DESCRIPTION OF THE CHAIRMAN’S MODIFICATION 

TO THE REVENUE PROVISIONS OF THE 

“AMERICAN RECOVERY AND REINVESTMENT 

TAX ACT OF 2009” 

Scheduled for Markup 

By the 

SENATE COMMITTEE ON FINANCE 

on January 27, 2009 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

January 27, 2009 

JCX-12-09
 

i 

CONTENTS 

Page

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

A. Modifications to Certain Provisions of the Chairman’s Mark ......................................... 2 

1. Modification to making work pay credit ...................................................................... 2 

2. Modification to waiver of recapture of first-time homebuyer credit ............................ 2 

3. Modification of the election of investment credit in lieu of production tax credits ..... 2 

4. Modification to proposal providing an energy research credit ..................................... 2 

5. Modification to proposal providing five-year carryback of operating losses ............... 2 

6. Modification to proposal deferring certain income from discharge of indebtedness ... 2 

7. Modification to proposal providing a credit for investment in advanced energy 

 property ......................................................................................................................... 3 

8. Modification to Recovery Zone Bonds ......................................................................... 3 

9. Modification to Tribal Economic Development Bonds ................................................ 3 

10. Modification to Qualified School Construction Bonds ................................................ 3 

11. Modification to economic recovery payments .............................................................. 3 

B. Additions to the Chairman’s Mark ................................................................................... 4 

1. Modification of credit for carbon dioxide sequestration ............................................... 4 

2. Modification of the alternative motor vehicle credit and the plug-in electric drive 

 motor vehicle credit ...................................................................................................... 5 

3. Parity for qualified transportation fringe benefits ......................................................... 6 

4. Reduce temporarily the S corporation built-in gains holding period ............................ 7 

5. Clarification of regulations related to limitations on certain built in losses 

 following an ownership change .................................................................................... 7 

6. Exempt facility bonds for high-speed rail ................................................................... 13 

7. Broadband tax incentives ............................................................................................ 14 

8. Application of certain labor standards to projects financed with certain 

 tax-favored bonds........................................................................................................ 16 
 

1 

INTRODUCTION 

The Senate Committee on Finance has scheduled a markup of the “American Recovery 

and Reinvestment Tax Act of 2009.” This document,1

 prepared by the staff of the Joint 

Committee on Taxation, provides a description of the Chairman’s modification to the revenue 

provisions of the Chairman’s mark and certain modifications to the provision providing 

economic recovery payments. 

 1

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

Chairman’s Modification to the Revenue Provisions of the “American Recovery and Reinvestment Tax 

Act of 2009” (JCX-12-09), January 27, 2009. This document can also be found on our website at 

www.jct.gov. 
 

2 

A. Modifications to Certain Provisions of the Chairman’s Mark 

1. Modification to making work pay credit 

The Chairman’s modification modifies the making work pay credit to provide that an 

individual is only eligible for the making work pay credit if the individual satisfies identical 

taxpayer identification number requirements as those applicable to the earned income tax credit. 

2. Modification to waiver of recapture of first-time homebuyer credit 

The Chairman’s modification modifies the first-time homebuyer credit by extending the 

date for qualifying purchases and waiver of recapture of the credit to home purchases after 

December 31, 2008 and before September 1, 2009. 

3. Modification of the election of investment credit in lieu of production tax credits 

The Chairman’s modification changes the election of an investment credit in lieu of the 

production credit to provide that the election is available with respect to any electricity 

production facility that would be eligible for a credit under section 45 if placed in service before 

the termination date applicable to such facility under section 45 (generally, through 2013; 

through 2012 for wind). 

4. Modification to proposal providing an energy research credit 

The Chairman’s modification clarifies that research related to renewable fuels is eligible 

for the energy research credit. 

5. Modification to proposal providing five-year carryback of operating losses 

The Chairman’s modification provides an election to increase the present-law net 

operating loss (“NOL”) carryback period from two to any whole number of years which is less 

than six in the case of an NOL for either (1) any taxable year ending during 2008 or 2009, or (2) 

any taxable year beginning during 2008 or 2009. The 90-percent limitation on the use of any 

alternative tax NOL deduction is suspended for carrybacks of losses from taxable years ending 

during 2008 or 2009 and carryovers of losses to such taxable years (this rule applies to taxable 

years beginning during 2008 or 2009 if the taxpayer elects the extended carryback period for 

such years). 

The Chairman’s modification also increases the carryback period of a loss from 

operations of a life insurance company from three years to any whole number of years which is 

less than six in the case of a loss from operations for either (1) any taxable year ending during 

2008 or 2009, or (2) any taxable year beginning during 2008 or 2009. 

6. Modification to proposal deferring certain income from discharge of indebtedness 

The Chairman’s modification provides that certain income from the cancellation of 

indebtedness recognized by the taxpayer as a result of a repurchase in 2009 or 2010 by (1) the 

taxpayer or (2) a related person of a “debt instrument” that was issued by the taxpayer is deferred 
 

3 

and recognized in later years. Such cancellation of indebtedness income realized in 2009 is 

deferred and included ratably in income in each of the eight taxable years beginning two years 

after the year of realization, and such cancellation of indebtedness income realized in 2010 is 

deferred and included ratably in income in each of the eight taxable years beginning one year 

after the year of realization. 

