

assistance under the Job Training Partnership Act or under other similar Federal, State, or local 

laws. 

Description of Proposal

The proposal adds a third exception to the general rule that student housing is not eligible 

for the low-income housing credit. This new exception applies in the case of a student who was 

previously under the care and placement responsibility of a foster care program (under part B or 

E of title IV of the Social Security Act. 

Effective Date

The proposal is effective for determinations made after the date of enactment. 

(e) Additions to housing credit agency allocation plan criteria 

Present Law

Each State must develop a plan for allocating credits, and such plan must include certain 

allocation criteria including: (1) project location; (2) housing needs characteristics; (3) project 

characteristics (including whether the project uses existing housing as part of a community 

revitalization plan; (4) sponsor characteristics; (5) tenant populations with special needs; 

(6) tenant populations of individuals with children; and (7) projects intended for eventual tenant 

ownership. 

The State allocation plan must also give preference to housing projects: (1) that serve the 

lowest-income tenants; (2) that are obligated to serve qualified tenants for the longest periods; 

and (3) that are located in qualified census tracts and the development of which contributes to a 

concerted community revitalization plan. For this purpose, a qualified census tract is defined as 

a census tract: (1) designated by the Secretary of HUD; and (2) for the most recent year for 

which census data is available for such tract, either 50 percent or more of the households have a 

income that is less than 60 percent of the area median income for that year or which has a 

poverty rate of at least 25 percent. 

Present law also requires that housing credit agencies perform a comprehensive market 

study of the housing needs of the low-income individuals in the area to be served by the project 

and a written explanation, available to the general public, for any allocation not made in 

accordance with the established priorities and selection criteria of the housing credit agency. It 

also requires that the housing credit agency conduct site visits to monitor for compliance with 

habitability standards. 

Description of Proposal

The proposal adds two additional criteria which States must use in its allocation of credits 

among potential low-income housing projects. The additional criteria are: (1) the energy 

efficiency of the project; (2) the historic nature of the project. 
11 

Effective Date

The proposal is effective for allocations made after December 31, 2008. 
12 

B. Modifications to Tax-Exempt Housing Bond Rules 

1. Refunding treatment for certain multifamily housing bonds 

Present Law

In general

Private activity bonds are bonds that nominally are issued by State or local governments, 

but the proceeds of which are used (directly or indirectly) by a private person and payment of 

which is derived from funds of such private person. The exclusion from income for interest paid 

on State and local bonds does not apply to private activity bonds, unless the bonds are issued for 

certain permitted purposes (“qualified private activity bonds”). The definition of a qualified 

private activity bond includes, but is not limited to, qualified mortgage bonds, qualified veterans’ 

mortgage bonds, and bonds for qualified residential rental projects. 

Qualified residential rental projects

Residential rental property may be financed with qualified private activity bonds if the 

financed project is a “qualified residential rental project.” A project is a qualified residential 

rental project if 20 percent or more of the residential units in such project are occupied by 

individuals whose income is 50 percent or less of area median gross income (the “20-50 test”). 

Alternatively, a project is a qualified residential rental project if 40 percent or more of the 

residential units in such project are occupied by individuals whose income is 60 percent or less 

of area median gross income (the “40-60 test”). The issuer must elect to apply either the 20-50 

test or the 40-60 test. Operators of qualified residential rental projects must annually certify that 

such project meets the requirements for qualification, including meeting the 20-50 test or the 40-

60 test. 

As with most qualified private activity bonds, bonds for qualified residential rental 

projects are subject to annual State volume limitations (the “State volume cap”). For calendar 

year 2008, the State volume cap, which is indexed for inflation, equals $85 per resident of the 

State, or $262.09 million, if greater. 

Bonds issued to finance qualified residential rental projects are subject to a term to 

maturity rule which limits the period of time such bonds may remain outstanding. Generally, 

this rule provides that the average maturity of a qualified private activity bond cannot exceed 120 

percent of the economic life of the property being financed.8

Description of Proposal

Under the proposal, if within 6 months after receipt of a repayment of a conduit loan used 

to finance a qualified residential rental project, such repayment is used to finance a second 

qualified residential rental project, any bond issued to refinance the first issue of bonds (i.e., the 

 8

 Sec. 147(b). 
13 

bond financing the original conduit loan) shall be treated as a refunding issue. Thus, under the 

proposal, the refinancing bond is treated as a refunding notwithstanding a change in obligors 

under the first and second conduit loans. The proposal only applies to the first refunding of the 

refunded bond and only if such refunding bond is issued within four years of the date of issue of 

the refunded bond. In addition, the final maturity date for the refunding bonds cannot be later 

than 34 years after the date of issuance of the refunded bond. 

Effective Date

The proposal applies to repayments of loans received after the date of enactment. 

2. Coordination of certain rules applicable to the low-income housing credit and qualified 

residential rental project exempt facility bonds 

Next available unit rules

Present Law

In order to be eligible for the low-income housing credit, each of the residential units 

with respect to which the credit is claimed must be: (1) occupied by low-income tenants; and (2) 

rent-restricted. If the incomes of any such tenants rise above certain levels, then the credit with 

respect to that unit is denied unless the next available unit in the low-income building (of a size 

comparable or smaller than such unit) is rented to a new tenant who satisfies the income and 

rent-restriction requirements (the “next-available-unit rule”).9

Subject to certain requirements, tax-exempt bonds may be issued to finance qualified 

residential rental projects. The tax-exempt bond rules for qualified residential projects have 

similar tenant income limitations as the low-income credit, but apply the next available unit rule 

on a project basis rather than a building-by-building basis.10 Therefore, to avoid noncompliance 

when the income of a tenant rises above certain levels, the next available unit (of a size 

comparable or smaller than such unit) in the entire project (rather than just the same building) 

must be rented to a new tenant who satisfies the income and rent-restriction requirements. 

Description of Proposal

In the case of a low-income building which is tax-exempt bond financed and eligible for 

the low-income housing credit, the proposal provides that both the bond and credit restrictions 

will be satisfied if the next available unit in the building is rented to a new tenant who satisfies 

the income and rent-restriction requirements. It therefore conforms the tax-exempt bond rule to 

the low-income housing credit rule. 

 9

 Sec. 42(g)(2)(D)(ii). 

10 Sec. 142(d)(3)(B). 
14 

Effective Date

The proposal applies to determinations of the status of qualified residential rental projects 

for periods beginning after the date of enactment with respect to bonds issued before, on, or after 

such date. 

Students 

Present Law

For purposes of the low-income housing credit, no credit is allowed with respect to a 

otherwise eligible unit occupied entirely by full-time students unless those students are 

comprised entirely of single parents and their children. Further, the single parents may not be 

dependents of another individual and the children may not be dependents of another individual 

other than of their parents. For this purpose tax exempt bonds are slightly different full this 

student rule applies. 

Description of Proposal

The proposal conforms the tax-exempt bond rule to the low income housing credit rule. 

Effective Date

The proposal applies to determinations of the status of qualified residential rental projects 

for periods beginning after the date of enactment with respect to bonds issued before, on, or after 

such date. 

Single-room occupancy units

Present Law

Unlike the requirements for projects financed with tax-exempt bonds, certain single-room 

occupancy housing used on a nontransient basis may qualify for the low-income credit, even 

though such housing may provide eating, cooking, and sanitation facilities on a shared basis. An 

example of housing that may qualify for the credit is a residential hotel used on a nontransient 

basis that is available to all members of the public. 

Among other requirements, qualified residential rental projects financed with tax-exempt 

bonds generally cannot be used on a transient basis. Treasury regulations clarify that a 

residential unit will not be treated as used on a transient basis if the unit contains complete 

facilities for living, including living, sleeping, eating, cooking, and sanitation.11

 11 Treas. Reg. 1.103-8(b)(10)(ii). 
15 

Description of Proposal

The proposal conforms the tax-exempt bond rule to the low-income housing credit rule. 

Effective Date

The proposal applies to determinations of the status of qualified residential rental projects 

for periods beginning after the date of enactment with respect to bonds issued before, on, or after 

such date. 
16 

C. Reforms Related to the Low-Income Housing Credit 

and Tax-Exempt Housing Bonds 

1. Hold harmless for reductions in area median gross income 

Present Law

Tax rules

Tax-exempt bonds

Residential rental property may be financed with exempt facility bonds if the financed 

project is a “qualified residential rental project.” A project is a qualified residential rental project 

if 20 percent or more of the residential units in such project are occupied by individuals whose 

income is 50 percent or less of area median gross income (the “20-50 test”). Alternatively, a 

project is a qualified residential rental project if 40 percent or more of the residential units in 

such project are occupied by individuals whose income is 60 percent or less of area median gross 

income (the “40-60 test”). The issuer must elect to apply either the 20-50 test or the 40-60 test 

(sec. 142). 

Low-income housing tax credit

In order to be eligible for the low-income housing credit, a qualified low-income building 

must be part of a qualified low-income housing project. In general, a qualified low-income 

housing project is defined as a project that satisfies one of two tests at the election of the 

taxpayer (sec. 42(g)). The first test is met if 20 percent or more of the residential units in the 

project are both rent-restricted, and occupied by individuals whose income is 50 percent or less 

of area median gross income (the “20-50 test”). The second test is met if 40 percent or more of 

the residential units in such project are both rent-restricted, and occupied by individuals whose 

income is 60 percent or less of area median gross income (the “40-60 test”). These income 

figures are adjusted for family size. 

Determination of income and area median gross income

The income of individuals and area median gross income are determined by the Secretary 

of the Treasury in a manner consistent with determinations of lower-income families and area 

median gross income under section 8 of the Housing Act of 1937 (sec. 142(d)). These 

determination under section 8 are made by HUD. These determinations also include adjustments 

for family size. 

Therefore such determinations (individual and area median gross income) are applicable 

for purposes of tax-exempt bonds and the low-income housing credit. 

