General Explanations

of the

Administration’s Fiscal Year 2015 

Revenue Proposals

Department of the Treasury

March 2014
 

 
General Explanations

of the

Administration’s Fiscal Year 2015 

Revenue Proposals

Department of the Treasury

March 2014

This document is available online at: 

http://www.treasury.gov/resource-center/tax-policy/Pages/general explanation.aspx

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TABLE OF CONTENTS

ADJUSTMENTS TO THE BALANCED BUDGET AND EMERGENCY 

DEFICIT CONTROL ACT (BBEDCA) BASELINE ..........................................1

Permanently Extend Increased Refundability of the Child Tax Credit............................... 2

Permanently Extend Earned Income Tax Credit (EITC) for Larger Families and Married 

Couples ................................................................................................................... 4

Permanently Extend the American Opportunity Tax Credit (AOTC)................................. 6

RESERVE FOR LONG-RUN REVENUE-NEUTRAL BUSINESS TAX

REFORM..................................................................................................................9

INCENTIVES FOR MANUFACTURING, RESEARCH, CLEAN ENERGY, AND 

INSOURCING AND CREATING JOBS ............................................................................. 10

Provide Tax Incentives for Locating Jobs and Business Activity in the United States and 

Remove Tax Deductions for Shipping Jobs Overseas........................................... 10

Enhance and Make Permanent the Research and Experimentation (R&E) Tax Credit... 12

Extend and Modify Certain Employment Tax Credits, Including Incentives for Hiring 

Veterans ................................................................................................................ 13

Modify and Permanently Extend Renewable Electricity Production Tax Credit ............. 16

Modify and Permanently Extend the Deduction for Energy-Efficient Commercial 

Building Property.................................................................................................. 18

TAX RELIEF FOR SMALL BUSINESS ............................................................................. 20

Extend Increased Expensing for Small Business.............................................................. 20

Eliminate Capital Gains Taxation on Investments in Small Business Stock .................... 22

Increase the Limitations for Deductible New Business Expenditures and Consolidate 

Provisions for Start-Up and Organizational Expenditures.................................. 24

Expand and Simplify the Tax Credit Provided to Qualified Small Employers for NonElective Contributions to Employee Health Insurance......................................... 26

INCENTIVES TO PROMOTE REGIONAL GROWTH................................................... 28

Modify and Permanently Extend the New Markets Tax Credit (NMTC).......................... 28

Restructure Assistance to New York City, Provide Tax Incentives for Transportation 

Infrastructure ........................................................................................................ 29

Reform and Expand the Low-Income Housing Tax Credit (LIHTC)................................... 31

Allow Conversion of Private Activity Bond Volume Cap into Low-Income Housing Tax 

Credits (LIHTCs).................................................................................................. 31

Encourage Mixed Income Occupancy by Allowing Low-Income Housing Tax Credit 

(LIHTC)-Supported Projects to Elect a Criterion Employing a Restriction on 

Average Income .................................................................................................... 33

Change Formulas for 70 Percent PV and 30 Percent PV Low-Income Housing Tax 

Credits (LIHTCs).................................................................................................. 35

Add Preservation of Federally Assisted Affordable Housing to Allocation Criteria ....... 37

Make the Low-Income Housing Tax Credit (LIHTC) Beneficial to Real Estate Investment 

Trusts (REITs)....................................................................................................... 38

Implement Requirement That Low-Income Housing Tax Credit (LIHTC)-Supported 

Housing Protect Victims of Domestic Abuse ........................................................ 40
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REFORM U.S. INTERNATIONAL TAX SYSTEM .......................................................... 42

Defer Deduction of Interest Expense Related to Deferred Income of Foreign 

Subsidiaries........................................................................................................... 42

Determine the Foreign Tax Credit on a Pooling Basis.................................................... 44

Tax Currently Excess Returns Associated with Transfers of Intangibles Offshore .......... 45

Limit Shifting of Income Through Intangible Property Transfers.................................... 47

Disallow the Deduction for Excess Non-Taxed Reinsurance Premiums Paid to 

Affiliates................................................................................................................ 48

Restrict Deductions for Excessive Interest of Members of Financial Reporting Groups. 49

Modify Tax Rules for Dual Capacity Taxpayers............................................................... 51

Tax Gain from the Sale of a Partnership Interest on Look-Through Basis...................... 53

Prevent Use of Leveraged Distributions from Related Corporations to Avoid Dividend 

Treatment .............................................................................................................. 55

Extend Section 338(h)(16) to Certain Asset Acquisitions................................................. 56

Remove Foreign Taxes From a Section 902 Corporation’s Foreign Tax Pool When 

Earnings Are Eliminated....................................................................................... 57

Create a New Category of Subpart F Income for Transactions Involving Digital Goods or 

Services................................................................................................................. 58

Prevent Avoidance of Foreign Base Company Sales Income through Manufacturing 

Services Arrangements.......................................................................................... 60

Restrict the Use of Hybrid Arrangements That Create Stateless Income......................... 61

Limit the Application of Exceptions Under Subpart F for Certain Transactions That Use 

Reverse Hybrids to Create Stateless Income ........................................................ 62

Limit the Ability of Domestic Entities to Expatriate ......................................................... 64

REFORM TREATMENT OF FINANCIAL AND INSURANCE INDUSTRY 

INSTITUTIONS AND PRODUCTS..................................................................................... 66

Require that Derivative Contracts be Marked to Market with Resulting Gain or Loss 

Treated as Ordinary.............................................................................................. 66

Modify Rules that Apply to Sales of Life Insurance Contracts......................................... 69

Modify Proration Rules for Life Insurance Company General and Separate Accounts .. 71

Expand Pro Rata Interest Expense Disallowance for Corporate-Owned Life Insurance 73

ELIMINATE FOSSIL FUEL PREFERENCES.................................................................. 75

Eliminate Oil and Natural Gas Preferences.......................................................................... 75

Repeal Enhanced Oil Recovery (EOR) Credit.................................................................. 75

Repeal Credit for Oil and Natural Gas Produced from Marginal Wells ......................... 76

Repeal Expensing of Intangible Drilling Costs ................................................................ 77

Repeal Deduction for Tertiary Injectants......................................................................... 79

Repeal Exception to Passive Loss Limitation for Working Interests in Oil and Natural 

Gas Properties...................................................................................................... 80

Repeal Percentage Depletion for Oil and Natural Gas Wells.......................................... 81

Repeal Domestic Manufacturing Deduction for Oil and Natural Gas Production.......... 83

Increase Geological and Geophysical Amortization Period for Independent Producers to 

Seven Years........................................................................................................... 84

Eliminate Coal Preferences................................................................................................... 85

Repeal Expensing of Exploration and Development Costs............................................... 85

Repeal Percentage Depletion for Hard Mineral Fossil Fuels.......................................... 87
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Repeal Capital Gains Treatment for Royalties................................................................. 89

Repeal Domestic Manufacturing Deduction for the Production of Coal and Other Hard 

Mineral Fossil Fuels............................................................................................. 90

OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS...................................... 91

Repeal the Excise Tax Credit for Distilled Spirits with Flavor and Wine Additives........ 91

Repeal Last-In, First-Out (LIFO) Method of Accounting for Inventories........................ 93

Repeal Lower-Of-Cost-or-Market (LCM) Inventory Accounting Method........................ 94

Modify Depreciation Rules for Purchases of General Aviation Passenger Aircraft........ 95

Repeal Gain Limitation for Dividends Received in Reorganization Exchanges .............. 96

Expand the Definition of Substantial Built-In Loss for Purposes of Partnership Loss 

Transfers............................................................................................................... 98

Extend Partnership Basis Limitation Rules to Nondeductible Expenditures.................... 99

Limit the Importation of Losses under Related Party Loss Limitation Rules................. 100

Deny Deduction for Punitive Damages .......................................................................... 101

Modify Like-Kind Exchange Rules for Real Property .................................................... 102

Conform Corporate Ownership Standards..................................................................... 103

Prevent Elimination of Earnings and Profits Through Distributions of Certain Stock.. 105

BUDGET PROPOSALS......................................................................................107

INCENTIVES FOR JOB CREATION, CLEAN ENERGY, AND 

MANUFACTURING............................................................................................................ 108

Provide Additional Tax Credits for Investment in Qualified Property Used in a 

Qualifying Advanced Energy Manufacturing Project ........................................ 108

Designate Promise Zones ............................................................................................... 110

Provide New Manufacturing Communities Tax Credit .................................................. 113

Provide a Tax Credit for the Production of Advanced Technology Vehicles................. 114

Provide a Tax Credit for Medium- and Heavy-Duty Alternative-Fuel Commercial 

Vehicles............................................................................................................... 116

Modify Tax-Exempt Bonds for Indian Tribal Governments ........................................... 117

Extend the Tax Credit for Cellulosic Biofuels................................................................ 120

Modify and Extend the Tax Credit for the Construction of Energy-Efficient New 

Homes ................................................................................................................. 121

Reduce Excise Taxes on Liquefied Natural Gas (LNG) to Bring Into Parity with 

Diesel .................................................................................................................. 123

INCENTIVES FOR INVESTMENT IN INFRASTRUCTURE ...................................... 124

Create the America Fast Forward Bond Program......................................................... 124

Allow Current Refundings of State and Local Governmental Bonds ............................. 127

Repeal the $150 Million Non-hospital Bond Limitation on Qualified Section 501(c)(3) 

Bonds................................................................................................................... 130

Increase National Limitation Amount for Qualified Highway or Surface Freight Transfer 

Facility Bonds..................................................................................................... 131

Eliminate the Volume Cap for Private Activity Bonds for Water Infrastructure............ 132

Increase the 25-Percent Limit on Land Acquisition Restriction on Private Activity 

Bonds................................................................................................................... 134
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Allow More Flexible Research Arrangements for Purposes of Private Business Use 

Limits................................................................................................................... 135

Repeal the Government Ownership Requirement for Certain Types of Exempt Facility 

Bonds................................................................................................................... 137

Exempt Foreign Pension Funds from the Application of the Foreign Investment in Real 

Property Tax Act (FIRPTA)................................................................................ 138

TAX CUTS FOR FAMILIES AND INDIVIDUALS......................................................... 139

Expand the Earned Income Tax Credit (EITC) for Workers without Qualifying 

Children .............................................................................................................. 139

Provide for Automatic Enrollment in Individual Retirement Accounts or Annuities (IRAs), 

Including a Small Employer Tax Credit, and Double the Tax Credit for Small 

Employer Plan Start-Up Costs............................................................................ 141

Expand the Child and Dependent Care Tax Credit........................................................ 145

Extend Exclusion from Income for Cancellation of Certain Home Mortgage Debt....... 147

Provide Exclusion from Income for Student Loan Forgiveness for Students in Certain 

Income-Based or Income-Contingent Repayment Programs Who Have Completed 

Payment Obligations........................................................................................... 149

Provide Exclusion from Income for Student Loan Forgiveness and for Certain 

Scholarship Amounts for Participants in the Indian Health Service (IHS) Health 

Professions Programs......................................................................................... 150

Make Pell Grants Excludable from Income and from Tax Credit Calculations............. 152

UPPER-INCOME TAX PROVISIONS.............................................................................. 154

Reduce the Value of Certain Tax Expenditures.............................................................. 154

Implement the Buffett Rule by Imposing a New “Fair Share Tax” ................................ 156

MODIFY ESTATE AND GIFT TAX PROVISIONS ....................................................... 158

Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in 

Effect in 2009 ...................................................................................................... 158

Require Consistency in Value for Transfer and Income Tax Purposes.......................... 160

Require a Minimum Term for Grantor Retained Annuity Trusts (GRATs) .................... 162

Limit Duration of Generation-Skipping Transfer (GST) Tax Exemption ....................... 164

Coordinate Certain Income and Transfer Tax Rules Applicable to Grantor Trusts...... 166

Extend the Lien on Estate Tax Deferrals where Estate Consists Largely of Interest in 

Closely Held Business......................................................................................... 168

Modify Generation-Skipping Transfer (GST) Tax Treatment of Health and Education 

Exclusion Trusts (HEETs)................................................................................... 169

Simplify Gift Tax Exclusion for Annual Gifts ................................................................. 170

Expand Applicability of Definition of Executor.............................................................. 172

REFORM TREATMENT OF FINANCIAL INDUSTRY INSTITUTIONS AND 

PRODUCTS........................................................................................................................... 173

Impose a Financial Crisis Responsibility Fee ................................................................ 173

Require Current Inclusion in Income of Accrued Market Discount and Limit the Accrual 

Amount for Distressed Debt................................................................................ 175

Require that the Cost Basis of Stock That is a Covered Security Must be Determined 

Using an Average Basis Method......................................................................... 176
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LOOPHOLE CLOSERS...................................................................................................... 177

Tax Carried (Profits) Interests as Ordinary Income ...................................................... 177

Require Non-Spouse Beneficiaries of Deceased Individual Retirement Account or Annuity 

(IRA) Owners and Retirement Plan Participants to Take Inherited Distributions 

Over No More than Five Years........................................................................... 179

Limit the Total Accrual of Tax-Favored Retirement Benefits......................................... 181

Conform Self-Employment Contributions Act (SECA) Taxes For Professional Service 

Businesses........................................................................................................... 184

OTHER REVENUE RAISERS ........................................................................................... 187

Increase Oil Spill Liability Trust Fund Financing Rate by One Cent and Update the Law 

to Include Other Sources of Crudes.................................................................... 187

Reinstate Superfund Taxes ................................................................................................. 188

 Reinstate and Extend Superfund Excise Taxes .......................................................... 188

 Reinstate Superfund Environmental Income Tax....................................................... 189

Increase Tobacco Taxes and Index for Inflation ............................................................ 190

Make Unemployment Insurance Surtax Permanent ....................................................... 191

Provide Short-Term Tax Relief to Employers and Expand Federal Unemployment Tax 

Act (FUTA) Base................................................................................................. 192

Enhance and Modify the Conservation Easement Deduction............................................. 193

 Enhance and Make Permanent Incentives for the Donation of Conservation 

Easements ........................................................................................................... 193

 Eliminate the Deduction for Contributions of Conservation Easements on Golf 

Courses ............................................................................................................... 195

 Restrict Deductions and Harmonize the Rules for Contributions of Conservation 

Easements for Historic Preservation.................................................................. 196

Eliminate Deduction for Dividends on Stock of Publicly-Traded Corporations Held in 

Employee Stock Ownership Plans ...................................................................... 197

REDUCE THE TAX GAP AND MAKE REFORMS ....................................................... 199

Expand Information Reporting ........................................................................................... 199

Require Information Reporting for Private Separate Accounts of Life Insurance 

Companies........................................................................................................... 199

Require a Certified Taxpayer Identification Number (TIN) from Contractors and Allow 

Certain Withholding............................................................................................ 200

Modify Reporting of Tuition Expenses and Scholarships on Form 1098-T.................... 201

Provide for Reciprocal Reporting of Information in Connection with the Implementation 

of the Foreign Account Tax Compliance Act...................................................... 203

Improve Compliance by Businesses................................................................................... 205

Require Greater Electronic Filing of Returns................................................................ 205

Implement Standards Clarifying When Employee Leasing Companies Can Be Held Liable 

for Their Clients’ Federal Employment Taxes.................................................... 207

Increase Certainty with Respect to Worker Classification............................................. 209

Increase Information Sharing to Administer Excise Taxes............................................. 212

Strengthen Tax Administration........................................................................................... 213

Impose Liability on Shareholders to Collect Unpaid Income Taxes of Applicable 

Corporations....................................................................................................... 213
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Increase Levy Authority for Payments to Medicare Providers with Delinquent Tax 

Debt..................................................................................................................... 215

Implement a Program Integrity Statutory Cap Adjustment for Tax Administration ...... 216

Streamline Audit and Adjustment Procedures for Large Partnerships.......................... 217

Revise Offer-in-Compromise Application Rules............................................................. 220

Expand Internal Revenue Service (IRS) Access to Information in the National Directory 

of New Hires for Tax Administration Purposes.................................................. 221

Make Repeated Willful Failure to File a Tax Return a Felony ...................................... 222

Facilitate Tax Compliance with Local Jurisdictions...................................................... 223

Extend Statute of Limitations where State Adjustment Affects Federal Tax Liability .... 224

Improve Investigative Disclosure Statute ....................................................................... 226

Require Taxpayers Who Prepare Their Returns Electronically but File Their Returns on 

Paper to Print Their Returns with a Scannable Code ........................................ 227

Allow the Internal Revenue Service (IRS) to Absorb Credit and Debit Card Processing 

Fees for Certain Tax Payments........................................................................... 228

Provide the Internal Revenue Service (IRS) with Greater Flexibility to Address 

Correctable Errors.............................................................................................. 229

Make E-Filing Mandatory for Exempt Organizations.................................................... 231

Authorize the Department of the Treasury to Require Additional Information to be 

Included in Electronically Filed Form 5500 Annual Reports and Electronic Filing 

of Certain Other Employee Benefit Plan Reports............................................... 232

Impose a Penalty on Failure to Comply with Electronic Filing Requirements.............. 234

Provide Whistleblowers with Protection from Retaliation ............................................. 235

Provide Stronger Protection from Improper Disclosure of Taxpayer Information in 

Whistleblower Actions ........................................................................................ 236

Index All Penalties For Inflation .................................................................................... 237

Extend Paid Preparer Earned Income Tax Credit (EITC) Due Diligence Requirements to 

the Child Tax Credit............................................................................................ 238

Extend Internal Revenue Service (IRS) Authority to Require a Truncated Social Security 

Number (SSN) on Form W-2............................................................................... 239

Add Tax Crimes to the Aggravated Identity Theft Statute .............................................. 241

Impose a Civil Penalty on Tax Identity Theft Crimes..................................................... 242

Allow States to Send Notices of Intent to Offset Federal Tax Refunds to Collect State Tax 

Obligations by Regular First-Class Mail Instead of Certified Mail................... 243

Explicitly Provide that the Department of the Treasury and the Internal Revenue Service 

(IRS) Have Authority to Regulate All Paid Return Preparers............................ 244

Rationalize Tax Return Filing Due Dates So They Are Staggered................................. 245

Increase the Penalty Applicable to Paid Tax Preparers Who Engage in Willful or 

Reckless Conduct ............................................................................................... 247

Enhance Administrability of the Appraiser Penalty ....................................................... 248

SIMPLIFY THE TAX SYSTEM......................................................................................... 249

Simplify the Rules for Claiming the Earned Income Tax Credit (EITC) for Workers 

Without Qualifying Children............................................................................... 249

Modify Adoption Credit to Allow Tribal Determination of Special Needs..................... 250

Simplify Minimum Required Distribution (MRD) Rules................................................. 251
vii

Allow All Inherited Plan and Individual Retirement Account or Annuity (IRA) balances to 

be Rolled Over Within 60 Days .......................................................................... 253

Repeal Non-Qualified Preferred Stock (NQPS) Designation ......................................... 255

Repeal Preferential Dividend Rule for Publicly Traded and Publicly Offered Real Estate 

Investment Trusts (REITs)................................................................................... 256

Reform Excise Tax Based on Investment Income of Private Foundations ..................... 258

Remove Bonding Requirements for Certain Taxpayers Subject to Federal Excise Taxes 

on Distilled Spirits, Wine, and Beer.................................................................... 259

Simplify Arbitrage Investment Restrictions .................................................................... 261

Simplify Single-Family Housing Mortgage Bond Targeting Requirements ................... 263

Streamline Private Business Limits on Governmental Bonds......................................... 264

Exclude Self-Constructed Assets of Small Taxpayers from the Uniform Capitalization 

(UNICAP) Rules.................................................................................................. 265

Repeal Technical Terminations of Partnerships............................................................. 267

Repeal Anti-Churning Rules of Section 197 ................................................................... 268

Repeal Special Estimated Tax Payment Provision for Certain Insurance Companies .. 269

Repeal the Telephone Excise Tax ................................................................................... 271

Increase the Standard Mileage Rate for Automobile Use by Volunteers ....................... 272

USER FEE ............................................................................................................................. 273

Reform Inland Waterways Funding ................................................................................ 273

OTHER INITIATIVES ........................................................................................................ 274

Allow Offset of Federal Income Tax Refunds to Collect Delinquent State Income Taxes 

for Out-of-State Residents ................................................................................... 274

Authorize the Limited Sharing of Business Tax Return Information to Improve the 

Accuracy of Important Measures of the Economy .............................................. 275

Eliminate Certain Reviews Conducted by the U.S. Treasury Inspector General for Tax 

Administration (TIGTA) ...................................................................................... 277

Modify Indexing to Prevent Deflationary Adjustments ................................................... 278 

TABLES OF REVENUE ESTIMATES .......................................................... 279

Table 1: Revenue Estimates of Adjustments to the Balanced Budget and Emergency 

Deficit Control Act (BBEDCA) Baseline............................................................ 279

Table 2: Revenue Estimates of Reserve for Long-Run Revenue-Neutral Business Tax 

Reform Proposals................................................................................................ 280

Table 3: Revenue Estimates of FY 2015 Budget Proposals............................................ 282 
viii
1

ADJUSTMENTS TO THE BALANCED BUDGET AND 

EMERGENCY DEFICIT CONTROL ACT (BBEDCA) 

BASELINE

The BBEDCA baseline, which is commonly used in budgeting and is defined in the statute, 

reflects, with some exceptions, the projected receipts level under current law. However, while 

the American Taxpayer Relief Act of 2012 (ATRA) made most of the 2001 and 2003 tax cuts 

and Alternative Minimum Tax relief permanent, it extended the American Opportunity Tax 

Credit (AOTC), Earned Income Tax Credit (EITC) expansions, and Child Tax Credit (CTC) 

expansions only through 2017. This Budget uses an adjusted baseline that permanently 

continues the AOTC, EITC, and CTC expansions extended through 2017 under ATRA.
2

PERMANENTLY EXTEND INCREASED REFUNDABILITY OF THE CHILD TAX

CREDIT

Current Law

An individual may claim a $1,000 tax credit for each qualifying child. A qualifying child must 

meet the following four tests:

1. Relationship – The child generally must be the taxpayers’ son, daughter, grandchild, 

sibling, niece, nephew, or foster child.

2. Residence – The child must live with the taxpayer in the same principal place of abode 

for over half the year.

3. Support – The child must not have provided more than half of his or her own support for 

the year.

4. Age – The child must be under the age of 17.

For purposes of the child tax credit, a qualifying child must be a citizen, national, or resident of 

the United States. The child tax credit is phased out at a rate of $50 for each $1,000 of modified 

adjusted gross income over $75,000 for unmarried taxpayers, $110,000 for married individuals 

filing joint returns, and $55,000 for married individuals filing separate returns.

The child tax credit is partially refundable, meaning that it is available to workers who have no 

individual income tax liability. Under the Economic Growth and Tax Relief Reconciliation Act 

of 2001 (EGTRRA) and as made permanent by the American Taxpayer Relief Act of 2012 

(ATRA), individuals could receive a refundable amount (the additional child credit) equal to the 

lesser of the child tax credit remaining after offsetting income tax liability and 15 percent of 

earned income in excess of $10,000 (indexed after 2001). Taxpayers with three or more children 

may determine the additional child tax credit using an alternative formula based on the extent to 

which a taxpayer’s social security taxes exceed the taxpayer’s Earned Income Tax Credit

(EITC). The American Recovery and Reinvestment Act of 2009 reduced the earned income 

threshold to $3,000 in tax years 2009 and 2010. The Tax Relief, Unemployment Insurance 

Reauthorization and Job Creation Act of 2010 extended this provision through 2012. ATRA 

extended this further through 2017. After 2017, the earned income threshold will increase to 

$10,000 (indexed after 2001).

Reasons for Change

Making the child tax credit partially refundable and reducing the earned income threshold makes 

additional tax relief available to the most vulnerable working families. Because the wages of 

low-income families have failed to keep up with inflation, continued indexing of the earned 

income threshold will result in a decreasing number of low-income families able to take 

advantage of the credit each year and smaller credits for the families who receive the credit. 
3

Proposal

The adjusted baseline for this Budget makes permanent the reduction of the earned income 

threshold to $3,000. The earned income threshold would not be indexed for inflation.

This change would be effective for taxable years beginning after December 31, 2017.
4

PERMANENTLY EXTEND EARNED INCOME TAX CREDIT (EITC) FOR LARGER 

FAMILIES AND MARRIED COUPLES

Current Law

Low- and moderate-income workers may be eligible for a refundable EITC. Eligibility for the 

EITC is based on the presence and number of qualifying children in the worker’s household, 

adjusted gross income (AGI), earned income, investment income, filing status, age, and 

immigration and work status in the United States. The amount of the EITC is based on the 

number of qualifying children in the worker’s household, AGI, earned income, and filing status. 

The EITC has a phase-in range (where each additional dollar of earned income results in a larger 

credit), a maximum range (where additional dollars of earned income or AGI have no effect on 

the size of the credit), and a phase-out range (where each additional dollar of the larger of earned 

income or AGI results in a smaller total credit). 

The EITC provides additional benefits for families with more qualifying children and for married 

couples filing joint returns. In particular, the EITC phases in at a faster rate for workers with 

more qualifying children, resulting in a larger maximum credit and a longer phase-out range. 

Furthermore, the income at which the EITC begins to phase out occurs at a higher amount for 

married couples than for unmarried workers with the same number of children, thereby 

increasing the range of income over which married couples are eligible for the maximum credit.

Prior to tax year 2009, the credit reached its maximum at two or more qualifying children and the 

EITC began to phase out for married couples at income levels $3,000 (indexed after 2008) higher

than for unmarried workers. The American Recovery and Reinvestment Act of 2009 (ARRA) 

increased the phase-in rate for families with three or more qualifying children from 40 percent to 

45 percent and increased the beginning of the phase-out range for married couples to $5,000 

above the level for unmarried filers (indexed after 2009) through 2010. The Tax Relief, 

Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended these

provisions through 2012. The American Taxpayer Relief Act of 2012 (ATRA) made permanent 

the first $3,000 increase in the beginning of the phase-out range and extended the remaining 

$2,000 increase and the third child benefits through 2017. After 2017, workers with three or 

more qualifying children will receive the same EITC as similarly situated workers with two 

qualifying children, and the phase-out range for married couples will begin at $3,000 (indexed 

after 2008) above the level for unmarried workers.

The end of the phase-in range and the beginning of the phase-out range are indexed for inflation. 

Hence, the maximum amount of the credit and the end of the phase-out range are effectively 

indexed. The following chart summarizes the EITC parameters for 2014.
5 

EITC Parameters for 2014 

Childless

Taxpayers

Taxpayers with Qualifying Children

One Child Two Children Three or More

Phase-in rate 7.65% 34.00% 40.00% 45.00% 

Minimum 

earnings for 

maximum credit

$6,480 $9,720 $13,650 $13,650 

Maximum credit $496 $3,305 $5,460 $6,143 

Phase-out rate 7.65% 15.98% 21.06% 21.06% 

Phase-out begins $8,110 

($13,540 joint)

$17,830 

($23,260 joint)

$17,830 

($23,260 joint) 

$17,830 

($23,260 joint) 

Phase-out ends $14,590 

($20,020 joint)

$38,511 

($43,941 joint)

$43,756 

($49,186 joint)

$46,997 

($52,427 joint)

To be eligible for the EITC, workers must have no more than $3,350 of investment income. 

(This amount is indexed for inflation.) 

Reasons for Change

Families with more children face larger expenses related to raising their children than families 

with fewer children and tend to have higher poverty rates. The steeper phase-in rate and larger 

maximum credit for workers with three or more qualifying children helps workers with larger 

families meet their expenses while maintaining work incentives. 

For married couples filing a joint return, the EITC is calculated based on joint earnings. 

Increasing the income at which the EITC begins to phase out provides tax relief for working 

families, including those with two earners. 

Proposal

The adjusted baseline for this Budget makes permanent the expansion of the EITC enacted as 

part of ARRA and temporarily extended by ATRA. 

Permanently extend EITC marriage penalty relief

The phase-out range for married couples would begin at income levels $5,000 higher than those 

for unmarried filers (indexed after 2009).

Permanently extend EITC for larger families

The phase-in rate of the EITC for workers with three or more qualifying children would be 

maintained at 45 percent. 

This change would be effective for taxable years beginning after December 31, 2017.
6 

PERMANENTLY EXTEND THE AMERICAN OPPORTUNITY TAX CREDIT (AOTC)

Current Law 

The American Taxpayer Relief Act of 2012 extended the AOTC through tax year 2017. The 

AOTC was enacted for tax years 2009 and 2010 as part of the American Recovery and 

Reinvestment Act of 2009 (ARRA) and extended to tax years 2011 and 2012 by the Tax Relief, 

Unemployment Insurance Reauthorization and Job Creation Act of 2010. Taxpayers may claim 

an AOTC for 100 percent of the first $2,000 plus 25 percent of the next $2,000 of qualified 

tuition and related expenses (for a maximum credit of $2,500) per student. The AOTC phases 

out for taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and 

$180,000 for joint filers). These amounts are not indexed for inflation. 

Prior to the ARRA, an individual taxpayer could claim a nonrefundable Hope Scholarship credit 

for 100 percent of the first $1,200 and 50 percent of the next $1,200 in qualified tuition and 

related expenses (for a maximum credit of $1,800) per student. These amounts are indexed for 

inflation; the amounts that would have been in effect for 2014 are shown. The Hope Scholarship 

credit was available only for the first two years of postsecondary education. To qualify for either 

the AOTC or Hope credit, the student must be enrolled at least half-time.

Taxpayers may also claim a nonrefundable Lifetime Learning Credit (LLC) for 20 percent of up 

to $10,000 in qualified tuition and related expenses (for a maximum credit of $2,000, which is 

not indexed for inflation) per taxpayer. 

In 2014, both the Hope credit and the LLC phase out between $54,000 and $64,000 of adjusted 

gross income ($108,000 and $128,000 if married filing jointly, indexed for inflation). In 

contrast, the AOTC is available to families with higher incomes.

Taxpayers may claim only one education benefit per student on their tax return. 

Reasons for Change 

The AOTC makes college more affordable for millions of middle-income families and for the 

first time makes college tax incentives partially refundable. 

Under prior law, some low-income families (those without sufficient income tax liability) could

not benefit from the Hope Scholarship credit or the LLC because they were not refundable. In 

2013, the maximum available credit covered about 80 percent of tuition and fees at the average 

two-year public institution, or about 30 percent of tuition and fees for an in-state student 

attending the average four-year public institution. 

Unlike the Hope Scholarship credit that applies for only the first two years of college, the AOTC 

is available for the first four years of college. This may increase the likelihood that students will 

stay in school and complete their degrees. More years of schooling translates into higher future 

incomes (on average) for students and a more educated workforce for the country. 
7

The higher phase-out thresholds under the AOTC give targeted tax relief to an even greater 

number of middle-income families facing the high costs of college. 

Proposal

The adjusted baseline for this Budget makes the AOTC a permanent replacement for the Hope 

Scholarship credit.

This change would be effective for taxable years beginning after December 31, 2017.
8
9

RESERVE FOR LONG-RUN REVENUE-NEUTRAL 

BUSINESS TAX REFORM

The President is calling on the Congress to immediately begin work on individual and business 

tax reform that contributes to deficit reduction and increases the incentive to create and retain 

high-quality jobs in the United States. The President laid out a framework for business tax 

reform that contains the following five elements: (1) Eliminate loopholes and subsides, broaden 

the base and cut the corporate tax rate; (2) Strengthen American manufacturing and innovation; 

(3) Strengthen the international tax system; (4) Simplify and cut taxes for small businesses; and 

(5) Restore fiscal responsibility and not add a dime to the deficit. Consistent with this 

framework, the Administration is offering a detailed set of business proposals that close 

loopholes and provide incentives for growth in a fiscally responsible manner. The 

Administration proposes that these proposals be enacted as part of long-run revenue-neutral 

business tax reform that would also cut the corporate tax rate and fundamentally reform tax 

incentives. As a result, the net savings from these proposals, which are described below, are not 

reflected in the budget estimates of receipts and are not counted toward meeting the 

Administration's deficit reduction goals. However, the transition to a reformed business tax 

system will generate temporary revenue, for example from addressing $1-$2 trillion of untaxed 

foreign earnings that U.S. companies have accumulated overseas, from repealing the LIFO 

inventory method, and from reforming accelerated depreciation. The Budget includes a $150 

billion allowance for this one-time savings, which it proposes to use to pay for one-time 

investments in transportation infrastructure. 
10

INCENTIVES FOR MANUFACTURING, RESEARCH, CLEAN ENERGY,

AND INSOURCING AND CREATING JOBS

PROVIDE TAX INCENTIVES FOR LOCATING JOBS AND BUSINESS ACTIVITY IN 

THE UNITED STATES AND REMOVE TAX DEDUCTIONS FOR SHIPPING JOBS 

OVERSEAS

Current Law

Under current law, there are limited tax incentives for U.S. employers to bring offshore jobs and 

investments into the United States. In addition, costs incurred to outsource U.S. jobs generally 

are deductible for U.S. income tax purposes.

Reasons for Change

On January 11, 2012, the White House released a report that details the emerging trend of 

“insourcing” and how companies are increasingly choosing to invest in the United States. 

Updating the numbers in that report shows that real private fixed nonresidential investment has 

grown by about 24 percent since the fourth quarter of 2009. Since the beginning of 2010, 

manufacturing employment has risen by about 490,000, while manufacturing production has 

increased by approximately 4.1 percent on an annualized basis. In addition, continued 

productivity growth has made the United States more competitive in attracting businesses to 

invest and create jobs by reducing the relative cost of doing business compared to other 

countries. 