7. Modification to proposal providing a credit for investment in advanced energy property 

The Chairman’s modification provides that a qualified advanced energy manufacturing 

project includes, in addition to the projects listed in the original proposal, projects that re-equip, 

expand, or establish a manufacturing facility for the production of property designed to refine or 

blend renewable fuels (but not fossil fuels), to produce renewable energy, or to produce energy 

conservation technologies (including energy conserving lighting technologies and smart grid 

technologies). The modification also modifies the limitation on property designed to 

manufacture equipment for use in the refining or blending of any transportation fuel to permit the 

renewable fuel property described above to be credit-eligible. 

8. Modification to Recovery Zone Bonds 

The Chairman’s modification provides that each State is guaranteed a one percent 

allocation of the national recovery zone economic development bond limitation, and of the 

national recovery zone facility bond limitation. The remainder of each national bond limitation 

is to be allocated based on employment decline as described in the Chairman's mark. 

9. Modification to Tribal Economic Development Bonds 

The Chairman's modification redefines a tribal economic development bond as any bond 

issued by an Indian tribal government that (1) notwithstanding section 7871(c), the interest on 

which would be tax-exempt if issued by a State or local government, and (2) that is designated 

by the Indian tribal government as a tribal economic development bond. The Chairman's 

modification also provides that for purposes of section 141 of the Code, an Indian tribe, and any 

instrumentality of such tribe, is treated as a State. 

10. Modification to Qualified School Construction Bonds 

The Chairman’s modification strikes the requirement that 40 percent of the national 

limitation be reserved for large school districts. The Chairman’s modification strikes the 1.68 

multiplier used in calculating a State's minimum percentage allocation. 

11. Modification to economic recovery payments 

The Chairman’s modification clarifies that, in accordance with the substance of the 

provision, the heading of the provision is “Economic recovery payments to recipients of Social 

Security, supplement security income, railroad retirement, and veterans disability compensation 

or pension benefits.” 

The Chairman’s modification also clarifies that the payments called for by the provision 

will be subject to the Treasury Offset Program. 
 

4 

B. Additions to the Chairman’s Mark 

1. Modification of credit for carbon dioxide sequestration 

Present Law

A credit of $20 per metric ton is available for qualified carbon dioxide captured by a 

taxpayer at a qualified facility and disposed of by such taxpayer in secure geological storage 

(including storage at deep saline formations and unminable coal seams under such conditions as 

the Secretary may determine).2

 In addition, the provision allows a credit of $10 per metric ton of 

qualified carbon dioxide that is captured by the taxpayer at a qualified facility and used by such 

taxpayer as a tertiary injectant (including carbon dioxide augmented waterflooding and 

immiscible carbon dioxide displacement) in a qualified enhanced oil or natural gas recovery 

project. Both credit amounts are adjusted for inflation after 2009. 

Qualified carbon dioxide is defined as carbon dioxide captured from an industrial source 

that (1) would otherwise be released into the atmosphere as an industrial emission of greenhouse 

gas, and (2) is measured at the source of capture and verified at the point or points of injection. 

Qualified carbon dioxide includes the initial deposit of captured carbon dioxide used as a tertiary 

injectant but does not include carbon dioxide that is recaptured, recycled, and re-injected as part 

of an enhanced oil or natural gas recovery project process. A qualified enhanced oil or natural 

gas recovery project is a project that would otherwise meet the definition of an enhanced oil 

recovery project under section 43, if natural gas projects were included within that definition. 

A qualified facility means any industrial facility (1) which is owned by the taxpayer, (2) 

at which carbon capture equipment is placed in service, and (3) which captures not less than 

500,000 metric tons of carbon dioxide during the taxable year. The credit applies only with 

respect to qualified carbon dioxide captured and sequestered or injected in the United States3 or 

one of its possessions.4

Except as provided in regulations, credits are attributable to the person that captures and 

physically or contractually ensures the disposal, or use as a tertiary injectant, of the qualified 

carbon dioxide. Credits are subject to recapture, as provided by regulation, with respect to any 

qualified carbon dioxide that ceases to be recaptured, disposed of, or used as a tertiary injectant 

in a manner consistent with the rules of the provision. 

The credit is part of the general business credit. The credit sunsets at the end of the 

calendar year in which the Secretary, in consultation with the Administrator of the 

Environmental Protection Agency, certifies that 75 million metric tons of qualified carbon 

dioxide have been captured and disposed of or used as a tertiary injectant. 

 2

 Sec. 45Q. 

3

 Sec. 638(1). 

4

 Sec. 638(2). 
 

5 

Description of Proposal

The proposal provides that carbon dioxide used as a tertiary injectant and otherwise 

eligible for a $10 per metric ton credit must be sequestered in permanent geologic storage in 

order to qualify for such credit. 