HUD hold harmless policy

Generally HUD releases its calculation of area median gross income for a calendar year 

early in that year. Historically HUD has used the most recent decennial census data and updated 

it with other data on income, employment and earnings. 
17 

Recently HUD modified its methodology to include additional data in its calculation of 

area median gross income. In some instances this change in methodology resulted in 

significantly lower numbers for area median gross income in some areas. In response to this 

result, HUD provided that such areas are not treated as having a lower area median gross income 

for purposes of HUD housing programs. 

Description of Proposal

In general

The proposal makes two modifications to the determination of area median gross income 

for purpose of tax-exempt bonds and the low-income housing credit. 

Determination of income and area median gross income

 The proposal provides that any determination of area median gross income with respect 

to a project may not be less than the determination of area median gross income with respect to 

that project for the preceding calendar year. This modification applies to all projects and is not 

limited to projects benefiting from the HUD hold harmless policy. 

HUD hold harmless policy 

In the case of a HUD hold harmless impacted project, the determination of area median 

gross income for the project is the greater of (i) the amount determined without regard to the 

special rule for HUD hold harmless impacted projects or (ii) the sum of the area median gross 

income determined under the HUD hold harmless policy with respect to the project for 2008 plus 

any increase in area median gross income after 2008. 

Effective Date

The proposal applies to determinations of area median gross income for calendar years 

after 2008. 

2. Exception from the annual recertification requirement for projects which are entirely 

low-income use 

Present Law

Tax Code rules

In General

Tax-exempt bonds

Residential rental property may be financed with exempt facility bonds if the financed 

project is a “qualified residential rental project.” A project is a qualified residential rental project 

if 20 percent or more of the residential units in such project are occupied by individuals whose 

income is 50 percent or less of area median gross income (the “20-50 test”). Alternatively, a 
18 

project is a qualified residential rental project if 40 percent or more of the residential units in 

such project are occupied by individuals whose income is 60 percent or less of area median gross 

income (the “40-60 test”). The issuer must elect to apply either the 20-50 test or the 40-60 test 

(sec. 142). 

Low-income housing tax credits

In order to be eligible for the low-income housing credit, a qualified low-income building 

must be part of a qualified low-income housing project. In general, a qualified low-income 

housing project is defined as a project that satisfies one of two tests at the election of the 

taxpayer (sec. 42(g)). The first test is met if 20 percent or more of the residential units in the 

project are both rent-restricted, and occupied by individuals whose income is 50 percent or less 

of area median gross income (the “20-50 test”). The second test is met if 40 percent or more of 

the residential units in such project are both rent-restricted, and occupied by individuals whose 

income is 60 percent or less of area median gross income (the “40-60 test”). These income 

figures are adjusted for family size. 

Determination of income and area median gross income

The income of individuals and area median gross income are determined by the Secretary 

of the Treasury in a manner consistent with determinations of lower-income families and area 

median gross income under section 8 of the Housing Act of 1937 (sec. 142(d)). These 

determinations also include adjustments for family size. 

Certification 

The Code provides that the operator of any qualified residential rental project must 

submit to the Secretary of the Treasury (at such time and in such manner as the Secretary 

prescribes) an annual certification that the project continues to satisfy the requirements of a 

qualified residential rental project. Any failure to comply with the annual certification to the 

Secretary of the Treasury will subject the operator to penalties but will not affect the tax-exempt 

status of the underlying bonds (sec. 142(d)(7)). 

Similar rules apply for the low-income housing credit regarding tenant incomes (sec. 

42(g)(4)). IRS Revenue Procedure 1994-64 allows a taxpayer to request a waiver of this 

certification under certain circumstances with the consent of the State agency responsible for 

monitoring the low-income credit project. 

Treatment of tenants whose income rise above the income limits

Generally a low-income unit will continue to be treated as such even when the tenant’s 

income rises above the income limits provided that the next available unit (of a size comparable 

to or smaller than such unit) in the project is occupied by a new resident who satisfies the income 

limits. 
19 

HUD rules

A family’s eligibility for various types of HUD housing assistance is based on its income 

and family composition. The HUD Handbook 4350.3 contains the certification and annual 

recertification rules to be followed by project operators. Under the HUD program requirements 

tenants have the responsibility to provide timely information to the project operators. Operators 

have the responsibility to review and verify the tenant information and to make changes to 

assistance payment and tenant rent to satisfy program requirements. 

Description of Proposal

The proposal waives the annual recertification requirements under the low-income credit 

(sec. 42) and tax-exempt bonds (sec. 142) for any project as long as no residential unit in the 

project is occupied by tenants who fail to satisfy the otherwise applicable income limits. The 

proposal does not modify the HUD rules; therefore some projects must continue annual 

certification notwithstanding this proposal. 

Effective Date

The proposal is effective for years ending after the date of enactment. 
20 

II. BENEFITS FOR SINGLE FAMILY HOUSING 

A. First-Time Homebuyer Credit 

Present Law

Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for 

owner-occupied residences. The subsidy provided for qualified mortgage bonds allows issuers 

to finance mortgages for homebuyers at reduced interest rates. The Code imposes several 

limitations on qualified mortgage bonds, including a “first-time homebuyer” requirement. The 

first-time homebuyer requirement provides that qualified mortgage bonds generally cannot be 

used to finance a mortgage for a homebuyer who had an ownership interest in a principal 

residence in the three years preceding the execution of the mortgage. In addition, bond proceeds 

generally only can be used for new mortgages, i.e., proceeds cannot be used to acquire or 

refinance existing mortgages. 

Prior to 2008, first-time homebuyers of a principal residence in the District of Columbia 

were 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 filing a joint return. 

A married individual filing separately can claim a maximum credit of $2,500. The credit phases 

out for individual taxpayers with modified 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 expired for residences purchased after 

December 31, 2007.12

Description of Proposal

Under the proposal, a taxpayer who is a first-time homebuyer is allowed a refundable tax 

credit equal to the lesser of $7,500 or 10 percent of the purchase price of a principal residence. 

The $7,500 maximum credit applies both to individuals and married couples filing a joint return. 

A married individual filing separately can claim a maximum credit of $3,750. The credit is 

allowed for the tax year in which the taxpayer purchases the home. 

The credit phases out for individual taxpayers with modified adjusted gross income 

between $70,000 and $90,000 ($110,000-$130,000 for joint filers) for the year of purchase. 

A taxpayer is considered a first-time homebuyer if such individual had no ownership 

interest in a principal residence in the United States during the 3-year period prior to the 

purchase of the home to which the credit applies. 

 12 Sec. 1400C. The credit was enacted as part of the Taxpayer Relief Act of 1997 and was 

originally scheduled to expire on December 31, 2000. It has been extended several times, the last 

extension through December 31, 2007. 
21 

No credit is allowed if the D.C. homebuyer credit is allowable for the taxable year the 

residence is purchased or a prior taxable year. A taxpayer is not permitted to claim the credit if 

the taxpayer’s financing is from tax-exempt mortgage revenue bonds, if the taxpayer is a 

nonresident alien, or if the taxpayer disposes of the residence (or it ceases to be a principal 

residence) before the close of a taxable year for which a credit otherwise would be allowable. 

The credit is recaptured ratably over fifteen years with no interest charge beginning in the 

second taxable year after the taxable year in which the home is purchased. For example, if the 

taxpayer purchases a home in 2008, the credit is allowed on the 2008 tax return, and repayments 

commence with the 2010 tax return. If the taxpayer sells the home (or the home ceases to be 

used as the principal residence of the taxpayer or the taxpayer’s spouse) prior to complete 

repayment of the credit, any remaining credit repayment amount is due on the tax return for the 

year in which the home is sold (or ceases to be used as the principal residence). However, the 

credit repayment amount may not exceed the amount of gain from the sale of the residence to an 

unrelated person. For this purpose, gain is determined by reducing the basis of the residence by 

the amount of the credit to the extent not previously recaptured. No amount is recaptured after 

the death of a taxpayer. In the case of an involuntary conversion of the home, recapture is not 

accelerated if a new principal residence is acquired within a two year period. In the case of a 

transfer of the residence to a spouse or to a former spouse incident to divorce, the transferee 

spouse (and not the transferor spouse) will be responsible for any future recapture. 

Effective Date

The provision is effective for qualifying home purchases after the date of committee 

action and before April 1, 2009 (without regard to whether or not there was a binding contract to 

purchase prior to the date of committee action). 
22 

B. Additional Standard Deduction for State and 

Local Property Taxes for Non-Itemizers 

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. 

Description of Proposal

The provision allows taxpayers an additional standard deduction for State and local real 

property taxes for taxpayers who claim the regular standard deduction. The additional standard 

deduction applies only for 2008, and is limited to $350 ($700 in the case of a married individual 

filing jointly). 

Effective Date

The provision applies to taxable years beginning in 2008. 
23 

III. GENERAL HOUSING PROVISIONS 

A. Modifications to Qualified Private Activity Bond Rules for Housing 

Present Law

In general

Private activity bonds are bonds that nominally are issued by State or local governments, 

but the proceeds of which are used (directly or indirectly) by a private person and payment of 

which is derived from funds of such private person. The exclusion from income for State and 

local bonds does not apply to private activity bonds, unless the bonds are issued for certain 

permitted purposes (“qualified private activity bonds”). The definition of a qualified private 

activity bond includes, but is not limited to, qualified mortgage bonds, qualified veterans’ 

mortgage bonds, and bonds for qualified residential rental projects. 

Qualified private activity bond rules for housing

Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for 

owner-occupied residences. The Code imposes several limitations on qualified mortgage bonds, 

including income limitations for homebuyers, purchase price limitations for the home financed 

with bond proceeds, and a “first-time homebuyer” requirement. The income limitations are 

satisfied if all financing provided by an issue is provided for mortgagors whose family income 

does not exceed 115 percent of the median family income for the metropolitan area or State, 

whichever is greater, in which the financed residences are located. The purchase price 

limitations provide that a residence financed with qualified mortgage bonds may not have a 

purchase price in excess of 90 percent of the average area purchase price for that residence. The 

first-time homebuyer requirement provides that qualified mortgage bonds generally cannot be 

used to finance a mortgage for a homebuyer who had an ownership interest in a principal 

residence in the three years preceding the execution of the mortgage. In addition, bond proceeds 

generally only can be used for new mortgages, i.e., proceeds cannot be used to acquire or 

refinance existing mortgages. Under present law, the proceeds of qualified mortgage bonds 

generally must be used to finance mortgages within 42 months from the date of issuance of the 

bonds. 