Further progress is possible. The Administration would like to make the United States more 

competitive in attracting businesses by creating a tax incentive to bring offshore jobs and 

investments back into the United States. In addition, the Administration would like to reduce the 

tax benefits that exist under current law for expenses incurred to move U.S. jobs offshore. 

Proposal

The proposal would create a new general business credit against income tax equal to 20 percent 

of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business. 

For this purpose, insourcing a U.S. trade or business means reducing or eliminating a trade or 

business (or line of business) currently conducted outside the U.S. and starting up, expanding, or 

otherwise moving the same trade or business within the United States, to the extent that this 

action results in an increase in U.S. jobs. While the creditable costs may be incurred by the 

foreign subsidiary of the U.S.-based multinational company, the tax credit would be claimed by 

the U.S. parent company. A similar benefit would be extended to non-mirror code possessions 

(Puerto Rico and American Samoa) through compensating payments from the U.S. Treasury.

In addition, to reduce tax benefits associated with U.S. companies’ moving jobs offshore, the 

proposal would disallow deductions for expenses paid or incurred in connection with outsourcing 

a U.S. trade or business. For this purpose, outsourcing a U.S. trade or business means reducing 
11

or eliminating a trade or business or line of business currently conducted inside the United States 

and starting up, expanding, or otherwise moving the same trade or business outside the United 

States, to the extent that this action results in a loss of U.S. jobs. In determining the subpart F 

income of a controlled foreign corporation, no reduction would be allowed for any expenses 

associated with moving a U.S. trade or business outside the United States.

For purposes of the proposal, expenses paid or incurred in connection with insourcing or 

outsourcing a U.S. trade or business are limited solely to expenses associated with the relocation 

of the trade or business and do not include capital expenditures or costs for severance pay and 

other assistance to displaced workers. The Secretary may prescribe rules to implement the 

provision, including rules to determine covered expenses. 

The proposal would be effective for expenses paid or incurred after the date of enactment.
12

ENHANCE AND MAKE PERMANENT THE RESEARCH AND EXPERIMENTATION 

(R&E) TAX CREDIT 

Current Law

The R&E tax credit is 20 percent of qualified research expenses above a base amount. The base 

amount is the product of the taxpayer’s “fixed base percentage” and the average of the taxpayer’s 

gross receipts for the four preceding years. The taxpayer’s fixed base percentage generally is the 

ratio of its research expenses to gross receipts for the 1984-88 period. The base amount cannot 

be less than 50 percent of the taxpayer’s qualified research expenses for the taxable year. 

Taxpayers can elect the alternative simplified research credit (ASC), which is equal to 14 percent 

of qualified research expenses that exceed 50 percent of the average qualified research expenses 

for the three preceding taxable years. Under the ASC, the rate is reduced to six percent if a 

taxpayer has no qualified research expenses in any one of the three preceding taxable years. An 

election to use the ASC applies to all succeeding taxable years unless revoked with the consent 

of the Secretary. 

The R&E tax credit also provides a credit for 20 percent of: (1) basic research payments above a 

base amount; and (2) all eligible payments to an energy research consortium for energy research. 

The R&E tax credit expired on December 31, 2013.

Reasons for Change

The R&E tax credit encourages technological developments that are an important component of 

economic growth. However, uncertainty about the future availability of the R&E tax credit 

diminishes the incentive effect of the credit because it is difficult for taxpayers to factor the 

credit into decisions to invest in research projects that will not be initiated and completed prior to 

the credit’s expiration. To improve the credit’s effectiveness, the R&E tax credit should be made 

permanent. 

Currently, a taxpayer must choose between using an outdated formula for calculating the R&E 

tax credit that provides a 20-percent credit rate for research spending over a certain base amount 

related to the business’s historical research intensity and the much simpler ASC that provides a 

14-percent credit in excess of a base amount based on its recent research spending. Increasing 

the rate of the ASC to 17 percent would provide an improved incentive to increase research and 

would make the ASC a more attractive alternative. Because the ASC base is updated annually, 

the ASC more accurately reflects the business’s recent research experience and simplifies the 

R&E tax credit’s computation. 

Proposal

The proposal would make the R&E tax credit permanent for expenditures paid or incurred after 

December 31, 2013, and increase the rate of the ASC from 14 percent to 17 percent, effective for 

expenditures paid or incurred after December 31, 2014.
13

EXTEND AND MODIFY CERTAIN EMPLOYMENT TAX CREDITS, INCLUDING 

INCENTIVES FOR HIRING VETERANS

Current Law

The work opportunity tax credit (WOTC) and the Indian employment credit provide temporary 

tax incentives to employers of individuals from certain targeted groups. Each credit is a 

component of the general business credit. The WOTC does not apply to an individual who 

begins work after December 31, 2013. The Indian employment credit does not apply for tax 

years beginning after December 31, 2013. 

The WOTC is available for employers hiring individuals from one or more of nine targeted 

groups. Current WOTC targeted groups include qualified: (1) recipients of Temporary 

Assistance for Needy Families; (2) veterans; (3) ex-felons, (4) residents of an empowerment 

zone or a rural renewal community who are at least 18 but not yet 40 years old; (5) referrals from 

state-sponsored vocational rehabilitation programs for the mentally and physically disabled; (6) 

summer youth employees who are 16 or 17 years old residing in an empowerment zone; (7) 

Supplemental Nutrition Assistance Program benefits recipients at least 18 years old but not yet 

40 years old; (8) Supplemental Security Income recipients; and (9) long-term family assistance 

recipients.

The WOTC is equal to 40 percent (25 percent for employment of 400 hours or less) of qualified 

wages paid during the first year of employment with a business (i.e., first-year wages). Qualified 

first-year wages are capped at the first $3,000 for summer youth employees, $10,000 for longterm family assistance recipients, $12,000 for disabled veterans hired within one year of being 

discharged or released from active duty, $14,000 for long-term unemployed veterans, $24,000 

for long-term unemployed veterans who are also disabled, and $6,000 for all other categories of 

targeted individuals. In addition, the first $10,000 of qualified second-year wages paid to longterm family assistance recipients is eligible for a 50-percent credit. A disabled veteran is a 

veteran entitled to compensation for a service-connected disability.

Qualified wages are those wages subject to the Federal Unemployment Tax Act, without regard 

to any dollar limitation in section 3306(b), paid by the employer to a member of a targeted 

group. Individuals must be certified by a designated local agency as a member of a targeted 

group. The WOTC does not apply to wages paid to individuals who work fewer than 120 hours 

in the first year of service. The employer’s deduction for wages is reduced by the amount of the 

credit. The WOTC may fully offset alternative minimum tax liability.

The WOTC is generally not available to qualified tax-exempt organizations, except for those 

employing qualified veterans. A qualified tax-exempt organization means an employer that is 

described in section 501(c) and exempt from tax under section 501(a). A credit of 26 percent 

(16.25 percent for employment of 400 hours or less) of qualified first-year wages is allowed 

against the Federal Insurance Contributions Act taxes of the organization. 

The Indian employment credit is equal to 20 percent of the excess of qualified wages and health 

insurance costs paid or incurred by an employer in the current tax year over the amount of such 
14

wages and costs paid or incurred by the employer in calendar year 1993. Qualified wages and 

health insurance costs with respect to any employee for the taxable year may not exceed 

$20,000. The employer’s deduction for wages is reduced by the amount of the credit. Qualified 

wages do not include any wages taken into account in determining the WOTC.

A qualified employee is an individual who is an enrolled member of an Indian tribe (or is the 

spouse of an enrolled member), lives on or near the reservation where he or she works, performs 

services that are substantially all within the Indian reservation, and receives wages from the 

employer that are less than or equal to $30,000 (adjusted annually for inflation after 1994) when 

determined at an annual rate. The inflation adjusted wage limit was $45,000 for 2013. The 

credit is not available for employees involved in certain gaming activities or who work in a 

building that houses such activities. 

Reasons for Change

The Indian employment credit was originally enacted in 1993 and the WOTC was originally 

enacted in 1996, both on a temporary basis. Both credits have been extended numerous times, 

but extension has often been retroactive or near the expiration date. This pattern leads to 

uncertainty for employers regarding the availability of the credit and may limit the incentive the 

credits provide for employers to employ individuals from the targeted groups. To improve the 

effectiveness of the credits, both credits should be made permanent.

Disabled veterans may pursue educational and other training opportunities after release or 

discharge from military service before entering the civilian workforce, yet few who pursue such 

education or training would be likely to complete it within the one-year period in which they 

would remain qualified for the WOTC under current law. The Administration believes that such 

education and training is beneficial and that disabled veterans who pursue such opportunities 

should remain a qualified veteran for the purpose of the WOTC until six months after the 

education or training is completed.

The Indian employment credit is structured as an incremental credit where current year qualified 

wages and health insurance costs in excess of such costs paid in the base year (1993), are subject 

to the credit. Updating the base year would eliminate the need for taxpayers to maintain tax 

records long beyond the normal requirements, and would restore the original incremental design 

of the credit.

Proposal

The proposal would permanently extend the WOTC to apply to wages paid to qualified 

individuals who begin work for the employer after December 31, 2013. 

In addition, for individuals who begin work for the employer after December 31, 2014, the 

definition of a qualified veteran would be expanded. Qualified veterans would now include 

disabled veterans who use G.I. Bill benefits to attend a qualified educational institution or 

training program within one year of being discharged or released from active duty, and are hired 

within six months of ending attendance at the qualified educational institution or training 
15

program. Qualified first-year wages of up to $12,000 paid to such individuals would be eligible 

for the WOTC. 

The proposal would permanently extend the Indian employment credit to apply to wages paid to 

qualified employees in tax years beginning after December 31, 2013. 

In addition, the proposal would modify the calculation of the credit. For tax years beginning 

after December 31, 2014, the credit would be equal to 20 percent of the excess of qualified 

wages and health insurance costs paid or incurred by an employer in the current tax year over the 

amount of such wages and costs paid or incurred by the employer in the base year. The base 

year costs would equal the average of such wages and costs for the two tax years prior to the 

current tax year.
16

MODIFY AND PERMANENTLY EXTEND RENEWABLE ELECTRICITY 

PRODUCTION TAX CREDIT

Current Law

The general business tax credit includes a renewable electricity production tax credit, which is a 

credit (indexed annually for inflation) per kilowatt-hour of electricity produced from qualified 

energy facilities. Qualified energy resources comprise wind, closed-loop biomass, open-loop 

biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower 

production, and marine and hydrokinetic renewable energy. Construction of a qualified facility 

must have begun before the end of 2013 for the facility to be eligible for the renewable 

electricity production tax credit. 

The base amount of the electricity production credit is 1.5 cents (indexed annually for inflation) 

per kilowatt-hour of electricity produced. The amount of the credit was 2.3 cents per kilowatthour for 2013. The electricity must be sold to an unrelated third party and a taxpayer may 

generally claim a credit during the 10-year period commencing with the date the qualified 

facility is placed in service. In the case of open-loop biomass facilities (including agricultural 

livestock waste nutrient facilities), small irrigation power facilities, landfill gas facilities, trash 

combustion facilities, qualified hydropower facilities, and marine and hydrokinetic renewable 

energy facilities, the otherwise allowable credit amount is 0.75 cents per kilowatt-hour, indexed 

for inflation measured after 1992 (1.1 cents per kilowatt-hour for 2013).

For all qualifying facilities, other than closed-loop biomass facilities modified to co-fire with 

coal, to co-fire with other biomass, or to co-fire with coal and other biomass, the amount of 

credit a taxpayer may claim is reduced by reason of grants, tax-exempt bonds, subsidized energy 

financing, and other credits, but the reduction cannot exceed 50 percent of the otherwise 

allowable credit. In the case of closed-loop biomass facilities modified to co-fire with coal 

and/or other biomass, there is no reduction in credit by reason of grants, tax-exempt bonds, 

subsidized energy financing, and other credits. 

The general business credit also includes an investment tax credit for qualified energy property. 

A permanent, nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment that either (1) uses solar energy to generate electricity, to heat or cool 

a structure, or to provide solar process heat, or (2) is used to produce, distribute, or use energy 

derived from a geothermal deposit. The credit for solar energy property temporarily is increased 

to 30 percent for solar facilities placed in service prior to January 1, 2017. 

In addition, energy investment credits are available for qualifying geothermal heat pump 

property, small wind property, combined heat and power property fuel cells, and microturbines 

placed in service prior to January 1, 2017.

Reasons for Change

Production of renewable electricity and investment in property qualifying for the investment tax 

credit for energy property further the Administration’s policy of supporting a clean energy 
17

economy, reducing our reliance on oil, and cutting greenhouse gas pollution. The extension of 

incentives for production and investment is necessary to the continued success of that policy. In 

addition, many renewable developers have insufficient income tax liability to claim the 

renewable electricity production tax credits and must enter into joint ventures or other financing 

transactions with other firms in order to take advantage of them. Making the credits refundable 

will reduce transaction costs, thereby increasing the incentives for firms to produce clean 

renewable energy. Extending this policy permanently will provide certainty for business 

planning. Furthermore, some renewable electricity is consumed directly by the facility that owns 

the energy property and is not sold to an unrelated third party. Allowing such directly consumed 

electricity, when its production can be independently verified, to be eligible for the credit will 

increase the incentives for businesses to produce clean renewable energy.

Proposal

The proposal would extend prior law for facilities on which construction begins before the end of 

2014. For facilities on which construction begins after December 31, 2014, the proposal would 

permanently extend the renewable electricity production tax credit and make it refundable. The 

renewable electricity production tax credit would also be available to otherwise eligible 

renewable electricity consumed directly by the producer, rather than sold to an unrelated third 

party, to the extent that its production can be independently verified. Solar facilities that 

currently qualify for the investment tax credit would be eligible for the renewable electricity 

production tax credit in lieu of the investment tax credit through 2016. Solar facilities placed in 

service after 2016 would only be eligible for the renewable electricity production tax credit.

The permanent 10-percent business energy credit for solar and geothermal property would be 

repealed for property placed in service after December 31, 2016. The temporary 30-percent 

credit for solar investments and the temporary credits for qualifying geothermal heat pump 

property, small wind property, combined heat and power property fuel cells, and microturbines 

would be allowed to expire.
18

MODIFY AND PERMANENTLY EXTEND THE DEDUCTION FOR ENERGYEFFICIENT COMMERCIAL BUILDING PROPERTY

Current Law

Taxpayers are allowed to deduct expenditures for energy efficient commercial building property 

placed in service on or before December 31, 2013. Energy efficient commercial building 

property is defined as property (1) installed on or in any building that is located in the United 

States and is within the scope of Standard 90.1-2001, (2) installed as part of (i) the interior 

lighting systems, (ii) the heating, cooling, ventilation, and hot water systems, or (iii) the building 

envelope, (3) certified as being installed as part of a plan designed to reduce the total annual 

energy use with respect to the interior lighting, heating, cooling, ventilation, and hot water 

systems of the building by 50 percent or more in comparison to a reference building that meets 

the minimum requirements of Standard 90.1-2001, and (4) with respect to which depreciation (or 

amortization in lieu of depreciation) is allowable. Standard 90.1-2001, as referred to here, is 

Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning 

Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA) as in 

effect on April 2, 2003 – a nationally accepted building energy code that has been adopted by 

State and local jurisdictions throughout the United States; new editions of the standard are 

reviewed by the Department of Energy under section 304 of the Energy Conservation and 

Production Act (P.L. 94-385). The maximum allowable deduction with respect to a building for 

all tax years is limited to $1.80 per square foot. 

In the case of a building that does not achieve a 50-percent energy savings, a partial deduction is 

allowed with respect to each separate building system (interior lighting; heating, cooling, 

ventilation, and hot water; and building envelope) that meets the system-specific energy-savings 

target prescribed by the Secretary of the Treasury. The applicable system-specific savings 

targets are those that would result in a total annual energy savings with respect to the whole 

building of 50 percent, if each of the separate systems met the system-specific target. The 

maximum allowable deduction for each separate system is $0.60 per square foot. 

The deduction is allowed in the year in which the property is placed in service. If the energy 

efficient commercial building property expenditures are made by a Federal, State, or local 

government or a political subdivision thereof, the deduction may be allocated to the person 

primarily responsible for designing the property. 

Reasons for Change

The President has called for a new Better Buildings Initiative that would reduce energy usage in 

commercial buildings by 20 percent over 10 years. This initiative would catalyze private sector 

investment to upgrade the efficiency of commercial buildings. Enhancing the current deduction 

for energy efficient commercial building property – which is primarily used by taxpayers 

constructing new buildings – and allowing a new deduction based on the energy savings 

performance of commercial building property installed in existing buildings would encourage 

private sector investments in energy efficiency improvements. 
19

Proposal

The proposal would extend the current law for property placed in service before January 1, 2015 

and update it to apply Standard 90.1-2004. For facilities placed in service after December 31, 

2014, the proposal would permanently extend and modify the current deduction with a larger 

fixed deduction. The deduction would be $3.00 per square foot for improvements that are part of 

a certified plan designed to reduce energy use by the building as a whole by at least 50 percent, 

relative to a reference building that meets the minimum requirements of Standard 90.1-2004. 

For improvements that are part of a certified plan to reduce energy use by one of the separate 

building systems by a proportion that would lead to at least 50-percent savings if applied to the 

building as a whole, the deduction would be $1.00 per square foot. For taxpayers that 

simultaneously satisfy the energy savings targets for both the building envelope and heating, 

cooling, ventilation, and hot water systems, the deduction would be $2.20. Energy-savings 

reference standards would be updated every three years by the Secretary of Treasury in 

consultation with the Secretary of Energy to encourage innovation by the commercial building 

industry.

The proposal would also provide a new deduction based on projected energy savings achieved by 

the retrofitting of existing commercial buildings. Deduction amounts and energy-savings targets 

would be the same as for new commercial buildings but the building’s projected energy savings 

would be measured relative to a specified energy-use baseline. The deduction would only apply 

to existing buildings with at least 10 years of occupancy. Projections of energy savings and 

specification of the comparison energy-use baselines for existing buildings would be based on 

methods and procedures provided by Secretary of Treasury in consultation with Secretary of 

Energy. 

Special rules would be provided to allow the credit to benefit a real estate investment trust or its 

shareholders.

A taxpayer may only take one deduction for each commercial building property. 

The deduction would be available for property placed in service after December 31, 2014.
20

TAX RELIEF FOR SMALL BUSINESS

EXTEND INCREASED EXPENSING FOR SMALL BUSINESS

Current Law

Section 179 of the Internal Revenue Code provides that, in place of capitalization and 

depreciation, taxpayers may elect to deduct a limited amount of the cost of qualifying 

depreciable property placed in service during a taxable year. The deduction limit is reduced by 

the amount by which the cost of qualifying property placed in service during the taxable year 

exceeds a specified threshold amount. The maximum deduction amount and the beginning of the 

phase-out range have been adjusted several times in recent years. For qualifying property placed 

in service in taxable years beginning in 2007, the maximum deduction amount was $125,000, but 

this level was reduced by the amount that a taxpayer’s qualifying investment exceeded $500,000. 

These two amounts were to have been indexed for inflation in subsequent years (2008-2010). 

For taxable years 2008 and 2009, however, the maximum deduction was changed to $250,000, 

with the phase-out beginning at $800,000 of qualifying investment, and for 2010 and 2011, these 

amounts were changed to $500,000 and $2 million, respectively. The American Taxpayer Relief 

Act of 2012 continued the 2011 amounts through 2013. For qualifying property placed in 

service in taxable years beginning after 2013, the limits revert to pre-2003 law, with $25,000 as 

the maximum deduction and $200,000 as the beginning of the phase-out range, with no indexing 

for inflation.

Qualifying property is defined generally as depreciable tangible personal property that is 

purchased for use in the active conduct of a trade or business. However, only $25,000 of the cost 

of any sport utility vehicle may be taken into account. For taxable years beginning after 2002 

and before 2014, off-the-shelf computer software is considered qualifying property. For taxable 

years 2010 through 2013, the definition of qualifying property also includes certain real property, 

such as leasehold improvement property, restaurant property and retail improvement property, 

but the maximum amount of the cost of such real property that may be expensed is $250,000.

The amount allowed as a deduction for any taxable year cannot exceed the taxable income of the 

taxpayer (computed without regard to the section 179 deduction) that is derived from the active 

conduct of a trade or business for that taxable year. Deductions disallowed because of this 

limitation may be carried forward to the following taxable year, except that disallowed amounts 

allocated to real property investments may not be carried over to a taxable year beginning after 

2013.

A section 179 election is currently revocable by the taxpayer with respect to any property, but 

such revocation, once made, is irrevocable. However, an election made with respect to a taxable 

year beginning after 2013 will not be revocable, except with the consent of the Secretary.

Reasons for Change

Making permanent the section 179 limits in effect for 2010 through 2013 would achieve several 

goals. It would provide stability for business planning. By expensing capital purchases, it would 
21

reduce the after-tax cost relative to the claiming of regular depreciation deductions and would 

encourage greater investment activity (and, thus, greater job creation) by small businesses and 

entrepreneurs. It would provide simplification for many small businesses by allowing them to 

avoid the complexity of tracking depreciation. It would provide significant tax relief to 

America’s small businesses and entrepreneurs.

Proposal

The proposal would permanently extend the 2013 section 179 expensing and investment 

limitations. The deduction limit of $500,000 and the $2 million level for beginning the phaseout would be indexed for inflation for all taxable years beginning after 2013, as would the dollar 

limitation on the expensing of sport utility vehicles. Qualifying property would permanently 

include off-the-shelf computer software, but would not include real property. An election under 

section 179 would be revocable by the taxpayer with respect to any property, but such 

revocation, once made, would be irrevocable. 

The proposal would be effective for qualifying property placed in service in taxable years 

beginning after December 31, 2013.
22

ELIMINATE CAPITAL GAINS TAXATION ON INVESTMENTS IN SMALL 

BUSINESS STOCK 

Current Law

Under the Small Business Jobs Act of 2010, section 1202 was amended so that taxpayers other 

than corporations may exclude 100 percent of the gain from the sale of “qualified small business 

stock” acquired after September 27, 2010 and before January 1, 2011, and held for at least five 

years, provided various requirements are met. The Tax Relief, Unemployment Insurance 

Reauthorization and Job Creation Act of 2010 extended this 100-percent exclusion to eligible 

stock acquired before January 1, 2012, and the American Tax Relief Act of 2012 further 

extended the 100-percent exclusion to eligible stock acquired before January 1, 2014. The 

excluded gain is not a preference under the Alternative Minimum Tax (AMT) for eligible stock 

acquired after September 27, 2010 and before January 1, 2014. 

Prior law provided a 50-percent exclusion (60-percent for certain empowerment zone businesses) 

for qualified small business stock. The taxable portion of the gain is taxed at a maximum rate of 

28 percent. The AMT treats 28 percent of the excluded gain on eligible stock acquired after 

December 31, 2000 and 42 percent of the excluded gain on stock acquired before January 1, 

2001 as a tax preference. A 75-percent exclusion enacted under the American Recovery and 

Reinvestment Act of 2009 applies to qualified stock acquired after February 17, 2009, and before 

September 28, 2010 with 21 percent of the excluded gains subject to the AMT.

The maximum amount of gain eligible for the exclusion by a taxpayer with respect to any single 

corporation during any year is the greater of (1) ten times the taxpayer’s basis in stock issued by 

the corporation and disposed of during the year, or (2) $10 million reduced by gain excluded in 

prior years on dispositions of the corporation’s stock. To qualify as a “small business,” the 

corporation, when the stock is issued, may not have gross assets exceeding $50 million 

(including the proceeds of the newly issued stock) and must be a C corporation. 

The corporation also must meet certain active trade or business requirements. For example, the 

corporation must be engaged in a trade or business other than: one involving the performance of 

services in the fields of health, law, engineering, architecture, accounting, actuarial science, 

performing arts, consulting, athletics, financial services, brokerage services, or any other trade or 

business where the principal asset of the trade or business is the reputation or skill of one or more 

employees; a banking, insurance, financing, leasing, investing or similar business; a farming 

business; a business involving production or extraction of items subject to depletion; or a hotel, 

motel, restaurant, or similar business. There are limits on the amount of real property that may 

be held by a qualified small business, and ownership of, dealing in, or renting real property is not 

treated as an active trade or business.

A related provision, section 1045, allows investors that sell qualified small business stock held 

over six months to defer recognition of capital gain by reinvesting the sales proceeds in new 

qualified stock within 60 days. Under this rollover provision, the investor’s basis in the new 

stock is reduced by the amount of the deferred gain. 
23

Reasons for Change

Making the exclusion for small business stock gain permanent would encourage and reward new 

investment in qualified small business stock. However, treatment of a percentage of excluded 

gain as a preference under the AMT eliminates almost all of the benefit of the provision for 

investments made before February 18, 2009. In addition, the current 60-day rollover period 

under section 1045 for reinvesting proceeds from the sale of qualified small business stock is 

inadequate. Increasing the rollover period for reinvestment would increase the use of this 

provision and increase the supply of investment capital for small business. 

Proposal

The proposal would make the 100-percent exclusion for qualified small business stock 

permanent. The AMT preference item for gain excluded under section 1202 would be repealed 

for all excluded gain on qualified small business stock. In addition to the current 60-day rollover 

period under section 1045, a new six-month rollover period is proposed for taxpayers to reinvest 

the proceeds from sales of qualified small business stock held longer than three years. Other 

limitations on the section 1202 exclusion would continue to apply. The proposal would clarify 

that small business stock can include stock acquired upon the exercise of warrants and options if 

such stock rights are acquired at original issue from the corporation, and that all relevant holding 

periods for such stock start on the date the stock is issued by the corporation to the taxpayer. The 

proposal would include additional information reporting requirements to assure compliance with 

those limitations, and taxpayers would be required to report qualified sales on their tax returns.

The proposal would be effective for qualified small business stock acquired after December 31, 

2013.
24

INCREASE THE LIMITATIONS FOR DEDUCTIBLE NEW BUSINESS 

EXPENDITURES AND CONSOLIDATE PROVISIONS FOR START-UP AND 

ORGANIZATIONAL EXPENDITURES

Current Law

Start-up expenditures (under section 195) consist of any amount (other than interest, taxes, or 

research and experimental expenditures) that would be deductible if paid or incurred in 

connection with the operation of an existing active trade or business, but which is instead 

incurred in connection with (1) investigating the creation or acquisition of an active trade or 

business, (2) creating an active trade or business, or (3) any activity engaged in for profit and for 

the production of income before the day on which the active trade or business begins, in 

anticipation of such activity becoming an active trade or business.

Organizational expenditures (under sections 248 and 709) are expenditures that are incident to 

the creation of a corporation or partnership, chargeable to a capital account, and are of a 

character which, if expended incident to the creation of a corporation or partnership having a 

limited life, would be amortizable over such life.

In general, a taxpayer may elect to deduct up to $5,000 of start-up expenditures in the taxable 

year in which the active trade or business begins, and to amortize the remaining amount ratably 

over the 180-month period beginning with the month in which the active trade or business 

begins. The $5,000 amount is reduced (but not below zero) by the amount by which such startup expenditures exceed $50,000. Similarly, a taxpayer may elect to deduct up to $5,000 of 

organizational expenditures in the taxable year in which the corporation or partnership begins 

business, and to amortize the remaining amount ratably over the 180-month period beginning 

with the month in which the corporation or partnership begins business. The $5,000 amount is 

reduced (but not below zero) by the amount by which such corporate or partnership 

organizational expenditures exceed $50,000.

In the case of a taxable year beginning in 2010, the Small Business Jobs Act of 2010 increased 

the $5,000 limit on expensed start-up expenditures to $10,000, and that amount was reduced (but 

not below zero) by the amount by which start-up expenditures with respect to the active trade or 

business exceeded $60,000.

Reasons for Change

An immediate deduction of new business expenditures lowers the tax cost of investigating new 

business opportunities and investing in new business activities. Increasing the dollar limit on 

expensed new business expenditures and increasing the phase-out amount would support new

business formation and job creation. Consolidating the Code provisions relating to expenditures 

incurred by new businesses simplifies tax administration and reduces new business owners’ tax 

compliance burden. 
25

Proposal

The Administration proposes to permanently allow up to $20,000 of new business expenditures 

to be deducted in the taxable year in which a trade or business begins and to amortize the 

remaining amount ratably over the 180-month period beginning with the month in which the 

business begins. This maximum amount of expensed new business expenditures would be 

reduced (but not below zero) by the amount by which new business expenditures with respect to 

the business exceed $120,000. New business expenditures would include amounts incurred in 

connection with (1) investigating the creation or acquisition of an active trade or business, 

(2) creating an active trade or business, (3) any activity engaged in for profit and for the 

production of income before the day on which the active trade or business begins, in anticipation 

of such activity becoming an active trade or business, and (4) expenditures that are incident to 

the creation of an entity taxed as a corporation or partnership, that are chargeable to a capital 

account and are of a character which, if expended incident to the creation of a corporation or 

partnership having a limited life, would be amortizable over such life.

The proposal would be effective for taxable years ending on or after the date of enactment.
26

EXPAND AND SIMPLIFY THE TAX CREDIT PROVIDED TO QUALIFIED SMALL 

EMPLOYERS FOR NON-ELECTIVE CONTRIBUTIONS TO EMPLOYEE HEALTH 

INSURANCE

Current Law

The cost to an employer of providing health coverage for its employees is generally deductible as 

an ordinary and necessary business expense for employee compensation. In addition, the value 

of employer-provided health coverage is not subject to employer-paid Federal Insurance 

Contributions Act tax. 

Employees are generally not taxed on the value of employer-provided health coverage for 

themselves, their spouses and their dependents under an accident or health plan. That is, health 

coverage benefits are excluded from gross income for purposes of income and employment 

taxes. Active employees may be able to pay for limited amounts of medical care and for their 

own employee premium contributions on a pre-tax basis through a cafeteria plan. 

The Affordable Care Act created a tax credit to help small employers provide health insurance 

for employees and their families. An employer must make uniform contributions of at least 50 

percent of the premium to qualify for the credit. For taxable years beginning in 2010 through 

2013, the credit was available for any health insurance coverage purchased from an insurance 

company licensed under State law. For taxable years beginning after December 31, 2013, the 

credit is generally available only for health insurance purchased through an Affordable Insurance 

Exchange and is available only for a maximum coverage period of two additional consecutive 

taxable years, beginning with the first year in which the employer or any predecessor first offers 

any qualified plans to its employees through an Exchange.

For-profit firms may claim the tax credit as a general business credit and may carry the credit 

back for one year and carry the credit forward for 20 years. The credit is available for tax 

liability under the alternative minimum tax. For tax-exempt organizations, the credit is 

refundable and is capped at the amount of income tax withholding for employees and both the 

employee and employer portion of the health insurance (Medicare) payroll tax. 

A qualified employer is an employer with no more than 25 full-time equivalent employees 

during the taxable year and whose employees have annual full-time equivalent wages that 

average no more than $50,000 (indexed beginning 2014). 

During 2010 through 2013, the maximum credit was 35 percent (25 percent for tax-exempt 

employers) of the employer’s contributions to the premium. For 2014 and later years, the 

maximum credit percentage is 50 percent (35 percent for tax-exempts). For taxable years 2010 

through 2013 eligible employer contributions were limited by the amount the employer would 

have contributed under the State average premium. For taxable years beginning after 2013, 

eligible employer contributions are limited by the average premium for the small group market in 

the rating area in which the employee enrolls for coverage. For example if the average premium 

in an employee's rating area was $5,000, an employer paying for 60 percent of a single plan 
27

costing $5,500 per year could claim no more than 60 percent of $5,000 in qualified employer 

contributions for purposes of calculating the credit. 

The credit is phased out on a sliding scale between 10 and 25 full-time equivalent employees as 

well as between an average annual wage of $25,000 (indexed) and $50,000 (indexed). Because 

the reductions are additive, an employer with fewer than 25 full-time employees paying an 

average wage less than $50,000 might not be eligible for any tax credit. For example, 

an employer with 18 full-time equivalent employees and an average annual wage of $37,500 

would have its credit reduced first by slightly more than half for the phase-out based on the 

number of employees and then by an additional half for the phase-out based on the average 

wage, thereby eliminating the entire credit. 

Reasons for Change

Expanding eligibility for the credit and simplifying its operation would increase the utilization of 

the tax credit, and encourage more small employers to provide health benefits to employees and 

their families. The credit also provides an incentive for small employers to join an Exchange, 

thereby broadening the risk pool. 

The current law denial of the credit to otherwise eligible small employers due to the additive 

nature of the credit phase-outs may be perceived to be unfair. In addition, the uniform 

contribution requirement and the rating area premium contribution limit add complexity and may 

discourage some small employers from taking advantage of the credit. 

Proposal

The proposal would expand the group of employers who are eligible for the credit to include 

employers with up to 50 full-time equivalent employees and would begin the phase-out at 20 

full-time equivalent employees. In addition, there would be a change in the coordination of the 

phase-outs based on average wage and the number of employees (using a formula that is 

multiplicative rather than additive) so as to provide a more gradual combined phase-out. As a 

result, the proposal would ensure that employers with fewer than 50 employees and an average 

wage less than $50,000 would be eligible for the credit, even if they are nearing the end of both 

phase-outs. The proposal would also eliminate the requirement that an employer make a uniform 

contribution on behalf of each employee (although applicable nondiscrimination laws will still 

apply), and would eliminate the limit imposed by the rating area average premium. 