Effective Date

The proposal is effective for carbon dioxide captured after the date of enactment. 

2. Modification of the alternative motor vehicle credit and the plug-in electric drive motor 

vehicle credit 

Present Law

A credit is available for each qualified plug-in electric drive motor vehicle placed in 

service. A qualified plug-in electric drive motor vehicle is a motor vehicle that has at least four 

wheels, is manufactured for use on public roads, meets certain emissions standards (except for 

certain heavy vehicles), draws propulsion using a traction battery with at least four kilowatthours of capacity, and is capable of being recharged from an external source of electricity. 

The base amount of the plug-in electric drive motor vehicle credit is $2,500, plus another 

$417 for each kilowatt-hour of battery capacity in excess of four kilowatt-hours. The maximum 

credit for qualified vehicles weighing 10,000 pounds or less is $7,500. This maximum amount 

increases to $10,000 for vehicles weighing more than 10,000 pounds but not more than 14,000 

pounds, to $12,500 for vehicles weighing more than 14,000 pounds but not more than 26,000 

pounds, and to $15,000 for vehicle weighing more than 26,000 pounds. 

In general, the credit is available to the vehicle owner, including the lessor of a vehicle 

subject to lease. If the qualified vehicle is used by certain tax-exempt organizations, 

governments, or foreign persons and is not subject to a lease, the seller of the vehicle may claim 

the credit so long as the seller clearly discloses to the user in a document the amount that is 

allowable as a credit. A vehicle must be used predominantly in the United States to qualify for 

the credit. 

Once a total of 250,000 credit-eligible vehicles have been sold for use in the United 

States, the credit phases out over four calendar quarters. The phaseout period begins in the 

second calendar quarter following the quarter during which the vehicle cap has been reached. 

Taxpayers may claim one-half of the otherwise allowable credit during the first two calendar 

quarters of the phaseout period and twenty-five percent of the otherwise allowable credit during 

the next two quarters. After this, no credit is available. Regardless of the phase-out limitation, 

no credit is available for vehicles purchased after 2014. 

The basis of any qualified vehicle is reduced by the amount of the credit. To the extent a 

vehicle is eligible for credit as a qualified plug-in electric drive motor vehicle, it is not eligible 

for credit as a qualified hybrid vehicle under section 30B. The portion of the credit attributable 

to vehicles of a character subject to an allowance for depreciation is treated as part of the general 

business credit; the nonbusiness portion of the credit is allowable to the extent of the excess of 
 

6 

the regular tax and the alternative minimum tax (reduced by certain other credits) for the taxable 

year. 

Description of Proposal

 The proposal modifies the plug-in electric drive motor vehicle credit by increasing the 

250,000 vehicle limitation to 500,000. It also modifies the definition of qualified plug-in electric 

drive motor vehicle to exclude low-speed vehicles. 

The proposal creates a new credit 10-percent credit for low-speed vehicles, motorcycles, 

and three-wheeled vehicles that would otherwise meet the criteria of a qualified plug-in electric 

drive motor vehicle but for the fact that they are low-speed vehicles or do not have at least four 

wheels. The maximum credit for such vehicles is $4,000. Basis reduction and other rules 

similar to those found in section 30 apply under the proposal. The new credit is part of the 

general business credit. The new credit is not available for vehicles sold after December 31, 

2011. 

Effective Date

The proposal is effective for vehicles sold after December 31, 2009. 

3. Parity for qualified transportation fringe benefits 

Present Law

Qualified transportation fringe benefits provided by an employer are excluded from an 

employee’s gross income for income tax purposes and from an employee’s wages for payroll tax 

purposes.5 Qualified transportation fringe benefits include parking, transit passes, vanpool 

benefits, and qualified bicycle commuting reimbursements. Up to $230 (for 2009) per month of 

employer-provided parking is excludable from income. Up to $120 (for 2009) per month of 

employer-provided transit and vanpool benefits are excludable from gross income. These 

amounts are indexed annually for inflation, rounded to the nearest multiple of $5. No amount is 

includible in the income of an employee merely because the employer offers the employee a 

choice between cash and qualified transportation fringe benefits. Qualified transportation fringe 

benefits also include a cash reimbursement by an employer to an employee. However, in the 

case of transit passes, a cash reimbursement is considered a qualified transportation fringe 

benefit only if a voucher or similar item which may be exchanged only for a transit pass is not 

readily available for direct distribution by the employer to the employee. 

Description of Proposal

The proposal increases the monthly exclusion for employer-provided transit and vanpool 

benefits to the same level as the exclusion for employer-provided parking. 

 5

 Code secs. 132(f), 3121(b)(2), and 3306(b)(16), and 3401(a)(19). 
 

7 

Effective Date

The proposal is effective for months beginning on or after date of enactment. The 

proposal does not apply to tax years beginning after December 31, 2010. 