Residential rental property may be financed with qualified private activity bonds if the 

financed project is a “qualified residential rental project.” A project is a qualified residential 

rental project if 20 percent or more of the residential units in such project are occupied by 

individuals whose income is 50 percent or less of area median gross income (the “20-50 test”). 

Alternatively, a project is a qualified residential rental project if 40 percent or more of the 

residential units in such project are occupied by individuals whose income is 60 percent or less 

of area median gross income (the “40-60 test”). 

As with most qualified private activity bonds, qualified mortgage bonds and bonds for 

qualified residential rental projects are subject to annual State volume limitations (the “State 

volume cap”). For calendar year 2008, the State volume cap, which is indexed for inflation, 

equals $85 per resident of the State, or $262.09 million, if greater. The interest income from 
24 

qualified mortgage bonds and bonds for qualified residential rental projects is a preference item 

for purposes of calculating the alternative minimum tax (“AMT”). 

Description of Proposal

Temporary volume cap increase

The proposal authorizes an additional $10 billion of volume cap for 2008 for the purpose 

of issuing qualified mortgage bonds or private activity bonds for qualified residential rental 

projects. The additional volume cap is allocated to each State in the same proportion as the 

population of such State bears to the population of all the States. Qualified mortgage bonds 

issued with respect to the additional volume cap may be used to finance either mortgages 

permitted under present law (e.g., new mortgages) or qualified subprime loans as defined under 

the bill. However, all proceeds of qualified mortgage bonds issued with respect to the additional 

volume cap must be used within 12 months of the date of issuance of such bonds. Additional 

volume cap that remains unused at the end of 2008 may be carried forward to 2009 and 2010, but 

solely for the purpose of issuing qualified mortgage bonds or private activity bonds for qualified 

residential rental projects. 

Qualified mortgage bonds for certain refinancings

The proposal creates an exception to the new mortgage requirement for qualified 

mortgage bonds by authorizing the use of such bonds to refinance a qualified subprime loan. 

The proposal defines a qualified subprime loan as an adjustable rate residential mortgage loan 

originated after December 31, 2001, and before January 1, 2008, that the issuer determines 

would be reasonably likely to cause financial hardship to the borrower if not refinanced. Under 

the proposal, proceeds of qualified mortgage bonds used to refinance qualified subprime loans 

must be so used within 12 months from the date of issuance of the bond. In addition, the 

proposal also provides that qualified subprime loans cannot be refinanced by bonds issued after 

December 31, 2010. 

Effective Date

The proposal applies to bonds issued after the date of enactment. 
25 

B. Repeal of Alternative Minimum Tax Limitation on Low-Income 

Housing Credit and Rehabilitation Credit 

Present Law

Under present law, business tax credits generally may not exceed the excess of the 

taxpayer’s income tax liability over the tentative minimum tax (or, if greater, 25 percent of the 

regular tax liability in excess of $25,000). Thus, business tax credits generally cannot offset the 

alternative minimum tax liability.13

Credits in excess of the limitation may be carried back one year and carried forward for 

up to 20 years. 

The tentative minimum tax is an amount equal to specified rates of tax imposed on the 

excess of the alternative minimum taxable income over an exemption amount. To the extent the 

tentative minimum tax exceeds the regular tax, a taxpayer is subject to the alternative minimum 

tax. 

Description of Proposal

The proposal treats the tentative minimum tax as being zero for purposes of determining 

the tax liability limitation with respect to the low-income housing credit and the rehabilitation 

credit. 

Thus, the low-income housing tax credit and rehabilitation credit may offset the 

alternative minimum tax liability. 

Effective Date

The proposal applies to low-income housing credits determined under section 42 

attributable to buildings placed in service after December 31, 2007 (including any carryback of 

these credits). 

The proposal applies to rehabilitation credits determined under section 47 attributable to 

qualified rehabilitation expenses properly taken into account for periods after December 31, 

2007 (including any carryback of these credits). 

 13 A special rule treats the tentative minimum tax as being zero for purposes of determining the 

tax liability limitation with respect to certain energy credits, the work opportunity credit and the credit for 

taxes paid with respect to employee cash tips (sec. 38(c)(4)). Thus, the credits listed in the preceding 

sentence may offset the alternative minimum tax liability. 
26 

C. Alternative Minimum Tax Treatment of Interest on Certain Bonds 

Present Law

Present law imposes an alternative minimum tax (“AMT”) on individuals and 

corporations. AMT is the amount by which the tentative minimum tax exceeds the regular 

income tax. The tentative minimum tax is computed based upon a taxpayer’s alternative 

minimum taxable income (“AMTI”). AMTI is the taxpayer’s taxable income modified to take 

into account certain preferences and adjustments. One of the preference items is tax-exempt 

interest on certain tax-exempt bonds issued for private activities (sec. 57(a)(5)). Also, in the case 

of a corporation, an adjustment based on current earnings is determined, in part, by taking into 

account 75 percent of items, including tax-exempt interest, that are excluded from taxable 

income but included in the corporation’s earnings and profits (sec. 56(g)(4)(B)). 

Description of Proposal

The proposal provides that tax-exempt interest on (i) exempt facility bonds issued as part 

of an issue 95 percent or more of the net proceeds of which are used to provide qualified 

residential rental projects (as defined in section 142(d)), (ii) qualified mortgage bonds (as defined 

in section 143(a)), and (iii) qualified veterans’ mortgage bonds (as defined in section 143(b)) is 

not an item of tax preference for purposes of the alternative minimum tax. Also, this interest is 

not included in the corporate adjustment based on current earnings. The proposal does not apply 

to interest on any refunding bond unless interest on the refunded bond (or in the case of a series 

of refundings, the original bond) was not an item of tax preference. 

 Effective Date

The proposal applies to interest on bonds issued after the date of enactment. 
27 

D. Bonds Guaranteed by Federal Home Loan Banks Eligible 

for Treatment as Tax-Exempt Bonds 

Present Law

Interest on bonds issued by State and local governments generally is excluded from gross 

income for Federal income tax purposes. However, the exclusion generally does not apply to 

State and local bonds that are Federally guaranteed. Under present law, a bond is Federally 

guaranteed if: (1) the payment of principal or interest with respect to such bond is guaranteed (in 

whole or in part) by the United States (or any agency or instrumentality thereof); (2) such bond is 

issued as part of an issue and five percent or more of the proceeds of such issue is to be (a) used 

in making loans the payment of principal or interest with respect to which is guaranteed (in 

whole or in part) by the United States (or any agency or instrumentality thereof), or (b) invested 

directly or indirectly in Federally insured deposits or accounts; or (3) the payment of principal or 

interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States 

(or any agency or instrumentality thereof). 

The Federal guarantee restriction was enacted in 1984 with certain exceptions for certain 

guarantee programs in existence at that time. The exceptions include guarantees by: the Federal 

Housing Administration; the Department of Veterans’ Affairs; the Federal National Mortgage 

Association; the Federal Home Loan Mortgage Association; the Government National Mortgage 

Association; the Student Loan Marketing Association; and the Bonneville Power Authority. The 

exception also includes guarantees for certain housing programs. These are: (a) private activity 

bonds for a qualified residential rental project or a housing program obligation under section 

11(b) of the United States Housing Act of 1937; (b) a qualified mortgage bond; or (c) a qualified 

veterans’ mortgage bond. 

Description of Proposal

Under the proposal, bonds issued by State and local governments are not treated as 

Federally guaranteed by reason of any guarantee provided by any Federal Home Loan Bank of a 

bond issued after the date of enactment and before January 1, 2011, if such bank made a 

guarantee of such bond in connection with such issuance. 

Effective Date

The proposal applies to guarantees made after the date of enactment. 
28 

E. Modification of Rules Pertaining to FIRPTA Nonforeign Affidavits 

Present Law

In general, nonresident aliens and foreign corporations are not taxed on capital gains.14 

However, such foreign persons must take into account gains and losses from the disposition of an 

interest in United States real property (“USRPI”), as if such persons were engaged in a trade or 

business in the United States during the taxable year, and such gain or loss were effectively 

connected with such trade or business.15

Although tax is imposed upon such dispositions on a net basis, in the case of any 

disposition of a USRPI by a foreign person, the transferee is generally required to deduct and 

withhold a tax equal to ten percent of the amount realized.16 The transferee is exempt from this 

withholding requirement if: 

In general, the transferred interest is not a USRPI; 

The transferee receives a “qualifying statement” from the Secretary of the 

Treasury (or his delegate) that states that the transferor is exempt from the tax on 

the disposition of the USRPI or has reached agreement with the Secretary for 

payment of such tax, and that any withholding tax has been satisfied or secured; 

The USRPI is acquired by the transferee for use by him as a residence and the 

amount realized does not exceed $300,000; or 

The transferor furnishes to the transferee an affidavit by the transferor stating, 

under penalties of perjury, the transferor’s United States taxpayer identification 

number and that the transferor is not a foreign person. However, this rule does 

not apply if the transferee has actual knowledge that such affidavit is false or if 

the transferee receives a notice from a transferor’s agent or a transferee’s agent 

that such affidavit is false, or if the transferee fails to meet the Secretary’s 

requirement that the transferee furnish a copy of such affidavit to the Secretary.17 

Regulations require the transferee to retain the transferor’s affidavit until the end 

of the fifth taxable year following the taxable year in which the transfer takes 

place.18

 14 Nonresident aliens present in the United States for a period or period aggregating 183 days or 

more during a taxable year are taxed at a flat 30 percent on their net U.S. source capital gains. Sec. 

871(a)(2). 