The proposal would be effective for taxable years beginning after December 31, 2013. 
28

INCENTIVES TO PROMOTE REGIONAL GROWTH

MODIFY AND PERMANENTLY EXTEND THE NEW MARKETS TAX CREDIT

(NMTC)

Current Law

The NMTC is a 39-percent credit for qualified equity investments (QEIs) made to acquire stock 

in a corporation, or a capital interest in a partnership, that is a qualified community development 

entity (CDE) and is held for a period of seven years. The allowable credit amount for any given 

year is the applicable percentage (five percent for the year the equity interest is purchased from 

the CDE and for each of the two subsequent years, and six percent for each of the following four 

years) of the amount paid to the CDE for the investment at its original issue. The NMTC is 

available for a taxable year to the taxpayer who holds the QEI on the date of the initial 

investment or on the respective anniversary date that occurs during the taxable year. The credit

is recaptured if at any time during the seven-year period that begins on the date of the original 

issue of the investment the entity ceases to be a qualified CDE, the proceeds of the investment 

cease to be used as required, or the equity investment is redeemed.

Under current law, the NMTC can be used to offset regular federal income tax liability but 

cannot be used to offset alternative minimum tax (AMT) liability.

The NMTC expired on December 31, 2013.

Reasons for Change

Permanent extension of the NMTC would allow CDEs to continue to generate investments in 

low-income communities. This would also create greater certainty for investment planning 

purposes. 

Proposal

The proposal would extend the NMTC permanently, with an allocation amount of $5 billion for 

each round. The proposal also would permit NMTC amounts resulting from QEIs made after 

December 31, 2013, to offset AMT liability.

The proposal would be effective upon enactment.
29

RESTRUCTURE ASSISTANCE TO NEW YORK CITY, PROVIDE TAX INCENTIVES 

FOR TRANSPORTATION INFRASTRUCTURE

Current Law

The Job Creation and Worker Assistance Act of 2002 (the Act) provided tax incentives for the 

area of New York City damaged or affected by the terrorist attacks on September 11, 2001. The 

Act created the “New York Liberty Zone,” defined as the area located on or south of Canal 

Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its 

intersection with East Broadway) in the Borough of Manhattan in the City of New York, New 

York. New York Liberty Zone tax incentives included: (1) an expansion of the work opportunity 

tax credit (WOTC) for New York Liberty Zone business employees; (2) a special depreciation 

allowance for qualified New York Liberty Zone property; (3) a five-year recovery period for 

depreciation of qualified New York Liberty Zone leasehold improvement property; (4) $8 billion 

of tax-exempt private activity bond financing for certain nonresidential real property, residential 

rental property and public utility property; (5) $9 billion of additional tax-exempt, advance 

refunding bonds; (6) increased section 179 expensing; and (7) an extension of the replacement 

period for nonrecognition of gain for certain involuntary conversions.1

The expanded WOTC credit provided a 40-percent subsidy on the first $6,000 of annual wages 

paid to New York Liberty Zone business employees for work performed during 2002 or 2003. 

The special depreciation allowance for qualified New York Liberty Zone property equals 30 

percent of the adjusted basis of the property for the taxable year in which the property was 

placed in service. Qualified nonresidential real property and residential rental property must 

have been purchased by the taxpayer after September 10, 2001, and placed in service before 

January 1, 2010. Such property is qualified property only to the extent it rehabilitates real 

property damaged, or replaces real property destroyed or condemned, as a result of the 

September 11, 2001, terrorist attacks.2

The five-year recovery period for qualified leasehold improvement property applied, in general, 

to buildings located in the New York Liberty Zone if the improvement was placed in service 

after September 10, 2001, and before January 1, 2007, and no written binding contract for the 

improvement was in effect before September 11, 2001. 

The $8 billion of tax-exempt private activity bond financing is authorized to be issued by the 

State of New York or any political subdivision thereof after March 9, 2002, and before January 

1, 2014. 

The $9 billion of additional tax-exempt, advance refunding bonds was available after March 9, 

2002, and before January 1, 2006, with respect to certain State or local bonds outstanding on 

 1 The Working Families Tax Relief Act of 2004 amended certain New York Liberty Zone provisions relating to taxexempt bonds.

2 Other qualified property must have been placed in service prior to January 1, 2007.
30

September 11, 2001.

Businesses were allowed to expense the cost of certain qualified New York Liberty Zone 

property placed in service prior to 2007, up to an additional $35,000 above the amounts 

generally available under section 179. In addition, only 50 percent of the cost of such qualified 

New York Liberty Zone property counted toward the limitation under which section 179 

deductions are reduced to the extent the cost of section 179 property exceeds a specified amount. 

A taxpayer may elect not to recognize gain with respect to property that is involuntarily 

converted if the taxpayer acquires within an applicable period (the replacement period) property 

similar or related in service or use. In general, the replacement period begins with the date of the 

disposition of the converted property and ends two years (three years if the converted property is 

real property held for the productive use in a trade or business or for investment) after the close 

of the first taxable year in which any part of the gain upon conversion is realized. The Act 

extended the replacement period to five years for property in the New York Liberty Zone that 

was involuntarily converted as a result of the terrorist attacks on September 11, 2001, if 

substantially all of the use of the replacement property is in New York City. 

Reasons for Change

Some of the tax benefits that were provided to New York following the attacks of September 11, 

2001, likely will not be usable in the form in which they were originally provided. State and 

local officials in New York have concluded that improvements to transportation infrastructure 

and connectivity in the Liberty Zone would have a greater impact on recovery and continued 

development than would continuing some of the original tax incentives. 

Proposal

The proposal would provide tax credits to New York State and New York City for expenditures 

relating to the construction or improvement of transportation infrastructure in or connecting to 

the New York Liberty Zone. New York State and New York City each would be eligible for a 

tax credit for expenditures relating to the construction or improvement of transportation 

infrastructure in or connecting to the New York Liberty Zone. The tax credit would be allowed 

in each year from 2015 to 2024, inclusive, subject to an annual limit of $200 million (for a total 

of $2 billion in tax credits), and would be divided evenly between the State and the City. Any 

unused credits below the annual limit would be added to the $200 million annual limit for the 

following year, including years after 2024. Similarly, expenditures that exceed the annual limit 

would be carried forward and subtracted from the annual limit in the following year. The credit 

would be allowed against any payments (other than payments of excise taxes and social security 

and Medicare payroll taxes) made by the City and State under any provision of the Internal 

Revenue Code, including income tax withholding. The Treasury Department would prescribe 

such rules as are necessary to ensure that the expenditures are made for the intended purposes. 

The amount of the credit received would be considered State and local funds for the purpose of 

any Federal program. 

The proposal would be effective after December 31, 2014. 
31

Reform and Expand the Low-Income Housing Tax Credit (LIHTC)

ALLOW CONVERSION OF PRIVATE ACTIVITY BOND VOLUME CAP INTO LOWINCOME HOUSING TAX CREDITS (LIHTCS)

Current Law

In general, gross income does not include interest on any State or local bond if the bond is a 

qualified private activity bond. One of the requirements to be a qualified private activity bond is 

that the bond generally needs to be part of an issue whose face amount, together with the face 

amount of other private activity bonds issued by the issuing authority in the calendar year, does 

not exceed the maximum amount of private activity bonds that the authority may issue for the 

year (referred to as the “PAB volume cap”). Every year, under the Internal Revenue Code (the 

Code), each State is allowed a limited amount of PAB volume cap.

Each year, the Code also provides each State with a limited amount of LIHTCs for the State to 

allocate. In addition to receiving a State allocation of LIHTCs, a building owner can generate

LIHTCs by financing the building with qualified private activity bonds. These latter LIHTCs 

may be earned on the qualified basis of a building if the qualified private activity bonds are 

subject to the PAB volume cap and they finance at least half of the aggregate basis of the 

building and the land. In the case of bond-derived credits, however, the credit rate is lower than 

the credit rate that generally applies to State-allocated credits.

Reasons for Change

State housing finance agencies in charge of allocating LIHTCs are often confronted with a larger 

number of deserving projects than they can support. Although bond-derived credits can facilitate 

the development of some buildings, other buildings can be built only with the higher credit rates 

that are available with allocated credits. Moreover, because issuance of bonds increases

transaction costs, use of bonds to finance smaller multi-family projects may not be economical. 

Increasing the volume of credits that are at a higher rate than bond-derived credits and that do 

not require issuance of bonds would allow the development of some meritorious projects for 

which the current supply of higher-rate credits is insufficient. 

Despite the transaction costs, some developers obtain LIHTCs by financing their buildings with 

private activity bonds, even though the developers have access to other, taxable financing that 

they would prefer to use. The resulting transaction costs consume resources that might otherwise 

provide affordable housing, and issuing these bonds for reasons other than obtaining financing 

unnecessarily adds them to the private activity bond marketplace.

Proposal

The proposal would provide two ways in which PAB volume cap could be converted into 

LIHTCs.
32

State conversion of PAB volume cap into LIHTCs that the State can allocate

States would be authorized to convert PAB volume cap to be received for a calendar year into 

LIHTC allocation authorization applicable to the same year. The conversion ratio would be reset 

each calendar year to respond to changing interest rates. In addition, each State would be subject 

to an annual maximum amount of PAB volume cap that can be converted.

Conversion ratio. For each $1,000 of PAB volume cap surrendered, the State would receive 

additional allocable LIHTCs for the calendar year equal to–

$1000 × twice the applicable percentage that applies for PAB-financed buildings and that 

is determined under section 42(b)(1)(B)(ii) for December of the preceding calendar year.

State-by-State limits on annual conversions. The aggregate amount of PAB volume cap that 

each State may convert with respect to a calendar year is eight percent of the PAB volume cap 

that the State receives for that year under section 146(d)(1).

The proposal would be effective with respect to PAB volume cap to be received in, and 

additional LIHTC allocation authority received for, calendar years beginning after the date of 

enactment.

Alternative qualification by building owners for PAB-related LIHTCs

Instead of obtaining the lower-rate credits by financing at least 50 percent of a building with taxexempt private activity bonds, a taxpayer could obtain these credits by satisfying the following 

requirements:

• There is an allocation of PAB volume cap in an amount not less than the amount of bonds 

that would be necessary to qualify for LIHTCs; and

• The volume cap so allocated reduces the State’s remaining volume cap as if tax-exempt 

bonds had been issued.

The proposal would be effective for projects that are allocated volume cap after the date of 

enactment.
33

ENCOURAGE MIXED INCOME OCCUPANCY BY ALLOWING LOW-INCOME 

HOUSING TAX CREDIT (LIHTC)-SUPPORTED PROJECTS TO ELECT A 

CRITERION EMPLOYING A RESTRICTION ON AVERAGE INCOME

Current Law

In order for a building to qualify for the LIHTC, a minimum portion of the units in the building 

must be rent restricted and occupied by low-income tenants. Under section 42(g)(1), the 

taxpayer makes an irrevocable election between two criteria. Either –

• At least 20 percent of the units must be rent restricted and occupied by tenants with 

income at or below 50 percent of area median income (AMI); or

• At least 40 percent of the units must be rent restricted and occupied by tenants with 

incomes at or below 60 percent of AMI. 

In all cases, qualifying income standards are adjusted for family size. The amount of the credit 

reflects the fraction of the building’s eligible basis that is attributable to the low-income units. 

Maximum allowable rents are restricted to 30 percent of the elected income standard, adjusted 

for the number of bedrooms in the unit.

Reasons for Change

In practice, these criteria often produce buildings that serve a very narrow income band of 

tenants – those just below the top of the eligible income range. For example, if the rentrestricted units in the building must be occupied by tenants at or below 60 percent of AMI, these 

units may end up being occupied by tenants with incomes that fall between 40 percent and 

60 percent of AMI. As a result, the income criteria do not include incentives to create mixedincome housing, and LIHTC-supported buildings may not be able to serve those most in need. 

Mixed-income buildings are especially important in low-income communities that are being 

revitalized and in sparsely populated rural areas. In addition, the inflexibility of the income 

criteria makes it difficult for LIHTC to support acquisition of partially or fully occupied 

properties for preservation or repurposing.

Proposal 

The proposal would add a third criterion to the two described above. When a taxpayer elects this 

criterion, at least 40 percent of the units in the project would have to be occupied by tenants with 

incomes that average no more than 60 percent of AMI. No rent-restricted unit, however, could 

be occupied by a tenant with income over 80 percent of AMI; and, for purposes of computing the 

average, any unit with an income limit that is less than 20 percent of AMI would be treated as 

having a 20-percent limit. Maximum allowable rents would be determined according to the 

income limit of the unit.

For example, suppose that a project has 70 identical rent-restricted units – 10 units with income 

limits of 20 percent of AMI, 10 with limits of 40 percent of AMI, 20 with limits of 60 percent of 
34

AMI, and 30 with limits of 80 percent of AMI. This would satisfy the new criterion because 

none of the limits exceeds 80 percent of AMI and the average does not exceed 60 percent of 

AMI. (10×20 + 10×40 + 20×60 + 30×80 = 4200, and 4200/70 = 60.)

A special rule would apply to rehabilitation projects that contain units that receive ongoing 

subsidies (e.g., rental assistance, operating subsidies, and interest subsidies) administered by the 

U.S. Department of Housing and Urban Development or the U.S. Department of Agriculture. If 

a tenant, when admitted to such a property, had an income not more than 60 percent of the thenapplicable AMI and if, when the tenant’s income is measured for purposes of LIHTC 

qualification, the tenant’s income is greater than 60 percent of the now-applicable AMI but not 

more than 80 percent of AMI (this fraction is called the “Credit-Year-1 AMI Percentage”), then, 

the taxpayer may make an election that would allow the tenant to remain in residence without 

impairing the building’s LIHTCs. In particular, the election would have the following 

consequences:

• The average-income criterion would be applied without taking that tenant’s unit into 

account;

• The requirement in the next-available-unit rule, see section 42(g)(2)(D)(ii), would apply; 

and

• The tenant’s unit would be treated as rent restricted if the gross rent collected from the 

unit does not exceed 30 percent of the Credit-Year-1 AMI Percentage times current AMI.

When the tenant moves out, if the unit is to continue to be rent-restricted, the income restriction 

on the unit would revert to 60 percent of AMI (or whatever other level the taxpayer determines, 

consistent with the criterion that was elected under section 42(g)(1)).

The proposal would be effective for elections under section 42(g)(1) that are made after the date 

of enactment.
35

CHANGE FORMULAS FOR 70 PERCENT PV AND 30 PERCENT PV LOW-INCOME 

HOUSING TAX CREDITS (LIHTCS)

Current Law

The owner of rental housing occupied by tenants having incomes below specified levels may 

claim the LIHTC over a 10-year period. The credits earned each year generally depend on three 

factors – the investment in the building, the portion of the building devoted to low-income units, 

and a credit rate (called the “applicable percentage”).

There are two applicable percentages, referred to as the 70-percent present value credit rate and 

the 30-percent present value credit rate. Each month, the Internal Revenue Service (IRS) 

announces these rates. The Internal Revenue Code prescribes discount factors and other 

computational assumptions that the IRS must use in setting the rates. The stated goal of the 

required computations is to ascertain rates such that the 10 annual installments of the credit have 

a present value of 70 percent (or 30 percent) of the total qualified basis of the property. 

(Generally, the qualified basis is the investment in the building, times the fraction of the building 

devoted to low-income units.)

The Housing and Economic Recovery Act of 2008 provided a temporary minimum applicable 

percentage of nine percent for the 70-percent present value credit rate for buildings placed in 

service before December 31, 2013. The American Taxpayer Relief Act of 2012 extended the 

nine-percent rate to apply to credit allocations made before January 1, 2014.

Every year, each State receives a limited number of LIHTCs that it may allocate. Most allocated 

LIHTCs are earned at the 70-percent present value credit rate (or, when applicable, at the ninepercent minimum rate). However, instead of a building owner earning LIHTCs as a result of a 

State allocation, if the owner uses tax-exempt private activity bonds to finance at least half of the 

cost of a building (including the land), then the entire qualified basis in the building may earn 

LIHTCs. These credits are at the 30-percent present value credit rate, and they do not reduce the 

State’s remaining allocable LIHTCs.

Reasons for Change

Experience has demonstrated that the current discounting formula does not function well when 

rates are particularly high or low. 

For example, when interest rates are very low (as they have been for the last few years) the 

statutorily prescribed discount rate is very low. As a result, the applicable percentage is 

determined using an artificially high present value for LIHTCs to be received toward the end of 

the credit period. This distortion produces applicable percentages that are so low that the LIHTC 

regime does not operate as Congress originally intended. The low rates prevent States from 

addressing their highest affordable-housing priorities, which often require relatively high levels 

of LIHTC subsidy. Moreover, there have been recent reductions in the Federal and State 

resources that might have filled financing gaps in LIHTC projects. This absence of alternative 
36

subsidies exacerbates the difficulty posed by the too-low discount rate. The temporary ninepercent floor was a response to these challenges.

Similarly, problems appear when interest rates are very high. In high-interest-rate environments, 

the statutory discount rate produces more accurate present value computations, but the need for 

LIHTCs is especially acute. LIHTC applicable percentages should be higher to counteract the 

fact that rising interest rates increase the gap between an owner’s expenditures, including 

especially debt service, and the restricted rents that the LIHTC statute allows the owner to 

collect.

Proposal

The proposal would allow the nine-percent temporary minimum applicable percentage to expire 

at the end of 2013 and would increase the discount rate used in the present value calculation for 

allocated LIHTCs. The new discount rate would better reflect private-market discount rates. 

The change would apply to both 70 percent and 30 percent allocated LIHTCs. Under the 

proposal, the discount rate to be used would be the average of the mid-term and long-term 

applicable Federal rates for the relevant month, plus 200 basis points. (However, the 30-percent 

present value credit rate for LIHTCs that result from tax-exempt bond financing would continue 

to be computed under current law.)

The proposal would be effective for allocations made on or after the date of enactment.
37

ADD PRESERVATION OF FEDERALLY ASSISTED AFFORDABLE HOUSING TO

ALLOCATION CRITERIA

Current Law

Each State (including State housing finance agencies in charge of allocating low income housing 

tax credits (LIHTCs)) must adopt a qualified allocation plan (QAP) to guide the allocation of 

LIHTCs. The Internal Revenue Code prescribes ten selection criteria that every QAP must 

include. These required criteria are: project location, housing needs characteristics, project 

characteristics (including whether the project includes the use of existing housing as part of a 

community revitalization plan), sponsor characteristics, tenant populations with special housing 

needs, public housing waiting lists, tenant populations of individuals with children, projects 

intended for eventual tenant ownership, the energy efficiency of the project, and the historic 

nature of the project. 

Reasons for Change

Preservation and rehabilitation of existing affordable housing is often a more efficient way of 

supplying affordable housing than is new construction. In addition, public resources may have 

already been expended in the development of existing affordable housing. Thus, preservation of 

federally assisted affordable housing should be encouraged.

Proposal

The proposal would add preservation of federally assisted affordable housing as an eleventh 

selection criterion that QAPs must include.

The proposal would be effective for allocations made in calendar years beginning after the date 

of enactment.
38

MAKE THE LOW-INCOME HOUSING TAX CREDIT (LIHTC) BENEFICIAL TO 

REAL ESTATE INVESTMENT TRUSTS (REITS)

Current Law

REITs and regulated investment companies (RICs) receive no benefit from becoming entitled to 

a general business credit under section 38, such as the LIHTC. Like other financial 

intermediaries, REITs and RICs are efficient investment vehicles only if they and their investors 

together incur only a single level of tax on the income from the REITs’ or RICs’ 

investments. The Internal Revenue Code (Code) achieves this result by allowing REITs and 

RICs a deduction for dividends paid (the DPD). Qualification requirements and an excise tax 

cause REITs and RICs to pay dividends of substantially all of their pre-DPD net income. In 

addition, the Code enables each REIT or RIC exactly to zero out its taxable income for the year 

by paying post-taxable-year-end dividends that the REIT or RIC may nevertheless deduct as if 

the dividends had been paid during the taxable year. A REIT or RIC that zeroes out its taxable 

income has no tax liability against which to use a tax credit.

Moreover, their shareholders would receive no benefit from REITs or RICs receiving those 

credits. REITs and RICs are C corporations. That is, unlike trusts, partnerships, and 

S corporations, they generally do not directly pass through tax items to their owners. A 

significant number of REIT shares are held by RICs.

The LIHTC provision in the Code encourages construction and major rehabilitation of affordable 

housing for low-income residents. A taxpayer is eligible to receive LIHTCs only after receiving 

an allocation either of credits or of tax-exempt volume cap from an appropriate State agency. In 

almost all financial climates, there are not enough allocations to satisfy all applicants. Although 

the credits that make up the general business credit are not transferable, in many cases –

including LIHTCs – there is, in effect, a “market” for the credits. The value of the credits in this 

market is reflected in the amount of equity that the credit can attract to the activity that Congress 

wanted to encourage when it created the credit.

Reasons for Change

The effectiveness of LIHTCs in increasing the construction and preservation of affordable 

housing would be enhanced if there were more demand for these credits. For example, during the 

recent economic crisis, there was a sharp drop in the amount that investors were willing to invest 

for each dollar of LIHTC acquired. If REIT shareholders could benefit from any LIHTCs that 

REITs receive, there would be an increase in demand.

Proposal

The proposal would permit a REIT that receives LIHTCs to designate as tax exempt some of the 

dividends that it distributes. Dividends so designated would be excluded from the gross income 

of the shareholders that receive them. The amount so designated could not exceed the quotient 

of the REIT’s LIHTCs for the year, divided by the highest corporate tax rate in section 11(b) of 

the Code. If there is insufficient E&P to pay this amount of dividends, the unused authority to 
39

designate tax-exempt dividends could be carried forward indefinitely. Also, if a REIT or RIC is 

a shareholder that receives these tax-exempt dividends, the recipient could designate as exempt a 

corresponding amount of dividends that it distributes. In the case of any compliance failure, the 

REIT would be responsible for recapture under section 42(j) as if it had used the credit to reduce 

its own tax liability. Under the proposal, the passive-loss and at-risk rules would not apply to the 

receipt of the exempt dividends.

The proposal would be effective for taxable years of a REIT that end after the date of enactment.
40

IMPLEMENT REQUIREMENT THAT LOW-INCOME HOUSING TAX CREDIT

(LIHTC)-SUPPORTED HOUSING PROTECT VICTIMS OF DOMESTIC ABUSE

Current Law

LIHTCs support the construction and preservation of a large portion of the nation’s affordable 

housing for people of limited means. For a project to qualify for LIHTCs, a minimum fraction of 

its units must be rent restricted and occupied by low-income individuals (defined as being at or 

below certain percentages of area median income; these units are referred to as “low-income” 

units.) The LIHTC program differs from most other Federal housing programs in its 

combination of the following attributes: the housing itself is owned and managed by privatesector persons, these persons are answerable in the first instance to State authorities, and the 

Federal role (undertaken by the Internal Revenue Service (IRS)) is to determine whether the 

owners are entitled to tax credits.

To ensure that low-income units remain low-income units for decades, no LIHTCs are allowed 

with respect to any building for any taxable year unless an extended low-income housing 

commitment (Long-Term Use Agreement, or Agreement) is in effect as of the end of the year. A 

Long-Term Use Agreement is a contract between the owner of the property and the applicable 

State housing credit agency (Agency). The Agreement must run with the land to bind future 

owners of the property for three decades or more, and certain provisions of the Agreement must 

be enforceable in State court not only by the Agency but also by any past, present, or future 

income-qualified tenant. In addition to requiring that certain minimum portions of a building be 

low-income units, the Long-Term Use Agreement must mandate certain conduct in the 

management of the building, including prohibiting the refusal to lease because the prospective 

tenant is a holder of a voucher or certificate of eligibility under section 8 of the United States 

Housing Act of 1937 and prohibiting eviction (other than for good cause) of any existing tenant 

in a low-income unit.

Credits are not available unless occupancy is available to the general public. Section 42(g)(9), 

however, clarifies that a project does not fail to meet this general public use requirement solely 

because of occupancy restrictions or preferences that favor tenants with special needs, tenants 

who are members of a specified group under certain Federal or State programs, or tenants who 

are involved in artistic or literary activities.

Section 601 of the Violence Against Women Reauthorization Act of 2013 (“the Act”) provides 

that applicants or tenants of housing assisted under a “covered housing program” may not be 

denied admission to, denied assistance under, terminated from participation in, or evicted from, 

the housing on the basis that the applicant or tenant is or has been a victim of domestic violence, 

dating violence, sexual assault, or stalking (collectively, “domestic abuse”). In appropriate 

cases, a lease may be bifurcated to evict or otherwise remove the perpetrator of criminal 

domestic abuse and yet to avoid penalizing a victim of that abuse who is a lawful occupant. That 

section includes as a covered housing program “the low income housing tax credit program 

under section 42 of the Internal Revenue Code of 1986.” 
41

Reasons for Change

Although the Act provides that no building that has produced LIHTCs for its owner should fail to 

provide reasonable protections for victims of domestic abuse, it does not amend the Internal 

Revenue Code, nor does it contain any provision for enforcing those protections in LIHTC 

buildings. These protections are important for tenants of these buildings.

Proposal

Protections for victims of domestic abuse would be required in all Long-Term Use Agreements. 

These provisions would apply to both the low-income and the market-rate units in the building. 

For example, once such an Agreement applies to a building, the owner could not refuse to rent 

any unit in the building to a person because that person had experienced domestic abuse. 

Moreover, such an experience of domestic abuse would not be good cause for terminating a 

tenant’s occupancy. Under the Agreement, an owner could bifurcate a lease so that the owner 

could simultaneously (1) remove or evict a tenant or lawful occupant who engaged in criminal 

activity directly relating to domestic abuse and (2) avoid evicting, terminating, or otherwise 

penalizing a tenant or lawful occupant who is a victim of that criminal activity. The proposal 

would clarify that such a continuing occupant of a low-income unit could become a tenant and 

would not have to be tested for low-income status as if the continuing occupant were a new 

tenant.

Any prospective, present, or former occupant of the building could enforce these provisions of an 

Agreement in any State court, whether or not that occupant meets the income limitations 

applicable to the building.

In addition, the proposal would clarify that occupancy restrictions or preferences that favor 

persons who have experienced domestic abuse would qualify for the “special needs” exception to 

the general public use requirement.

The proposed requirements for Long-Term Use Agreements would be effective for Agreements 

that are either first executed, or subsequently modified, 30 days or more after enactment. The 

proposed clarification of the general public use requirement would be effective for taxable years 

ending after the date of enactment.
42

REFORM U.S. INTERNATIONAL TAX SYSTEM

DEFER DEDUCTION OF INTEREST EXPENSE RELATED TO DEFERRED INCOME 

OF FOREIGN SUBSIDIARIES

Current Law

Taxpayers generally may deduct ordinary and necessary expenses paid or incurred in carrying on 

any trade or business. The Internal Revenue Code and the regulations thereunder contain 

detailed rules regarding allocation and apportionment of expenses for computing taxable income 

from sources within and without the United States. Under current rules, a U.S. person that incurs 

interest expense properly allocable and apportioned to foreign-source income may deduct those 

expenses even if the expenses exceed the taxpayer’s gross foreign-source income or if the 

taxpayer earns no foreign-source income. For example, a U.S. person that incurs debt to acquire 

stock of a foreign corporation is generally permitted to deduct currently the interest expense from 

the acquisition indebtedness even if no income is derived currently from such stock. Current law 

includes provisions that may require a U.S. person to recapture as U.S.-source income the 

amount by which foreign-source expenses exceed foreign-source income for a taxable year. 

However, if in a taxable year the U.S. person earns sufficient foreign-source income of the same 

statutory grouping in which the stock of the foreign corporation is classified, expenses, such as 

interest expense, properly allocated and apportioned to the stock of the foreign corporation may 

not be subject to recapture in a subsequent taxable year. 

Reasons for Change 

The ability to deduct expenses from overseas investments while deferring U.S. tax on the income 

from the investment may cause U.S. businesses to shift their investments and jobs overseas, 

harming the domestic economy. 

Proposal 

The proposal would defer the deduction of interest expense that is properly allocated and 

apportioned to stock of a foreign corporation that exceeds an amount proportionate to the 

taxpayer’s pro rata share of income from such subsidiaries that is currently subject to U.S. tax. 

Under the proposal, foreign-source income earned by a taxpayer through a branch would be 

considered currently subject to U.S. tax; thus, the proposal would not apply to interest expense 

properly allocated and apportioned to such income. Other directly earned foreign source income 

(for example, royalty income) would be similarly treated. 

For purposes of the proposal, the amount of a taxpayer’s interest expense that is properly 

allocated and apportioned to stock of a foreign corporation would generally be determined under 

the principles of current Treasury regulations. The Treasury Department, however, will continue 

to revise existing Treasury regulations and propose such other statutory changes as necessary to 

prevent inappropriate decreases in the amount of interest expense that is allocated and 

apportioned to foreign-source income. 
43

Interest expense that is deferred under the proposal would be deductible in a subsequent tax year 

to the extent that the amount of interest expense allocated and apportioned to stock of foreign 

subsidiaries in such subsequent year is less than the annual limitation for that year. Treasury 

regulations may modify the manner in which a taxpayer can deduct previously deferred interest 

expenses in certain cases. 

The proposal would be effective for taxable years beginning after December 31, 2014.
44

DETERMINE THE FOREIGN TAX CREDIT ON A POOLING BASIS 

Current Law

Section 901 provides that, subject to certain limitations, a taxpayer may choose to claim a credit 

against its U.S. income tax liability for income, war profits, and excess profits taxes paid or 

accrued during the taxable year to any foreign country or any possession of the United States. 

Under section 902, a domestic corporation is deemed to have paid the foreign taxes paid by 

certain foreign subsidiaries from which it receives a dividend (the deemed paid foreign tax 

credit). The foreign tax credit is limited to an amount equal to the pre-credit U.S. tax on the 

taxpayer’s foreign-source income. This foreign tax credit limitation is applied separately to 

foreign-source income in each of the separate categories described in section 904(d)(1), i.e., the 

passive category and general category.

Reasons for Change

The purpose of the foreign tax credit is to mitigate the potential for double taxation when U.S. 

taxpayers are subject to foreign taxes on their foreign-source income. The reduction to two 

foreign tax credit limitation categories, for passive category income and general category income 

under the American Jobs Creation Act of 2004, enhanced U.S. taxpayers’ ability to reduce the 

residual U.S. tax on foreign-source income through “cross-crediting.”

Proposal

The proposal would require a U.S. taxpayer to determine its deemed paid foreign tax credit on a 

consolidated basis taking into account the aggregate foreign taxes and earnings and profits of all 

of the foreign subsidiaries with respect to which the U.S. taxpayer can claim a deemed paid 

foreign tax credit (including lower tier subsidiaries described in section 902(b)). The deemed 

paid foreign tax credit for a taxable year would be limited to an amount proportionate to the 

taxpayer’s pro rata share of the consolidated earnings and profits of the foreign subsidiaries 

repatriated to the U.S. taxpayer in that taxable year that are currently subject to U.S. tax. Foreign 

taxes deferred under this proposal in prior years would be creditable in a subsequent taxable year 

to the extent that the amount of deemed paid foreign taxes in the current year are less than the 

annual limitation for that year. The Secretary would be granted authority to issue any Treasury 

regulations necessary to carry out the purposes of the proposal.

The proposal would be effective for taxable years beginning after December 31, 2014. 
45

TAX CURRENTLY EXCESS RETURNS ASSOCIATED WITH TRANSFERS OF 

INTANGIBLES OFFSHORE

Current Law

Section 482 authorizes the Secretary to distribute, apportion, or allocate gross income, 

deductions, credits, and other allowances between or among two or more organizations, trades, 

or businesses under common ownership or control whenever “necessary in order to prevent 

evasion of taxes or clearly to reflect the income of any of such organizations, trades, or 

businesses.” The regulations under section 482 provide that the standard to be applied is that 

of unrelated persons dealing at arm’s length. In the case of transfers of intangible assets, 

section 482 further provides that the income with respect to the transaction must be 

commensurate with the income attributable to the transferred intangible assets.

In general, the subpart F rules (sections 951-964) require U.S. shareholders with a 10-percent or 

greater interest in a controlled foreign corporation (CFC) to include currently in income for U.S. 

tax purposes their pro rata share of certain income of the CFC (referred to as “subpart F 

income”), without regard to whether the income is actually distributed to the shareholders. A 

CFC generally is defined as any foreign corporation if U.S. persons own (directly, indirectly, or 

constructively) more than 50 percent of the corporation’s stock (measured by vote or value), 

taking into account only those U.S. persons that own at least 10 percent of the corporation’s 

voting stock.

Subpart F income consists of foreign base company income, insurance income, and certain 

income relating to international boycotts and other proscribed activities. Foreign base 

company income consists of foreign personal holding company income (which includes 

passive income such as dividends, interest, rents, royalties, and annuities) and other categories 

of income from business operations, including foreign base company sales income, foreign 

base company services income, and foreign base company oil-related income.

A foreign tax credit is generally available for foreign income taxes paid by a CFC to the 

extent that the CFC’s income is taxed to a U.S. shareholder under subpart F, subject to the 

limitations set forth in section 904.

Reasons for Change

The potential tax savings from transactions between related parties, especially with regard to 

transfers of intangible assets to low-taxed affiliates, puts significant pressure on the 

enforcement and effective application of transfer pricing rules. There is evidence indicating

that income shifting through transfers of intangibles to low-taxed affiliates has resulted in a 

significant erosion of the U.S. tax base. Expanding subpart F to include excess income from

intangibles transferred to low-taxed affiliates will reduce the incentive for taxpayers to engage 

in these transactions.
46

Proposal

The proposal would provide that if a U.S. person transfers (directly or indirectly) an intangible

asset from the United States to a related CFC (a “covered intangible”), then certain excess 

income from transactions connected with or benefitting from the covered intangible would be 

treated as subpart F income if the income is subject to a low foreign effective tax rate. In the 

case of an effective tax rate of 10 percent or less, the proposal would treat all excess income as 

subpart F income, and would then phase out ratably for effective tax rates of 10 to 15 percent. 