4. Reduce temporarily the S corporation built-in gains holding period 

Present Law

A “small business corporation” (as defined in section 1361(b)) can elect under section 

1362 to be taxed as an S corporation. Unlike C corporations, S corporations generally pay no 

corporate-level tax. Instead, income of an S corporation generally passes though to its 

shareholders, who pay tax on their pro-rata shares of such income.6

 Where a corporation that 

was formed as a C corporation elects to become an S corporation, the S corporation is taxed on 

all gains that were built-in at the time of the election if such gains are recognized during the first 

10 S corporation years (the "built-in gains holding period").7

 Gains are not built-in gains to the 

extent they are shown to have arisen while the S election was in effect or are offset by losses. 

The built-in gains tax also applies to gains with respect to property received by an S corporation 

from a C corporation in a carryover basis transaction. The tax on built-in gains is imposed at the 

highest corporate rate (currently, 35 percent). 

Description of Proposal

The proposal would reduce temporarily the S corporation built-in gains holding period 

from the current 10 year period to a seven-year period for taxable years that begin in 2009 and 

2010. 

Effective Date

The proposal is effective for taxable years beginning in 2009. 

5. Clarification of regulations related to limitations on certain built in losses following an 

ownership change 

Present Law

Section 382 limits the extent to which a “loss corporation” that experiences an 

“ownership change” may offset taxable income in any post-change taxable year by pre-change 

net operating losses, certain built-in losses, and deductions attributable to the pre-change period.8

 

 6

 Sec. 1366. 

7

 See sec. 1374. 

8

 Section 383 imposes similar limitations, under regulations, on the use of carryforwards of 

general business credits, alternative minimum tax credits, foreign tax credits, and net capital loss 

carryforwards. Section 383 generally refers to section 382 for the meanings of its terms, but requires 

appropriate adjustments to take account of its application to credits and net capital losses. 
 

8 

In general, the amount of income in any post-change year that may be offset by such net 

operating losses, built-in losses and deductions is limited to an amount (referred to as the 

“section 382 limitation”) determined by multiplying the value of the loss corporation 

immediately before the ownership change by the long-term tax-exempt interest rate.9

 

A “loss corporation” is defined as a corporation entitled to use a net operating loss 

carryover or having a net operating loss carryover for the taxable year in which the ownership 

change occurs. Except to the extent provided in regulations, such term includes any corporation 

with a “net unrealized built-in loss” (or NUBIL),10 defined as the amount by which the fair 

market value of the assets of the corporation immediately before an ownership change is less 

than the aggregate adjusted basis of such assets at such time. However, if the amount of the 

NUBIL does not exceed the lesser of (i) 15 percent of the fair market value of the corporation’s 

assets or (ii) $10,000,000, then the amount of the NUBIL is treated as zero.11

An ownership change is defined generally as an increase by more than 50 percentage 

points in the percentage of stock of a loss corporation that is owned by any one or more fivepercent (or greater) shareholders (as defined) within a three year period.12 Treasury regulations 

provide generally that this measurement is to be made as of any “testing date,” which is any date 

on which the ownership of one or more persons who were or who become five-percent 

shareholders increases.13 

 9

 If the loss corporation had a “net unrealized built in gain” (or NUBIG) at the time of the 

ownership change, then the section 382 limitation for any taxable year may be increased by the amount of 

the “recognized built-in gains” (discussed further below) for that year. A NUBIG is defined as the 

amount by which the fair market value of the assets of the corporation immediately before an ownership 

change exceeds the aggregate adjusted basis of such assets at such time. However, if the amount of the 

NUBIG does not exceed the lesser of (i) 15 percent of the fair market value of the corporation’s assets or 

(ii) $10,000,000, then the amount of the NUBIG is treated as zero. Sec. 382(h)(1). 

10 Sec. 382(k)(1). 

11 Sec. 382(h)(3). 

12 Determinations of the percentage of stock of any corporation held by any person are made on 

the basis of value. Sec. 382(k)(6)(C). 

13 See Treas. Reg. sec. 1.382-2(a)(4) (providing that “a loss corporation is required to determine 

whether an ownership change has occurred immediately after any owner shift, or issuance or transfer 

(including an issuance or transfer described in Treas. Reg. sec. 1.382-4(d)(8)(i) or (ii)) of an option with 

respect to stock of the loss corporation that is treated as exercised under Treas. Reg. sec. 1.382-4(d)(2)” 

and defining a “testing date” as “each date on which a loss corporation is required to make a 

determination of whether an ownership change has occurred”) and Temp. Treas. Reg. sec. 1.382-2T(e)(1) 

(defining an “owner shift” as “any change in the ownership of the stock of a loss corporation that affects 

the percentage of such stock owned by any 5-percent shareholder”). Treasury regulations under section 

382 provide that, in computing stock ownership on specified testing dates, certain unexercised options 

must be treated as exercised if certain ownership, control, or income tests are met. These tests are met 

only if “a principal purpose of the issuance, transfer, or structuring of the option (alone or in combination 
 