15 Sec. 897(a)(1). 

16 Sec. 1445(a). 

17 Sec. 1445(b). 

18 Treas. Reg. sec. 1.1445-2(b)(3).
29 

In certain circumstances, agents may be liable for some or all of the withholding tax. In 

general, if the transferor’s agent or the transferee’s agent has actual knowledge that the affidavit 

is false, then such agent is required to notify the transferee pursuant to regulations.19 An agent 

that is required to notify the transferee pursuant to regulations yet fails to do so is under the same 

duty to deduct and withhold that the transferee would have been under if such agent had properly 

given such notice.20 However, an agent’s liability under these circumstances is limited to the 

amount of the agent’s compensation from the transaction.21

In the case of a real estate transaction, a “real estate reporting person” is required to file 

an information return and to furnish certain written statements to customers.22 A real estate 

reporting person means the person (including any attorney or title company) responsible for 

closing the transaction, if there is such a person.23

Description of Proposal

The proposal provides an alternate procedure with respect to the nonforeign affidavit. 

Under this procedure, in lieu of furnishing a nonforeign affidavit to the transferee, a transferor 

may furnish such affidavit to a “qualified substitute.” Such qualified substitute is then required 

to furnish a statement to the transferee stating, under penalties of perjury, that the qualified 

substitute has such affidavit in his or her possession. With respect to a disposition of a USRPI, 

the term “qualified substitute” means (1) the person, including any attorney or title company, 

responsible for closing the transaction, other than the transferor’s agent, and (2) the transferee’s 

agent. 

This exemption does not apply if the transferee or qualified substitute has actual 

knowledge that such affidavit or statement is false, if the transferee or qualified substitute 

receives a notice from a transferor’s agent, transferee’s agent, or qualified substitute that such 

affidavit or statement is false, or if the transferee or qualified substitute fails to meet a regulatory 

requirement that the transferee or qualified substitute furnish a copy of such affidavit or 

statement to the Secretary. 

Moreover, if the transferor’s agent, the transferee’s agent, or the qualified substitute has 

actual knowledge that the affidavit or statement is false, then such agent or qualified substitute is 

 19 Sec. 1445(d)(1). 

20 Sec. 1445(d)(2)(A). 

21 Sec. 1445(d)(2)(B). 

22 Sec. 6045(e)(1). There is an exception to this requirement for a sale or exchange of a 

residence for $250,000 or less ($500,000 if the seller is married), if certain conditions are met. Sec. 

6045(e)(5). 

23 If there is no such person, then the real estate reporting person with respect to that transaction 

is either the mortgage lender, seller’s broker, buyer’s broker, or other person designated under 

regulations, in that order. Sec. 6045(e)(2). 
30 

required to notify the transferee. As under present law, the time and manner of such notice is to 

be specified by regulations. An agent or qualified substitute that is required to notify the 

transferee pursuant to regulations yet fails to do so has the same duty to deduct and withhold that 

the transferee would have had if such agent or qualified substitute had properly given such 

notice. An agent’s or qualified substitute’s liability under these circumstances is limited to the 

amount of the compensation that such agent or qualified substitute derives from the transaction. 

The Secretary of the Treasury is required to prescribe such regulations as may be 

necessary or appropriate to carry out this proposal. It is intended that such rules will require the 

qualified substitute and transferee to retain the documentation for a period commensurate with 

the period required under the present-law regulations. 

Effective Date

The proposal is effective for dispositions after the date of enactment. 
31 

F. Modify Rehabilitation Credit Tax-Exempt Use Safe Harbor 

Present Law

A 10-percent credit is provided for rehabilitation expenditures with respect to buildings 

first placed in service before 1936. A 20-percent credit is provided for rehabilitation 

expenditures with respect to a certified historic structure. 

Rehabilitation expenditures eligible for the credit do not include any expenditure in 

connection with the rehabilitation of a building that is allocable to the portion of the property that 

is (or may reasonably be expected to be) tax-exempt use property. In the case of nonresidential 

real property, tax-exempt use property generally means the portion of the property leased in a 

disqualified lease (e.g., if the lease term exceeds 20 years or other criteria are present) to taxexempt entities, including the United States or a State or an agency or instrumentality thereof, a 

tax-exempt organization, a foreign person or entity, or an Indian tribal government. However, in 

the case of nonresidential real property, the property is treated as “tax-exempt use” property only 

if the portion of the property leased to tax-exempt entities in disqualified leases is more than 35 

percent of the property. 

Description of Proposal

The proposal increases the percentage from 35 percent to 50 percent, so that for 

determining rehabilitation expenditures eligible for the credit, nonresidential real property is 

treated as “tax-exempt use” property only if the portion of the property leased to tax-exempt 

entities in disqualified leases is more than 50 percent of the property. 

Effective Date

The proposal is effective for expenditures properly taken into account for periods after 

December 31, 2007. 
32 

IV. REAL ESTATE INVESTMENT TRUST (“REIT”) 

MODIFICATIONS 

Present Law

In general

A real estate investment trust (“REIT”) is an entity that otherwise would be taxed as a 

U.S. corporation, that elects to be taxed under a special REIT tax regime, and that meets 

specified requirements. At least 90 percent of REIT income (other than net capital gain) must be 

distributed annually; the REIT must derive most of its income from passive, generally real 

estate-related investments; and REIT assets must be primarily real estate related. Other 

requirements also apply.24 

If an electing entity meets the requirements for REIT status, the portion of its income that 

is distributed to its investors each year as a dividend is deductible by the REIT (unlike the case of 

a regular corporation that cannot deduct dividends). As a result, the distributed income of the 

REIT is not taxed at the entity level; the distributed income is taxed only at the investor level.25 

Income tests 

In general

A REIT is restricted to earning certain types of generally passive income. Among other 

requirements, at least 75 percent of the gross income of a REIT in a taxable year must consist of 

real estate related income. This includes rents from real property, income from the sale or 

exchange of real property (including interests in real property) that is not stock in trade, 

inventory, or held by the taxpayer primarily for sale to customers in the ordinary course of its 

trade or business, interest on mortgages secured by real property or interests in real property, and 

certain income from foreclosure property (the “75-percent income test”).26

In addition, 95 percent of the REIT gross income in a taxable year must be from the 75-

percent required sources, plus other generally passive investments such as dividends, capital 

gains, and interest income (the “95-percent income test”).27 Amounts attributable to most types 

 24 Secs. 856 and 857. Among other requirements, a REIT must have transferable interests, must 

have at least 100 shareholders, and more than 50 percent of the REIT interests may not be owned by 5 or 

fewer individual shareholders (as determined using specified attribution rules). 

25 A REIT that has net capital gain can either distribute that gain as a “capital gain” dividend or 

retain that gain without distributing it. A mechanism is provided under which the shareholders can report 

the net capital gain as if it were distributed to them. In either case, the gain is in effect taxed only as net 

capital gain of the shareholders. Sec. 857(b)(3). 

26 Secs. 856(c)(3) and 1221(a)(1). Income from sales that are not prohibited transactions solely 

by virtue of section 857(b)(6) is also qualified REIT income. 

27 Sec. 856(c)(3). 
33 

of services provided to tenants (other than certain “customary services”), or to more than 

specified amounts of personal property, are not qualifying rents.28 In addition, amounts received 

from any entity in which the REIT owns more than 10 percent of the vote or value also generally 

are not qualifying income, though there is an exception for certain amounts received from 

taxable REIT subsidiaries (described further below). 

Except as provided by regulations, income from a hedging transaction which is clearly 

identified,29 including gain from the sale or disposition of such a transaction, is not included as 

gross income under the 95 percent of income test, to the extent the transaction hedges any 

indebtedness incurred or to be incurred by the REIT to acquire or carry real estate assets.30 

Foreign currency exchange gain 

A REIT must be a U.S. domestic entity, but it is permitted to hold foreign real estate or 

other foreign-based assets, provided the 75-percent and 95-percent income tests and the other 

requirements for REIT qualification are met.31 A REIT that holds foreign real estate or other 

foreign based assets may experience foreign currency exchange gain under the foreign currency 

transaction rules of the Code described below. Foreign currency exchange gain is not explicitly 

included in the statutory definitions of qualifying income for purposes of the 75-percent and 95-

percent income tests, though the IRS has issued some guidance that allows foreign currency gain 

to be treated as qualified income in certain circumstances. 

The foreign currency transaction rules of sections 985 through 989 apply whenever a 

taxpayer engages in a business or investment activity using a currency other than the taxpayer’s 

functional currency. Section 985 provides in general that all determinations for Federal income 

tax purposes are made in the taxpayer’s functional currency. A taxpayer’s functional currency is 

the dollar except in the case of a qualified business unit (“QBU”), in which case the functional 

currency is “the currency of the economic environment in which a significant part of such unit’s 

activities are conducted and which is used by such unit in keeping its books and records.”32 A 

QBU is any separate and clearly identified unit of a trade or business of a taxpayer that maintains 

separate books and records.33

 28 Sec. 856(d). Amounts attributable to the provision of certain services by an independent 

contractor or by a taxable REIT subsidiary can be qualified rents. Sec. 856(d)(7). 

29 A hedging transaction for this purpose is one defined in clause (i) or (ii) of section 

1221(b)(2)(A). The identification requirement is defined in section 1221(a)(7). 

30 Sec. 856(c)(5)(G). 

31 See Rev. Rul. 74-191, 1974-1 C.B. 170. 

32 Sec. 985(b)(1). 

33 Sec. 989(a). 
34 

A taxpayer that engages in a business or investment activity using a currency other than 

the U.S. dollar may have gain or loss under section 987 or 988, depending on the nature of the 

activity and type of entity (if any) through which the activity is conducted. 

A U.S. taxpayer becomes subject to section 988 when it enters into a “section 988 

transaction.” Among other things, a “section 988 transaction” includes the acquisition of a debt 

instrument, becoming an obligor under a debt instrument, the accrual of items of expense or 

gross income, or the disposition of any nonfunctional currency.34 

When a REIT holds a mortgage (or other instrument or arrangement described in section 

988)35 denominated in foreign currency, the REIT may experience foreign currency gain or loss 

under the rules of section 988 if the applicable foreign currency exchange rate changes between 

the time interest on an obligation to (or an obligation of) the REIT accrues and the time it is paid. 