For this purpose, excess intangible income would be defined as the excess of gross income 

from transactions connected with or benefitting from such covered intangible over the costs 

(excluding interest and taxes) properly allocated and apportioned to this income increased by a 

percentage mark-up. For purposes of this proposal, the transfer of an intangible asset includes

by sale, lease, license, or through any shared risk or development agreement (including any 

cost sharing arrangement)). This subpart F income will be a separate category of income for 

purposes of determining the taxpayer’s foreign tax credit limitation under section 904.

The proposal would be effective for transactions in taxable years beginning after December 31,

2014.
47

LIMIT SHIFTING OF INCOME THROUGH INTANGIBLE PROPERTY TRANSFERS 

Current Law

The Secretary may distribute, apportion, or allocate gross income, deductions, credits, and other 

allowances between or among two or more organizations, trades, or businesses under common 

ownership or control whenever “necessary in order to prevent evasion of taxes or clearly to 

reflect the income of any of such organizations, trades, or businesses” (section 482). In the case 

of transfers of intangible property (as defined in section 936(h)(3)(B)), section 482 also provides 

that the income with respect to the transaction must be commensurate with the income 

attributable to the transferred intangible property. Further, under section 367(d), if a U.S. person 

transfers intangible property (as defined in section 936(h)(3)(B)) to a foreign corporation in a 

transaction that would otherwise be tax-free under section 351 or section 361, the U.S. person is 

treated as (i) having sold such property in exchange for payments which are contingent upon the 

productivity, use, or disposition of the property, and (ii) receiving amounts which reasonably 

reflect the amounts which would have been received annually in the form of such payments over 

the useful life of the property, or, in the case of a disposition following such transfer, at the time 

of the disposition. The amounts taken into account shall be commensurate with the income 

attributable to the intangible. Finally, under the regulations issued pursuant to section 367(e)(2), 

if a U.S. subsidiary corporation transfers intangible property (as defined in section 936(h)(3)(B)) 

to a foreign parent corporation in an otherwise tax-free liquidation described in section 332, the 

U.S. subsidiary must recognize gain upon the distribution of such property.

Reasons for Change

Controversy often arises concerning the value of intangible property transferred between related 

persons and the scope of the intangible property subject to sections 482 and 367. This lack of 

clarity may result in the inappropriate avoidance of U.S. tax and misuse of the rules applicable to 

transfers of intangible property to foreign persons.

Proposal

The proposal would provide that the definition of intangible property under section 936(h)(3)(B) 

(and therefore for purposes of sections 367 and 482) also includes workforce in place, goodwill, 

and going concern value, and any other item owned or controlled by a taxpayer that is not a 

tangible or financial asset and that has substantial value independent of the services of any 

individual. The proposal also would clarify that where multiple intangible properties are 

transferred, or where intangible property is transferred with other property or services, the 

Commissioner may value the properties or services on an aggregate basis where that achieves a 

more reliable result. In addition, the proposal would clarify that the Commissioner may value 

intangible property taking into consideration the prices or profits that the controlled taxpayer 

could have realized by choosing a realistic alternative to the controlled transaction undertaken. 

The proposal would be effective for taxable years beginning after December 31, 2014. No 

inference is intended regarding the scope of intangible property included in section 936(h)(3)(B) 

under current law.
48

DISALLOW THE DEDUCTION FOR EXCESS NON-TAXED REINSURANCE 

PREMIUMS PAID TO AFFILIATES

Current Law

Insurance companies are generally allowed a deduction for premiums paid for reinsurance. If the 

reinsurance transaction results in a transfer of reserves and reserve assets to the reinsurer, 

potential tax liability for earnings on those assets is generally shifted to the reinsurer as well. 

While insurance income of a controlled foreign corporation is generally subject to current 

U.S. taxation, insurance income of a foreign-owned foreign company that is not engaged in a 

trade or business in the United States is not subject to U.S. income tax. Reinsurance policies 

issued by foreign reinsurers with respect to U.S. risks are generally subject to an excise tax equal 

to one percent of the premiums paid, unless waived by treaty.

Reasons for Change

Reinsurance transactions with affiliates that are not subject to U.S. federal income tax on 

insurance income can result in substantial U.S. tax advantages over similar transactions with 

entities that are subject to tax in the United States. The excise tax on reinsurance policies issued 

by foreign reinsurers is not always sufficient to offset this tax advantage. These tax advantages 

create an inappropriate incentive for foreign-owned domestic insurance companies to reinsure 

U.S. risks with foreign affiliates.

Proposal

The proposal would (1) deny an insurance company a deduction for premiums and other amounts 

paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to 

the extent that the foreign reinsurer (or its parent company) is not subject to U.S. income tax with 

respect to the premiums received; and (2) would exclude from the insurance company’s income 

(in the same proportion in which the premium deduction was denied) any return premiums, 

ceding commissions, reinsurance recovered, or other amounts received with respect to 

reinsurance policies for which a premium deduction is wholly or partially denied.

A foreign corporation that is paid a premium from an affiliate that would otherwise be denied a 

deduction under this proposal would be permitted to elect to treat those premiums and the 

associated investment income as income effectively connected with the conduct of a trade or 

business in the United States and attributable to a permanent establishment for tax treaty 

purposes. For foreign tax credit purposes, reinsurance income treated as effectively connected 

under this rule would be treated as foreign source income and would be placed into a separate 

category within section 904.

The provision would be effective for policies issued in taxable years beginning after December 

31, 2014.
49

RESTRICT DEDUCTIONS FOR EXCESSIVE INTEREST OF MEMBERS OF 

FINANCIAL REPORTING GROUPS

Current Law

Business interest payments generally are deductible from taxable income while dividend 

payments are not deductible. An exception to this general rule is section 163(j), which denies 

U.S. tax deductions for interest paid by a corporation to a related party when (1) the 

corporation’s debt-equity ratio exceeds 1.5, and (2) net interest expense exceeds 50 percent of 

the corporation’s adjusted taxable income (computed by adding back net interest expense, 

depreciation, amortization, depletion, and any net operating loss deduction, and any deduction 

for domestic production activities under section 199). Disallowed interest expense may be 

carried forward indefinitely for deduction in a subsequent year. In addition, the corporation’s 

excess limitation for a tax year (i.e., the amount by which 50 percent of adjusted taxable 

income exceeds net interest expense) may be carried forward to the three subsequent tax 

years. 

Reasons for Change

The fungibility of money makes it easy to adjust the mix of debt and equity in a controlled entity, 

making the use of debt one of the simplest techniques available to multinational groups for 

shifting profits to lower tax jurisdictions. Although section 163(j) places a cap on the amount of 

interest expense a corporation can deduct relative to its U.S. earnings, section 163(j) does not 

consider the leverage of a multinational group’s U.S. operations relative to the leverage of the 

group’s worldwide operations. Therefore, under current law, multinational groups are able to 

inappropriately reduce their U.S. tax on income earned from U.S. operations by over-leveraging

their U.S. operations relative to those located in lower tax jurisdictions. The Administration has 

included a separate proposal, Defer Deduction of Interest Expense Related to Deferred Income,

in the Administration’s Fiscal Year 2015 Revenue Proposals, to address this concern for U.S.-

parented groups by denying current deductions for interest expense that is properly allocated and 

apportioned based on fungibility principles to the deferred foreign earnings of non-U.S. members of 

the group. Nonetheless, opportunities remain for foreign-parented multinationals to disproportionately 

leverage the operations of a U.S.subgroup. 

Proposal

The proposal generally would apply to an entity that is a member of a group that prepares 

consolidated financial statements (“financial reporting group”) in accordance with U.S. 

Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting 

Standards (“IFRS”), or other method authorized by the Secretary of the Treasury under 

regulations. Under the proposal, a member’s U.S. interest expense deduction generally would be 

limited to the member’s interest income plus the member’s proportionate share of the financial 

reporting group’s net interest expense computed under U.S. income tax principles. A member’s 

proportionate share of the financial reporting group’s net interest expense would be determined 

based on the member’s proportionate share of the group’s earnings (computed by adding back 

net interest expense, taxes, depreciation, and amortization) reflected in the group’s financial 
50

statements. If a member fails to substantiate the member’s proportionate share of the group’s net 

interest expense, or a member so elects, the member’s interest deduction would be limited to 10 

percent of the member’s adjusted taxable income (as defined under section 163(j)). Regardless 

of whether a taxpayer computes the interest limitation under the proportionate share approach or 

using the ten-percent alternative, disallowed interest would be carried forward indefinitely and 

any excess limitation for a tax year would be carried forward to the three subsequent tax years. 

A member of a financial reporting group that is subject to the proposal would be exempt from 

the application of section 163(j). 

U.S. subgroups would be treated as a single member of a financial reporting group for purposes 

of applying the proposal. For this purpose, a U.S. subgroup is defined as any U.S. entity that is 

not owned directly or indirectly by another U.S. entity, and all members (domestic or foreign) 

that are owned directly or indirectly by such entity. If a U.S. member of a U.S. subgroup owns 

stock of one or more foreign corporations, this proposal would apply before the Administration’s 

proposal that defers the deduction of interest expense allocable to deferred foreign earnings. The 

U.S. subgroup’s interest expense that remains currently deductible after the application of this 

proposal would then be subject to deferral to the extent such remaining U.S. interest expense is 

allocable to deferred foreign earnings. 

The proposal would not apply to financial services entities, and such entities would be excluded 

from the financial reporting group for purposes of applying the proposal to other members of the 

financial reporting group. The proposal also would not apply to financial reporting groups that 

would otherwise report less than $5 million of net interest expense, in the aggregate, on one or 

more U.S. income tax returns for a taxable year. Entities that are exempt from this proposal 

would remain subject to section 163(j).

The Secretary would be granted authority to issue any Treasury regulations necessary to carry 

out the purposes of the proposal, including coordinating the application of the proposal with 

other interest deductibility rules, defining financial services entities, permitting financial 

reporting groups to compute the group’s non-U.S. net interest expense without making certain 

adjustments required under U.S. income tax principles, and providing for the treatment of passthrough entities. In addition, if a financial reporting group does not prepare financial statements 

under U.S. GAAP or IFRS, it is expected that regulations generally would allow the use of 

financial statements prepared under other countries’ generally accepted accounting principles in 

appropriate circumstances. 

The proposal would be effective for taxable years beginning after December 31, 2014.
51

MODIFY TAX RULES FOR DUAL CAPACITY TAXPAYERS

Current Law

Section 901 provides that, subject to certain limitations, a taxpayer may choose to claim a credit 

against its U.S. income tax liability for income, war profits, and excess profits taxes paid or 

accrued during the taxable year to any foreign country or any possession of the United States.

To be a creditable tax, a foreign levy must be substantially equivalent to an income tax under 

United States tax principles, regardless of the label attached to the levy under law. Under current 

Treasury regulations, a foreign levy is a tax if it is a compulsory payment under the authority of a 

foreign government to levy taxes and is not compensation for a specific economic benefit 

provided by the foreign country. Taxpayers that are subject to a foreign levy and that also 

receive a specific economic benefit from the levying country (dual capacity taxpayers) may not 

credit the portion of the foreign levy paid for the specific economic benefit. The current 

Treasury regulations provide that, if a foreign country has a generally-imposed income tax, the 

dual capacity taxpayer may treat as a creditable tax the portion of the levy that application of the 

generally imposed income tax would yield (provided that the levy otherwise constitutes an 

income tax or an in lieu of tax). The balance of the levy is treated as compensation for the 

specific economic benefit. If the foreign country does not generally impose an income tax, the 

portion of the payment that does not exceed the applicable federal tax rate applied to net income 

is treated as a creditable tax. A foreign tax is treated as generally imposed even if it applies only 

to persons who are not residents or nationals of that country.

There is no separate section 904 foreign tax credit limitation category for oil and gas income. 

However, under section 907, the amount of creditable foreign taxes imposed on foreign oil and 

gas income is limited in any year to the applicable U.S. tax on that income.

Reasons for Change

The purpose of the foreign tax credit is to mitigate double taxation of income by the United 

States and a foreign country. When a payment is made to a foreign country in exchange for a 

specific economic benefit, there is no double taxation. Current law recognizes the distinction 

between a payment of creditable taxes and a payment in exchange for a specific economic 

benefit but fails to achieve the appropriate split between the two when a single payment is made 

in a case where, for example, a foreign country imposes a levy only on oil and gas income, or 

imposes a higher levy on oil and gas income as compared to other income.

Proposal

The proposal would allow a dual capacity taxpayer to treat as a creditable tax the portion of a 

foreign levy that does not exceed the foreign levy that the taxpayer would pay if it were not a 

dual-capacity taxpayer. The proposal would replace the current regulatory provisions, including 

the safe harbor, that apply to determine the amount of a foreign levy paid by a dual-capacity 

taxpayer that qualifies as a creditable tax. The proposal also would convert the special foreign 

tax credit limitation rules of section 907 into a separate category within section 904 for foreign 
52

oil and gas income. The aspect of the proposal that would determine the amount of a foreign 

levy paid by a dual-capacity taxpayer that qualifies as a creditable tax would yield to United 

States treaty obligations to the extent that they explicitly allow a credit for taxes paid or accrued 

on certain oil or gas income.

The aspect of the proposal that would determine the amount of a foreign levy paid by a dualcapacity taxpayer that qualifies as a creditable tax would be effective for amounts that, if such 

amounts were an amount of tax paid or accrued, would be considered paid or accrued in taxable 

years beginning after December 31, 2014. The aspect of the proposal that would convert the 

special foreign tax credit limitation rules of section 907 into a separate category within section 

904 would be effective for taxable years beginning after December 31, 2014.
53

TAX GAIN FROM THE SALE OF A PARTNERSHIP INTEREST ON LOOKTHROUGH BASIS

Current Law

In general, the sale or exchange of a partnership interest is treated as the sale or exchange of a 

capital asset. Capital gains of a nonresident alien individual or foreign corporation generally are 

subject to federal income tax only if the gains are or are treated as income that is effectively 

connected with the conduct of a trade or business in the United States (Effectively Connected 

Income (ECI)). Section 875(1) provides that a nonresident alien individual or foreign 

corporation shall be considered as being engaged in a trade or business within the United States 

if the partnership of which such individual or corporation is a member is so engaged. Revenue 

Ruling 91-32 holds that gain or loss of a nonresident alien individual or foreign corporation from 

the sale or exchange of a partnership interest is effectively connected with the conduct of a trade 

or business in the United States to the extent of the partner’s distributive share of unrealized gain 

or loss of the partnership that is attributable to property used or held for use in the partnership’s 

trade or business within the United States (ECI property). A partnership may elect under section 

754 to adjust the basis of its assets upon the transfer of an interest in the partnership to reflect the 

transferee partner’s basis in the partnership interest. 

Reasons for Change

Nonresident alien individuals and foreign corporations may take a position contrary to the 

holding of Revenue Ruling 91-32, arguing that gain from the sale of a partnership interest is not 

subject to federal income taxation because no Internal Revenue Code (Code) provision explicitly 

provides that gain from the sale or exchange of a partnership interest by a nonresident alien 

individual or foreign corporation is treated as ECI. If the partnership has in effect an election 

under section 754, the partnership’s basis in its assets is also increased, thereby preventing that 

gain from being taxed in the future.

Proposal

The proposal would provide that gain or loss from the sale or exchange of a partnership interest 

is effectively connected with the conduct of a trade or business in the United States to the extent 

attributable to the transferor partner’s distributive share of the partnership’s unrealized gain or 

loss that is attributable to ECI property. The Secretary would be granted authority to specify the 

extent to which a distribution from the partnership is treated as a sale or exchange of an interest 

in the partnership and to coordinate the new provision with the nonrecognition provisions of the 

Code.

In addition, the transferee of a partnership interest would be required to withhold 10 percent of 

the amount realized on the sale or exchange of a partnership interest unless the transferor 

certified that the transferor was not a nonresident alien individual or foreign corporation. If a 

transferor provided a certificate from the Internal Revenue Service that established that the 

transferor’s federal income tax liability with respect to the transfer was less than 10 percent of 

the amount realized, the transferee would withhold such lesser amount. If the transferee failed to 
54

withhold the correct amount, the partnership would be liable for the amount of 

underwithholding, and would satisfy the withholding obligation by withholding on future 

distributions that otherwise would have gone to the transferee partner.

The proposal would be effective for sales or exchanges after December 31, 2014.
55

PREVENT USE OF LEVERAGED DISTRIBUTIONS FROM RELATED 

CORPORATIONS TO AVOID DIVIDEND TREATMENT

Current Law

Section 301 provides rules for characterizing a distribution of property by a corporation to a 

shareholder. The amount of the distribution is first treated as a dividend to the extent of the 

distributing corporation’s applicable earnings and profits. To the extent the amount of the 

distribution exceeds the distributing corporation’s applicable earnings and profits, the excess 

amount is treated as a reduction in the shareholder’s adjusted tax basis in the stock of the 

distributing corporation, and then any remaining excess is treated by the shareholder as gain 

from the sale or exchange of property. For these purposes, a corporation generally calculates its 

earnings and profits on a stand-alone basis, with special rules for consolidated groups.

Reasons for Change

Under current law, the earnings and profits of a foreign corporation can be repatriated without 

being characterized as a dividend by having such corporation fund a distribution from a second, 

related foreign corporation that does not have earnings and profits, but in which the distributee 

shareholder has sufficient tax basis to characterize the distribution (in whole or substantial part) 

as a return of stock basis under the ordering rules of section 301. Similarly, the earnings and 

profits of a domestic corporation also can be distributed in such a manner to a shareholder that 

has sufficient tax basis.

Proposal 

The proposal would provide that to the extent a corporation (the “funding corporation”) funds a 

second, related corporation (the “distributing corporation”) with a principal purpose of avoiding 

dividend treatment on distributions to a U.S. shareholder, the U.S. shareholder’s basis in the 

stock of the distributing corporation will not be taken into account for the purpose of determining 

the treatment of the distribution under section 301. For this purpose, the funding corporation and 

the distributing corporation are related if they are members of a controlled group within the 

meaning of section 1563(a), but replacing the reference to “at least 80 percent” with “more than 

50 percent.” Funding transactions to which the proposal would apply include capital 

contributions, loans, or distributions to the distributing corporation, whether the funding 

transaction occurs before or after the distribution. 

The proposal would be effective for distributions made after December 31, 2014.
56

EXTEND SECTION 338(h)(16) TO CERTAIN ASSET ACQUISITIONS

Current Law

A corporation that makes a qualified stock purchase of a target corporation is permitted to elect 

under section 338 (section 338 election) to treat the stock acquisition as an asset acquisition, 

thereby stepping up the tax basis of the target corporation’s assets. For this purpose, a qualified 

stock purchase is any transaction or series of transactions in which the purchasing corporation 

acquires 80 percent of the stock of the target corporation. Section 338(h)(16) provides that 

(subject to certain exceptions) the deemed asset sale resulting from a section 338 election is not 

treated as occurring for purposes of determining the source or character of any item for purpose 

of applying the foreign tax credit rules to the seller. Instead, for these purposes, the gain is 

generally treated by the seller as gain from the sale of the stock. Thus, section 338(h)(16) 

prevents a seller from increasing allowable foreign tax credits as a result of a section 338 

election.

Section 901(m) denies a credit for certain foreign taxes paid or accrued after a covered asset 

acquisition (CAA). A CAA includes a section 338 election made with respect to a qualified 

stock purchase as well as other transactions that are treated as asset acquisitions for U.S. tax 

purposes but the acquisition of an interest in an entity for foreign tax purposes. 

Reasons for Change

Section 338(h)(16) applies to a qualified stock purchase for which a section 338 election is made, 

but it does not apply to the other types of CAAs subject to the credit disallowance rules under 

section 901(m). These other types of CAAs present the same foreign tax credit concerns as those 

addressed by section 338(h)(16) in the case of a qualified stock purchase for which a section 338 

election is made.

Proposal

The proposal would extend the application of section 338(h)(16) to any CAA, within the 

meaning of section 901(m). The Secretary would be granted authority to issue any Treasury 

regulations necessary to carry out the purposes of the proposal.

The proposal would apply to CAAs occurring after December 31, 2014.
57

REMOVE FOREIGN TAXES FROM A SECTION 902 CORPORATION’S FOREIGN

TAX POOL WHEN EARNINGS ARE ELIMINATED

Current Law

Sections 902 and 960 provide that a domestic corporation owning at least 10 percent of the 

voting stock of a foreign corporation is allowed a credit for foreign taxes paid by a foreign 

corporation if the domestic corporation receives a dividend distribution from the foreign 

corporation or an income inclusion under subpart F that is treated as a dividend for purposes of 

section 902. Regulations under section 367(b) provide rules for the allocation of earnings and 

profits and foreign taxes of a foreign corporation in transactions described in section 381.

Certain transactions result in a reduction, allocation, or elimination of a corporation’s earnings 

and profits other than by reason of a dividend or by reason of section 381 (generally providing 

that earnings and profits and other tax attributes of a target corporation carry over to an acquiring 

corporation in a tax-free restructuring transaction). For example, if a corporation redeems a 

portion of its stock and the redemption is treated as a sale or exchange, there is a reduction in the 

earnings and profits (if any) of the redeeming corporation (see section 312(n)(7)). As another 

example, certain section 355 distributions can result in the reduction of the distributing 

corporation’s earnings and profits (see section 312(h) and the regulations thereunder).

Reasons for Change

The reduction, allocation, or elimination of a corporation’s earnings and profits in a transaction 

without a corresponding reduction in the corporation’s associated foreign taxes paid would result

in a corporate shareholder of the corporation claiming an indirect credit under section 902 for 

foreign taxes paid with respect to earnings that will no longer fund a dividend distribution for 

U.S. tax purposes. 

Proposal

The proposal would reduce the amount of foreign taxes paid by a foreign corporation in the event 

a transaction results in the reduction, allocation, or elimination of a foreign corporation’s 

earnings and profits other than a reduction by reason of a dividend or a section 381 transaction. 

The amount of foreign taxes that would be reduced in such a transaction would equal the amount 

of foreign taxes associated with such earnings and profits. 

The proposal would be effective for transactions occurring after December 31, 2014. No 

inference is intended regarding the determination of the amount of foreign taxes deemed paid 

under current law.
58

CREATE A NEW CATEGORY OF SUBPART F INCOME FOR TRANSACTIONS 

INVOLVING DIGITAL GOODS OR SERVICES

Current Law 

Internal Revenue Code (Code) sections 952 and 954 describe certain categories of income that, 

when earned by a controlled foreign corporation (CFC), are currently included in the income of 

United States shareholders of that CFC as subpart F income under Code section 951. These 

categories include “foreign base company income”, which includes foreign personal holding 

company income, foreign base company sales income, and foreign base company services 

income. Foreign personal holding company income generally includes rents and royalties other 

than those derived in the active conduct of a trade or business and received from a person other 

than a related person. Foreign base company sales income generally includes income earned in 

connection with a purchase and subsequent sale of personal property where such property is 

purchased from (or on behalf of), or sold to (or on behalf of), a related person, provided the 

property is manufactured outside of the CFC’s country of organization and sold for use or 

consumption outside that country. Foreign base company services income generally includes 

income earned in connection with the performance of certain services performed outside of the 

CFC’s country of organization for or on behalf of a related person. All these categories of 

subpart F income are intended to ensure that tax is not deferred on income that is not generated 

by an active trade or business of the CFC. 

Digital transactions involving copyrighted articles can take the form of leases, sales, or services. 

For example, a transaction involving a transfer of a computer program (i.e., a copyrighted article) 

could be characterized as a sale or lease of the computer program, depending on the facts and 

circumstances concerning the benefits and burdens of ownership with respect to the computer 

program. A computer program hosted on a server also might be used in a transaction 

characterized as the provision of a service to a user who accesses the server from a remote 

location.

Reasons for Change 

The existing categories of subpart F income do not adequately address mobile income earned 

from providing digital goods and services. By choosing different forms for substantially similar 

transactions involving digital goods and services (leases, sales, or services), taxpayers may be 

able to avoid the application of the existing subpart F rules. In this regard, the subpart F rules, 

which are generally intended to require current U.S. taxation of passive and highly mobile

income, have not kept pace with advances in technology. This shortcoming enables CFCs to 

shift income related to digital goods and services to low-tax jurisdictions, in many cases eroding 

the U.S. tax base. For example, a CFC may be able to conduct business with remotely-located 

customers through the “cloud” using intangible property acquired from a related party and 

without conducting any substantial business activities of its own. 
59

Proposal 

The proposal would create a new category of subpart F income, foreign base company digital 

income, which generally would include income of a CFC from the lease or sale of a digital 

copyrighted article or from the provision of a digital service, in cases where the CFC uses 

intangible property developed by a related party (including property developed pursuant to a cost 

sharing arrangement) to produce the income and the CFC does not, through its own employees, 

make a substantial contribution to the development of the property or services that give rise to 

the income. An exception would apply where the CFC earns income directly from customers 

located in the CFC’s country of incorporation that use or consume the digital copyrighted article 

or digital service in such country.

The proposal would be effective for taxable years beginning after December 31, 2014.
60

PREVENT AVOIDANCE OF FOREIGN BASE COMPANY SALES INCOME 

THROUGH MANUFACTURING SERVICES ARRANGEMENTS

Current Law 

Section 954 describes certain categories of foreign base company income that, when earned by a

controlled foreign corporation (CFC), are currently included in the income of United States 

shareholders of that CFC as subpart F income under section 951. One category of foreign base 

company income, foreign base company sales income, generally includes income earned in 

connection with a purchase and subsequent sale of personal property where such property is 

purchased from (or on behalf of), or sold to (or on behalf of), a related person, provided the 

property is manufactured outside of the CFC’s country of organization and sold for use or 

consumption outside that country. Another category of foreign base company income, foreign 

base company services income, generally includes income earned in connection with the 

performance of certain services outside of the CFC’s country of organization where such 

services are performed for or on behalf of a related person. 

Reasons for Change 

In order for the foreign base company sales income rules of subpart F to apply, a CFC generally 

must engage in both a purchase and subsequent sale of personal property where such property is 

either purchased from, or sold to, a related person. Under current law, taxpayers take the 

position that a CFC can avoid foreign base company sales income by structuring the related party 

transaction by which the CFC obtains the property that the CFC sells to customers as the 

provision of a manufacturing service to the CFC rather than as a purchase of the property by the 

CFC. In some cases, taxpayers take this position with respect to property produced in the United 

States on behalf of a related CFC. The policy concerns that underlie the foreign base company 

sales income rules, including concerns about U.S. base erosion, apply with respect to income 

earned by a CFC from the sale of property produced by a related party, regardless of whether the 

CFC is characterized as obtaining the property through a purchase transaction or through a 

manufacturing service. 

Proposal 

The proposal would expand the category of foreign base company sales income to include 

income of a CFC from the sale of property manufactured on behalf of the CFC by a related 

person. The existing exceptions to foreign base company sales income would continue to apply.

The proposal would be effective for taxable years beginning after December 31, 2014.
61

RESTRICT THE USE OF HYBRID ARRANGEMENTS THAT CREATE STATELESS 

INCOME

Current Law 

Subject to certain exceptions and limitations, interest and royalty payments made or incurred in 

carrying on a trade or business are generally deductible under current law without regard to the 

tax treatment of such payments in other jurisdictions. 

Reasons for Change 

There has been a proliferation of tax avoidance techniques involving a variety of cross-border 

hybrid arrangements, such as hybrid entities, hybrid instruments, and hybrid transfers (such as a 

sales-repurchase or “repo” transaction, in which the parties take inconsistent positions in respect 

of the ownership of the same property). Such arrangements enable taxpayers to claim deductions 

in the United States without corresponding inclusions in the payee’s tax jurisdiction, resulting in 

income that is not subject to tax in any jurisdiction (“stateless income”). Taxpayers may also use 

arrangements involving hybrid entities to claim multiple deductions for the same payment in 

different jurisdictions. 

Proposal 

The proposal would deny deductions for interest and royalty payments made to related parties 

under certain circumstances involving hybrid arrangements. For example, the proposal would 

deny a deduction in the United States when a taxpayer makes an interest or royalty payment to a 

related party, and either (i) as a result of the hybrid arrangement, there is no corresponding 

inclusion to the recipient in the foreign jurisdiction or (ii) the hybrid arrangement would permit 

the taxpayer to claim an additional deduction for the same payment in another jurisdiction. 

The Secretary would be granted authority to issue any Treasury regulations necessary to carry 

out the purposes of this proposal, including regulations that would (1) deny deductions from 

certain conduit arrangements that involve a hybrid arrangement between at least two of the 

parties to the arrangement; (2) deny interest or royalty deductions arising from certain hybrid 

arrangements involving unrelated parties in appropriate circumstances, such as structured 

transactions; and (3) deny all or a portion of a deduction claimed with respect to an interest or 

royalty payment that, as a result of the hybrid arrangement, is subject to inclusion in the 

recipient’s jurisdiction pursuant to a preferential regime that has the effect of reducing the 

generally applicable statutory rate by at least 25 percent.

The proposal would be effective for taxable years beginning after December 31, 2014. 
62

LIMIT THE APPLICATION OF EXCEPTIONS UNDER SUBPART F FOR CERTAIN 

TRANSACTIONS THAT USE REVERSE HYBRIDS TO CREATE STATELESS 

INCOME

Current Law 

In general, U.S. multinational companies do not pay current U.S. tax on the profits earned by

their foreign subsidiaries (referred to as controlled foreign corporations, or CFCs). Under 

current law, the rules of subpart F (sections 951-964) provide a limited exception to this general 

rule, by requiring certain U.S. shareholders of CFCs to include in their income on a current basis 

certain narrowly defined categories of income of the CFC (referred to as “subpart F income”), 

regardless of whether the income is distributed to the shareholders. Subpart F income includes 

passive items of income such as dividends, interest, rents and royalties.

There is an exception from subpart F income for certain dividend and interest income received 

from a related corporation created or organized and operating in the same country as the CFC 

receiving the income (the same-country exception in section 954(c)(3)). In addition, the samecountry exception provides that certain rents and royalties received from a related corporation for 

the use of property within the country under the laws of which the CFC receiving the income is 

created or organized are not included in subpart F income. There also was a temporary provision 

(section 954(c)(6))that provided another exception to subpart F income (the look-through 

exception) for certain dividends, interest, rents and royalties received from a related CFC to the 

extent such income is attributable or properly allocable to income of the related CFC that is 

neither subpart F income nor income effectively connected with the conduct of a trade or 

business within the United States. The look-through exception expired on December 31, 2013.

Reasons for Change 

There has been a proliferation of tax avoidance techniques involving a variety of cross-border 

hybrid arrangements. In one such arrangement, a U.S. person holds an interest in a reverse 

hybrid, which is an entity that is a corporation for U.S. tax purposes but is a fiscally transparent 

entity (such as a partnership) or a branch under the laws of a foreign jurisdiction. Because the 

U.S. treats the reverse hybrid as a corporation, income earned by the reverse hybrid generally 

will not be subject to current U.S. tax. Moreover, even if the reverse hybrid is treated as a CFC, 

interest and royalty income earned by the reverse hybrid from certain foreign related persons 

(which otherwise would qualify as subpart F income) may nonetheless not be subject to current 

U.S. taxation as a result of either section 954(c)(3) or section 954(c)(6). Payments to the reverse 

hybrid, however, generally are also not subject to tax in the foreign jurisdiction in which it is

established or organized, because the foreign jurisdiction views the reverse hybrid as a fiscally 

transparent entity and therefore treats that entity’s income as derived by its owners, including its 

U.S. owners. As a result of this hybrid treatment, income earned by the reverse hybrid generally 

would not be subject to tax currently in either the United States or the foreign jurisdiction. 
63

Proposal 

The proposal would provide that sections 954(c)(3) and 954(c)(6) do not apply to payments 

made to a foreign reverse hybrid held directly by a U.S. owner when such amounts are treated as

deductible payments received from foreign related persons. 

The proposal would be effective for taxable years beginning after December 31, 2014. 
64

LIMIT THE ABILITY OF DOMESTIC ENTITIES TO EXPATRIATE

Current Law

Section 7874 applies to certain transactions (known as “inversion transactions”) in which a U.S. 

corporation (an expatriated entity) is replaced by a foreign corporation (“foreign acquiring 

corporation”) as the parent company of a worldwide affiliated group of companies. Section 7874 

generally provides that certain adverse tax consequences apply if (i) substantially all of the assets 

of a domestic corporation are acquired by a foreign acquiring corporation; (ii) the historical

owners of the domestic corporation retain a sufficient ownership interest in the foreign acquiring

corporation (i.e., at least 60 percent); and (iii) the foreign acquiring corporation, together with the 

affiliated group that includes the foreign acquiring corporation, does not conduct substantial 

business activities in the country in which it is created or organized. Similar provisions apply if 

a foreign acquiring corporation acquires substantially all of the properties constituting a trade or 

business of a domestic partnership.

The resulting U.S. tax consequences depend on the level of shareholder continuity. If the 

continuing ownership of historical shareholders of the domestic corporation in the foreign 

acquiring corporation is 80 percent or more (by vote or value), the new foreign parent 

corporation is treated as a domestic corporation for all U.S. tax purposes (the “80-percent test”). 