9 

Section 382(h) governs the treatment of certain built-in losses and built-in gains 

recognized with respect to assets held by the loss corporation at the time of the ownership 

change. In the case of a loss corporation that has a NUBIL (measured immediately before an 

ownership change), section 382(h)(1) provides that any “recognized built-in loss” (or RBIL) for 

any taxable year during a “recognition period” (consisting of the five years beginning on the 

ownership change date) is subject to the section 382 limitation in the same manner as if it were a 

pre-change net operating loss.14 An RBIL is defined for this purpose as any loss recognized 

during the recognition period on the disposition of any asset held by the loss corporation 

immediately before the ownership change date, to the extent that such loss is attributable to an 

excess of the adjusted basis of the asset on the change date over its fair market value on that 

date.15 An RBIL also includes any amount allowable as depreciation, amortization or depletion 

during the recognition period, to the extent that such amount is attributable to the excess of the 

adjusted basis of the asset over its fair market value on the ownership change date.16 In addition, 

any amount that is allowable as a deduction during the recognition period (determined without 

regard to any carryover) but which is attributable to periods before the ownership change date is 

treated as an RBIL for the taxable year in which it is allowable as a deduction.17 

As indicated above, section 382(h)(1) provides in the case of a loss corporation that has a 

NUBIG that the section 382 limitation may be increased for any taxable year during the 

recognition period by the amount of recognized built-in gains (or RBIGs) for such taxable year.18 

 

with other arrangements) is to avoid or ameliorate the impact of an ownership change of the loss 

corporation.” Treas. Reg. sec. 1.382-4(d). Compare prior temporary regulations, Temp. Reg. sec. 1.382-

2T(h)(4) (“Solely for the purpose of determining whether there is an ownership change on any testing 

date, stock of the loss corporation that is subject to an option shall be treated as acquired on any such date, 

pursuant to an exercise of the option by its owner on that date, if such deemed exercise would result in an 

ownership change.”). Internal Revenue Service Notice 2008-76, I.R.B. 2008-39 (September 29, 2008), 

released September 7, 2008, provides that the Treasury Department intends to issue regulations modifying 

the term “testing date” under section 382 to exclude any date on or after which the United States acquires 

stock or options to acquire stock in certain corporations with respect to which there is a “Housing Act 

Acquisition” pursuant to the Housing and Economic Recovery Act of 2008 (P.L. 110-289). The Notice 

states that the regulations will apply on and after September 7, 2008, unless and until there is additional 

guidance. Internal Revenue Service Notice 2008-84, I.R.B. 2008-41 (October 14, 2008), provides that the 

Treasury Department intends to issue regulations modifying the term “testing date” under section 382 to 

exclude any date as of the close of which the United States owns, directly or indirectly, a more than 50 

percent interest in a loss corporation, which regulations will apply unless and until there is additional 

guidance. 

14 Sec. 382(h)(2). The total amount of the loss corporation’s RBILs that are subject to the section 

382 limitation cannot exceed the amount of the corporation’s NUBIL. 

15 Sec. 382(h)(2)(B). 

16 Sec. 382(h)(2)(B). 

17 Sec. 382(h)(6)(B). 

18 The total amount of such increases cannot exceed the amount of the corporation’s NUBIG. 
 

10 

An RBIG is defined for this purpose as any gain recognized during the recognition period on the 

disposition of any asset held by the loss corporation immediately before the ownership change 

date, to the extent that such gain is attributable to an excess of the fair market value of the asset 

on the change date over its adjusted basis on that date.19 In addition, any item of income that is 

properly taken into account during the recognition period but which is attributable to periods 

before the ownership change date is treated as an RBIG for the taxable year in which it is 

properly taken into account.20 

Internal Revenue Service Notice 2003-6521 provides two alternative safe harbor 

approaches for the identification of built-in items for purposes of section 382(h): the “1374 

approach” and the “338 approach.” 

Under the 1374 approach,22 NUBIG or NUBIL is the net amount of gain or loss that 

would be recognized in a hypothetical sale of the assets of the loss corporation immediately 

before the ownership change.23 The amount of gain or loss recognized during the recognition 

period on the sale or exchange of an asset held at the time of the ownership change is RBIG or 

RBIL, respectively, to the extent it is attributable to a difference between the adjusted basis and 

the fair market value of the asset on the change date, as described above. However, the 1374 

approach generally relies on the accrual method of accounting to identify items of income or 

deduction as RBIG or RBIL, respectively. Generally, items of income or deduction properly 

included in income or allowed as a deduction during the recognition period are considered 

attributable to period before the change date (and thus are treated as RBIG or RBIL, 

respectively), if a taxpayer using an accrual method of accounting would have included the item 

in income or been allowed a deduction for the item before the change date. However, the 1374 

approach includes a number of exceptions to this general rule, including a special rule dealing 

with bad debt deductions under section 166. Under this special rule, any deduction item properly 

taken into account during the first 12 months of the recognition period as a bad debt deduction 

under section 166 is treated as RBIL if the item arises from a debt owed to the loss corporation at 

 19 Sec. 382(h)(2)(A). 

20 Sec. 382(h)(6)(A). 

21 2003-2 C.B. 747. 