In May 2007, the IRS ruled in Rev. Rul. 2007-33 that section 988 currency gain that is 

recognized by a REIT will be qualifying income for purposes of the 95-percent and 75-percent 

income tests of section 856(c)(2) and (3), respectively, to the extent the underlying income so 

qualifies.36

Section 987 applies when there is a remittance from a foreign investment activity 

conducted through a QBU that is a branch that keeps its books and records in a functional 

currency other than the dollar. If a REIT were to operate with a QBU that kept its books and 

records in a foreign currency, the REIT could experience foreign currency exchange gain or loss 

on remittances under these rules.37 

 34 Sec. 988(c)(1)(B) and (C). 

35 Section 988 applies to (i) the acquisition of a debt instrument or becoming the obligor under a 

debt instrument; (ii) accruing (or otherwise taking into account) any item of expense or gross income or 

receipts which is to be paid after the date on which so accrued or taken into account, and (iii) entering into 

or acquiring any forward contract, futures contract, option, or similar financial instrument. 

36 Rev. Rul. 2007-33, 2007-21 I.R.B. 1281. This ruling does not specifically address the 

treatment of currency gain that might arise with respect to the payment of principal, nor does it 

specifically address the treatment of foreign currency gain that might arise in connection with a 

borrowing in a foreign currency made to acquire assets that produce qualifying income. A private letter 

ruling concluded that section 988 currency gain attributable to fluctuation in the exchange rates of 

currency used to make payments on non-dollar debt obligations incurred to acquire qualifying assets 

would be treated as qualifying income. PLR 200808024. A private letter ruling may be relied upon only 

by the taxpayer to which the ruling is issued. 

37 Recent proposed regulations under section 987 would replace previously proposed rules in an 

attempt to limit the ability of taxpayers to recognize non-economic foreign currency losses that could 

reduce otherwise taxable income, as well as to prevent non-economic currency gains that could arise. The 

2006 proposed regulations would provide certain tracing-type rules. See REG-208270-86 (Sept. 7, 2006). 

See also, Notice 2000-20 (March 22, 2000), discussing concerns regarding earlier proposed regulations 

issued in 1991. The 2006 proposed regulations when originally issued did not by their terms apply to 

REITs, RICs, or certain other types of entities. Prop. Reg. Sec. 1.987-1(b)(iii). But see Notice 2007-42, 

2007-21 I.R.B. 1288, infra. 
35 

The IRS has ruled in several private rulings that a REIT may establish a REIT subsidiary 

that itself qualifies as a separate REIT (and, thus, would not be treated as a branch) to conduct 

qualified REIT activity with respect to foreign investments in a particular foreign currency, and 

that subsidiary can be treated as a QBU whose functional currency is that particular foreign 

currency if that subsidiary keeps its books and records in that particular foreign currency.38 

While this structure provides a method of doing business abroad, this structure effectively 

requires a separate REIT subsidiary for each different currency in which the REIT may conduct 

activities.39

In 2007 the IRS also issued a notice regarding the application of section 987 to a QBU of 

a REIT. The notice states that until further guidance is issued, a REIT that has a QBU that uses a 

functional currency other than the U.S. dollar may apply the principles of proposed regulations 

issued on September 7, 2006, to determine whether section 987 currency gain is derived from 

income described in sections 856(c)(2) or (3).40 

Certain other items

Certain private letter rulings issued to particular taxpayers have permitted various other 

types of income to be ignored for purposes of the 75-percent or 95-percent income tests, due to 

the relationship of the income to REIT qualifying assets or income. A few examples include a 

settlement payment received by a REIT with respect to construction of a mall, or a payment 

received as a “breakup” fee in a proposed merger.41 

Asset tests

At least 75 percent of the value of REIT assets must be real estate assets, cash and cash 

items (including receivables) and Government securities (the “75-percent asset test”). Real 

estate assets are real property (including interests in real property and mortgages on real 

 38 See, e.g. PLR 200625019 and PLR 200550025. A private letter ruling may be relied upon only 

by the taxpayer to which the ruling was issued. 

39 In this structure, the parent REIT treats the dividends paid by the subsidiary REIT as a 

qualified REIT dividend, and minimizes any currency gains by having the subsidiary convert the foreign 

currency into dollars at the same time as the dividend distribution by the subsidiary. 

40 Notice 2007-42, 2007-21 I.R.B. 1288. Compare REG-208270-86 (Sept. 7, 2006), which by its 

terms did not apply to REITs. 

41 PLR 200039027 and PLR 200127024. A private letter ruling may relied upon only by the 

taxpayer to which the ruling was issued. 
36 

property) and shares (or transferable certificates of beneficial interest) in other REITs.42 No 

more than 25 percent of REIT assets may be securities other than such real estate assets.43 

Except with respect to a taxable REIT subsidiary (described further below), not more 

than 5 percent of the value of REIT assets may be securities of any one issuer, and the REIT 

may not possess securities representing more than 10 percent of the outstanding value or voting 

power of any one issuer.44 In addition, not more than 20 percent of the value of a REIT’s assets 

may be securities of one or more taxable REIT subsidiaries.45 

The asset tests must be met as of the close of each quarter. However, a REIT that has 

met the asset tests as of the close of any quarter does not lose its REIT status solely because of a 

discrepancy during a subsequent quarter between the value of such investments and such 

requirements, unless there is an acquisition of one or more investments to which the change in 

value is attributable.46 

Taxable REIT subsidiaries

A REIT generally cannot own more than 10 percent of the vote or value of a single 

entity; however, there is an exception for ownership of a taxable REIT subsidiary (“TRS”) that is 

taxed as a corporation, provided that securities of one or more TRS’s do not represent more than 

20 percent of the value of REIT assets. A TRS generally can engage in any kind of business 

activity except that it is not permitted directly or indirectly to operate either a lodging facility or 

a health care facility. However, a TRS is permitted to rent hotel, motel, or other transient 

lodging facilities from its parent REIT and is permitted to hire an independent contractor to 

operate such facilities.47 Furthermore, rent paid to the REIT by the TRS in such a case is 

qualified rent for purposes of the REIT’s 75-percent and 95-percent income tests. This lodging 

facility rental rule is an exception to the general rule that rent paid to a REIT by any corporation 

(including a TRS) in which the REIT owns 10 percent or more of the vote or value is not 

qualified rental income for purposes of the 75-percent or 95-percent REIT income tests, unless, 

 42 Sec. 856(c)(4)(A). Certain stock or debt instruments that are temporary investments also 

qualify if they are temporary investments of new capital, but only for the 1-year period beginning on the 

date the REIT receives such capital. Sec. 856(c)(5)(B). 

43 Sec. 856(c)(4)(B)(i). 

44 Sec. 856(c)(4)(B)(iii). 

45 Sec. 856(c)(4)(B)(ii). 

46 Sec. 856(c)(4). In the case of such an acquisition, the REIT also has a grace period of 30 days 

after the close of the quarter to eliminate the discrepancy. 

47 An independent contractor will not fail to be treated as such for this purpose because the TRS 

bears the expenses of operation of the facility under the contract, or because the TRS receives the 

revenues from the operation of the facility, net of expenses for such operation and fees payable to the 

operator pursuant to the contract, or both. Sec. 857(d)(9)(B). 
37 

in the case of a TRS, at least 90 percent of the space is rented to unrelated parties and the rent 

paid by the TRS is comparable to the rent paid by the unrelated parties.48 

Prohibited transactions tax 

REITs are subject to a prohibited transaction tax (“PTT”) of 100 percent of the net 

income derived from prohibited transactions. The definition of a prohibited transaction for this 

purpose is the same as the definition of a transaction the gain on which for any taxpayer (not 

limited to a REIT) would otherwise be ordinary income, rather than capital gain, because it is 

“stock in trade of a taxpayer or other property which would properly be included in the inventory 

of the taxpayer if on hand at the close of the taxable year, or property held for sale to customers 

by the taxpayer in the ordinary course of his trade or business” (Sec. 1221(a)(1))). The PTT for a 

REIT does not apply if the sale satisfies certain safe harbor provisions in sections 857(b)(6)(C) 

or (D), including an asset holding period of at least four years.49 If the conditions are met, the 

REIT can sell up to 10 percent of the aggregate bases of all its assets as of the beginning of the 

taxable year, without being subject to the PTT tax. 

Description of Proposal

Foreign currency gain 

The proposal would include certain foreign currency gains under sections 987 or 988 as 

qualifying income for purposes of the 75-percent and 95-percent income tests. In the case of a 

section 988 transaction, foreign currency gain that is “attributable to” income items that 

otherwise are treated as qualifying income for purposes of the 75-percent and 95-percent income 

tests, respectively (and including any other 988 gain attributable to the acquisition or ownership 

of, or to becoming the obligor under, obligations secured by mortgages on real property or on 

interests in real property), would be treated as qualifying income for those tests.50 The proposal 

would reach a result similar to that in Rev. Rul. 2007-33 in the case of gain attributable to an 

item of REIT income, and would in addition clarify that there is a similar result in the case of 

currency gain associated with principal payments and with certain liabilities of a REIT. 

 48 REITs are also subject to a tax equal to 100 percent of redetermined rents, redetermined 

deductions, and excess interest. These are defined generally as the amounts of specified REIT transactions 

with a TRS of the REIT, to the extent such amounts differ from an arm’s length amount. 

49 Additional requirements for the safe harbor limit the amount of expenditures the REIT can 

make during the 4-year period prior to the sale that are includible in the adjusted basis of the property, 

require marketing to be done by an independent contractor, and forbid a sales price that is based on the 

income or profits of any person. 