If the continuing shareholder ownership is at least 60 percent but less than 80 percent, the foreign 

status of the acquiring corporation is respected but certain other adverse tax consequences apply, 

including the inability to use tax attributes to reduce certain corporate-level income or gain

(“inversion gain”) recognized by the expatriated entity (the “60-percent test”). 

Reasons for Change

In order to reduce their U.S. taxes, domestic entities have with greater frequency been combining 

with smaller foreign entities such that the level of continued ownership of the historical

shareholders of the domestic entity is less than 80 percent (although above the 60-percent 

threshold). As a result of the combination, the domestic entity and the foreign entity often will 

be subsidiaries of a newly formed foreign parent company located in a tax favorable jurisdiction. 

Domestic entities engaging in these transactions often emphasize that the U.S. tax liability of the 

multinational group is expected to be substantially reduced as a result of the transaction with 

only minimal changes to its operations. Inversion transactions raise significant policy concerns 

because they facilitate the erosion of the U.S. tax base through deductible payments by the 

remaining U.S. members of the multinational group to the non-U.S. members and through 

aggressive transfer pricing for transactions between such U.S. and non-U.S. members. The 

resulting group’s U.S. taxes also may be reduced because foreign subsidiaries may no longer 

qualify as controlled foreign corporations, thus permitting the group to avoid U.S. taxation on 

passive and other highly mobile income that it earns abroad and that would otherwise be 

currently included in the U.S. tax base under subpart F of the Code. 

Existing adverse tax consequences of 60-percent inversion transactions have not prevented 

inversion transactions with continuity between 60 and 80 percent from occurring. There is no 

policy reason to permit a domestic entity to engage in an inversion transaction when its owners 
65

retain a controlling interest in the resulting entity, only minimal operational changes are 

expected, and there is significant potential for substantial erosion of the U.S. tax base. 

Furthermore, if as a result of a cross-border business combination the shareholders of the 

domestic entity do not maintain control of the resulting multinational group, the transaction 

should still be considered an inversion transaction if the affiliated group that includes the foreign 

acquiring corporation has substantial business activities in the United States and the foreign 

acquiring corporation is primarily managed and controlled in the United States.

Proposal

To limit the ability of domestic entities to expatriate, the proposal would broaden the definition

of an inversion transaction by reducing the 80-percent test to a greater than 50-percent test, and 

eliminating the 60-percent test. The proposal would also add a special rule whereby, regardless 

of the level of shareholder continuity, an inversion transaction will occur if the affiliated group 

that includes the foreign corporation has substantial business activities in the United States and 

the foreign corporation is primarily managed and controlled in the United States. Finally, the 

proposal would amend section 7874 to provide that an inversion transaction can occur if there is 

an acquisition either of substantially all of the assets of a domestic partnership (regardless of 

whether such assets constitute a trade or business) or of substantially all of the assets of a trade or 

business of a domestic partnership.

The proposal would be effective for transactions that are completed after December 31, 2014.
66

REFORM TREATMENT OF FINANCIAL AND INSURANCE INDUSTRY 

INSTITUTIONS AND PRODUCTS

REQUIRE THAT DERIVATIVE CONTRACTS BE MARKED TO MARKET WITH 

RESULTING GAIN OR LOSS TREATED AS ORDINARY 

Current Law

Under current law, derivative contracts are subject to rules on timing and character that vary

according to how a contract is characterized and, in some cases, where it is traded. Forward

contracts are generally taxable only when they are transferred or settled, with the resulting gain 

or loss treated as capital. Options are also taxable only when they are transferred, settled, or 

when the option lapses, with gain or loss treated as capital. When a forward contract is traded on 

an exchange, however, it is generally classified as a regulated futures contract, which is treated 

as sold on the last day of the taxable year (marked to market), with gain or loss treated as 60 

percent long term and 40 percent short term. Certain exchange traded options are also entitled to 

60/40 treatment.

Notional principal contracts (NPCs, also often referred to as swap contracts) are subject to their 

own timing and character rules. Income and expense from the two legs of an NPC are netted and 

accrued annually as ordinary income or deduction, as the case may be. In the case of an NPC 

that provides for one or more contingent nonperiodic payments, however, such as the value of 

stock on a specified future date, the tax rules are unclear. Gain or loss that results from the sale 

or termination of an NPC, whether the NPC provides for contingent or non-contingent payments, 

is generally treated as capital. Different timing and character rules may apply to forwards, 

options, and NPCs that are qualified hedges, part of a straddle, or referenced to a foreign 

currency.

In addition to forwards, futures, options, and NPCs, there are contractual arrangements such as 

convertible debt, contingent debt, structured notes, and securities lending transactions that either 

are themselves derivatives or contain embedded derivatives. Different timing and character rules 

apply to these instruments. Contingent debt, for example, requires the holder to accrue current 

income based on the payments the holder would receive from a comparable noncontingent bond 

of the issuer, with adjustments for payments that differ from the projected payment schedule. 

Both income and gain from a contingent debt instrument is generally ordinary. In the case of a 

structured note (which includes many exchange traded notes), the tax rules are unclear. 

Structured note holders generally take the view that no income or gain is recognized until the 

structured note matures or is sold, and they treat the gain or loss as capital. Similarly, taxpayers 

that enter into a securities lending transaction have disposed of their securities in exchange for a 

contractual right to have the securities returned upon request. Section 1058 of the Internal 

Revenue Code (Code), however, provides that no gain or loss is recognized as long as the 

securities loan satisfies certain criteria. The recognition of gain or loss on a securities lending 

transaction is therefore dependent on whether the transaction satisfies the requirements of section 

1058. 
67

Reasons for Change

The disparate treatment of derivatives under current tax rules, which have evolved sporadically

over more than 50 years, has created a regime that is essentially elective. Tax rules based on the 

form of a derivative allow banks and exchanges to construct economically equivalent contracts 

to achieve different desired tax results. Sophisticated taxpayers can use these instruments to 

achieve the timing and character that meets their objectives. At the same time, the wide variance 

in the tax treatment of derivative contracts that are economically similar often leads to 

uncertainty about how the tax rules apply to a given financial instrument.

Proposal

The proposal would require that gain or loss from a derivative contract be marked to market no 

later than the last business day of the taxpayer’s taxable year. Gain or loss resulting from the 

contract would be treated as ordinary and as attributable to a trade or business of the taxpayer for 

purposes of section 172(d)(4). The source of income associated with a derivative would 

continue to be determined under current law. 

A derivative contract would be broadly defined to include any contract the value of which is 

determined, directly or indirectly, in whole or in part, by the value of actively traded property. A 

derivative contract that is embedded in another financial instrument or contract would be subject 

to mark to market if the derivative by itself would be marked to market. Consequently, mark to 

market treatment would apply to contingent debt and structured notes linked to actively traded 

property. In addition, a taxpayer that enters into a derivative contract that substantially 

diminishes the risk of loss on actively traded stock that is not otherwise marked to market would 

be required to mark the stock to market, with preexisting gain recognized at that time and loss 

recognized when the financial instrument would have been recognized in the absence of the 

straddle. The proposal would expressly provide the Secretary with the authority to issue 

regulations that match the timing, source, and character of income, gain, deduction, and loss 

from a capital asset and a transaction that diminishes the risk of loss or opportunity for gain from 

that asset. For example, in the case of stock issued by a U.S. corporation, the source of 

dividends on the stock would be U.S., while gain or loss on a sale of the stock is generally 

sourced based on the residence of the recipient. Thus, if a taxpayer were to hedge the stock with 

a notional principal contract (NPC), the Secretary would have the authority to write regulations 

that provide that dividend equivalent payments on the NPC are matched to the dividends on the 

stock for timing, source, and character, while gain or loss on the NPC could be matched to the 

gain or loss on the stock for timing, source, and character.

Mark to market accounting would not be required for a transaction that qualifies as a business 

hedging transaction. A business hedging transaction is a transaction that is entered into in the 

ordinary course of a taxpayer’s trade or business primarily to manage risk of price changes 

(including changes related to interest rates, currency fluctuations, or creditworthiness) with 

respect to ordinary property or ordinary obligations, and that is identified as a hedging 

transaction before the close of the day on which it was acquired, originated, or entered into. A 

transaction would satisfy the identification requirement if it is identified as a business hedge for 

financial accounting purposes and it hedges price changes on ordinary property or obligations.
68

The proposal would eliminate or amend a number of provisions in the Code that address specific 

taxpayers and transactions, including section 475, section 1256 (mark to market and 60/40 

capital gain), section 1092 (tax straddles), section 1233 (short sales), section 1234 (gain or loss 

from an option), section 1234A (gains or losses from certain terminations), section 1258 

(conversion transactions), section 1259 (constructive sales transactions), and section 1260 

(constructive ownership transactions).

The proposal would apply to derivative contracts entered into after December 31, 2014.
69

MODIFY RULES THAT APPLY TO SALES OF LIFE INSURANCE CONTRACTS

Current Law

The seller of a life insurance contract generally must report as taxable income the difference 

between the amount received from the buyer and the adjusted basis in the contract, unless the 

buyer is a viatical settlement provider and the insured person is terminally or chronically ill. 

Under a transfer-for-value rule, the buyer of a previously issued life insurance contract who 

subsequently receives a death benefit generally is subject to tax on the difference between the 

death benefit received and the sum of the amount paid for the contract and premiums 

subsequently paid by the buyer. This rule does not apply if the buyer's basis is determined in 

whole or in part by reference to the seller's basis, nor does the rule apply if the buyer is the 

insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation 

in which the insured is a shareholder or officer. 

Persons engaged in a trade or business that make payments of premiums, compensation, 

remunerations, other fixed or determinable gains, profits, and income, or certain other types of 

payments in the course of that trade or business to another person generally are required to report 

such payments of $600 or more to the Internal Revenue Service (IRS). However, reporting may 

not be required in some circumstances involving the purchase of a life insurance contract. 

Reasons for Change

Recent years have seen a significant increase in the number and size of life settlement 

transactions, wherein individuals sell previously-issued life insurance contracts to investors. 

Compliance is sometimes hampered by a lack of information reporting. In addition, the current 

law exceptions to the transfer-for-value rule may give investors the ability to structure a 

transaction to avoid paying tax on the profit when the insured person dies. 

Proposal

The proposal would require a person or entity who purchases an interest in an existing life 

insurance contract with a death benefit equal to or exceeding $500,000 to report the purchase 

price, the buyer's and seller's taxpayer identification numbers (TINs), and the issuer and policy 

number to the IRS, to the insurance company that issued the policy, and to the seller. Upon the 

payment of any policy benefits to the buyer, the insurance company would be required to report 

the gross benefit payment, the buyer's TIN, and the insurance company's estimate of the buyer's 

basis to the IRS and to the payee. 

The proposal also would modify the transfer-for-value rule by eliminating the exception that 

currently applies if the buyer is a partner of the insured, a partnership in which the insured is a 

partner, or a corporation in which the insured is a shareholder or officer. Instead, under the 

proposal, the rule would not apply in the case of a transfer to the insured, or to a partnership or a 

corporation of which the insured is a 20-percent owner. Other exceptions to the rule would 

continue to apply. 
70

The proposal would apply to sales or assignment of interests in life insurance policies and 

payments of death benefits in taxable years beginning after December 31, 2014.
71

MODIFY PRORATION RULES FOR LIFE INSURANCE COMPANY GENERAL AND 

SEPARATE ACCOUNTS

Current Law

Corporate taxpayers may generally qualify for a dividends-received deduction (DRD) with 

regard to dividends received from other domestic corporations, in order to prevent or limit 

taxable inclusion of the same income by more than one corporation. No DRD is allowed, 

however, in respect of any dividend on any share of stock (1) to the extent the taxpayer is under 

an obligation to make related payments with respect to positions in substantially similar or 

related property, or (2) that is held by the taxpayer for 45 days or less during the 91-day period 

beginning on the date that is 45 days before the share becomes ex-dividend with respect to the 

dividend. For this purpose, the taxpayer’s holding period is reduced for any period in which the 

taxpayer has diminished its risk of loss by holding one or more positions with respect to 

substantially similar or related property.

In the case of a life insurance company, the DRD is permitted only with regard to the 

“company's share” of dividends received, reflecting the fact that some portion of the company's 

dividend income is used to fund tax-deductible reserves for its obligations to policyholders. 

Likewise, the net increase or net decrease in reserves is computed by reducing the ending 

balance of the reserve items by the policyholders’ share of tax-exempt interest. The regime for 

computing the company's share and policyholders’ share of net investment income is sometimes 

referred to as proration.

The policyholders’ share equals 100 percent less the company’s share, whereas the latter is equal 

to the company’s share of net investment income divided by net investment income. The 

company’s share of net investment income is the excess, if any, of net investment income over 

certain amounts, including “required interest,” that are set aside to satisfy obligations to 

policyholders. Required interest with regard to an account is calculated by multiplying a 

specified account earnings rate by the mean of the reserves with regard to the account for the 

taxable year.

A life insurance company's separate account assets, liabilities, and income are segregated from 

those of the company’s general account in order to support variable life insurance and variable 

annuity contracts. A company’s share and policyholders’ share are computed for the company’s 

general account and separately for each separate account.

Reasons for Change

The proration methodology currently used by some taxpayers may produce a company’s share 

that greatly exceeds the company’s economic interest in the net investment income earned by its 

separate account assets, generating controversy between life insurance companies and the 

Internal Revenue Service. The purposes of the proration regime would be better served, and life 

insurance companies would be treated more like other taxpayers with a diminished risk of loss in 

stock or an obligation to make related payments with respect to dividends, if the company's share 

bore a more direct relationship to the company's actual economic interest in the account.
72

Proposal

The proposal would repeal the existing regime for prorating investment income between the 

“company’s share” and the “policyholders’ share.” The general account DRD, tax-exempt 

interest, and increases in certain policy cash values of a life insurance company would instead be 

subject to a fixed 15 percent proration in a manner similar to that which applies under current 

law to non-life insurance companies. The limitations on DRD that apply to other corporate 

taxpayers would be expanded to apply explicitly to life insurance company separate account 

dividends in the same proportion as the mean of reserves bears to the mean of total assets of the

account. The proposal would thus put the company’s general account DRD on a similar footing 

to that of a non-life company, and would put its separate account DRD on a similar footing to 

that of any other taxpayer with a diminished risk of loss in stock that it owns, or with an 

obligation to make related payments with regard to dividends.

The proposal would be effective for taxable years beginning after December 31, 2014.
73

EXPAND PRO RATA INTEREST EXPENSE DISALLOWANCE FOR CORPORATEOWNED LIFE INSURANCE

Current Law

In general, no Federal income tax is imposed on a policyholder with respect to the earnings 

credited under a life insurance or endowment contract, and Federal income tax generally is 

deferred with respect to earnings under an annuity contract (unless the annuity contract is owned 

by a person other than a natural person). In addition, amounts received under a life insurance 

contract by reason of the death of the insured generally are excluded from gross income of the 

recipient.

Interest on policy loans or other indebtedness with respect to life insurance, endowment, or 

annuity contracts generally is not deductible, unless the insurance contract insures the life of a 

key person of the business. A key person includes a 20-percent owner of the business, as well as 

a limited number of the business' officers or employees. However, this interest disallowance rule 

applies to businesses only to the extent that the indebtedness can be traced to a life insurance, 

endowment, or annuity contract.

In addition, the interest deductions of a business other than an insurance company are reduced to 

the extent the interest is allocable to unborrowed policy cash values based on a statutory formula. 

An exception to the pro rata interest disallowance applies with respect to contracts that cover 

individuals who are officers, directors, employees, or 20-percent owners of the taxpayer. In the 

case of both life and non-life insurance companies, special proration rules similarly require 

adjustments to prevent or limit the funding of tax-deductible reserve increases with tax-preferred 

income, including earnings credited under life insurance, endowment, and annuity contracts that 

would be subject to the pro rata interest disallowance rule if owned by a non-insurance company. 

Reasons for Change

Leveraged businesses can fund deductible interest expenses with tax-exempt or tax-deferred 

income credited under life insurance, endowment, or annuity contracts insuring certain types of 

individuals. For example, these businesses frequently invest in investment-oriented insurance 

policies covering the lives of their employees, officers, directors, or owners. These entities 

generally do not take out policy loans or other indebtedness that is secured or otherwise traceable 

to the insurance contracts. Instead, they borrow from depositors or other lenders, or issue bonds. 

Similar tax arbitrage benefits result when insurance companies invest in certain insurance 

contracts that cover the lives of their employees, officers, directors, or 20-percent shareholders 

and fund deductible reserves with tax-exempt or tax-deferred income.

Proposal

The proposal would repeal the exception from the pro rata interest expense disallowance rule for 

contracts covering employees, officers, or directors, other than 20-percent owners of a business 

that is the owner or beneficiary of the contracts. 
74

The proposal would apply to contracts issued after December 31, 2014, in taxable years ending 

after that date. For this purpose, any material increase in the death benefit or other material 

change in the contract would be treated as a new contract except that in the case of a master 

contract, the addition of covered lives would be treated as a new contract only with respect to the 

additional covered lives.
75

ELIMINATE FOSSIL FUEL PREFERENCES

Eliminate Oil and Natural Gas Preferences

REPEAL ENHANCED OIL RECOVERY (EOR) CREDIT

Current Law

The general business credit includes a 15-percent credit for eligible costs attributable to EOR 

projects. If the credit is claimed with respect to eligible costs, the taxpayer’s deduction (or basis 

increase) with respect to those costs is reduced by the amount of the credit. Eligible costs 

include the cost of constructing a gas treatment plant to prepare Alaska natural gas for pipeline 

transportation and any of the following costs with respect to a qualified EOR project: (1) the cost 

of depreciable or amortizable tangible property that is an integral part of the project; (2) 

intangible drilling and development costs that the taxpayer can elect to deduct; and (3) deductible 

tertiary injectant costs. A qualified EOR project must be located in the United States and must 

involve the application of one or more of nine listed tertiary recovery methods that can 

reasonably be expected to result in more than an insignificant increase in the amount of crude oil 

which ultimately will be recovered. The allowable credit is phased out over a $6 range for a 

taxable year if the annual average unregulated wellhead price per barrel of domestic crude oil 

during the calendar year preceding the calendar year in which the taxable year begins (the 

reference price) exceeds an inflation adjusted threshold. The credit was completely phased out 

for taxable years beginning in 2011, because the reference price ($74.71) exceeded the inflation 

adjusted threshold ($42.91) by more than $6.

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The credit, like other oil 

and gas preferences the Administration proposes to repeal, distorts markets by encouraging more 

investment in the oil and gas industry than would occur under a neutral system. This market 

distortion is detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of supporting a clean energy economy, reducing our reliance on oil, and 

cutting carbon pollution. Moreover, the credit must ultimately be financed with taxes that result 

in other distortions, e.g., in reductions in investment in other, potentially more productive, areas 

of the economy. 

Proposal

The proposal would repeal the investment tax credit for enhanced oil recovery projects for 

taxable years beginning after December 31, 2014.
76

REPEAL CREDIT FOR OIL AND NATURAL GAS PRODUCED FROM MARGINAL 

WELLS

Current Law

The general business credit includes a credit for crude oil and natural gas produced from 

marginal wells. The credit rate is $3.00 per barrel of oil and 50 cents per 1,000 cubic feet of 

natural gas for taxable years beginning in 2005 and is adjusted for inflation in taxable years 

beginning after 2005. The credit is available for production from wells that produce oil and 

natural gas qualifying as marginal production for purposes of the percentage depletion rules or 

that have average daily production of not more than 25 barrel-of-oil equivalents and produce at 

least 95 percent water. The credit per well is limited to 1,095 barrels of oil or barrel-of-oil 

equivalents per year. The credit rate for crude oil is phased out for a taxable year if the annual 

average unregulated wellhead price per barrel of domestic crude oil during the calendar year 

preceding the calendar year in which the taxable year begins (the reference price) exceeds the 

applicable threshold. The phase-out range and the applicable threshold at which phase-out 

begins are $3.00 and $15.00 for taxable years beginning in 2005 and are adjusted for inflation in 

taxable years beginning after 2005. The credit rate for natural gas is similarly phased out for a 

taxable year if the annual average wellhead price for domestic natural gas exceeds the applicable 

threshold. The phase-out range and the applicable threshold at which phase-out begins are 33 

cents and $1.67 for taxable years beginning in 2005 and are adjusted for inflation in taxable 

years beginning after 2005. The credit has been completely phased out for all taxable years since 

its enactment. Unlike other components of the general business credit, which can be carried 

back only one year, the marginal well credit can be carried back up to five years.

 

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. The credit, like other oil 

and gas preferences the Administration proposes to repeal, distorts markets by encouraging more 

investment in the oil and natural gas industry than would occur under a neutral system. This 

market distortion is detrimental to long-term energy security and is also inconsistent with the 

Administration’s policy of supporting a clean energy economy, reducing our reliance on oil, and 

cutting carbon pollution. Moreover, the credit must ultimately be financed with taxes that cause 

other economic distortions, e.g. underinvestment in other, potentially more productive, areas of 

the economy. 

Proposal

The proposal would repeal the production tax credit for oil and natural gas from marginal wells 

for production in taxable years beginning after December 31, 2014.
77

REPEAL EXPENSING OF INTANGIBLE DRILLING COSTS

Current Law

In general, costs that benefit future periods must be capitalized and recovered over such periods 

for income tax purposes, rather than being expensed in the period the costs are incurred. In 

addition, the uniform capitalization rules require certain direct and indirect costs allocable to 

property to be included in inventory or capitalized as part of the basis of such property. In 

general, the uniform capitalization rules apply to real and tangible personal property produced by 

the taxpayer or acquired for resale.

Special rules apply to intangible drilling costs (IDCs). IDCs include all expenditures made by an 

operator (i.e., a person who holds a working or operating interest in any tract or parcel of land 

either as a fee owner or under a lease or any other form of contract granting working or operating 

rights) for wages, fuel, repairs, hauling, supplies, and other expenses incident to and necessary 

for the drilling of wells and the preparation of wells for the production of oil and natural gas. In 

addition, IDCs include the cost to operators of any drilling or development work (excluding 

amounts payable only out of production or gross or net proceeds from production, if the amounts 

are depletable income to the recipient, and amounts properly allocable to the cost of depreciable

property) done by contractors under any form of contract (including a turnkey contract). IDCs 

include amounts paid for labor, fuel, repairs, hauling, and supplies which are used in the drilling, 

shooting, and cleaning of wells; in such clearing of ground, draining, road making, surveying, 

and geological works as are necessary in preparation for the drilling of wells; and in the 

construction of such derricks, tanks, pipelines, and other physical structures as are necessary for 

the drilling of wells and the preparation of wells for the production of oil and natural gas. 

Generally, IDCs do not include expenses for items which have a salvage value (such as pipes and 

casings) or items which are part of the acquisition price of an interest in the property.

Under the special rules applicable to IDCs, an operator who pays or incurs IDCs in the 

development of an oil or natural gas property located in the United States may elect either to 

expense or capitalize those costs. The uniform capitalization rules do not apply to otherwise 

deductible IDCs.

If a taxpayer elects to expense IDCs, the amount of the IDCs is deductible as an expense in the 

taxable year the cost is paid or incurred. Generally, IDCs that a taxpayer elects to capitalize may 

be recovered through depletion or depreciation, as appropriate; or in the case of a nonproductive 

well (“dry hole”), the operator may elect to deduct the costs. In the case of an integrated oil 

company (i.e., a company that engages, either directly or through a related enterprise, in 

substantial retailing or refining activities) that has elected to expense IDCs, 30 percent of the 

IDCs on productive wells must be capitalized and amortized over a 60-month period.

A taxpayer that has elected to deduct IDCs may, nevertheless, elect to capitalize and amortize 

certain IDCs over a 60-month period beginning with the month the expenditure was paid or 

incurred. This rule applies on an expenditure-by-expenditure basis; that is, for any particular 

taxable year, a taxpayer may deduct some portion of its IDCs and capitalize the rest under this 
78

provision. This allows the taxpayer to reduce or eliminate IDC adjustments or preferences under 

the alternative minimum tax.

The election to deduct IDCs applies only to those IDCs associated with domestic properties. For 

this purpose, the United States includes certain wells drilled offshore.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The expensing of IDCs, 

like other oil and gas preferences the Administration proposes to repeal, distorts markets by 

encouraging more investment in the oil and natural gas industry than would occur under a neutral 

system. This market distortion is detrimental to long-term energy security and is also 

inconsistent with the Administration’s policy of supporting a clean energy economy, reducing 

our reliance on oil, and cutting carbon pollution. Moreover, the subsidy for oil and natural gas

must ultimately be financed with taxes that cause other economic distortions, e.g., 

underinvestment in other, potentially more productive, areas of the economy. Capitalization of 

IDCs would place the oil and gas industry on a cost recovery system similar to that of other 

industries and reduce economic distortions.

Proposal

The proposal would repeal expensing of IDCs and 60-month amortization of capitalized IDCs. 

IDCs would be capitalized as depreciable or depletable property, depending on the nature of the 

cost incurred, in accordance with the generally applicable rules. 

The proposal would be effective for costs paid or incurred after December 31, 2014.
79

REPEAL DEDUCTION FOR TERTIARY INJECTANTS

Current Law

Taxpayers are allowed to deduct the cost of qualified tertiary injectant expenses for the taxable 

year. Qualified tertiary injectant expenses are amounts paid or incurred for any tertiary 

injectants (other than recoverable hydrocarbon injectants) that are used as a part of a tertiary 

recovery method to increase the recovery of crude oil. The deduction is treated as an 

amortization deduction in determining the amount subject to recapture upon disposition of the 

property.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. The deduction for tertiary 

injectants, like other oil and natural gas preferences the Administration proposes to repeal, 

distorts markets by encouraging more investment in the oil and natural gas industry than would 

occur under a neutral system. This market distortion is detrimental to long-term energy security 

and is also inconsistent with the Administration’s policy of supporting a clean energy economy, 

reducing our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and 

gas must ultimately be financed with taxes that cause other economic distortions, e.g.,

underinvestment in other, potentially more productive, areas of the economy. Capitalization of 

tertiary injectants would place the oil and natural gas industry on a cost recovery system similar 

to that of other industries and reduce economic distortions.

Proposal

The proposal would repeal the deduction for qualified tertiary injectant expenses for amounts 

paid or incurred after December 31, 2014.
80

REPEAL EXCEPTION TO PASSIVE LOSS LIMITATION FOR WORKING 

INTERESTS IN OIL AND NATURAL GAS PROPERTIES

Current Law

The passive loss rules limit deductions and credits from passive trade or business activities. 

Deductions attributable to passive activities, to the extent they exceed income from passive 

activities, generally may not be deducted against other income, such as wages, portfolio income, 

or business income that is not derived from a passive activity. A similar rule applies to credits. 

Suspended deductions and credits are carried forward and treated as deductions and credits from 

passive activities in the next year. The suspended losses and credits from a passive activity are 

allowed in full when the taxpayer completely disposes of the activity.

Passive activities are defined to include trade or business activities in which the taxpayer does 

not materially participate. An exception is provided, however, for any working interest in an oil 

or natural gas property that the taxpayer holds directly or through an entity that does not limit the 

liability of the taxpayer with respect to the interest.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The special tax treatment 

of working interests in oil and gas properties, like other oil and natural gas preferences the 

Administration proposes to repeal, distorts markets by encouraging more investment in the oil 

and natural gas industry than would occur under a neutral system. This market distortion is 

detrimental to long-term energy security and is also inconsistent with the Administration’s policy 

of supporting a clean energy economy, reducing our reliance on oil, and cutting carbon pollution. 

Moreover, the working interest exception for oil and natural gas must ultimately be financed 

with taxes that cause other economic distortions, e.g., underinvestment in other, potentially more 

productive, areas of the economy. Eliminating the working interest exception would subject oil 

and natural gas properties to the same limitations as other activities and reduce economic 

distortions.

Proposal

The proposal would repeal the exception from the passive loss rules for working interests in oil 

and natural gas properties for taxable years beginning after December 31, 2014.
81

REPEAL PERCENTAGE DEPLETION FOR OIL AND NATURAL GAS WELLS

Current Law

The capital costs of oil and natural gas wells are recovered through the depletion deduction. 

Under the cost depletion method, the basis recovery for a taxable year is proportional to the 

exhaustion of the property during the year. This method does not permit cost recovery 

deductions that exceed basis or that are allowable on an accelerated basis.

A taxpayer may also qualify for percentage depletion with respect to oil and natural gas 

properties. The amount of the deduction is a statutory percentage of the gross income from the 

property. For oil and natural gas properties, the percentage ranges from 15 to 25 percent and the 

deduction may not exceed 100 percent of the taxable income from the property (determined 

before the deductions for depletion and domestic manufacturing). In addition, the percentage 

depletion deduction for oil and natural gas properties may not exceed 65 percent of the 

taxpayer’s overall taxable income (determined before the deduction for depletion and with 

certain other adjustments).

Other limitations and special rules apply to the percentage depletion deduction for oil and natural 

gas properties. In general, only independent producers and royalty owners (in contrast to 

integrated oil companies) qualify for the percentage depletion deduction. In addition, oil and 

natural gas producers may claim percentage depletion only with respect to up to 1,000 barrels of 

average daily production of domestic crude oil or an equivalent amount of domestic natural gas 

(applied on a combined basis in the case of taxpayers that produce both). This quantity 

limitation is allocated, at the taxpayer’s election, between oil production and natural gas 

production and then further allocated within each class among the taxpayer’s properties. Special 

rules apply to oil and natural gas production from marginal wells (generally, wells for which the 

average daily production is less than 15 barrels of oil or barrel-of-oil equivalents or that produce 

only heavy oil). Only marginal well production can qualify for percentage depletion at a rate of 

more than 15 percent. The rate is increased in a taxable year that begins in a calendar year 

following a calendar year during which the annual average unregulated wellhead price per barrel 

of domestic crude oil is less than $20. The increase is one percentage point for each whole dollar 

of difference between the two amounts. In addition, marginal wells are exempt from the 100-

percent-of-net-income limitation described above in taxable years beginning during the period 

1998-2007 and in taxable years beginning during the period 2009-2011. Unless the taxpayer 

elects otherwise, marginal well production is given priority over other production in applying the 

1,000-barrel limitation on percentage depletion.

A qualifying taxpayer determines the depletion deduction for each oil and natural gas property 

under both the percentage depletion method and the cost depletion method and deducts the larger 

of the two amounts. Because percentage depletion is computed without regard to the taxpayer’s 

basis in the depletable property, a taxpayer may continue to claim percentage depletion after all 

the expenditures incurred to acquire and develop the property have been recovered.
82

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. Percentage depletion 

effectively provides a lower rate of tax with respect to a favored source of income. The lower 

rate of tax, like other oil and natural gas preferences the Administration proposes to repeal, 

distorts markets by encouraging more investment in the oil and natural gas industry than would 

occur under a neutral system. This market distortion is detrimental to long-term energy security 

and is also inconsistent with the Administration’s policy of supporting a clean energy economy, 

reducing our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and 

natural gas must ultimately be financed with taxes that cause other economic distortions, e.g.,

underinvestment in other, potentially more productive, areas of the economy. 

Cost depletion computed by reference to the taxpayer’s basis in the property is the equivalent of 

economic depreciation. Limiting oil and gas producers to cost depletion would place them on a 

cost recovery system similar to that of other industries and reduce economic distortions.

Proposal

The proposal would repeal percentage depletion with respect to oil and natural gas wells. 

Taxpayers would be permitted to claim cost depletion on their adjusted basis, if any, in oil and 

natural gas wells. 

The proposal would be effective for taxable years beginning after December 31, 2014.
83

REPEAL DOMESTIC MANUFACTURING DEDUCTION FOR OIL AND NATURAL 

GAS PRODUCTION

Current Law

A deduction is allowed with respect to income attributable to domestic production activities (the 

manufacturing deduction). For taxable years beginning after 2009, the manufacturing deduction 

is generally equal to nine percent of the lesser of qualified production activities income for the 

taxable year or taxable income for the taxable year, limited to 50 percent of the W-2 wages of the 

taxpayer for the taxable year. The deduction for income from oil and natural gas production 

activities is computed at a six-percent rate.

Qualified production activities income is generally calculated as a taxpayer’s domestic 

production gross receipts (i.e., the gross receipts derived from any lease, rental, license, sale, 

exchange, or other disposition of qualifying production property manufactured, produced, grown, 

or extracted by the taxpayer in whole or significant part within the United States; any qualified 

film produced by the taxpayer; or electricity, natural gas, or potable water produced by the 

taxpayer in the United States) minus the cost of goods sold and other expenses, losses, or 

deductions attributable to such receipts. 

The manufacturing deduction generally is available to all taxpayers that generate qualified 

production activities income, which under current law includes income from the sale, exchange 

or disposition of oil, natural gas or primary products thereof produced in the United States.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The manufacturing 

deduction for oil and natural gas effectively provides a lower rate of tax with respect to a favored 

source of income. The lower rate of tax, like other oil and natural gas preferences the 

Administration proposes to repeal, distorts markets by encouraging more investment in the oil 

and natural gas industry than would occur under a neutral system. This market distortion is 

detrimental to long-term energy security and is also inconsistent with the Administration’s policy 

of supporting a clean energy economy, reducing our reliance on oil, and cutting carbon pollution. 

Moreover, the tax subsidy for oil and natural gas must ultimately be financed with taxes that 

cause other economic distortions, e.g., underinvestment in other, potentially more productive, 

areas of the economy.