22 The 1374 approach generally incorporates rules similar to those of section 1374(d) and the 

Treasury regulations thereunder in calculating NUBIG and NUBIL and identifying RBIG and RBIL. 

23 More specifically, NUBIG or NUBIL is calculated by determining the amount that would be 

realized if immediately before the ownership change the loss corporation had sold all of its assets, 

including goodwill, at fair market value to a third party that assumed all of its liabilities, decreased by the 

sum of any deductible liabilities of the loss corporation that would be included in the amount realized on 

the hypothetical sale and the loss corporation’s aggregate adjusted basis in all of its assets, increased or 

decreased by the corporation’s section 481 adjustments that would be taken into account on a hypothetical 

sale, and increased by any RBIL that would not be allowed as a deduction under section 382, 383 or 384 

on the hypothetical sale. 
 

11 

the beginning of the recognition period (and deductions for such items properly taken into 

account after the first 12 months of the recognition period are not RBILs).24 

The 338 approach identifies items of RBIG and RBIL generally by comparing the loss 

corporation’s actual items of income, gain, deduction and loss with those that would have 

resulted if a section 338 election had been made with respect to a hypothetical purchase of all of 

the outstanding stock of the loss corporation on the change date. Under the 338 approach, 

NUBIG or NUBIL is calculated in the same manner as it is under the 1374 approach.25 The 338 

approach identifies RBIG or RBIL by comparing the loss corporation’s actual items of income, 

gain, deduction and loss with the items of income, gain, deduction and loss that would result if a 

section 338 election had been made for the hypothetical purchase. The loss corporation is treated 

for this purpose as using those accounting methods that the loss corporation actually uses. The 

338 approach does not include any special rule with regard to bad debt deductions under section 

166. 

Section 166 generally allows a deduction in respect of any debt that becomes worthless, 

in whole or in part, during the taxable year.26 The determination of whether a debt is worthless, 

in whole or in part, is a question of fact. However, in the case of a bank or other corporation that 

is subject to supervision by Federal authorities, or by State authorities maintaining substantially 

equivalent standards, the Treasury regulations under section 166 provide a presumption of 

worthlessness to the extent that a debt is charged off during the taxable year pursuant to a 

specific order of such an authority or in accordance with established policies of such an authority 

(and in the latter case, the authority confirms in writing upon the first subsequent audit of the 

bank or other corporation that the charge-off would have been required if the audit had been 

made at the time of the charge-off). The presumption does not apply if the taxpayer does not 

claim the amount so charged off as a deduction for the taxable year in which the charge-off takes 

place. In that case, the charge-off is treated as having been involuntary; however, in order to 

claim the section 166 deduction in a later taxable year, the taxpayer must produce sufficient 

evidence to show that the debt became partially worthless in the later year or became recoverable 

only in part subsequent to the taxable year of the charge-off, as the case may be, and to the extent 

that the deduction claimed in the later year for a partially worthless debt was not involuntarily 

charged off in prior taxable years, it was charged off in the later taxable year.27 

 24 Notice 2003-65, section III.B.2.b. 

25 Accordingly, unlike the case in which a section 338 election is actually made, contingent 

consideration (including a contingent liability) is taken into account in the initial calculation of NUBIG or 

NUBIL, and no further adjustments are made to reflect subsequent changes in deemed consideration. 

26 Section 166 does not apply, however, to a debt which is evidenced by a security, defined for 

this purpose (by cross-reference to section 165(g)(2)(C)) as a bond, debenture, note or certificate or other 

evidence of indebtedness issued by a corporation or by a government or political subdivision thereof, with 

interest coupons or in registered form. Sec. 166(e). 

27 See Treas. Reg. sec. 1.166-2(d)(1) and (2). 
 

12 

The Treasury regulations also permit a bank (generally as defined for purposes of section 

581, with certain modifications) that is subject to supervision by Federal authorities, or State 

authorities maintaining substantially equivalent standards, to make a “conformity election” under 

which debts charged off for regulatory purposes during a taxable year are conclusively presumed 

to be worthless for tax purposes to the same extent, provided that the charge-off results from a 

specific order of the regulatory authority or corresponds to the institution’s classification of the 

debt as a “loss asset” pursuant to loan loss classification standards that are consistent with those 

of certain specified bank regulatory authorities. The conformity election is treated as the 

adoption of a method of accounting.28

Internal Revenue Service Notice 2008-83,29 released on October 1, 2008, provides that 

“[f]or purposes of section 382(h), any deduction properly allowed after an ownership change (as 

defined in section 382(g)) to a bank with respect to losses on loans or bad debts (including any 

deduction for a reasonable addition to a reserve for bad debts) shall not be treated as a built-in 

loss or a deduction that is attributable to periods before the change date.”30 The Notice further 

states that the Internal Revenue Service and the Treasury Department are studying the proper 

treatment under section 382(h) of certain items of deduction or loss allowed after an ownership 

change to a corporation that is a bank (as defined in section 581) both immediately before and 

after the change date, and that any such corporation may rely on the treatment set forth in Notice 

2008-83 unless and until there is additional guidance. 