50 It is intended that in the case of a section 988 transaction, any currency gain arising after the 

payment of a section 988 item would not be treated as “attributable to” qualifying income under this 

proposal and, thus, would not be treated as qualifying income. 
38 

In the case of QBU with a functional currency other than the U.S. dollar, section 987 

foreign currency gain would be treated as qualifying income for purposes of both the 75- percent 

and 95-percent income tests if such gain is attributable to a QBU that independently meets the 

75-percent income and asset tests (before application of the provision). Consequently, a REIT 

could establish under the bill a branch QBU rather than using a subsidiary REIT structure.51 The 

proposal thus would allow currency gain on remittances to qualify as good REIT income without 

requiring for that purpose the particular tracing-type rules of the existing section 987 proposed 

regulations as allowed for REITs under Notice 2007-42. The QBU itself would not have to meet 

the 95-percent income test in order for currency gain on its remittances to be treated as qualified 

income. The REIT still would be required to meet the 95-percent income test, as well as all the 

other REIT requirements, on an overall basis that includes the income and assets of its QBU. 

However, for this purpose, any currency gains on remittances from a QBU that met the 75 

percent income and asset tests would be added to qualifying income for purposes of both the 75-

percent and 95-percent income tests. 

In addition, any other foreign currency gain may, if so determined by the Secretary of the 

Treasury, be considered qualified income. 

The proposal makes several changes to other REIT provisions, so that they also refer to 

foreign currency gains or losses. First, the present law rule that excludes certain hedging income 

from the computation of the 95-percent income test would be extended to exclude income from 

the hedging of currency for purposes of the 75-percent or 95-percent tests, respectively, where 

the currency gain, if any, would be good income under the provision for such 75-percent or 95-

percent income tests, respectively. Second, the rule that if a REIT has met the asset tests as of 

the close of any quarter it will not fail them solely because of a discrepancy due to variations in 

value that are not attributable to the acquisition of investments is modified to include a 

discrepancy caused solely by the change in the foreign currency exchange rate used to value a 

foreign asset. Third, the term “cash” for purposes of the REIT asset qualification rules would 

include foreign currency if the REIT or its QBU uses such currency as its functional currency. 

Fourth, permitted foreclosure property income also would include foreign currency gain that is 

attributable to otherwise permitted income from foreclosure property. Finally, foreign currency 

gain under section 988(b)(1), or loss under section 988(b)(2), that is attributable to any 

prohibited transaction would be taken into account in determining the amount of prohibited 

transaction net income subject to the 100 percent tax. 

Treasury authority regarding other items of income

The proposal would authorize the Treasury Department to issue guidance that would 

allow other items of income to be qualifying income (or to be excluded from the computation 

altogether). 

 51 In the case of a QBU that meets those tests, it is intended that although section 987 foreign 

currency gain on remittances as of the time of remittance would be considered attributable to the QBU 

and would be considered qualifying income, currency gain arising after remittance would not be 

attributable to the QBU and would not be treated as qualifying income under the proposal. 
39 

Taxable REIT subsidiary limit increase 

The proposal would increase the percentage of the value of REIT assets that can be held 

in securities of a taxable REIT subsidiary to 25 percent from the present 20 percent. 

Holding period under safe harbor for prohibited transactions 

The proposal would shorten from four years to two years the minimum holding period 

under the prohibited transactions tax safe harbor. The provision would make clear that the safe 

harbor is an exception from the prohibited transactions tax only, and does not cause a gain on a 

sale that otherwise does not qualify for capital gains treatment (i.e., because it was a sale of 

property held for sale to customers in the ordinary course of business under section 1221(a)(1)) 

to become a capital gain transaction. Consequently, capital gain treatment would continue to be 

determined based on all the facts and circumstances as under present law, without regard to the 

prohibited transactions tax safe harbor. 

Permitted extent of sales under safe harbor for prohibited transactions

The proposal changes the maximum amount of sales within a taxable year that can 

qualify for the prohibited transactions tax safe harbor. Instead of the present limit of 10 percent 

of the aggregate bases of all the assets of the REIT as of the beginning of the taxable year, the 

limit under the proposal is 10 percent of either such basis or of the aggregate fair market value of 

all the assets of the REIT as of such time. 

Health care facilities held by a taxable REIT subsidiary

The proposal expands the taxable REIT subsidiary exception for hotel, motel, and other 

transient facilities so that it also applies to health care facilities. Thus, a taxable REIT subsidiary 

would be permitted to rent a health care facility from its parent REIT and hire an independent 

contractor to operate such a facility; the rents paid to the parent REIT would be qualifying rental 

income for purposes of the 75-percent and 95-percent income tests. Under the proposal, a 

taxable REIT subsidiary would not be considered to be operating or managing a qualified health 

care property or a qualified lodging facility other than through an independent contractor solely 

because the taxable REIT subsidiary directly or indirectly possessed a license, permit, or similar 

instrument enabling it to do so. 

Effective Date

The provisions of the proposal generally would be effective for taxable years beginning 

after the date of enactment. However, the rules treating certain foreign currency gain as 

qualified income for purposes of the income tests would apply to gains and items of income 

recognized after the date of enactment. The hedging rules relating to the new foreign currency 

rules would be effective for transactions entered into after such date of enactment. The Treasury 

authority to treat additional items of income as qualified income or to exclude such items from 

income for purposes of the income qualification tests would apply after the date of enactment. 

The foreign currency conforming amendment relating to gain from foreclosure property would 

apply to gains recognized after the date of enactment, and the provision relating to net prohibited 

transactions income would apply to gains and deductions recognized after the date of enactment. 
40 

The provisions relating to the prohibited transactions tax safe harbor would apply to sales made 

after the date of enactment. 
41 

V. REVENUE PROVISIONS 

A. Broker Reporting of Customer’s Basis in Securities Transactions 

Present Law

In general

Gain or loss generally is recognized for Federal income tax purposes on realization of 

that gain or loss (for example, through the sale of property giving rise to the gain or loss). The 

taxpayer’s gain or loss on a disposition of property is the difference between the amount realized 

and the adjusted basis.52

To compute adjusted basis, a taxpayer must first determine the property’s unadjusted or 

original basis and then make adjustments prescribed by the Code.53 The original basis of 

property is its cost, except as otherwise prescribed by the Code (for example, in the case of 

property acquired by gift or bequest or in a tax-free exchange). Once determined, the taxpayer’s 

original basis generally is adjusted downward to take account of depreciation or amortization, 

and generally is adjusted upward to reflect income and gain inclusions or capital outlays with 

respect to the property. 

Basis computation rules

If a taxpayer has acquired stock in a corporation on different dates or at different prices 

and sells or transfers some of the shares of that stock, and the lot from which the stock is sold or 

transferred is not adequately identified, the shares deemed sold are the earliest acquired shares 

(the “first-in-first-out rule”).54 If a taxpayer makes an adequate identification of shares of stock 

that it sells, the shares of stock treated as sold are the shares that have been identified.55 A 

taxpayer who owns shares in a regulated investment company (“RIC”) generally is permitted to 

elect, in lieu of the specific identification or first-in-first-out methods, to determine the basis of 

RIC shares sold under one of two average-cost-basis methods described in Treasury 

regulations.56

 52 Sec. 1001. 

53 Sec. 1016. 

54 Treas. Reg. sec. 1.1012-1(c)(1). 

55 Treas. Reg. sec. 1.1012-1(c). 

56 Treas. Reg. sec. 1.1012-1(e). 
42 

Information reporting

Present law imposes information reporting requirements on participants in certain 

transactions. Under these requirements, information is generally reported to the IRS and 

furnished to taxpayers. These requirements are intended to assist taxpayers in preparing their 

income tax returns and to help the IRS determine whether taxpayers’ tax returns are correct and 

complete. For example, every person engaged in a trade or business generally is required to file 

information returns for each calendar year for payments of $600 or more made in the course of 

the payor’s trade or business.57

Section 6045(a) requires brokers to file with the IRS annual information returns showing 

the gross proceeds realized by customers from various sale transactions. The Secretary is 

authorized to require brokers to report additional information related to customers.58 Brokers are 

required to furnish to every customer information statements with the same gross proceeds 

information that is included in the returns filed with the IRS for that customer.59 These 

information statements are required to be furnished by January 31 of the year following the 

calendar year for which the return under section 6045(a) is required to be filed.60

A person who is required to file information returns but who fails to do so by the due date 

for the returns, includes on the returns incorrect information, or files incomplete returns 

generally is subject to a penalty of $50 for each return with respect to which such a failure 

occurs, up to a maximum of $250,000 in any calendar year.61 Similar penalties, with a $100,000 

calendar year maximum, apply to failures to furnish correct information statements to recipients 

of payments for which information reporting is required.62

Present law does not require information reporting with respect to a taxpayer’s basis in 

property but does impose an obligation to keep records, as described below. 

Basis recordkeeping requirements

Taxpayers are required to “keep such records . . . as the Secretary may from time to time 

prescribe.”63 Treasury regulations impose recordkeeping requirements on any person required to 

file information returns.64

 57 Sec. 6041(a). 

58 Sec. 6045(a). 

59 Sec. 6045(b). 

60 Id. 

61 Sec. 6721. 

62 Sec. 6722. 

63 Sec. 6001. 
43 

Treasury regulations provide that donors and donees should keep records that are relevant 

in determining a donee’s basis in property.65 IRS Publication 552 states that a taxpayer should 

keep basis records for property until the period of limitations expires for the year in which the 

taxpayer disposes of the property. 

Explanation of Provision

In general

Under the provision, every broker that is required to file a return under section 6045(a) 

reporting the gross proceeds from the sale of a covered security must include in the return the (1) 

customer’s adjusted basis in the security and (2) whether any gain or loss with respect to the 

security is long-term or short-term (within the meaning of section 1222). 

Covered securities

A covered security is any specified security acquired on or after an applicable date if the 

security was (1) acquired through a transaction in the account in which the security is held or (2) 

was transferred to that account from an account in which the security was a covered security, but 

only if the transferee broker received a statement under section 6045A (described below) with 

respect to the transfer. Under this rule, securities acquired by gift or inheritance are not covered 

securities. 

A specified security is any share of stock in a corporation (including stock of a regulated 

investment company); any note, bond, debenture, or other evidence of indebtedness; any 

commodity or a contract or a derivative with respect to the commodity if the Secretary 

determines that adjusted basis reporting is appropriate; and any other financial instrument with 

respect to which the Secretary determines that adjusted basis reporting is appropriate. 