Proposal

The proposal would retain the overall manufacturing deduction, but exclude from the definition 

of domestic production gross receipts all gross receipts derived from the sale, exchange or other 

disposition of oil, natural gas or a primary product thereof for taxable years beginning after 

December 31, 2014. There is a parallel proposal to repeal the domestic manufacturing deduction 

for coal and other hard mineral fossil fuels.
84

INCREASE GEOLOGICAL AND GEOPHYSICAL AMORTIZATION PERIOD FOR 

INDEPENDENT PRODUCERS TO SEVEN YEARS

Current Law

Geological and geophysical expenditures are costs incurred for the purpose of obtaining and 

accumulating data that will serve as the basis for the acquisition and retention of mineral 

properties. The amortization period for geological and geophysical expenditures incurred in 

connection with oil and natural gas exploration in the United States is two years for independent 

producers and seven years for integrated oil and natural gas producers.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. The accelerated 

amortization of geological and geophysical expenditures incurred by independent producers, like 

other oil and natural gas preferences the Administration proposes to repeal, distorts markets by 

encouraging more investment in the oil and natural gas industry than would occur under a neutral 

system. This market distortion is detrimental to long-term energy security and is also 

inconsistent with the Administration’s policy of supporting a clean energy economy, reducing 

our reliance on oil, and cutting carbon pollution. Moreover, the tax subsidy for oil and natural 

gas must ultimately be financed with taxes that cause other economic distortions, e.g.,

underinvestment in other, potentially more productive, areas of the economy. 

Increasing the amortization period for geological and geophysical expenditures incurred by 

independent oil and natural gas producers from two years to seven years would provide a more 

accurate reflection of their income and more consistent tax treatment for all oil and natural gas 

producers.

Proposal

The proposal would increase the amortization period from two years to seven years for 

geological and geophysical expenditures incurred by independent producers in connection with 

all oil and natural gas exploration in the United States. Seven-year amortization would apply 

even if the property is abandoned and any remaining basis of the abandoned property would be 

recovered over the remainder of the seven-year period. 

The proposal would be effective for amounts paid or incurred after December 31, 2014.
85

Eliminate Coal Preferences

REPEAL EXPENSING OF EXPLORATION AND DEVELOPMENT COSTS

Current Law

In general, costs that benefit future periods must be capitalized and recovered over such periods 

for income tax purposes, rather than being expensed in the period the costs are incurred. In 

addition, the uniform capitalization rules require certain direct and indirect costs allocable to 

property to be included in inventory or capitalized as part of the basis of such property. In 

general, the uniform capitalization rules apply to real and tangible personal property produced by 

the taxpayer or acquired for resale.

Special rules apply in the case of mining exploration and development expenditures. A taxpayer 

may elect to expense the exploration costs incurred for the purpose of ascertaining the existence, 

location, extent, or quality of an ore or mineral deposit, including a deposit of coal or other hardmineral fossil fuel. Exploration costs that are expensed are recaptured when the mine reaches the 

producing stage either by a reduction in depletion deductions or, at the election of the taxpayer, 

by an inclusion in income in the year in which the mine reaches the producing stage.

After the existence of a commercially marketable deposit has been disclosed, costs incurred for 

the development of a mine to exploit the deposit are deductible in the year paid or incurred 

unless the taxpayer elects to deduct the costs on a ratable basis as the minerals or ores produced 

from the deposit are sold. 

In the case of a corporation that elects to deduct exploration costs in the year paid or incurred, 30 

percent of the otherwise deductible costs must be capitalized and amortized over a 60-month 

period. In addition, a taxpayer that has elected to deduct exploration costs may, nevertheless, 

elect to capitalize and amortize those costs over a 10-year period. This rule applies on an 

expenditure-by-expenditure basis; that is, for any particular taxable year, a taxpayer may deduct 

some portion of its exploration costs and capitalize the rest under this provision. This allows the 

taxpayer to reduce or eliminate adjustments or preferences for exploration costs under the 

alternative minimum tax. Similar rules limiting corporate deductions and providing for 60-

month and 10-year amortization apply with respect to mine development costs.

The election to deduct exploration costs and the rule making development costs deductible in the 

year paid or incurred apply only with respect to domestic ore and mineral deposits.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. The expensing of 

exploration and development costs relating to coal and other hard-mineral fossil fuels, like other 

fossil-fuel preferences the Administration proposes to repeal, distorts markets by encouraging 

more investment in fossil-fuel production than would occur under a neutral system. This market 

distortion is inconsistent with the Administration’s policy of supporting a clean energy economy 
86

and cutting carbon pollution. Moreover, the tax subsidy for coal and other hard-mineral fossil 

fuels must ultimately be financed with taxes that cause other economic distortions, e.g.,

underinvestment in other, potentially more productive, areas of the economy. Capitalization of 

exploration and development costs relating to coal and other hard-mineral fossil fuels would 

place taxpayers in that industry on a cost recovery system similar to that employed by other 

industries and reduce economic distortions.

Proposal

The proposal would repeal expensing, 60-month amortization, and 10-year amortization of 

exploration and development costs with respect to coal and other hard-mineral fossil fuels. The 

costs would be capitalized as depreciable or depletable property, depending on the nature of the 

cost incurred, in accordance with the generally applicable rules. The other hard-mineral fossil 

fuels for which expensing, 60-month amortization, and 10-year amortization would not be 

allowed include lignite and oil shale to which a 15-percent depletion rate applies.

The proposal would be effective for costs paid or incurred after December 31, 2014.
87

REPEAL PERCENTAGE DEPLETION FOR HARD MINERAL FOSSIL FUELS

Current Law

The capital costs of coal mines and other hard-mineral fossil-fuel properties are recovered 

through the depletion deduction. Under the cost depletion method, the basis recovery for a 

taxable year is proportional to the exhaustion of the property during the year. This method does 

not permit cost recovery deductions that exceed basis or that are allowable on an accelerated 

basis.

A taxpayer may also qualify for percentage depletion with respect to coal and other hard-mineral 

fossil-fuel properties. The amount of the deduction is a statutory percentage of the gross income 

from the property. The percentage is 10 percent for coal and lignite and 15 percent for oil shale 

(other than oil shale to which a 71⁄2-percent depletion rate applies because it is used for certain 

nonfuel purposes). The deduction may not exceed 50 percent of the taxable income from the 

property (determined before the deductions for depletion and domestic manufacturing).

A qualifying taxpayer determines the depletion deduction for each property under both the 

percentage depletion method and the cost depletion method and deducts the larger of the two 

amounts. Because percentage depletion is computed without regard to the taxpayer’s basis in the 

depletable property, a taxpayer may continue to claim percentage depletion after all the 

expenditures incurred to acquire and develop the property have been recovered.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. Percentage depletion 

effectively provides a lower rate of tax with respect to a favored source of income. The lower 

rate of tax, like other fossil-fuel preferences the Administration proposes to repeal, distorts 

markets by encouraging more investment in fossil-fuel production than would occur under a 

neutral system. This market distortion is inconsistent with the Administration’s policy of 

supporting a clean energy economy and cutting carbon pollution. Moreover, the tax subsidy for 

coal and other hard-mineral fossil fuels must ultimately be financed with taxes that cause other 

economic distortions, e.g., underinvestment in other, potentially more productive, areas of the 

economy. 

Cost depletion computed by reference to the taxpayer’s basis in the property is the equivalent of 

economic depreciation. Limiting fossil-fuel producers to cost depletion would place them on a 

cost recovery system similar to that of other industries and reduce economic distortions.

Proposal

The proposal would repeal percentage depletion with respect to coal and other hard-mineral 

fossil fuels. The other hard-mineral fossil fuels for which no percentage depletion would be 

allowed include lignite and oil shale to which a 15-percent depletion rate applies. Taxpayers 
88

would be permitted to claim cost depletion on their adjusted basis, if any, in coal and other hardmineral fossil-fuel properties. 

The proposal would be effective for taxable years beginning after December 31, 2014.
89

REPEAL CAPITAL GAINS TREATMENT FOR ROYALTIES

Current Law

Royalties received on the disposition of coal or lignite generally qualify for treatment as longterm capital gain, and the royalty owner does not qualify for percentage depletion with respect to 

the coal or lignite. This treatment does not apply unless the taxpayer has been the owner of the 

mineral in place for at least one year before it is mined. The treatment also does not apply to 

income realized as a co-adventurer, partner, or principal in the mining of the mineral or to certain 

related-party transactions.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st

-century energy economy. The capital gain 

treatment of coal and lignite royalties, like other fossil-fuel preferences the Administration 

proposes to repeal, distorts markets by encouraging more investment in fossil-fuel production 

than would occur under a neutral system. This market distortion is inconsistent with the 

Administration’s policy of supporting a clean energy economy and cutting carbon pollution. 

Moreover, the tax subsidy for coal and lignite must ultimately be financed with taxes that cause 

other economic distortions, e.g., underinvestment in other, potentially more productive, areas of 

the economy. 

Proposal

The proposal would repeal capital gains treatment of coal and lignite royalties and would tax 

those royalties as ordinary income.

The proposal would be effective for amounts realized in taxable years beginning after December 

31, 2014.
90

REPEAL DOMESTIC MANUFACTURING DEDUCTION FOR THE PRODUCTION OF 

COAL AND OTHER HARD MINERAL FOSSIL FUELS

Current Law

A deduction is allowed with respect to income attributable to domestic production activities (the 

manufacturing deduction). For taxable years beginning after 2009, the manufacturing deduction 

is generally equal to nine percent of the lesser of qualified production activities income for the 

taxable year or taxable income for the taxable year, limited to 50 percent of the W-2 wages of the 

taxpayer for the taxable year.

Qualified production activities income is generally calculated as a taxpayer’s domestic 

production gross receipts (i.e., the gross receipts derived from any lease, rental, license, sale, 

exchange, or other disposition of qualifying production property manufactured, produced, grown, 

or extracted by the taxpayer in whole or significant part within the United States; any qualified 

film produced by the taxpayer; or electricity, natural gas, or potable water produced by the 

taxpayer in the United States) minus the cost of goods sold and other expenses, losses, or 

deductions attributable to such receipts.

The manufacturing deduction generally is available to all taxpayers that generate qualified 

production activities income, which under current law includes income from the sale, exchange 

or disposition of coal, other hard-mineral fossil fuels, or primary products thereof produced in 

the United States.

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so 

that the United States can transition to a 21st-century energy economy. The manufacturing 

deduction for coal and other hard mineral fossil fuels effectively provides a lower rate of tax with 

respect to a favored source of income. The lower rate of tax, like other fossil-fuel preferences 

the Administration proposes to repeal, distorts markets by encouraging more investment in 

fossil-fuel production than would occur under a neutral system. This market distortion is 

inconsistent with the Administration’s policy of supporting a clean energy economy and cutting 

carbon pollution. Moreover, the tax subsidy for coal and other hard-mineral fossil fuels must 

ultimately be financed with taxes that cause other economic distortions, e.g., underinvestment in 

other, potentially more productive, areas of the economy.

Proposal

The proposal would retain the overall manufacturing deduction, but exclude from the definition 

of domestic production gross receipts all gross receipts derived from the sale, exchange or other 

disposition of coal, other hard-mineral fossil fuels, or a primary product thereof. The hard 

mineral fossil fuels to which the exclusion would apply include lignite and oil shale to which a 

15-percent depletion rate applies. There is a parallel proposal to repeal the domestic 

manufacturing deduction for oil and natural gas companies. The proposal would be effective for 

taxable years beginning after December 31, 2014.
91

OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS

REPEAL THE EXCISE TAX CREDIT FOR DISTILLED SPIRITS WITH FLAVOR 

AND WINE ADDITIVES

Current Law

Distilled spirits are currently taxed at a rate of $13.50 per proof-gallon. (A proof-gallon is one 

liquid gallon of spirits that is 50 percent alcohol (100 proof) at 60 degrees F). Some distilled 

spirits are flavored with additives. Section 5010 of the Internal Revenue Code allows a credit 

against the $13.50 per proof gallon excise tax on distilled spirits for flavor and wine additives, 

reducing the effective excise rate paid on distilled spirits with such content. The credit is 

available on distilled spirits that are produced in the U.S. as well as on distilled spirits that are 

imported into the U.S. 

The value of the section 5010 credit comes from two sources: (1) up to 2.5 percent of the 

distilled spirits in a mixture that comes from flavors is tax-exempt, though flavors above this 

level are taxed at the distilled spirit rate, and (2) the wine component of the additive is taxed at 

the wine rate, which is less than the tax rate on distilled spirits.

Reasons for Change

The tax credit introduces differences in the prices of similar goods, and thereby distorts decisions 

by producers and consumers. Consumers may favor distilled spirit products with additives 

because of their comparatively lower price, relative to similar products with the same overall 

alcohol content but without additives. In addition, the credit encourages producers to use 

additives. In the first year following the enactment of the credit (1981), roughly one million 

proof-gallons of wines and flavors were mixed with 300 million proof-gallons of spirits. Since 

then the volume of wines and flavors have increased substantially while the volume of spirits 

used in mixed products has stayed roughly constant. In 2013, 12.6 million proof gallons of 

wines and flavors were mixed with 330 million gallons of spirits within the United States.

The credit creates tax advantages for foreign producers and production compared to domestic 

production. Some countries allow greater use of additives than the U.S. allows. This can lead to 

larger credits for foreign producers. In addition, the Alcohol and Tobacco Tax and Trade Bureau 

(TTB) of the U.S. Treasury does not have the authority for on-site audits of foreign producers. 

In contrast, TTB can perform on-site audits of domestic producers to verify the additives used. 

Calculating the credit and enforcing compliance with the provision is complicated for producers 

and TTB, as it requires information about the specific components of the beverage rather than 

alcohol content alone. Repeal would raise revenue and simplify tax collections. 
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Proposal

The proposal would repeal the section 5010 credit for distilled spirits and tax all distilled spirit 

beverages at the $13.50 per proof-gallon rate.

The proposal would be effective for all spirits produced in or imported into the United States 

after December 31, 2014.
93

REPEAL LAST-IN, FIRST-OUT (LIFO) METHOD OF ACCOUNTING FOR 

INVENTORIES

Current Law

A taxpayer with inventory may determine the value of its inventory and its cost of goods sold 

using a number of different methods. The most prevalent method is the first-in, first-out (FIFO) 

method, which matches current sales with the costs of the earliest acquired (or manufactured) 

inventory items. As an alternative, a taxpayer may elect to use the LIFO method, which treats 

the most recently acquired (or manufactured) goods as having been sold during the year. The 

LIFO method can provide a tax benefit for a taxpayer facing rising inventory costs, since the cost 

of goods sold under this method is based on more recent, higher inventory values, resulting in 

lower taxable income. If inventory levels fall during the year, however, a LIFO taxpayer must 

include lower-cost LIFO inventory values (reflecting one or more prior-year inventory 

accumulations) in the cost of goods sold, and its taxable income will be correspondingly higher. 

To be eligible to elect LIFO for tax purposes, a taxpayer must use LIFO for financial accounting 

purposes. 

Reasons for Change

Repeal of the LIFO method would eliminate a tax deferral opportunity available to taxpayers that 

hold inventories, the costs of which increase over time. In addition, LIFO repeal would simplify 

the Internal Revenue Code by removing a complex and burdensome accounting method that has 

been the source of controversy between taxpayers and the Internal Revenue Service.

International Financial Reporting Standards do not permit the use of the LIFO method, and their 

adoption by the Securities and Exchange Commission would cause violations of the current 

LIFO book/tax conformity requirement. Repealing LIFO would remove this possible 

impediment to the implementation of these standards in the United States. 

Proposal

The proposal would repeal the use of the LIFO inventory accounting method for Federal income 

tax purposes. Taxpayers that currently use the LIFO method would be required to change their 

method of inventory accounting, resulting in the inclusion in income of prior-years’ LIFO 

inventory reserves (the amount of income deferred under the LIFO method). The resulting 

section 481(a) adjustment, which is a one-time increase in gross income, would be taken into 

account ratably over ten years, beginning with the year of change. 

The repeal is proposed to be effective for the first taxable year beginning after December 31, 

2014.
94

REPEAL LOWER-OF-COST-OR-MARKET (LCM) INVENTORY ACCOUNTING 

METHOD

Current Law

Taxpayers required to maintain inventories are permitted to use a variety of methods to 

determine the cost of their ending inventories, including methods such as the last-in, first-out 

(LIFO) method, the first-in, first-out method, and the retail method. Taxpayers not using a LIFO 

method may: (1) write down the carrying values of their inventories by applying the LCM 

method instead of the cost method; and (2) write down the cost of “subnormal” goods (i.e., those 

that are unsalable at normal prices or unusable in the normal way because of damage, 

imperfection, or other similar causes).

Reasons for Change

The allowance of inventory write-downs under the LCM and subnormal goods provisions is an 

exception from the realization principle, and is essentially a one-way mark-to-market regime that 

understates taxable income. Thus, a taxpayer is able to obtain a larger cost-of-goods-sold 

deduction by writing down an item of inventory if its replacement cost falls below historical cost, 

but need not increase an item’s inventory value if its replacement cost increases above historical 

cost. This asymmetric treatment is unwarranted. Also, the market value used under LCM for tax 

purposes generally is the replacement or reproduction cost of an item of inventory, not the item’s 

net realizable value, as is required under generally accepted financial accounting rules. While 

the operation of the retail method is technically symmetric, it also allows retailers to obtain 

deductions for write-downs below inventory cost because of normal and anticipated declines in 

retail prices.

Proposal

The proposal would statutorily prohibit the use of the LCM and subnormal goods 

methods. Appropriate wash-sale rules also would be included to prevent taxpayers from 

circumventing the prohibition. The proposal would result in a change in the method of 

accounting for inventories for taxpayers currently using the LCM and subnormal goods methods, 

and any resulting section 481(a) adjustment generally would be included in income ratably over 

a four-year period beginning with the year of change.

The proposal would be effective for taxable years beginning after December 31, 2014.
95

MODIFY DEPRECIATION RULES FOR PURCHASES OF GENERAL AVIATION 

PASSENGER AIRCRAFT 

Current Law

Under the depreciation rules, the recovery period for airplanes not used in commercial or 

contract carrying of passengers or freight (including corporate jets) generally is five years and 

the recovery period for airplanes and other assets (including ground property, but excluding 

helicopters) used in commercial or contract carrying of passengers or freight generally is seven 

years.

Reasons for Change

The shorter recovery period for depreciating airplanes not used in commercial or contract 

carrying of passengers or freight provides a tax preference for corporate jets and similar airplanes 

used primarily for transportation of passengers. To eliminate the preference for these airplanes 

over similar commercial transportation airplanes, their recovery periods should be harmonized.

Proposal

The proposal would define “general aviation passenger aircraft” to mean any airplane (including 

airframes and engines) not used in commercial or contract carrying of passengers or freight, but 

which primarily engages in the carrying of passengers (other than an airplane used primarily in 

emergency or emergency relief operations).

The proposal would increase the recovery period for depreciating general aviation passenger 

aircraft from five years to seven years. Correspondingly, for taxpayers using the alternative 

depreciation system, the recovery period for general aviation passenger aircraft would be 

extended to 12 years.

Any airplane not used in commercial or contract carrying of passengers or freight, but which is 

primarily engaged in non-passenger activities (e.g., crop dusting, firefighting, aerial surveying, 

etc.) and any helicopter would continue to be depreciated using a recovery period of five years 

(six years under the alternative depreciation system). 

The proposal would be effective for property placed in service after December 31, 2014.
96

REPEAL GAIN LIMITATION FOR DIVIDENDS RECEIVED IN REORGANIZATION 

EXCHANGES

Current Law

If as part of a reorganization transaction an exchanging shareholder receives in exchange for 

stock of the target corporation both stock and property that cannot be received without the 

recognition of gain (often referred to as “boot”), the exchanging shareholder is required to 

recognize gain equal to the lesser of the gain realized in the exchange or the amount of boot 

received (commonly referred to as the “boot-within-gain” limitation). Further, if the exchange 

has the effect of the distribution of a dividend, then all or part of the gain recognized by the 

exchanging shareholder is treated as a dividend to the extent of the shareholder’s ratable share of 

the corporation’s earnings and profits. The remainder of the gain (if any) is treated as gain from 

the exchange of property.

Outside the corporate reorganization and spin-off contexts, all of a corporation’s current and 

accumulated earnings and profits are taken into account in determining the extent to which a 

distribution is taxed as a dividend.

Reasons for Change

There is not a significant policy reason to vary the tax treatment of a distribution based on 

whether it is received in the normal course of a corporation’s operations or is instead received as 

part of a reorganization exchange. Thus, repealing the boot-within-gain limitation for an 

exchange that has the effect of the distribution of a dividend will provide more uniform treatment 

for dividends that is less dependent on context. Moreover, in cross-border reorganizations, the 

boot-within-gain limitation can permit U.S. shareholders to repatriate previously-untaxed 

earnings and profits of foreign subsidiaries with minimal U.S. tax consequences. 

For example, if the exchanging shareholder’s stock in the target corporation has little or no builtin gain at the time of the reorganization (because, for example, the shareholder recently 

purchased the target corporation), the boot-within-gain rule would allow the target corporation to 

distribute cash to the shareholder up to the shareholder’s high stock basis without tax. This 

result applies even if the target corporation has previously untaxed earnings and profits equal to 

or greater than the boot. Conversely, if the target corporation had made the cash distribution to 

its shareholder separate from the reorganization and its earnings and profits were sufficient to tax 

the distribution as a dividend, the shareholder would generally be taxed on the dividend. 

This result is also inconsistent with the principle that previously untaxed earnings and profits of a 

foreign subsidiary should be subject to U.S. tax upon repatriation.

Proposal

The proposal would repeal the boot-within-gain limitation of current law in the case of any 

reorganization transaction if the exchange has the effect of the distribution of a dividend, as 

determined under section 356(a)(2). In addition, the proposal would take into account all of the 

available earnings and profits of the corporation (not merely the shareholder’s ratable share of 
97

the corporation’s undistributed earnings and profits) consistent with the rules governing ordinary 

dividend distributions.

The proposal would be effective for taxable years beginning after December 31, 2014.
98

EXPAND THE DEFINITION OF SUBSTANTIAL BUILT-IN LOSS FOR PURPOSES OF 

PARTNERSHIP LOSS TRANSFERS

Current Law

Under section 743(b), a partnership does not adjust the basis of partnership property following 

the transfer of a partnership interest unless the partnership has made an election under section 

754 to make basis adjustments or the partnership has a substantial built-in loss. If an election is 

in effect or the partnership has a substantial built-in loss, adjustments are made with respect to 

the transferee partner to account for the difference between the transferee partner’s proportionate 

share of the adjusted basis of the partnership property and the transferee’s basis in its partnership 

interest. These adjustments are intended to adjust the basis of partnership property to 

approximate the result of a direct purchase of the property by the transferee partner. 

Prior to 2004, section 743(b) applied only if the partnership made an election under section 754. 

To prevent the duplication of losses, Congress amended section 743 to mandate section 743(b) 

adjustments if the partnership had a substantial built-in loss in its assets. Section 743(d) defines 

a substantial built-in loss by reference to the partnership’s adjusted basis – that is, there is a 

substantial built-in loss if the partnership’s adjusted basis in its assets exceeds by more than 

$250,000 the fair market value of such property. 

Reasons for Change

Although the 2004 amendments to section 743 prevent the duplication of losses where the 

partnership has a substantial built-in loss in its assets, it does not prevent the duplication of losses 

where the transferee partner would be allocated a net loss in excess of $250,000 if the 

partnership sold all of its assets in a fully taxable transaction for fair market value, but the 

partnership itself does not have a substantial built-in loss in its assets. 

Proposal

The proposal would amend section 743(d) to also measure a substantial built-in loss by reference 

to whether the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical 

disposition by the partnership of all of the partnership’s assets, immediately after the transfer of 

the partnership interest, in a full taxable transaction for cash equal to the fair market value of the 

assets. 

The proposal would apply to sales or exchanges after the date of enactment.
99

EXTEND PARTNERSHIP BASIS LIMITATION RULES TO NONDEDUCTIBLE 

EXPENDITURES

Current Law

Section 704(d) provides that a partner’s distributive share of loss is allowed only to the extent of 

the partner’s adjusted basis in its partnership interest at the end of the partnership year in which 

such loss occurred. Any excess is allowed as a deduction at the end of the partnership year in 

which the partner has sufficient basis in its partnership interest to take the deductions. Section 

704(d) does not apply to partnership expenditures not deductible in computing partnership 

taxable income and not properly chargeable to capital account. 

Reasons for Change

Even though a partner’s distributive share of nondeductible expenditures reduces the partner’s 

basis in its partnership interest, such items are not subject to section 704(d), and the partner may 

deduct or credit them currently even if the partner’s basis in its partnership interest is zero. 

Proposal

The proposal would amend section 704(d) to allow a partner’s distributive share of expenditures 

not deductible in computing the partnership’s taxable income and not properly chargeable to 

capital account only to the extent of the partner’s adjusted basis in its partnership interest at the 

end of the partnership year in which such expenditure occurred. 

The proposal would apply to a partnership’s taxable year beginning on or after the date of 

enactment.
100

LIMIT THE IMPORTATION OF LOSSES UNDER RELATED PARTY LOSS 

LIMITATION RULES

Current Law

If a loss sustained by a transferor is disallowed under section 267(a)(1) or section 707(b)(1) 

because the transferor and transferee are related under section 267(b) or section 707(b)(1), 

section 267(d) provides that the transferee may reduce any gain the transferee later recognizes on 

a disposition of the transferred asset by the amount of the loss disallowed to the transferor. This 

has the effect of shifting the benefit of the loss from the transferor to the transferee. 

Reasons for Change

Because section 267(d) shifts the benefit of the loss from the transferor to the transferee, losses 

can be imported where gain or loss with respect to the property is not subject to Federal income 

tax in the hands of the transferor immediately before the transfer but any gain or loss with 

respect to the property is subject to Federal income tax in the hands of the transferee immediately 

after the transfer. 

Proposal

The proposal would amend section 267(d) to provide that the principles of section 267(d) do not 

apply to the extent gain or loss with respect to the property is not subject to Federal income tax 

in the hands of the transferor immediately before the transfer but any gain or loss with respect to 

the property is subject to Federal income tax in the hands of the transferee immediately after the 

transfer. 

The proposal would apply to transfers made after the date of enactment.
101

DENY DEDUCTION FOR PUNITIVE DAMAGES

Current Law

No deduction is allowed for a fine or similar penalty paid to a government for the violation of 

any law. If a taxpayer is convicted of a violation of the antitrust laws, or the taxpayer’s plea of 

guilty or nolo contendere to such a violation is entered or accepted in a criminal proceeding, no 

deduction is allowed for two-thirds of any amount paid or incurred on a judgment or in 

settlement of a civil suit brought under section 4 of the Clayton Antitrust Act on account of such 

violation or any related antitrust violation. Where neither of these two provisions is applicable, a 

deduction is allowed for damages paid or incurred as ordinary and necessary expenses in 

carrying on any trade or business, regardless of whether such damages are compensatory or 

punitive. 

Reasons for Change

The deductibility of punitive damage payments undermines the role of such damages in 

discouraging and penalizing certain undesirable actions or activities. 

Proposal

The proposal would disallow a deduction for punitive damages paid or incurred by the taxpayer, 

whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is 

covered by insurance, such damages paid or incurred by the insurer would be included in the 

gross income of the insured person. The insurer would be required to report such payments to 

the insured person and to the Internal Revenue Service. 

The proposal would apply to damages paid or incurred after December 31, 2015.
102

MODIFY LIKE-KIND EXCHANGE RULES FOR REAL PROPERTY

Current Law

When capital assets are sold or exchanged, capital gain or loss is generally recognized. Under 

section 1031, however, no gain or loss is recognized when business or investment property is 

exchanged for “like-kind” business or investment property. As a result, the tax on capital gain is 

deferred until a later realization event, provided that certain requirements are met. The “likekind” standard under section 1031, which focuses on the legal character of the property, allows 

for deferral of tax on the exchange of improved and unimproved real estate. Certain properties, 

including stocks, bonds, notes or other securities or evidences of indebtedness are excluded from 

nonrecognition treatment under section 1031. 

Reasons for Change

There is little justification for allowing deferral of the capital gain on the exchange of real 

property. The difficulty in valuing exchanged property is a primary historical justification for 

1031 deferral. However, this rationale has limited appeal. For the exchange of one property for 

another of equal value to occur, taxpayers must be able to value the properties. In addition, 

many, if not most, exchanges affected by this proposal are facilitated by qualified intermediaries 

who help satisfy the exchange requirement by selling the exchanged property and acquiring the

replacement property. These complex three party exchanges were not contemplated when the 

provision was enacted. They highlight the fact that valuation of exchanged property is not the 

hurdle it was when the provision was originally enacted. Further, the ability to exchange 

unimproved real estate for improved real estate encourages “permanent deferral” by allowing 

taxpayers to continue the cycle of tax deferred exchanges. 

Proposal

The proposal would limit the amount of capital gain deferred under section 1031 from the 

exchange of real property to $1,000,000 (indexed for inflation) per taxpayer per taxable year. 

The proposal limits the amount of real estate gain that qualifies for deferral while preserving the 

ability of small businesses to generally continue current practices and maintain their investment 

in capital. Treasury would be granted regulatory authority necessary to implement the provision, 

including rules for aggregating multiple properties exchanged by related parties.

The provision would be effective for like-kind exchanges completed after December 31, 2014.
103

CONFORM CORPORATE OWNERSHIP STANDARDS

Current Law

For tax-free transfers of assets to controlled corporations in exchange for stock, tax-free 

distributions of controlled corporations, and tax-free corporate reorganizations, “control” is 

defined in section 368 as the ownership of 80 percent of the voting stock and 80 percent of the 

number of shares of all other classes of stock of the corporation. The section 368 control test is 

also incorporated by cross-reference in other sections of the Internal Revenue Code (Code) 

relating to discharge of indebtedness income, non-deductibility of interest on corporate 

acquisition indebtedness, installment obligations, qualified small business stock, and qualifying 

as an S corporation. In contrast, the “affiliation” test under section 1504 for permitting two or 

more corporations to file consolidated returns is the direct or indirect ownership by a parent 

corporation of at least 80 percent of the total voting power of another corporation’s stock and at 

least 80 percent of the total value of the corporation’s stock. Several other Code provisions, 

including rules relating to tax-free parent-subsidiary liquidations, and qualified stock purchases 

and dispositions incorporate by cross-reference the affiliation test.

Prior to 1984, the affiliation test required ownership of 80 percent of the voting stock and 80 

percent of the number of shares of all other classes of stock of the corporation, similar to the 

control test. Congress amended the affiliation test in 1984 in response to concerns that 

corporations were filing consolidated returns under circumstances in which a parent 

corporation’s interest in the issuing corporation accounted for less than 80 percent of the equity 

value of such corporation. In 1986, the affiliation test became the ownership standard for taxfree parent-subsidiary liquidations and qualified stock purchases and dispositions. In 2006, the 

Code was amended to provide that the affiliation test applies to determine whether a distributing 

or controlled corporation satisfied the active trade or business requirement for a tax-free 

distribution of subsidiary stock.

Reasons for Change

By carefully allocating voting power among the shares of a corporation, taxpayers can 

manipulate the control test in order to qualify or not qualify, as desired, a transaction as tax-free 

(for example, a transaction could be structured to avoid tax-free treatment to recognize a loss). 

In addition, the absence of a value component allows corporations to retain control of a 

corporation but to “sell” a significant amount of the value of the corporation tax-free. Congress 

amended the affiliation test in 1984 to address similar concerns regarding the manipulation of the 

vote and value of affiliated corporations. A uniform ownership test for corporate transactions 

will also reduce complexity currently caused by these inconsistent tests.

Proposal

The proposal would conform the control test under section 368 with the affiliation test under 

section 1504. Thus, “control” would be defined as the ownership of at least 80 percent of the 

total voting power and at least 80 percent of the total value of stock of a corporation. For this 
104

purpose, stock would not include certain preferred stock that meets the requirements of section 

1504(a)(4).

The proposal would be effective for transactions occurring after December 31, 2014.
105

PREVENT ELIMINATION OF EARNINGS AND PROFITS THROUGH 

DISTRIBUTIONS OF CERTAIN STOCK

Current Law

Generally, a shareholder that receives a distribution of property from a corporation made with 

respect to its stock must include in gross income the portion of the distribution constituting a 

dividend. The portion of the distribution received by the shareholder that is not a dividend is 

applied against and reduces the shareholder’s adjusted basis of the corporation’s stock, and any 

amount distributed in excess of the shareholder’s basis that is not a dividend is treated as gain 

from the sale or exchange of property. The shareholder takes a basis in the distributed property 

equal to its fair market value.

A distribution of property made by a corporation constitutes a dividend if it is made out of the 

corporation’s earnings and profits from the current taxable year and then from its earnings and 

profits accumulated in successive prior periods. The amount of the corporation’s earnings and 

profits at the time the distribution is made is not relevant. Rather, earnings and profits are 

computed as of the close of the corporation’s taxable year in which the distribution is made 

without diminution due to distributions made during the taxable year.

Generally, the corporation is required to recognize any gain realized on the distribution of any 

appreciated property to a shareholder, but does not recognize any loss realized on a distribution 

of property with respect to its stock. Although the corporation does not recognize a loss, its

earnings and profits are decreased by the sum of the amount of money, the principal amount or 

issue price of any obligations (as the case may be), and the adjusted basis of any other property, 

so distributed.

Under current law, if an actual or deemed redemption of stock is treated as equivalent to the 

receipt of a dividend by a shareholder, the shareholder’s basis in any remaining stock of the 

corporation is increased by the shareholder’s basis in the redeemed stock.