Description of Proposal

The provision states that Congress finds as follows: (1) The delegation of authority to the 

Secretary of the Treasury, or his delegate, under section 382(m) does not authorize the Secretary 

to provide exemptions or special rules that are restricted to particular industries or classes of 

taxpayers, (2) Internal Revenue Service Notice 2008-83 is inconsistent with the congressional 

intent in enacting such section 382(m), (3) the legal authority to prescribe Notice 2008-83 is 

doubtful, (4) however, as taxpayers should generally be able to rely on guidance issued by the 

Secretary of the Treasury, legislation is necessary to clarify the force and effect of Notice 2008-

83 and restore the proper application under the Internal Revenue Code of the limitation on builtin losses following an ownership change of a bank. 

Under the provision, Treasury Notice 2008-83 shall be deemed to have the force and 

effect of law with respect to any ownership change (as defined in section 382(g)) occurring on or 

before January 16, 2009, and with respect to any ownership change (as so defined) which occurs 

after January 16, 2009, if such change (1) is pursuant to a written binding contract entered in to 

on or before such date or (2) is pursuant to a written agreement entered into on or before such 

date and such agreement was described on or before such date in a public announcement or in a 

 28 See Treas. Reg. sec. 1.166-2(d)(3); cf. Priv. Let. Rul. 9248048 (July 7, 1992); Tech. Ad. Mem. 

9122001 (Feb. 8, 1991). 

29 2008-42 I.R.B. 2008-42 (Oct. 20, 2008). 

30 Notice 2008-83, section 2. 
 

13 

filing with the Securities and Exchange Commission required by reason of such ownership 

change, but shall otherwise have no force or effect with respect to any ownership change after 

such date. 

Effective Date

The provision is effective on the date of enactment. 

6. Exempt facility bonds for high-speed rail 

Present Law

In general

Under present law, gross income does not include interest on State or local bonds. State 

and local bonds are classified generally as either governmental bonds or private activity bonds. 

Governmental bonds are bonds the proceeds of which are primarily used to finance 

governmental functions or which are repaid with governmental funds. Private activity bonds are 

bonds in which the State or local government serves as a conduit providing financing to 

nongovernmental persons (e.g., private businesses or individuals). 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”) and other Code requirements are 

met. 

High-speed rail

An exempt facility bond is a type of qualified private activity bond. Exempt facility 

bonds can be issued for high-speed intercity rail facilities. A facility qualifies as a high-speed 

intercity rail facility if it is a facility (other than rolling stock) for fixed guideway rail 

transportation of passengers and their baggage between metropolitan statistical areas. The 

facilities must use vehicles that are reasonably expected to operate at speeds in excess of 150 

miles per hour between scheduled stops and the facilities must be made available to members of 

the general public as passengers. If the bonds are to be issued for a nongovernmental owner of 

the facility, such owner must irrevocably elect not to claim depreciation or credits with respect to 

the property financed by the net proceeds of the issue. 

The Code imposes a special redemption requirement for these types of bonds. Any 

proceeds not used within three years of the date of issuance of the bonds must be used within the 

following six months to redeem such bonds. 

Seventy-five percent of the principal amount of the bonds issued for high-speed rail 

facilities is exempt from the volume limit. If all the property to be financed by the net proceeds 

of the issue is to be owned by a governmental unit, then such bonds are completely exempt from 

the volume limit. 
 

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Description of Proposal

The proposal modifies the requirement that high-speed intercity rail transportation 

facilities use vehicles that are reasonably expected to operate at speeds in excess of 150 miles per 

hour. Instead, under the proposal such facilities must use vehicles reasonably expected to attain 

a top speed in excess of 150 miles per hour. 

Effective Date

The proposal is effective for bonds issued after date of enactment. 

7. Broadband tax incentives 

Present Law

A taxpayer is allowed to recover, through annual depreciation deductions, the cost of 

certain property used in a trade or business or for the production of income. The amount of the 

depreciation deduction allowed with respect to tangible property for a taxable year is determined 

under the modified accelerated cost recovery system (“MACRS”).31 Under MACRS, different 

types of property generally are assigned applicable recovery periods and depreciation methods. 

The recovery periods applicable to most tangible personal property (generally tangible property 

other than residential rental property and nonresidential real property) range from 3 to 25 years. 

The depreciation methods generally applicable to tangible personal property are the 200-percent 

and 150-percent declining balance methods, switching to the straight-line method for the taxable 

year in which the depreciation deduction would be maximized. 

No credit is specifically designed under present law to encourage the development of 

qualified broadband expenditures. 

Description of Proposal

The amendment provides an investment tax credit for “qualified broadband 

expenditures.” Qualified broadband expenditures comprise both “current-generation” and “nextgeneration” broadband. The provision establishes a 10 percent credit for investment in currentgeneration broadband in rural and underserved areas. The provision establishes a 20 percent 

credit for investment in current-generation broadband in unserved areas. The provision 

establishes a 20 percent credit for investment in next-generation broadband in in rural, 

underserved, and unserved areas. The basis of qualified property must be reduced by the amount 

of credit received. To qualify for the credit, the qualified broadband equipment must be placed 

in service after December 31, 2008, and before January 1, 2011. 