For stock in a corporation (including in a regulated investment company), the applicable 

date generally is January 1, 2010. Open-end funds (defined below) are permitted to elect to treat 

as a covered security any stock in the fund acquired before January 1, 2010. This election is 

described below. 

For any specified security other than stock in a corporation, the applicable date is January 

1, 2012, or a later date determined by the Secretary. 

Computation of adjusted basis

The customer’s adjusted basis required to be reported to the IRS is determined under the 

following rules. The adjusted basis of any security other than stock for which an average basis 

method is permissible under section 1012 is determined under this first-in, first-out method 

 64 Treas. Reg. sec. 1.6001-1(a). 

65 Treas. Reg. sec. 1.1015-1(g). 
44 

unless the customer notifies the broker by means of making an adequate identification (under the 

rules of section 1012 for specific identification) of the stock sold or transferred. The adjusted 

basis of stock for which an average basis method is permissible under section 1012 and that is 

acquired before January 1, 2012 is determined in accordance with any acceptable method under 

section 1012 (that is, the first-in, first-out method, the average cost method, or the specific 

identification method). Under this rule, a broker’s basis computation method used for stock held 

in one account with that broker may differ from the basis computation method used for stock 

held in another account with that broker. The adjusted basis of stock for which an average basis 

method is permissible under section 1012 and that is acquired on or after January 1, 2012 is 

determined in accordance with the broker’s default method (that is, a method that is permitted by 

section 1012 and that is generally used by the broker in tracking basis) unless the customer 

notifies the broker that the customer elects another method permitted by section 1012. This 

notification is made separately for each account in which stock is held and, once made, applies to 

all open-end stock held in the account. 

For any sale, exchange, or other disposition of a specified security after the applicable 

date (defined previously), the provision modifies section 1012 so that the conventions prescribed 

by regulations under that section for determining adjusted basis (the first-in, first-out, specific 

identification, and average cost conventions) apply on an account-by-account basis. Under this 

rule, for example, if a customer holds shares of the same specified security in accounts with 

different brokers, each broker makes its adjusted basis determinations by reference only to the 

shares held in the account with that broker. Unless the election described next applies, stock in 

an open-end fund acquired before January 1, 2010 is treated as a separate account. A 

consequence of this rule is that if adjusted basis is being determined using the average cost 

convention, average cost is computed without regard to any open-end stock acquired before 

January 1, 2010. An open-end fund, however, may elect (at the time and in the form and manner 

prescribed by the Secretary), on a stockholder-by-stockholder basis, to treat as covered securities 

all stock in the fund held by the stockholder without regard to when the stock was acquired. 

When this election applies, the average cost of a customer’s open-end stock is determined by 

taking into account shares of stock acquired before, on, and after January 1, 2010. A similar 

election is allowed for any broker holding stock in an open-end fund as a nominee of the 

beneficial owner of the stock. 

An open-end fund is a regulated investment company (as defined in section 851) that 

offers for sale or has outstanding any redeemable security of which it is the issuer and the shares 

of which are not traded on an established securities exchange. A mutual fund the stock of which 

is priced daily and is acquired from the fund is an open-end fund. So-called exchange traded 

funds, funds in which there is intra-day pricing and in which shares may be purchased on an 

exchange (rather than from the funds directly) are not open-end funds. It is intended that if a 

regulated investment company offers two or more classes of shares one or more of which is 

traded on an established securities exchange and one or more of which is not traded on such an 

exchange, the regulated investment company will be treated as an open-end fund with respect to 

the class or classes of shares that are not traded on an established securities exchange. 

If stock is acquired on or after January 1, 2010 in connection with a dividend 

reinvestment plan, the basis of that stock is determined under one of the basis computation 

methods permissible for stock in an open-end fund. Accordingly, the average cost method may 
45 

be used for determining the basis of this stock. In determining basis under this rule, the accountby-account rules described previously, including the election available to open-end funds, apply. 

A dividend reinvestment plan means any arrangement under which dividends on stock are 

reinvested in stock identical to the stock with respect to which the dividends are paid. Stock is 

treated as acquired in connection with such a plan if the stock is acquired pursuant to the plan or 

if the dividends paid on the stock are subject to the plan. 

Exception for wash sales

Unless the Secretary provides otherwise, a customer’s adjusted basis in a covered 

security generally is determined without taking into account the effect on basis of the wash sale 

rules of section 1091. If, however, the acquisition and sale transactions resulting in a wash sale 

under section 1091 occur in the same account and are in identical securities, adjusted basis is 

determined by taking into account the effect of the wash sale rules. Securities are identical for 

this purpose only if they have the same Committee on Uniform Security Identification 

Procedures number. 

Special rules for short sales

The provision provides that in the case of a short sale, gross proceeds and basis reporting 

under section 6045 generally is required in the year in which the short sale is closed (rather than, 

as under the present law rule for gross proceeds reporting, the year in which the short sale is 

entered into). This rule does not, however, apply to any short sale that results in a constructive 

sale under section 1259 with respect to property held in the account in which the short sale is 

entered into. As a result of this rule, gross proceeds and basis reporting for a constructive sale is 

required in the year in which the short sale resulting in the constructive sale is entered into so 

long as the short sale is made in the account in which the taxpayer holds the relevant property. 

Reporting requirements for options

The provision generally eliminates the present-law regulatory exception from section 

6045(a) reporting for certain options. If a covered security is acquired by the exercise of an 

option, or is delivered to satisfy the exercise of an option, and the option was granted or acquired 

in the same account as the covered security, the amount of the premium received or paid for the 

option is treated as an adjustment to the gross proceeds from the subsequent sale of the covered 

security or as an adjustment to the customer’s adjusted basis in that security. Gross proceeds and 

basis reporting also generally is required when there is a lapse of, or a closing transaction with 

respect to, an option on a specified security. These reporting rules related to options transactions 

apply only to options granted or acquired on or after January 1, 2012. 

Treatment of S corporations

The provision provides that for purposes of section 6045, an S corporation (other than a 

financial institution) is treated in the same manner as a partnership. This rule applies to any sale 

of a covered security acquired by an S corporation (other than a financial institution) after 

December 31, 2011. When this rule takes effect, brokers generally will be required to report 

gross proceeds and basis information to customers that are S corporations. 
46 

Time for providing statements to customers

The provision changes to February 15 the present-law January 31 deadline for furnishing 

certain information statements to customers. The statements to which the new February 15 

deadline applies are (1) statements showing gross proceeds (under section 6045(b)) or substitute 

payments (under section 6045(d)) and (2) consolidated reporting statements (as defined in 

regulations) for reporting gross proceeds, dividends (under section 6042(c)), interest (under 

section 6049(c)(2)(A)), or royalties (under section 6050N(b)). The term “consolidated reporting 

statement” is intended to refer to annual tax information statements that brokerage firms 

customarily provide to their customers. 

Broker-to-broker and issuer reporting

Every broker (as defined in section 6045(c)(1)), and any other person specified in 

Treasury regulations, that transfers to a broker (as defined in section 6045(c)(1)) a security that is 

a covered security when held by that broker or other person must, under new section 6045A, 

furnish to the transferee broker a written statement that allows the transferee broker to satisfy the 

provision’s basis and holding period reporting requirements. The Secretary may provide 

regulations that prescribe the content of this statement and the manner in which it must be 

furnished. It is contemplated that the Secretary will permit this broker-to-broker reporting 

requirement to be satisfied electronically rather than by paper. Unless the Secretary provides 

otherwise, the statement required by this rule must be furnished on the date of the transfer of the 

covered security. 

Present law penalties for failure to furnish correct payee statements apply to failures to 

furnish correct statements in connection with the transfer of covered securities. 

New section 6045B requires, according to forms or regulations prescribed by the 

Secretary, any issuer of a specified security to file a return setting forth a description of any 

organizational action (such as a stock split or a merger or acquisition) that affects the basis of the 

specified security, the quantitative effect on the basis of that specified security, and any other 

information required by the Secretary. This return must be filed within 45 days after the date of 

the organizational action or, if earlier, by January 15 of the year following the calendar year 

during which the action occurred. Every person required to file this return for a specified 

security also must furnish, according to forms or regulations prescribed by the Secretary, to the 

nominee with respect to that security (or to a certificate holder if there is no nominee) a written 

statement showing the name, address, and phone number of the information contact of the person 

required to file the return, the information required to be included on the return with respect to 

the security, and any other information required by the Secretary. This statement must be 

furnished to the nominee or certificate holder on or before January 15 of the year following the 

calendar year in which the organizational action took place. No return or information statement 

is required to be provided under new section 6045B for any action with respect to a specified 

security if the action occurs before the applicable date (as defined previously) for that security. 

The Secretary may waive the return filing and information statement requirements if the 

person to which the requirements apply makes publicly available, in the form and manner 

determined by the Secretary, the name, address, phone number, and email address of the 
47 

information contact of that person, and the information about the organizational action and its 

effect on basis otherwise required to be included in the return. 

The present-law penalties for failure to file correct information returns apply to failures to 

file correct returns in connection with organizational actions. Similarly, the present-law 

penalties for failure to furnish correct payee statements apply to a failure under new section 

6045B to furnish correct statements to nominees or holders or to provide required publiclyavailable information in lieu of returns and written statements. 

Effective Date

The provision generally takes effect on January 1, 2010. The change to February 15 of 

the present-law January 31 deadline for furnishing certain information statements to customers 

applies to statements required to be furnished after December 31, 2008. 
48 

B. Delay Implementation of Worldwide Interest Allocation 

Present Law

In general

In order to compute the foreign tax credit limitation, a taxpayer must determine the 

amount of its taxable income from foreign sources. Thus, the taxpayer must allocate and 

apportion deductions between items of U.S.-source gross income, on the one hand, and items of 

foreign-source gross income, on the other. 