Reasons for Change

There has been a proliferation of transactions in which corporations distribute stock in 

subsidiaries having artificially high bases but minimal value in an effort to reduce earnings and 

profits prior to making large distributions in the subsequent taxable period. For example, assume 

a parent corporation owns all of the common stock and preferred stock of a subsidiary 

corporation. The preferred stock has a value of $10 million, but a basis of $1 billion because of 

dividend equivalent redemptions in which the parent received $990 million of cash. Assume 

also that the parent has $1 billion of earnings and profits. If the parent distributed its $10 million 

of subsidiary preferred stock to its shareholders, it would permanently eliminate any earnings 

and profits equal to the adjusted basis of the distributed stock ($1 billion) even though the parent 

has not suffered any economic loss or experienced a commensurate reduction in its dividend 

paying capacity. Then, in the following year, the parent could distribute its cash of $990 million 

to its shareholders and avoid dividend treatment.
106

A reduction of a corporation’s earnings and profits as a result of the distribution of high-basis 

stock in a taxable year in which the corporation has not suffered any economic loss, and thus no 

diminution of dividend-paying capacity, is not consistent with the role of earnings and profits to 

measure dividend paying capacity and inappropriately avoids dividend treatment to the 

corporation’s shareholders. Moreover, in cross-border distributions, the earnings and profits 

adjustment rules can permit U.S. shareholders to repatriate previously-untaxed earnings and 

profits of foreign subsidiaries with minimal U.S. tax consequences. This is inconsistent with the 

principle that previously untaxed earnings and profits of a foreign subsidiary should be subject to 

U.S. tax upon repatriation.

Proposal

The proposal would amend the application of the general earnings and profits adjustment rules to 

distributions of stock of another corporation. Under the proposal, a corporation’s distribution of 

stock of another corporation would reduce the distributing corporation’s earnings and profits in 

any taxable year by the greater of the stock’s fair market value or the corporation’s basis in the 

stock. For this purpose, the distributing corporation’s basis in the distributed stock would be 

determined without regard to any adjustments as a result of actual or deemed dividend equivalent 

redemptions by the corporation whose stock is distributed and without regard to any series of 

distributions or transactions undertaken with a view to create and distribute high-basis stock of 

any corporation. Treasury would be granted regulatory authority necessary or appropriate to 

carry out the proposal.

The proposal would be effective upon enactment.
107

BUDGET PROPOSALS

The Administration’s proposals, which begin the process of reducing the deficit and reforming 

the Internal Revenue Code, will strengthen the economy and provide support to middle-income 

families. These proposals provide support for job creation and incentives for investment in 

infrastructure, help make work pay by expanding the Earned Income Tax Credit for workers 

without qualifying children, and help families save for retirement and pay for college and child 

care. They also reduce the deficit and make the tax system fairer by eliminating a number of tax 

loopholes and reducing tax benefits for higher-income taxpayers. The Administration’s 

proposals that affect receipts are described below.
108

INCENTIVES FOR JOB CREATION, CLEAN ENERGY, AND 

MANUFACTURING

PROVIDE ADDITIONAL TAX CREDITS FOR INVESTMENT IN QUALIFIED 

PROPERTY USED IN A QUALIFYING ADVANCED ENERGY MANUFACTURING 

PROJECT 

Current Law

A 30-percent tax credit is provided for investments in eligible property used in a qualifying 

advanced energy project. A qualifying advanced energy project is a project that re-equips, 

expands, or establishes a manufacturing facility for the production of: (1) property designed to 

produce energy from renewable resources; (2) fuel cells, microturbines, or an energy storage 

system for use with electric or hybrid-electric vehicles; (3) electric grids to support the 

transmission, including storage, of intermittent sources of renewable energy; (4) property 

designed to capture and sequester carbon dioxide emissions; (5) property designed to refine or 

blend renewable fuels or to produce energy conservation technologies; (6) electric drive motor 

vehicles that qualify for tax credits or components designed for use with such vehicles; and (7) 

other advanced energy property designed to reduce greenhouse gas emissions.

Eligible property is property: (1) that is necessary for the production of the property listed above; 

(2) that is tangible personal property or other tangible property (not including a building and its 

structural components) that is used as an integral part of a qualifying facility; and (3) with 

respect to which depreciation (or amortization in lieu of depreciation) is allowable. 

Under the American Recovery and Reinvestment Act of 2009 (ARRA), total credits were limited 

to $2.3 billion, and the Treasury Department, in consultation with the Department of Energy, was 

required to establish a program to consider and award certifications for qualified investments 

eligible for credits within 180 days of the date of enactment of ARRA. Credits may be allocated 

only to projects where there is a reasonable expectation of commercial viability. In addition, 

consideration must be given to projects that: (1) will provide the greatest domestic job creation; 

(2) will have the greatest net impact in avoiding or reducing air pollutants or greenhouse gas 

emissions; (3) have the greatest potential for technological innovation and commercial 

deployment; (4) have the lowest levelized cost of generated or stored energy, or of measured 

reduction in energy consumption or greenhouse gas emission; and (5) have the shortest 

completion time. Guidance under current law requires taxpayers to apply for the credit with 

respect to their entire qualified investment in a project.

Applications for certification under the program may be made only during the two-year period 

beginning on the date the program is established. An applicant that is allocated credits must 

provide evidence that the requirements of the certification have been met within one year of the 

date of acceptance of the application and must place the property in service within three years 

from the date of the issuance of the certification.
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Reasons for Change

The $2.3 billion cap on the credit has resulted in the funding of less than one-third of the 

technically acceptable applications that have been received. Rather than turning down worthy 

projects that could be deployed quickly to create jobs and support economic activity, the 

program – which has proven successful in leveraging private investment in building and 

equipping factories that manufacture clean energy products in America – should be expanded. 

The lack of a reliable and extensive network of refueling stations can inhibit the adoption of 

alternative fuel vehicles. Using some of the credit allocation to subsidize construction of such 

networks (or other related infrastructure) would promote the use of cleaner burning alternative 

fuels.

Proposal

The proposal would authorize an additional $2.5 billion of credits for investments in eligible 

property used in a qualifying advanced energy manufacturing project. Up to $200 million of 

these credits may be allocated to the construction of infrastructure that contributes to networks of 

refueling stations that serve alternative fuel vehicles. Taxpayers would be able to apply for a 

credit with respect to part or all of their qualified investment. If a taxpayer applies for a credit 

with respect to only part of the qualified investment in the project, the taxpayer’s increased cost 

sharing and the project’s reduced revenue cost to the government would be taken into account in 

determining whether to allocate credits to the project. 

Applications for the additional credits would be made during the two-year period beginning on 

the date on which the additional authorization is enacted. As under current law, applicants that

are allocated the additional credits must provide evidence that the requirements of the 

certification have been met within one year of the date of acceptance of the application and must 

place the property in service within three years from the date of the issuance of the certification.

The proposal would be effective as of the date of enactment.
110

DESIGNATE PROMISE ZONES

Current Law

The Internal Revenue Code (Code) contains various incentives targeted to encourage the 

development of particular geographic regions, including empowerment zones. There are 40 

empowerment zones–30 in urban areas and 10 in rural areas–that were designated through a 

competitive application process in three separate rounds in 1994, 1998, and 2002. State and 

local governments nominated distressed geographic areas, which were selected on the strength of 

their strategic plans for economic and social revitalization. The urban areas were designated by 

the Secretary of Housing and Urban Development. The rural areas were designated by the 

Secretary of Agriculture. Empowerment zone designation remained in effect through December 

31, 2013.

Incentives for businesses in empowerment zones include (1) a 20-percent wage credit for 

qualifying wages, (2) additional expensing for qualified zone property, (3) tax-exempt financing 

for certain qualifying zone facilities, (4) deferral of capital gains on sales and reinvestment in 

empowerment zone assets, and (5) exclusion of 60 percent (rather than 50 percent) of the gain on 

the sale of qualified small business stock held more than five years. (For qualified small 

business stock acquired after September 27, 2010 and before January 1, 2014, the exclusion 

percentage increases to 100 percent. This provision (100-percent exclusion) applies to all 

qualified small business stock, not just that issued by enterprise zone businesses.)

The wage credit provides a 20-percent subsidy on the first $15,000 of annual wages paid to 

residents of empowerment zones by businesses located in these communities, if substantially all 

of the employee’s services are performed within the zone. The credit is not available for wages 

taken into account in determining the work opportunity tax credit (WOTC).

To be eligible for the capital incentives, businesses must generally satisfy the requirements of an 

enterprise zone business. Among other conditions, these requirements stipulate that at least 50 

percent of the total gross income of such business is derived from the active conduct of a 

business within an empowerment zone, a substantial portion of the use of tangible property of 

such business is within an empowerment zone, and at least 35 percent of its employees are 

residents of an empowerment zone. 

Enterprise zone businesses are allowed to expense the cost of certain qualified zone property 

(which, among other requirements, must be used in the active conduct of a qualified business in 

an empowerment zone) up to an additional $35,000 above the amounts generally available under 

Code section 179. In addition, only 50 percent of the cost of such qualified zone property counts 

toward the limitation under which section 179 deductions are reduced to the extent the cost of 

section 179 property exceeds a specified amount.

In addition, residents of empowerment zones who are 18-39 years old qualify as a targeted group 

for the WOTC. Employers who hire an individual in a targeted group receive a 40-percent credit 

that applies to the first $6,000 of qualified first-year wages. Empowerment zone residents aged 
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16-17 can also qualify as a targeted group for WOTC, but the qualifying wage limit is reduced to 

$3,000 and the period of employment must be between May 1 and September 15.

Reasons for Change

Promise zones would promote job creation and investment in economically distressed areas that 

have demonstrated potential for future growth and diversification into new industries. While 

current law provides regionally targeted benefits to numerous areas, most of these incentives 

expired recently and some of these designations have been in effect for almost 20 years. The 

Administration desires to target resources to areas where they would provide the most benefit on 

a going-forward basis. In particular, the national competition for promise zone status would 

encourage such areas to develop rigorous plans for economic growth that connect the zone to 

drivers of regional economic growth. The targeted tax incentives provided to the zone would 

encourage private sector investment and other forms of increased economic activity in these 

areas. The current tax incentives are perceived as complex and difficult for businesses to 

navigate, potentially reducing the take-up rate for these incentives.

Proposal

The Administration proposes to designate 20 promise zones (14 in urban areas and 6 in rural 

areas), including zones that competed for and received a Promise Zones designation in 2014. 

Zone designations and corresponding tax incentives would be in effect from January 1, 2015 

through December 31, 2024. The Secretary of Agriculture and the Secretary of Housing and 

Urban Development (HUD) would select the zones in consultation with the Secretary of 

Commerce, the Secretary of Education, the Attorney General, the Secretary of Health and 

Human Services, the Secretary of Labor, and the Secretary of the Treasury. 

The zones would be chosen through a competitive application process, inclusive of zones that 

competed in 2013 for promise zone designations awarded in 2014. To apply, an applicant would 

need the formal support of a State, county, city, or other general purpose political subdivision of 

a State or possession (a “local government”), or an Indian tribal government. Applicant areas 

could be supported by more than one local government, if the applicant area is within the 

jurisdiction of more than one local government or State. In addition, local governments within a 

region could join together to jointly support multiple applicant areas for promise zone status, so 

long as each designated zone independently satisfies the eligibility criteria. To be eligible to 

apply, an area must satisfy the following criteria:

1. An applicant area would have to have a continuous boundary (that is, an area must be a 

single area; it cannot be comprised of two or more separate areas) and could not exceed 

20 square miles if an urban area or 1,000 square miles if a rural area.

2. An applicant urban area would have to include a portion of at least one local government 

jurisdiction with a population of at least 50,000. The population of an applicant urban 

area could not exceed the lesser of: (1) 200,000; or (2) the greater of 50,000 or 10 

percent of the population of the most populous city in the nominated area. A nominated 

rural area could not have a population that exceeded 30,000.
112

Applicant areas would be designated as promise zones based on the strength of the applicant’s 

“competitiveness plan” and its need to attract investment and jobs. Communities would be 

encouraged to develop a strategic plan to build on their economic strengths and outline targeted 

investments to develop their competitive advantages. Collaboration across a wide range of 

stakeholders would be useful in developing a coherent and comprehensive strategic plan. A 

successful plan would clearly outline how the economic strategy would connect the zone to 

drivers of regional economic growth. 

In evaluating applications, the Secretary of Agriculture and the Secretary of HUD could consider 

other factors for the affected population, including: unemployment rates, poverty rates, 

household income, home-ownership, labor force participation and educational attainment. In 

addition, the Secretary may set minimal standards for the levels of unemployment and poverty 

that must be satisfied by the nominated applicant area.

“Rural area” would be defined as any area that is (1) outside of a metropolitan statistical area 

(within the meaning of section 143(k)(2)(B)), or (2) determined by the Secretary of Agriculture

to be a rural area. “Urban area” would be defined as any area that is not a rural area. 

Two tax incentives would be applicable to promise zones. First, an employment credit would be 

provided to businesses that employ zone residents. The credit would apply to the first $15,000 of 

qualifying zone employee wages. The credit rate would be 20 percent for zone residents who are 

employed within the zone and 10 percent for zone residents employed outside of the zone. The 

definition of a qualified zone employee would follow rules for a qualified empowerment zone 

employee found in section 1396(d). For the purposes of the 10-percent credit, the requirement 

that substantially all of the services performed by the employee for the employer are within the 

zone would not apply. The definition of qualified zone wages would follow the definitions 

provided in section 1396(c) and 1397(a) for the empowerment zone employment credit.

Second, qualified property placed in service within the zone would be eligible for additional 

first-year depreciation of 100 percent of the adjusted basis of the property. Qualified property 

for this purpose includes tangible property with a recovery period of 20 years or less, water 

utility property, certain computer software, and qualified leasehold improvement property. 

Qualified property must be new property. Qualified property excludes property that is required 

to be depreciated under the Alternative Depreciation System. The taxpayer must purchase (or 

begin the manufacture or construction of) the property after the date of zone designation and 

before the zone designation ends (but only if no written binding contract for the acquisition was 

in effect before zone designation). The property must be placed in service within the zone while 

the zone designation is in effect. 

The Secretary of the Treasury would be given authority to collect data from taxpayers on the use 

of such tax incentives by zone. The Secretary of Agriculture and the Secretary of HUD may 

require the nominating local government to provide other data on the economic conditions in the 

zones both before and after designation. These data would be used to evaluate the effectiveness 

of the promise zones program.

The proposal would be effective upon date of enactment.
113

PROVIDE NEW MANUFACTURING COMMUNITIES TAX CREDIT

Current Law

Under current law, there is no tax incentive directly targeted to investments in communities that 

do not necessarily qualify as low-income communities, but that have suffered or expect to suffer 

an economic disruption as a result of a major job loss event, such as a military base closing or 

manufacturing plant closing.

Reasons for Change

The loss of a major employer can devastate a community, and incentives, including tax 

incentives, could encourage investments that help such affected communities recover more 

quickly from the economic disruption.

Proposal

The Administration proposes a new allocated tax credit to support investments in communities 

that have suffered a major job loss event. For this purpose, a major job loss event occurs when a 

military base closes or a major employer closes or substantially reduces a facility or operating 

unit, resulting in a long-term mass layoff. Applicants for the credit would be required to consult 

with relevant state or local Economic Development Agencies (or similar entities) in selecting 

those investments that qualify for the credit. The credit could be structured using the mechanism 

of the New Markets Tax Credit or as an allocated investment credit similar to the tax credit for 

investments in qualified property used in a qualifying advanced energy manufacturing 

project. The Administration intends to work with Congress to craft the appropriate structure and 

selection criteria. Similar benefits would be extended to non-mirror code possessions (Puerto 

Rico and American Samoa) through compensating payments from the U.S. Treasury.

The proposal would provide about $2 billion in credits for qualified investments approved in 

each of the three years, 2015 through 2017.
114

PROVIDE A TAX CREDIT FOR THE PRODUCTION OF ADVANCED 

TECHNOLOGY VEHICLES 

Current Law

A tax credit is allowed for plug-in electric drive motor vehicles. A plug-in electric drive motor 

vehicle is a vehicle that has at least four wheels, is manufactured for use on public roads, is 

treated as a motor vehicle for purposes of title II of the Clean Air Act (that is, is not a low-speed 

vehicle), has a gross vehicle weight of less than 14,000 pounds, meets certain emissions 

standards, draws propulsion energy using a traction battery with at least four kilowatt hours of 

capacity, is capable of being recharged from an external source, and meets certain other 

requirements. The credit is $2,500 plus $417 for each kilowatt hour of battery capacity in excess 

of four kilowatt hours, up to a maximum credit of $7,500. The credit phases out for a 

manufacturer’s vehicles over four calendar quarters beginning with the second calendar quarter 

following the quarter in which 200,000 of the manufacturer’s credit-eligible vehicles have been 

sold. The credit is generally allowed to the taxpayer that places the vehicle in service (including 

a person placing the vehicle in service as a lessor). In the case of a vehicle used by a tax-exempt 

or governmental entity, however, the credit is allowed to the person selling the vehicle to the taxexempt or governmental entity, but only if the seller clearly discloses the amount of the credit to 

the purchaser.

Reasons for Change

The President is proposing increased investment in research and development and a competitive 

program to encourage communities to invest in the advanced vehicle infrastructure, address the 

regulatory barriers, and provide the local incentives to achieve deployment at critical mass. The 

President is also proposing a transformation of the existing tax credit for plug-in electric drive 

motor vehicles into one that is allowed for a wider range of advanced technologies and that is 

allowed generally to the seller.

Making the credit available to a wider range of technologies, removing the cap placed on the 

number of vehicles per manufacturer that can receive the credit, and allowing for a scalable 

credit up to a maximum of $10,000 will help increase production of advanced vehicles that 

diversify our fuel use and bring down the cost of producing such vehicles. 

Making the credit transferable will add flexibility to the market. This flexibility would enable 

the seller or person financing the sale to offer a point-of-sale rebate to consumers. 

Proposal

The proposal would replace the credit for plug-in electric drive motor vehicles with a credit for 

advanced technology vehicles. The credit would be available for a vehicle that meets the 

following criteria: (1) the vehicle operates primarily on an alternative to petroleum; (2) as of 

January 1, 2014, there are few vehicles in operation in the U.S. using the same technology as 

such vehicle; and (3) the technology used by the vehicle exceeds the footprint based target miles 

per gallon by at least 25 percent. The Secretary of the Treasury, in consultation with the 
115

Secretary of Energy, will determine what constitutes the “same technology” for this purpose. 

The credit would be limited to vehicles that weigh no more than 14,000 pounds and are treated as 

motor vehicles for purposes of title II of the Clean Air Act. In general, the credit would be the 

sum of $5,000 and the product of 100 and the amount by which the vehicle’s miles per gallons 

equivalent exceeds its footprint-based target miles per gallon, but would be capped at $10,000 

($7,500 for vehicles with an MSRP above $45,000). The credit for a battery-powered vehicle 

would be determined under current law rules for the credit for plug-in electric drive motor 

vehicles if that computation results in a greater credit. The credit would be available to the 

manufacturer of the vehicle, but the manufacturer would have the option to transfer the credit to 

a dealer that sells the vehicle or to the end-use purchaser of the vehicle. If the credit is 

transferred to an end-use business purchaser, the purchaser would not be required to reduce the 

basis of depreciable property by the amount of the credit.

The credit would be allowed for vehicles placed in service after December 31, 2014 and before 

January 1, 2022. The credit would be 75 percent of the otherwise allowable amount for vehicles 

placed in service in 2019, 50 percent of such amount for vehicles placed in service in 2020, and 

25 percent of such amount for vehicles placed in service in 2021.
116

PROVIDE A TAX CREDIT FOR MEDIUM- AND HEAVY-DUTY ALTERNATIVEFUEL COMMERCIAL VEHICLES 

Current Law

A tax credit is allowed for fuel-cell vehicles purchased before 2015. The credit is $20,000 for 

vehicles weighing more than 14,000 pounds but not more than 26,000 pounds and $40,000 for 

vehicles weighing more than 26,000 pounds. There is no tax incentive for other types of 

alternative-fuel vehicles (vehicles operating on compressed natural gas, liquefied natural gas, 

liquefied petroleum gas, hydrogen, or any liquid at least 85 percent of the volume of which 

consists of methanol) weighing more than 14,000 pounds.

Reasons for Change

Alternative-fuel vehicles have the potential to reduce petroleum consumption. A tax credit 

would encourage the purchase of such vehicles and the development of a commercially viable 

manufacturing base for alternative-fuel medium and heavy-duty vehicles. Making the credit 

transferable would add flexibility to the market. This flexibility would enable the seller or 

person financing the sale of these vehicles to offer a point-of-sale rebate to purchasers.

Proposal

The proposal would allow a tax credit of $25,000 for dedicated alternative-fuel vehicles 

weighing between 14,000 pounds and 26,000 pounds and $40,000 for dedicated alternative-fuel 

vehicles weighing more than 26,000 pounds.

The credit would be available to the manufacturer of the vehicle, but the manufacturer would 

have the option to transfer the credit to a dealer that sells the vehicle or to the vehicle’s end-use 

purchaser. If the credit is transferred to an end-use business purchaser, the purchaser would not 

be required to reduce the basis of depreciable property by the amount of the credit. 

The credit would be allowed for vehicles placed in service after December 31, 2014, and before 

January 1, 2021. For vehicles placed in service in calendar year 2020, the credit would be 

limited to 50 percent of the otherwise allowable amount.
117

MODIFY TAX-EXEMPT BONDS FOR INDIAN TRIBAL GOVERNMENTS

Current Law

In general, section 7871(c) limits Indian tribal governments in their use of tax-exempt bonds to 

the financing of “essential governmental function” activities that are “customarily” performed by 

State and local governments with general taxing powers. In addition, outside the limited 

authorization for Tribal Economic Development Bonds, section 7871(c)(2) generally prohibits 

Indian tribal governments from issuing tax-exempt private activity bonds, except in narrow 

circumstances to finance manufacturing facilities subject to restrictions. 

The American Recovery and Reinvestment Act of 2009 (ARRA) provided $2 billion in bond 

authority for a new category of tax-exempt bonds for Indian tribal governments, known as 

“Tribal Economic Development Bonds” under section 7871(f) of the Internal Revenue Code. 

This bond provision provides Indian tribal governments more flexibility to finance economic 

development projects than is allowable under the existing essential governmental function 

standard. This bond provision generally allows Indian tribal governments to use tax-exempt 

bond financing under more flexible standards that are comparable to those applied to States and 

local governments in their use of tax-exempt bonds under section 103 (subject to express 

targeting restrictions on Tribal Economic Development Bonds that require financed projects to 

be located on Indian reservations and that prohibit the financing of certain gaming facilities). 

For State and local governments, a more flexible two-part standard under section 141 generally 

allows use of tax-exempt “governmental bonds” (as distinguished from “private activity bonds”) 

if either: (1) the issuer uses at least 90 percent of the bond proceeds for State or local 

governmental use (as contrasted with private business use); or (2) the debt service on at least 90 

percent of the bond proceeds is payable from or secured by payments or property used for State 

or local governmental use. 

ARRA also included a directive to the Treasury Department to study the Tribal Economic 

Development Bond provision and to report to Congress on the results of this study, including 

recommendations regarding this provision. The legislative history of ARRA indicated that 

Congress sought recommendations on whether to “eliminate or otherwise modify” the essential 

governmental function standard for Indian tribal tax-exempt bond financing. 

Reasons for Change

In 2011, the Treasury Department submitted its report to Congress regarding recommendations 

on the Tribal Economic Development Bond provision. This proposal incorporates the 

recommendations from this report. For further background and analysis on these 

recommendations, see this Treasury Department report, which is available at 

http://www.treasury.gov/resource-center/tax-policy/Documents/Tribal-Economic-DevelopmentBond-Provision-under-Section-7871-of-IRC-12-19-11.pdf.

For State and local governments, the applicable two-part private business restriction standard for 

tax-exempt governmental bonds (as distinguished from private activity bonds) under section 141 

involves established, well-known, and administrable tax standards. The private business use 
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limitation particularly involves workable tax standards using general tax principles that focus on 

ownership, leasing, and contractual rights. These standards focus eligibility for governmental 

bonds on the nature of the beneficiaries of the tax-exempt financing (rather than on the nature of 

the activities financed).

By contrast, for Indian tribal governments, the essential governmental function standard focuses 

on appropriate governmental activities (rather than the actual beneficiaries) and has proven to be 

a difficult standard to define and to administer. The analogous essential governmental function 

standard under section 115 is vague. Moreover, the custom-based limitation on this standard has 

proven to be particularly unworkable, based on difficulties in determining customs, the 

subjective nature of customs, the evolving nature of customs over time, the differing nature of 

customs among diverse State and local governmental entities, and the increasing involvement of 

State and local governments in quasi-commercial activities.

Although the Indian Tribal Government Tax Status Act of 1982 sought to provide tax parity 

between Indian tribal governments and State and local governments, the existing framework for 

eligibility for tax-exempt bond financing for State and local governments, on one hand, and 

Indian tribal governments, on the other hand, reflects fundamentally different analytic standards. 

Application of the different analytic standards resulted in different outcomes and perceived 

unfairness.

The Treasury Department believes that goals of tax parity, fairness, flexibility, and 

administrability warrant the provision of a tax-exempt bond program framework for Indian tribal 

governments that uses standards that are comparable to those used for State and local 

governments, with tailored modifications.

Proposal

1. Adopt for Indian Tribal Governments the Comparable State or Local Government 

Standard of Eligibility for Issuing Tax-exempt Governmental Bonds on a Permanent Basis. The 

proposal would adopt the State or local government standard for tax-exempt governmental bonds 

under section 141 without a bond volume cap on such governmental bonds (subject to 

restrictions discussed below). This standard is generally embodied in the limited authorization 

for Tribal Economic Development Bonds under section 7871(f) for purposes of Indian tribal 

governmental eligibility to issue tax-exempt governmental bonds. The proposal would repeal the 

existing essential governmental function standard for Indian tribal governmental tax-exempt 

bond financing under section 7871(c).

2. Adopt a Comparable Private Activity Bond Standard. The proposal would allow Indian 

tribal governments to issue tax-exempt private activity bonds for the same types of projects and 

activities as are allowed for State and local governments under section 141(e), under a national 

bond volume cap. The same volume cap exceptions as those for State and local governments 

would apply in addition to the bonds being subject to restrictions discussed below. The proposal 

would employ a tailored version of a comparable annual tax-exempt private activity bond 

volume cap for Indian tribal governments. This tailored national Tribal private activity bond 

volume cap for all Indian tribal governments together as a group would be in an amount equal to 
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the greater of: (i) a total national Indian tribal population-based measure determined under 

section 146(d)(1)(A) (applied by using such national Indian tribal population in lieu of State 

population), or (ii) the minimum small population-based State amount under section 

146(d)(1)(B). The proposal would delegate to the Treasury Department the responsibility to 

allocate that national bond volume cap among Indian tribal governments.

3. Project Location Restriction. The proposal would impose a targeting restriction on the 

location of projects financed with tax-exempt bonds issued or used by Indian tribal governments 

that is similar to the restriction under section 7871(f)(3)(B)(ii), which requires that projects 

financed with Tribal Economic Development Bonds be located on Indian reservations. The 

proposal would provide some additional flexibility with respect to this project location 

restriction. The proposal would allow Indian tribal governments to issue or use tax-exempt 

bonds to finance projects that are located on Indian reservations, together with projects that both: 

(1) are contiguous to, within reasonable proximity of, or have a substantial connection to an 

Indian reservation; and (2) provide goods or services to resident populations of Indian 

reservations.

4. Gambling Facility Restriction. For policy reasons, the proposal would impose a targeting 

restriction on tax-exempt bonds issued or used by Indian tribal governments generally that 

incorporates the existing targeting restriction under section 7871(f)(3)(B)(i) which presently 

prohibits use of proceeds of Tribal Economic Development Bonds to finance certain gaming 

projects.

The proposal would be effective as of the date of enactment.
120

EXTEND THE TAX CREDIT FOR CELLULOSIC BIOFUELS 

Current Law

The cellulosic biofuel producer credit expired on December 31, 2013. This nonrefundable 

income tax credit of $1.01 was available for each gallon of qualified cellulosic biofuel produced 

in a taxable year. Cellulosic biofuel includes any liquid fuel that (1) is produced in the United 

States and used as fuel in the United States, (2) is derived from fibre-based sources 

(lignocellulosic or hemicellulosic matter) available on a renewable or recurring basis or from 

cultivated algae or related microorganisms and (3) meets the registration requirements for fuels 

and fuel additives established by the Environmental Protection Agency (EPA) under section 211 

of the Clean Air Act. Thus, to qualify for the credit the fuel must be approved by the EPA. 

Cellulosic biofuel cannot qualify as biodiesel, renewable diesel, or alternative fuel for purposes 

of the income tax credit, excise tax credit, or payment provisions relating to those fuels. 

Reasons for Change

Cellulosic biofuels have the potential to reduce petroleum consumption and greenhouse gas

emissions. Extending the existing tax credit would support this transformative transportation 

fuel. However, support for this fuel should be phased out in the future as this fuel becomes costcompetitive.

Proposal

The proposal would retroactively extend the tax credit for blending cellulosic fuel at $1.01 per 

gallon through December 31, 2020, and would then reduce the amount of the credit by 20.2 cents 

per gallon in each subsequent year, so that the credit would expire after December 31, 2024.
121

MODIFY AND EXTEND THE TAX CREDIT FOR THE CONSTRUCTION OF 

ENERGY-EFFICIENT NEW HOMES

Current Law

The general business tax credit included a new energy-efficient home credit available to eligible 

contractors for the construction of qualified new energy-efficient homes acquired for use as 

residences. To have qualified as a new energy-efficient home, the home must have been 

certified in accordance with guidance prescribed by the Secretary to achieve either a 30-percent 

or 50-percent reduction in heating and cooling energy consumption compared to a comparable 

dwelling constructed in accordance with the standards of chapter 4 of the 2006 International 

Energy Conservation Code (IECC) as in effect (including supplements) on January 1, 2006, and 

any applicable Federal minimum efficiency standards for heating and cooling equipment. For 

homes meeting the 30-percent standard, one-third of such 30-percent savings must come from 

the building envelope (i.e., windows, wall, and doors), and for homes meeting the 50-percent 

standard, one-fifth of such 50-percent savings must come from the building envelope. The credit 

equaled $1,000 in the case of a new manufactured home (e.g., a mobile home or other pre-built 

home) that met the 30-percent standard and $2,000 in the case of a new home that met the 50-

percent standard.

In lieu of meeting the 30-percent efficiency improvement relative to the standards of chapter 4 of 

the 2006 IECC, manufactured homes certified by a method prescribed by the Administrator of 

the Environmental Protection Agency (EPA) under the ENERGY STAR Labeled Homes 

program are eligible for the $1,000 credit.

The credit applies to homes acquired prior to January 1, 2014.

Reasons for Change

The prior tax credit expired at the end of 2013. The expired credit applied only to energy 

savings from heating and cooling, which accounts for about half of home energy use. Ideally, 

the tax incentive would encourage overall energy efficiency, not just heating and cooling 

efficiency. 

In addition, energy efficiency and other home building standards have continued to improve 

since the prior provision was enacted. For example, ENERGY STAR certified new homes are at 

least 15 percent more energy efficient than a home built to a model building code which sets 

minimum energy efficiency standards (the 2009 International Energy Conservation Code), and 

features additional measures that deliver a total energy efficiency improvement of up to 30 

percent compared to a typical new home. These savings may be even higher in states with less 

rigorous energy efficiency codes. ENERGY STAR certification includes energy efficiency in 

heating, cooling, and building envelope, in addition to efficiency standards for lighting and 

appliances and hot water. It also includes a checklist to help ensure quality installation 

procedures are followed and critical construction details are not omitted. The Department of 

Energy (DOE) Challenge Homes program, which began in 2013, is even more 

ambitious. Challenge Homes must meet all ENERGY STAR home requirements plus additional 
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higher standards for the best proven practices and technologies for energy efficiency, indoor air 

quality, durability, and readiness for the transition to renewable energy. The ENERGY STAR 

and Challenge Homes requirements are coordinated and share a common certification process.

Re-targeting the tax credit to the ENERGY STAR and Challenge Home standards would 

promote the adoption of high overall energy efficiency standards in the construction of new 

homes.

Proposal

The proposal would extend the tax credit for homes acquired prior to January 1, 2015. For 

homes acquired after December 31, 2014, and before January 1, 2025 the proposal would 

provide a $1,000 energy efficient new home tax credit for the construction of a qualified 

ENERGY STAR certified new home acquired for use as a residence. In addition, a $4,000 tax 

credit would be provided for the construction of a qualified DOE Challenge Home acquired for 

use as a residence. To ensure that a new home meets ENERGY STAR or DOE Challenge Home 

guidelines, verification by a qualified third party would be required. 
123

REDUCE EXCISE TAXES ON LIQUEFIED NATURAL GAS (LNG) TO BRING INTO 

PARITY WITH DIESEL

Current Law

An excise tax of 24.3 cents per gallon is imposed on diesel fuel and liquefied natural gas used as 

highway motor fuels to fund the Highway Trust Fund. With the exception of liquefied petroleum 

gas (propane), compressed natural gas, and LNG, highway motor fuels are subject to an 

additional 0.1 cent per gallon tax to fund the Leaking Underground Storage Tank Trust Fund. 

Without congressional action, most of these taxes will expire after September 30, 2016. 