“Current-generation” broadband services are defined as the transmission of signals at a 

rate of at least 5 million bits per second to the subscriber and at a rate of at least 1 million bits per 

second from the subscriber or wireless technology transmission of signals at a rate of at least 3 

 31 Sec. 168. 
 

15 

million bits per second to the subscriber and at a rate of at least 768 kilobits per second from the 

subscriber. “Next-generation” broadband services are defined as the transmission of signals at a 

rate of at least 100 million bits per second to the subscriber and at a rate of at least 20 million bits 

per second from the subscriber. 

Qualified broadband expenditures means the direct or indirect costs properly taken into 

account for the taxable year for the purchase or installation of qualified equipment (including 

upgrades) and the connection of the equipment to a qualified subscriber. The term does not 

include costs of launching satellite equipment. 

Qualified broadband expenditures include only the portion of the purchase price paid by 

the lessor, in the case of leased equipment, that is attributable to otherwise qualified broadband 

expenditures by the lessee. In the case of property that is originally placed in service by a person 

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

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

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

under the leaseback. 

A qualified subscriber, with respect to current-generation broadband services, means any 

nonresidential subscriber maintaining a permanent place of business in a rural, underserved, or 

unserved area, or any residential subscriber residing in a rural, underserved, or unserved area that 

is not a saturated market. A qualified subscriber, with respect to next generation broadband 

services, means any nonresidential subscriber maintaining a permanent place of business in a 

rural, underserved, or unserved area, or any residential subscriber. 

The term ‘rural area’ means any census tract which is not within 10 miles of any 

incorporated or census designated place containing more than 25, 000 people, and is not within a 

country or county equivalent which has and overall population density of more than 500 people 

per square mile of land. 

An underserved area is a low-income community designed under section 45 D which is 

defined as a population census tract located in either (1) a poverty rate of at least 20 percent or 

(2) median family income which does not exceed 80 percent of the greater of metropolitan area 

median family income or statewide median family income (for a nonmetropolitan census tract, 

does not exceed 80 percent of statewide median family income). 

An unserved area is a location, as certified by the State, that does not currently have a 

provider of current generation broadband services. 

A saturated market, for this purpose, means any census tract in which, as of the date of 

enactment, current generation broadband services have been provided by a single provider to 85 

percent or more of the total potential residential subscribers. The services must be usable at least 

a majority of the time during periods of maximum demand, and usable in a manner substantially 

the same as services provided through equipment not eligible for the credit under this provision. 

If current- or next-generation broadband services can be provided through qualified 

equipment to both qualified subscribers and to other subscribers, the provision provides that the 

expenditures with respect to the equipment are allocated among subscribers to determine the 
 

16 

amount of qualified broad broadband expenditures that may be credit-eligible under the 

provision. 

Qualified equipment means equipment that provides current- or next-generation 

broadband services at least a majority of the time during periods of maximum demand to each 

subscriber, and in a manner substantially the same as such services are provided by the provider 

to subscribers through equipment with respect to which no credit is allowed under the provision. 

Limitations are imposed under the provision on equipment depending on where it extends, and 

on certain packet switching equipment, and on certain multiplexing and demultiplexing 

equipment. 

Expenditures generally are not taken into account for purposes of the credit under the 

provision with respect to property used predominantly outside the United States, used 

predominantly to furnish lodging, used by a tax-exempt organization (other than in a business 

whose income is subject to unrelated business income tax), or used by the United States or a 

political subdivision or by a possession, agency or instrumentality thereof or by a foreign person 

or entity. The basis of property is reduced by the cost of the property that is taken into account 

as a credit under the provision. Recapture rules are provided. The credit is a general business 

credit. 

Effective Date

The provision is effective for property placed in service after December 31, 2008. 

8. Application of certain labor standards to projects financed with certain tax-favored 

bonds 

Present Law

The United States Code (Subchapter IV of Chapter 31 of Title 40) applies a prevailing 

wage requirement to certain contracts to which the Federal Government is a party. 

Description of Proposal

The proposal provides that Subchapter IV of Chapter 31 of Title 40 of the U.S. Code 

shall apply to projects financed with the proceeds of: 

1. any qualified clean renewable energy bond (as defined in sec. 54C of the Code) issued 

after the date of enactment; 

2. any qualified energy conservation bond (as defined in sec. 54D of the Code) issued 

after the date of enactment; ; 

3. any qualified zone academy bond (as defined in sec. 54E of the Code) issued after the 

date of enactment; 

4. any qualified school construction bond (as defined in sec. 54F of the Code) issued; and 
 

17 

5. any recovery zone economic development bond (as defined in sec. 1400U-2 of the 

Code). 

Effective Date

The proposal is effective on the date of enactment.