In the case of interest expense, the rules generally are based on the approach that money 

is fungible and that interest expense is properly attributable to all business activities and property 

of a taxpayer, regardless of any specific purpose for incurring an obligation on which interest is 

paid.66 For interest allocation purposes, all members of an affiliated group of corporations 

generally are treated as a single corporation (the so-called “one-taxpayer rule”) and allocation 

must be made on the basis of assets rather than gross income. The term “affiliated group” in this 

context generally is defined by reference to the rules for determining whether corporations are 

eligible to file consolidated returns. 

For consolidation purposes, the term “affiliated group” means one or more chains of 

includible corporations connected through stock ownership with a common parent corporation 

which is an includible corporation, but only if: (1) the common parent owns directly stock 

possessing at least 80 percent of the total voting power and at least 80 percent of the total value 

of at least one other includible corporation; and (2) stock meeting the same voting power and 

value standards with respect to each includible corporation (excluding the common parent) is 

directly owned by one or more other includible corporations. 

Generally, the term “includible corporation” means any domestic corporation except 

certain corporations exempt from tax under section 501 (for example, corporations organized and 

operated exclusively for charitable or educational purposes), certain life insurance companies, 

corporations electing application of the possession tax credit, regulated investment companies, 

real estate investment trusts, and domestic international sales corporations. A foreign 

corporation generally is not an includible corporation. 

Subject to exceptions, the consolidated return and interest allocation definitions of 

affiliation generally are consistent with each other.67 For example, both definitions generally 

exclude all foreign corporations from the affiliated group. Thus, while debt generally is 

considered fungible among the assets of a group of domestic affiliated corporations, the same 

 66 However, exceptions to the fungibility principle are provided in particular cases, some of 

which are described below. 

67 One such exception is that the affiliated group for interest allocation purposes includes section 

936 corporations that are excluded from the consolidated group. 
49 

rules do not apply as between the domestic and foreign members of a group with the same 

degree of common control as the domestic affiliated group. 

Banks, savings institutions, and other financial affiliates

The affiliated group for interest allocation purposes generally excludes what are referred 

to in the Treasury regulations as “financial corporations” (Treas. Reg. sec. 1.861-11T(d)(4)). 

These include any corporation, otherwise a member of the affiliated group for consolidation 

purposes, that is a financial institution (described in section 581 or section 591), the business of 

which is predominantly with persons other than related persons or their customers, and which is 

required by State or Federal law to be operated separately from any other entity which is not a 

financial institution (sec. 864(e)(5)(C)). The category of financial corporations also includes, to 

the extent provided in regulations, bank holding companies (including financial holding 

companies), subsidiaries of banks and bank holding companies (including financial holding 

companies), and savings institutions predominantly engaged in the active conduct of a banking, 

financing, or similar business (sec. 864(e)(5)(D)). 

A financial corporation is not treated as a member of the regular affiliated group for 

purposes of applying the one-taxpayer rule to other non-financial members of that group. 

Instead, all such financial corporations that would be so affiliated are treated as a separate single 

corporation for interest allocation purposes. 

Worldwide interest allocation

In general

The American Jobs Creation Act of 2004 (“AJCA”)68 modifies the interest expense 

allocation rules described above (which generally apply for purposes of computing the foreign 

tax credit limitation) by providing a one-time election (the “worldwide affiliated group election”) 

under which the taxable income of the domestic members of an affiliated group from sources 

outside the United States generally is determined by allocating and apportioning interest expense 

of the domestic members of a worldwide affiliated group on a worldwide-group basis (i.e., as if 

all members of the worldwide group were a single corporation). If a group makes this election, 

the taxable income of the domestic members of a worldwide affiliated group from sources 

outside the United States is determined by allocating and apportioning the third-party interest 

expense of those domestic members to foreign-source income in an amount equal to the excess 

(if any) of (1) the worldwide affiliated group’s worldwide third-party interest expense multiplied 

by the ratio which the foreign assets of the worldwide affiliated group bears to the total assets of 

the worldwide affiliated group,69 over (2) the third-party interest expense incurred by foreign 

members of the group to the extent such interest would be allocated to foreign sources if the 

 68 Pub. L. No. 108-357, sec. 401 (2004). 

69 For purposes of determining the assets of the worldwide affiliated group, neither stock in 

corporations within the group nor indebtedness (including receivables) between members of the group is 

taken into account. 
50 

principles of worldwide interest allocation were applied separately to the foreign members of the 

group.70

For purposes of the new elective rules based on worldwide fungibility, the worldwide 

affiliated group means all corporations in an affiliated group as well as all controlled foreign 

corporations that, in the aggregate, either directly or indirectly,71 would be members of such an 

affiliated group if section 1504(b)(3) did not apply (i.e., in which at least 80 percent of the vote 

and value of the stock of such corporations is owned by one or more other corporations included 

in the affiliated group). Thus, if an affiliated group makes this election, the taxable income from 

sources outside the United States of domestic group members generally is determined by 

allocating and apportioning interest expense of the domestic members of the worldwide affiliated 

group as if all of the interest expense and assets of 80-percent or greater owned domestic 

corporations (i.e., corporations that are part of the affiliated group, as modified to include 

insurance companies) and certain controlled foreign corporations were attributable to a single 

corporation. 

The common parent of the domestic affiliated group must make the worldwide affiliated 

group election. It must be made for the first taxable year beginning after December 31, 2008, in 

which a worldwide affiliated group exists that includes at least one foreign corporation that 

meets the requirements for inclusion in a worldwide affiliated group. Once made, the election 

applies to the common parent and all other members of the worldwide affiliated group for the 

taxable year for which the election was made and all subsequent taxable years, unless revoked 

with the consent of the Secretary of the Treasury. 

Financial institution group election

Taxpayers are allowed to apply the bank group rules to exclude certain financial 

institutions from the affiliated group for interest allocation purposes under the worldwide 

fungibility approach. The rules also provides a one-time “financial institution group” election 

that expands the bank group. At the election of the common parent of the pre-election 

worldwide affiliated group, the interest expense allocation rules are applied separately to a 

subgroup of the worldwide affiliated group that consists of (1) all corporations that are part of the 

bank group, and (2) all “financial corporations.” For this purpose, a corporation is a financial 

corporation if at least 80 percent of its gross income is financial services income (as described in 

section 904(d)(2)(C)(i) and the regulations thereunder) that is derived from transactions with 

unrelated persons.72 For these purposes, items of income or gain from a transaction or series of 

 70 Although the interest expense of a foreign subsidiary is taken into account for purposes of 

allocating the interest expense of the domestic members of the electing worldwide affiliated group for 

foreign tax credit limitation purposes, the interest expense incurred by a foreign subsidiary is not 

deductible on a U.S. return. 

71 Indirect ownership is determined under the rules of section 958(a)(2) or through applying rules 

similar to those of section 958(a)(2) to stock owned directly or indirectly by domestic partnerships, trusts, 

or estates. 

72 See Treas. Reg. sec. 1.904-4(e)(2).
51 

transactions are disregarded if a principal purpose for the transaction or transactions is to qualify 

any corporation as a financial corporation. 

The common parent of the pre-election worldwide affiliated group must make the 

election for the first taxable year beginning after December 31, 2008, in which a worldwide 

affiliated group includes a financial corporation. Once made, the election applies to the financial 

institution group for the taxable year and all subsequent taxable years. In addition, anti-abuse 

rules are provided under which certain transfers from one member of a financial institution group 

to a member of the worldwide affiliated group outside of the financial institution group are 

treated as reducing the amount of indebtedness of the separate financial institution group. 

Regulatory authority is provided with respect to the election to provide for the direct allocation 

of interest expense in circumstances in which such allocation is appropriate to carry out the 

purposes of these rules, to prevent assets or interest expense from being taken into account more 

than once, or to address changes in members of any group (through acquisitions or otherwise) 

treated as affiliated under these rules. 

Effective date of worldwide interest allocation under AJCA

The worldwide interest allocation rules under AJCA are effective for taxable years 

beginning after December 31, 2008. 

Description of Proposal

The proposal delays the effective date of worldwide interest allocation rules for one year, 

until taxable years beginning after December 31, 2009. The required dates for making the 

worldwide affiliated group election and the financial institution group election are changed 

accordingly. 

The proposal also provides a special phase-in rule in the case of the first taxable year to 

which the worldwide interest allocation rules apply. For that year, the amount of the taxpayer’s 

taxable income from foreign sources is reduced by 10 percent of the excess of (i) the amount of 

its taxable income from foreign sources as calculated using the worldwide interest allocation 

rules over (ii) the amount of its taxable income from foreign sources as calculated using the 

present-law interest allocation rules. Any foreign tax credits disallowed by virtue of this 

reduction in foreign-source taxable income may be carried back or forward under the normal 

rules for carrybacks and carryforwards of excess foreign tax credits. 

Effective Date

The proposal is effective on the date of enactment. 
52 

C. Modifications to Corporate Estimated Tax Payments 

Present Law

In general

In general, corporations are required to make quarterly estimated tax payments of their 

income tax liability. For a corporation whose taxable year is a calendar year, these estimated tax 

payments must be made by April 15, June 15, September 15, and December 15. 

Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) 

TIPRA provided the following special rules: 

In case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2012, shall be increased to 106.25 percent of the payment otherwise due 

and the next required payment shall be reduced accordingly. 

In case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2013, shall be increased to 100.75 percent of the payment otherwise due 

and the next required payment shall be reduced accordingly. 

Subsequent legislation

Several public laws have been enacted since TIPRA which further increase the 

percentage of payments due under each of the two special rules enacted by TIPRA described 

above. 

Description of Proposal

The proposal makes two modifications to the corporate estimated tax payment rules. 

First, in case of a corporation with assets of at least $1 billion, the payments due in July, 

August, and September, 2013, the otherwise applicable payment are increased by 13 percent of 

the payment otherwise due and the next required payment shall be reduced accordingly. 

Second, in case of a corporation with assets of at least $1 billion, the increased payments 

due in July, August, and September, 2012 under the special rules in TIPRA and subsequent 

legislation are repealed. In effect the general rule is applied (i.e., such corporations are required 

to make quarterly estimated tax payments based on their income tax liability.) 

Effective Date

The proposal is effective on the date of enactment.