However, a 4.3 cents per gallon fuels tax is a permanent funding mechanism for the Highway 

Trust Fund and will not expire. 

In contrast to current law, and because these excise taxes are routinely extended, the

Administration’s tax receipts baseline assumes permanent extension. This reflects longstanding 

practice and conforms to the Balanced Budget and Emergency Control Act of 1985, as amended.

Reasons for Change

Vehicles fueled with LNG emit significantly lower levels of carbon dioxide, nitrogen oxide, and 

sulfur dioxide compared to diesel-fueled vehicles. In addition, the use of LNG as a 

transportation fuel helps reduce petroleum consumption. Reducing the excise tax on LNG so 

that is at parity with diesel fuel on an energy-content adjusted basis would promote the use of 

natural gas vehicles.

Proposal

The proposal would lower the 24.3 cents per gallon excise tax on LNG to 14.1 cents per gallon 

beginning after December 31, 2014. 
124

INCENTIVES FOR INVESTMENT IN INFRASTRUCTURE

CREATE THE AMERICA FAST FORWARD BOND PROGRAM

Current Law

Build America Bonds are a lower-cost borrowing tool for State and local governments that were 

enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA). Traditional 

tax-exempt bonds provide for lower borrowing costs for State and local governments indirectly 

through a Federal tax exemption to investors for the interest income received on the bonds. By 

comparison, Build America Bonds are taxable bonds issued by State and local governments in 

which the Federal Government makes direct payments to State and local governmental issuers 

(called “refundable tax credits”) to subsidize a portion of their borrowing costs in an amount 

equal to 35 percent of the coupon interest on the bonds. Issuance of Build America Bonds is 

limited to original financing for public capital projects for which issuers otherwise could use taxexempt “governmental bonds” (as contrasted with “private activity bonds,” which benefit private 

entities). ARRA authorized the issuance of Build America Bonds in 2009 and 2010 without 

volume limitation, and the authority to issue these bonds expired at the end of 2010. Issuers 

could choose in 2009 and 2010 to issue Build America Bonds or traditional tax-exempt bonds.

Tax-exempt bonds have broader program parameters than Build America Bonds. In addition to 

using the bonds for original financing for public capital projects like Build America Bonds, taxexempt bonds may generally be used for: (1) “current refundings” to refinance prior 

governmental bonds for interest cost savings where the prior bonds are repaid promptly within 

90 days of issuance of the refunding bonds; (2) short-term “working capital” financings for 

governmental operating expenses for seasonal cash flow deficits; (3) financing for section 

501(c)(3) nonprofit entities, such as nonprofit hospitals and universities; and (4) qualified private 

activity bond financing for specified private projects and programs (including, for example, mass 

commuting facilities, solid waste disposal facilities, low-income residential rental housing 

projects, and single-family housing for low- and moderate-income homebuyers, among others), 

which are subject to annual State bond volume caps with certain exceptions. 

Reasons for Change

The Build America Bond program has been successful and has expanded the market for State 

and local governmental debt. From April 2009 through December 2010, approximately $185 

billion in Build America Bonds were issued in 2,899 transactions in all 50 States, the District of 

Columbia, and two territories. During 2009 and 2010, Build America Bonds gained one-third of 

the market of the total dollar supply of State and local new, long-term governmental debt. 

This program taps into a broader market for investors without regard to tax liability (e.g., pension 

funds may be investors in Build America Bonds, though they typically do not invest in taxexempt bonds). By comparison, traditional tax-exempt bonds have a narrower class of investors, 

which generally consist of retail investors (individuals and mutual funds hold over 70 percent of 

tax-exempt bonds). 
125

The Build America Bond program delivers an efficient Federal subsidy directly to State and local 

governments (rather than through third-party investors). By comparison, tax-exempt bonds can 

be viewed as inefficient in that the Federal revenue cost of the tax exemption is often greater 

than the benefits to State and local governments achieved through lower borrowing costs. The 

Build America Bond program also has a potentially more streamlined tax compliance framework 

focusing directly on governmental issuers who benefit from the subsidy, as compared with taxexempt bonds and tax credit bonds, which involve investors as tax intermediaries. The Build 

America Bond program also has relieved supply pressures in the tax-exempt bond market and 

has helped to reduce interest rates in that market. 

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 

1985, as amended, refund payments to state and local government issuers claiming refundable 

tax credits for their Build America Bonds currently are being reduced by a sequestration rate. 

For refund payments processed by the Internal Revenue Service on or after October 1, 2013 and 

on or before September 30, 2014, the refundable tax credit payments to issuers are reduced by 

the fiscal year 2014 sequestration rate of 7.2 percent. Market participants have argued that 

current sequestration cuts to refundable tax credit payments for Build America Bonds has 

reduced investor interest in purchasing these types of taxable bonds. 

America Fast Forward Bonds would build upon the successful example of the Build America 

Bond program by providing a new bond program with broader uses that will attract new sources 

of capital for infrastructure investment (e.g., pension funds may be investors in America Fast 

Forward Bonds, though they typically do not invest in tax-exempt bonds). In order to alleviate 

concerns about future sequestration cuts, refundable tax credit payments to issuers of America 

Fast Forward Bonds, should be protected from sequestration. 

Proposal

Provide America Fast Forward Bonds and Expand Eligible Uses 

The proposal would create a new, permanent America Fast Forward Bond program that would be 

an optional alternative to traditional tax-exempt bonds. Like Build America Bonds, America 

Fast Forward Bonds would be taxable bonds issued by State and local governments in which the 

Federal Government makes direct payments to State and local governmental issuers (through 

refundable tax credits). For the permanent America Fast Forward Bond program, the Treasury 

Department would make direct payments to State and local governmental issuers in an amount 

equal to 28 percent of the coupon interest on the bonds. The 28-percent Federal subsidy level is 

intended to be approximately revenue neutral relative to the estimated future Federal tax 

expenditures for tax-exempt bonds. The America Fast Forward program should facilitate greater 

efficiency, a broader investor base, and lower costs for State and local governmental debt. 

Eligible uses for America Fast Forward Bonds would include: (1) original financing for 

governmental capital projects, as under the authorization of Build America Bonds; (2) current 

refundings of prior public capital project financings for interest cost savings where the prior 

bonds are repaid promptly within 90 days of issuance of the current refunding bonds; (3) shortterm governmental working capital financings for governmental operating expenses (such as tax 
126

and revenue anticipation borrowings for seasonal cash flow deficits), subject to a 13-month 

maturity limitation; and (4) financing for section 501(c)(3) nonprofit entities.

The proposal also recommends precluding direct payments to State and local government issuers 

under the permanent America Fast Forward Bond program from being subject to sequestration. 

For purposes of this proposal, the term “sequestration” means any reduction in direct spending 

pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985 (Title II, of P.L. 

99-177), as amended, the Statutory-Pay-As-You-Go Act of 2010 (P.L. 111-139), as amended or 

the Budget Control Act of 2011 (P.L. 112-25), as amended.

Allow Eligible Use of America Fast Forward Bonds to Include Financing All Qualified Private 

Activity Bond Program Categories 

In addition to including financing for section 501(c)(3) nonprofit entities, eligible uses also 

include financing for the types of projects and programs that can be financed with qualified 

private activity bonds, subject to the applicable State bond volume caps for the qualified private 

activity bond category.

The proposal would be effective for bonds issued on or after January 1, 2015.
127

ALLOW CURRENT REFUNDINGS OF STATE AND LOCAL GOVERNMENTAL 

BONDS

Current Law

The Internal Revenue Code (Code) provides Federal tax subsidies for lower borrowing costs on 

debt obligations issued by States and local governments and political subdivisions thereof (“State 

and local bonds”). The Code delivers Federal borrowing subsidies to State and local 

governments in different ways. Section 103 provides generally for the issuance of tax-exempt 

bonds for eligible governmental purposes at lower borrowing costs based on the excludability of 

the interest paid on the bonds from the gross income of the owners of the bonds. Other State or 

local bond provisions provide Federal borrowing subsidies to State and local governments 

through direct subsidy payments (called “refundable tax credits”) to State and local 

governmental issuers, tax credits to investors in certain tax credit bonds to replace specified 

portions of the interest on those bonds, and other collateral tax advantages to State and local 

bonds.

From time to time, for reasons associated with Federal cost considerations and other targeting 

objectives, various State and local bond provisions have had bond volume caps, time deadlines 

for bond issuance, or transitional provisions for program restrictions. For example, section 

54AA enacted by the American Recovery and Reinvestment Act of 2009 authorized the issuance 

of taxable Build America Bonds in 2009 and 2010 for governmental capital projects and 

provided for direct borrowing subsidy payments to issuers for 35 percent of the borrowing costs. 

In addition, section 54A authorizes the issuance of certain Qualified Tax Credit Bonds for 

targeted public school and energy programs under specified bond volume caps and within certain 

time periods. Other examples of targeted, temporary bond provisions include a $25 billion 

authorization for “Recovery Zone Bonds” in section 1400U1-3; a temporary exception to the 

alternative minimum tax preference for interest on tax-exempt private activity bonds under 

section 57(a)(5); and a temporary increase in the size of a small issuer exception (from $10 

million to $30 million) to the tax-exempt carrying cost disallowance rule for financial institutions 

in section 265(b).

In the tax-exempt bond area, a “current refunding” or “current refunding issue” (under Treas. 

Reg. §1.150-1(d)(3)) refers to bonds used to refinance prior bonds in circumstances in which the 

prior bonds are redeemed or retired within 90 days after issuance of the current refunding bonds.

Reasons for Change

Tax policy favors current refundings of State and local bonds within appropriate size and 

maturity parameters because these current refundings generally reduce both: (1) borrowing costs 

for State and local governmental issuers; and (2) Federal revenue costs or tax expenditure costs
128

of Federal subsidies for borrowing costs on State and local bonds. The primary reason that 

States and local governments engage in current refunding transactions is to reduce interest costs.1

The extent to which statutory provisions address current refundings has varied among different 

State and local bond program provisions. Selected examples of provisions that address current 

refundings include the following: section 1313(a) of the Tax Reform Act of 1986 (general 

transition rule); section 147(b) (private activity bond volume cap); section 142(i)(9) (bond 

volume cap for qualified green buildings and sustainable design projects); section 142(m)(4) 

(bond volume cap for qualified highway or surface freight transfer projects); and section 

1394(f)(3)(C)(ii) (bond volume cap for new empowerment zone facility bonds). By contrast, 

other State and local bond programs do not address current refundings expressly. Selected 

examples of provisions that do not address current refundings expressly include Build America 

Bonds under section 54AA, Qualified Tax Credit Bonds under section 54A, and Recovery Zone 

Bonds under section 1400U1-3.

In light of the disparate statutory treatment of current refundings and the lack of express 

consideration of current refundings in certain statutory provisions, a general statutory provision 

that sets forth parameters for allowable current refundings of State and local bonds would 

promote greater uniformity and tax certainty.

Proposal

The proposal would provide a general Code provision to authorize current refundings of State or 

local bonds upon satisfaction of the following requirements:

1. Size Limit. The issue price of the current refunding bonds would be required to be no 

greater than the outstanding principal amount (generally meaning the outstanding stated principal 

amount, except as provided below) of the refunded bonds. For bonds issued with more than a de 

minimis amount of original issue discount or premium, the adjusted issue price or accreted 

present value of the refunded bonds would be required to be used as the measure of this size 

limitation in lieu of the outstanding stated principal amount of the refunded bonds.

2. Maturity Limit. The weighted average maturity of the current refunding bonds would be 

required to be no longer than the remaining weighted average maturity of the refunded bonds 

(determined in the manner provided in section 147(b)).

This provision would apply generally to State and local bond programs or provisions that do not 

otherwise allow current refundings or expressly address the treatment of current refundings 

(including bonds for which bond volume caps or time deadlines applied to issuance of original 

bonds). This provision would be inapplicable to State and local bond programs or provisions 

that otherwise allow or expressly address current refundings, such as traditional tax-exempt 

governmental bonds under section 103 for which current refundings generally are allowable 

without statutory bond maturity restrictions and qualified tax-exempt private activity bonds 

 1 By comparison, an “advance refunding” refers to a refinancing in which the refunding bonds and the prior bonds 

may remain outstanding concurrently for more than 90 days. Advance refundings involve duplicative Federal 

subsidy costs for the same financed project or purpose. Section 149(d) restricts advance refundings. 
129

under section 141(e) for which current refundings generally are allowable within prescribed 

statutory bond maturity restrictions under section 147(b).

The proposal would be effective as of the date of enactment. 
130

REPEAL THE $150 MILLION NON-HOSPITAL BOND LIMITATION ON QUALIFIED 

SECTION 501(c)(3) BONDS

Current Law

Section 501(c)(3) bonds can be used to finance either capital expenditures or working capital 

expenditures of section 501(c)(3) organizations. The Tax Reform Act of 1986 established a 

$150 million limit on the volume of outstanding, non-hospital, tax-exempt section 501(c)(3) 

bonds. The limit was repealed in 1997 with respect to bonds issued after August 5, 1997, if at 

least 95 percent of the net proceeds were used to finance capital expenditures incurred after that 

date. Thus, the limitation continues to apply to bonds more than five percent of the net proceeds 

of which finance or refinance (1) working capital expenditures, or (2) capital expenditures, 

incurred on or before August 5, 1997.

Reasons for Change

The $150 million limitation results in complexity and provides disparate treatment depending on 

the nature and timing of bond-financed expenditures. Issuers must determine whether an issue 

consists of non-hospital bonds, and they must calculate the amount of non-hospital bonds that are 

allocable to a particular tax-exempt organization. In addition, issuers must determine whether 

more than five percent of the net proceeds of each issue of non-hospital bonds finances working 

capital expenditures, or capital expenditures incurred on or before August 5, 1997, to determine 

whether the issue is subject to the limitation. Repealing the limitation would enable nonprofit 

universities to utilize tax-exempt financing on a basis comparable to public universities. 

Proposal

The $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the 

benefit of any one section 501(c)(3) organization would be repealed in its entirety, effective for 

bonds issued after the date of enactment. 
131

INCREASE NATIONAL LIMITATION AMOUNT FOR QUALIFIED HIGHWAY OR 

SURFACE FREIGHT TRANSFER FACILITY BONDS

Current Law

Tax-exempt private activity bonds may be used to finance qualified highway or surface freight 

transfer facilities. A qualified highway or surface freight transfer facility is (1) any surface 

transportation project, (2) any project for an international bridge or tunnel for which an 

international entity authorized under Federal or State law is responsible, or (3) any facility for the 

transfer of freight from truck to rail or rail to truck. These projects must receive Federal 

assistance under title 23 of the United States Code or, in the case of facilities for the transfer of 

freight from truck to rail or rail to truck, Federal assistance under either title 23 or title 49 of the 

United States Code. 

Tax-exempt bonds issued to finance qualified highway or surface freight transfer facilities are 

not subject to State volume limitations. Instead, the Secretary of Transportation is authorized to 

allocate a total of $15 billion of issuance authority to qualified highway or surface freight 

transfer facilities in such manner as the Secretary determines appropriate. 

The proceeds of qualified highway or surface freight transfer facility bonds must be spent on 

qualified projects within five years from the date of issuance of such bonds. Bond proceeds that 

remain unspent after five years must be used to redeem outstanding bonds. 

Reasons for Change

Qualified highway or surface freight transfer facility bonds are a permitted category of taxexempt private activity bond that permit private involvement in qualified highway or surface 

transfer projects. Increasing by $4 billion the issuance amount of these types of bonds is 

consistent with the Administration’s policy of supporting investment in highway and freight 

transfer projects, especially in light of the expansion of the Transportation Infrastructure Finance 

and Innovation Act as part of the recent Moving Ahead for Progress in the 21st Century Act’s 

surface transportation reauthorization. 

Proposal

The proposal would increase the $15 billion aggregate amount permitted to be allocated by the 

Secretary of Transportation to $19 billion. 

The proposal would be effective upon enactment. 
132

ELIMINATE THE VOLUME CAP FOR PRIVATE ACTIVITY BONDS FOR WATER

INFRASTRUCTURE

Current law

State and local governments issue tax-exempt bonds to finance a wide range of public 

infrastructure projects. In general, the interest on bonds issued by State and local governments is 

excludable from gross income if the bonds meet certain eligibility requirements. There are two 

basic kinds of tax-exempt bonds: governmental bonds and qualified private activity bonds. 

Bonds generally are treated as governmental bonds if the proceeds are used to carry out 

governmental purposes or the bonds are repaid with governmental funds. In general, there are 

limits on the private business use of proceeds, including loans, as well as private business 

repayment of governmental bonds. Governmental bonds are subject to various general 

restrictions, including arbitrage investment restrictions, registration and reporting requirements, 

Federal guarantee restrictions, advance refunding limitations, spending period limitations, and 

pooled bond limitations. Governmental bonds, however, are not subject to specific volume 

limitations. 

Private activity bonds may be issued on a tax-exempt basis only if they meet the general 

requirements for governmental bonds and the additional requirements necessary for “qualified” 

private activity bonds. Qualified private activity bonds include exempt facility bonds, qualified 

mortgage bonds for single-family housing, qualified veterans’ mortgage bonds, qualified small 

issue bonds, qualified student loan bonds, qualified redevelopment bonds, and qualified section 

501(c)(3) bonds. Eligible facilities for which exempt facility bonds may be issued include 

facilities for the furnishing of water and sewage facilities. Most qualified private activity bonds 

are subject to an annual unified State volume cap. 

Reasons for Change

The nation’s water and wastewater infrastructure facilities are essential to the important national 

public policy interests in ensuring clean and safe drinking water and sanitation. There is a 

significant need for capital funding to upgrade the nation’s water and wastewater infrastructure 

facilities. The Environmental Protection Agency’s surveys of 20-year capital investment needs 

estimate $335 billion (2007 dollars) will be needed for drinking water supplies and $298 billion 

(2008 dollars) for wastewater and storm water treatment. Removing the volume cap on taxexempt qualified private activity bonds for water and wastewater infrastructure facilities would 

encourage additional needed private investment and public-private partnerships in these 

infrastructure facilities. 

Proposal

The proposal would provide an exception to the unified annual State volume cap on tax-exempt 

qualified private activity bonds for exempt facilities for the “furnishing of water” or “sewage 

facilities.” These bonds are intended to complement Environmental Protection Agency and local 

efforts to finance water quality improvement projects in the United States.
133

The proposal would be effective for bonds issued after the date of enactment to finance water or 

sewage facilities. 
134

INCREASE THE 25-PERCENT LIMIT ON LAND ACQUISITION RESTRICTION ON

PRIVATE ACTIVITY BONDS

Current Law 

In general, the interest on bonds issued by State and local governments is excludable from gross 

income if the bonds meet certain eligibility requirements. Section 147 provides that except for 

certain limited exceptions, a private activity bond is not a qualified bond if it is part of an issue 

where 25 percent or more of the net proceeds are to be used for the acquisition of land. For land 

used for farming purposes, no portion of bond proceeds may be used to acquire such land unless 

the purchase is by a “first-time farmer” who will be the principal user of the land and will 

materially and substantially participate on the farm. 

Section 147 provides an exception to the rule limiting the amount of bond proceeds that can be 

used for land acquisition where bond proceeds are used by a governmental unit to acquire land in 

connection with an airport, mass commuting facility, high-speed intercity rail facility, dock, or 

wharf, if such land is acquired for the purpose of noise abatement, wetland preservation, or for 

future uses as an airport, mass commuting facility, high-speed intercity rail facility, dock, or 

wharf, and there is no other significant use of such land. The restriction also does not apply to 

qualified mortgage bonds, qualified veterans’ mortgage bonds, qualified student loan bonds, 

qualified section 501(c)(3), bonds, or qualified public educational facility bonds. 

Reasons for Change

The purpose of the land acquisition restriction was to ensure that bond proceeds were not used 

primarily to finance land purchases. However, since this restriction was enacted in 1984, land 

costs have steadily increased, thus prohibiting bond financing of many projects that once fell 

within the intent of the 25-percent exception. Increasing the percentage of the amount of bond 

proceeds that can be used for land acquisition would account for the steady increase in land costs 

and make it easier to bond finance projects in areas where land values have substantially 

increased. 

Proposal

The proposal would increase the 25-percent land acquisition restriction to 35 percent on certain 

qualified private activity bonds.

The proposal would be effective for bonds issued after the date of enactment.
135

ALLOW MORE FLEXIBLE RESEARCH ARRANGEMENTS FOR PURPOSES OF

PRIVATE BUSINESS USE LIMITS

Current Law

Section 141 treats tax-exempt bonds issued by State and local governments as governmental 

bonds if the issuer limits private business use and other private involvement sufficiently to avoid 

treatment as “private activity bonds.” Bonds generally are classified as private activity bonds if 

more than 10 percent of the bond proceeds are both (1) used for private business, and (2) payable 

or secured from property or payments derived from private business use. Except for certain 

qualified private activity bonds, the interest on private activity bonds is taxable. 

For purposes of the private business limits on tax-exempt bonds, private business use of a bondfinanced project generally means any direct or indirect use in a trade or business by any person 

other than a qualified user. Qualified users include State and local governmental units for taxexempt governmental bonds and section 501(c)(3) exempt entities for qualified 501(c)(3) bonds. 

Under these rules, the Federal government also is treated like a private business. The following 

types of actual or beneficial use of a tax-exempt bond-financed project by a private business 

generally constitute private business use: ownership of a project; leasing of a project; certain 

contractual legal rights to use a project; certain incentive-payment contracts with respect to a 

project; and certain economic benefits derived from a project. One type of contractual 

arrangement that raises private business use questions is public-private research arrangements 

involving the conduct of research at tax-exempt bond-financed research facilities.

The legislative history of the Tax Reform Act of 1986 states that, to avoid impermissible private 

business use, the research arrangement must include specific features. For example, in the case 

of corporate-sponsored research, subject to certain restrictions, a tax-exempt bond-financed 

university facility may be used for corporate-sponsored research under a research agreement 

without being considered private business use. In particular, the sponsor must pay a competitive 

price for its use of the technology developed under the research agreement. Moreover, the price 

must be determined at the time the technology is available for use rather than an earlier time 

(such as when the research agreement is entered into). 

Reflecting this legislative history, Treasury and Internal Revenue Service guidance provides safe 

harbors that allow certain research arrangements with private businesses at tax-exempt bond 

financed research facilities without giving rise to private business use. The safe harbors reflect 

the constraints enumerated in the legislative history.

Reasons for Change

Research and technological innovation provide benefits to educational institutions and to society 

at large. Research involves significant investment and considerable uncertainty regarding the 

total costs, necessary lead time, and ultimate outcome of advancing scientific knowledge. More 

flexible standards for public-private research arrangements for purposes of the private business 

limits on tax-exempt bonds than those allowed under existing safe harbors potentially would 
136

foster greater investment in research, greater technological innovation, and broader benefits to 

society at large. 

Proposal

The proposal would provide an exception to the private business limits on tax-exempt bonds for 

research arrangements relating to basic research at tax-exempt bond-financed research facilities 

that meet the following requirements:

(1) A qualified user (a State and local government or section 501(c)(3) nonprofit entity)

would be required to own the research facilities.

(2) A qualified user would be permitted to enter into any bona fide, arm’s-length 

contractual arrangement with a private business sponsor of basic research regarding the terms for 

sharing the economic benefits of any products resulting from the research, including 

arrangements in which those economic terms (such as exclusive or non-exclusive licenses of 

intellectual property, and licensing fees or royalty rates) are determined in advance at the time 

the parties enter into the contractual arrangement.

The proposal would be effective for research agreements entered into after the date of enactment. 
137

REPEAL THE GOVERNMENT OWNERSHIP REQUIREMENT FOR CERTAIN 

TYPES OF EXEMPT FACILITY BONDS

Current Law

State and local governments are eligible to issue governmental bonds for a wide range of public 

infrastructure projects and other projects if the bond proceeds are used predominately for State 

and local government use or the bonds are payable or secured predominately from State and

local government sources of payments, such as generally applicable taxes. State and local 

governments are also eligible to issue tax-exempt private activity bonds under section 141(e) 

with permitted private business use and other private involvement to finance certain specified 

types of projects. One type of permitted tax-exempt private activity bond is an exempt facility 

bond under section 142. The Internal Revenue Code permits tax-exempt financing with respect 

to different categories of “exempt facilities” under section 142 including airports, docks and 

wharves, and mass commuting facilities. 

Under section 142, airports, docks and wharves, and mass commuting facilities are treated as 

exempt facilities only if all of the property to be financed with the net proceeds of the tax-exempt 

bond issue is to be owned by a governmental unit. 

To qualify as exempt facilities that are eligible for tax-exempt bond financing, airports, docks 

and wharves, and mass commuting facilities must also meet a public use requirement. The 

public use requirement requires that the facility financed must serve or be available on a regular 

basis for general public use. 

Reasons for Change

The Administration has consistently emphasized the importance of infrastructure investment and 

the role that private capital can play in enhancing such investment. Eliminating the requirement 

that airports, docks and wharves, and mass commuting facilities must be governmentally owned 

will facilitate and encourage needed private sector investment in this infrastructure. 

Proposal

The proposal would repeal the requirement under section 142 that airports, docks and wharves, 

and mass commuting facilities must be owned by a governmental unit. 

The proposal would be effective for bonds issued after the date of enactment.
138

EXEMPT FOREIGN PENSION FUNDS FROM THE APPLICATION OF THE 

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA)

Current Law

FIRPTA, enacted in 1980, is intended to subject foreign investors to the same U.S. tax treatment 

on gains from the disposition of U.S. real property interests as that which applies to U.S. 

investors. Thus, under FIRPTA, when a nonresident alien individual or foreign corporation sells 

an interest in U.S. real estate (including directly held real property and stock in corporations that 

predominantly hold real property), any gain on the sale generally is subject to U.S. tax.

U.S. pension or retirement trusts or similar arrangements whose purpose is to provide pension or 

retirements benefits generally are exempt from U.S. tax (U.S. pension funds). For example, 

trusts forming part of qualified pension, profit sharing, or stock bonus plans generally are exempt 

from U.S. tax under section 501(a). 

Reasons for Change

Gain of a U.S. pension fund from the disposition of a U.S. real property interest generally is 

exempt from U.S. tax, but gain of a similar pension fund created or organized outside the United 

States from the disposition of that same property would be subject to U.S. tax under FIRPTA.

Proposal

The proposal would exempt from the application of FIRPTA gains of foreign pension funds from 

the disposition of U.S. real property interests. For this purpose, a foreign pension fund would 

generally mean a trust, corporation, or other organization or arrangement that is created or 

organized outside of the United States; generally exempt from income tax in the jurisdiction in 

which it is created or organized; and substantially all of the activity of which is to administer or 

provide pension or retirement benefits. The Secretary would be granted authority to issue 

regulations necessary to carry out the purposes of the proposal, including whether for this 

purpose an entity or arrangement is a foreign pension fund or a benefit is a pension or retirement 

benefit. 

The proposal would be effective for dispositions of U.S. real property interests occurring after 

December 31, 2014.
139

TAX CUTS FOR FAMILIES AND INDIVIDUALS

EXPAND THE EARNED INCOME TAX CREDIT (EITC) FOR WORKERS WITHOUT 

QUALIFYING CHILDREN

Current Law

Low- and moderate-income workers may be eligible for a refundable EITC. Eligibility for the 

EITC is based on the presence and number of qualifying children in the worker’s household, 

adjusted gross income (AGI), earned income, investment income, filing status, age, and 

immigration and work status in the United States.

The EITC has a phase-in range (where each additional dollar of earned income results in a larger 

credit), a plateau (where additional dollars of earned income or AGI have no effect on the size of 

the credit), and a phase-out range (where each additional dollar of the larger of earned income or 

AGI results in a smaller total credit). The dollar thresholds are adjusted annually for inflation. 

In 2015, the credit is phased in at a rate of 7.65 percent on earnings up to about $6,570, such that 

the maximum credit will be about $500. The credit is phased out at a rate of 7.65 percent on 

income in excess of $8,220 ($13,720 for married couples filing jointly). The credit is phased out 

completely at incomes of $14,790 for unmarried taxpayers and $20,290 for married couples 

filing jointly.

To be eligible for the EITC for workers without qualifying children, the taxpayer must be at least 

25 years old and less than 65 years old. (In the case of married taxpayers filing jointly, the credit 

may be claimed if at least one spouse is over age 24 and less than age 65.) A taxpayer who may 

be claimed as a dependent or as a qualifying child by another taxpayer, including most college 

students, may not claim the EITC for workers without children. 

There is no age limitation on the EITC for workers with qualifying children. 

Reason for Change

The EITC for workers without children is relatively small and phases out at very low incomes. 

As such, it provides little or no assistance to individuals at or near the poverty line. For example, 

in 2015 a single worker without children who earned $12,000 (a wage close to the poverty line), 

would be in the phase-out range and eligible for a credit of about $200 and would receive a 

refund of about $40 after subtracting his or her federal income tax (and would pay nearly $920 in 

Federal payroll taxes). A single individual working full-time at minimum wage would receive 

less than $25 of EITC and face income tax liability of over $400 after subtracting his or her 

EITC. A larger childless EITC would promote employment and reduce poverty for this group of 

workers. 

The current age restrictions prevent young workers and older workers from claiming the EITC. 

As a result, young workers living independently from their families are unable to benefit from 

the antipoverty and work related effects of the EITC just when they are establishing the patterns 

of behavior that may persist throughout their working lives. The EITC, by increasing the 
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effective wage, encourages additional work effort in the short run, which may in turn affect longrun labor force attachment and wages. The current age restriction on older workers is 

inconsistent with recent increases in the full retirement age. As a result, workers age 65 and 66 

with low incomes may lose the benefit of the EITC before retiring and claiming their social 

security benefits. 

Proposal

The proposal would increase the EITC for workers without qualifying children by doubling the 

phase-in rate and the phase-out rate from 7.65 percent to 15.3 percent, thereby doubling the 

maximum credit from about $500 to about $1,000. The beginning of the phase-out range would 

be increased from an estimated $8,220 to $11,500 for 2015 (from $13,720 to $17,000 for joint 

filers) and be indexed in subsequent years as under current law. Thus, the credit for workers 

without children would be phased out completely at $18,070 for single taxpayers and $23,750 for 

married taxpayers filing jointly.

The proposal would also allow taxpayers at least age 21 and under age 67 to claim the EITC for 

workers without qualifying children, if otherwise eligible. In the case of married taxpayers filing 

jointly, the credit could be claimed if either spouse were at least age 21 and under age 67. As 

under current law, taxpayers who could be claimed as a qualifying child or a dependent would 

not be eligible for the EITC for childless workers. Thus, full-time students who are dependent 

upon their parents would not be allowed to claim the EITC for workers without qualifying 

children, despite meeting the new age requirements, even if their parents did not claim a 

dependent exemption or an EITC on their behalf.

In addition, a separate proposal would simplify the EITC rules by allowing certain taxpayers 

who reside with a qualifying child that they do not claim to receive the EITC for workers without 

qualifying children.

This proposal would be effective for tax years beginning after December 31, 2014.
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PROVIDE FOR AUTOMATIC ENROLLMENT IN INDIVIDUAL RETIREMENT 

ACCOUNTS OR ANNUITIES (IRAS), INCLUDING A SMALL EMPLOYER TAX 

CREDIT, AND DOUBLE THE TAX CREDIT FOR SMALL EMPLOYER PLAN STARTUP COSTS

Current Law

A number of tax-preferred, employer-sponsored retirement savings programs exist under current 

law. These include section 401(k) cash or deferred arrangements, section 403(b) programs for 

public schools and charitable organizations, section 457 plans for governments and nonprofit 

organizations, and simplified employee pensions (SEPs) and SIMPLE plans for small employers. 

Small employers (those with no more than 100 employees) that adopt a new qualified retirement, 

SEP or SIMPLE plan are entitled to a temporary business tax credit equal to 50 percent of the 

employer’s plan “start-up costs,” which are the expenses of establishing or administering the 

plan, including expenses of retirement-related employee education with respect to the plan. The 

credit is limited to a maximum of $500 per year for three years. 

Individuals who do not have access to an employer-sponsored retirement savings arrangement 

may be eligible to make smaller tax-favored contributions to IRAs. 

In 2013, IRA contributions were limited to $5,500 a year (plus $1,000 for those age 50 or older). 

Section 401(k) plans permitted contributions (employee plus employer contributions) of up to 

$51,000 a year (of which $17,500 can be pre-tax employee contributions) plus $5,500 of 

additional pre-tax employee contributions for those age 50 or older.

Reasons for Change

For many years, until the economic downturn in 2008, the personal saving rate in the United 

States has been exceedingly low. Tens of millions of U.S. households have not placed 

themselves on a path to become financially prepared for retirement. In addition, the proportion 

of U.S. workers participating in employer-sponsored plans has remained stagnant for decades at 

no more than about half the total work force, notwithstanding repeated private- and public-sector 

efforts to expand coverage. Among employees eligible to participate in an employer-sponsored 

retirement savings plan such as a 401(k) plan, participation rates typically have ranged from twothirds to three-quarters of eligible employees, but making saving easier by making it automatic 

has been shown to be remarkably effective at boosting participation well above these levels. 

Beginning in 1998, Treasury and the Internal Revenue Service (IRS) issued a series of rulings 

and other guidance defining, permitting, and encouraging automatic enrollment in 401(k) and 

other plans (i.e., enrolling employees by default unless they opt out). Automatic enrollment was 

further facilitated by the Pension Protection Act of 2006. In 401(k) plans, automatic enrollment 

has tended to increase participation rates to more than nine out of ten eligible employees. In 

contrast, for workers who lack access to a retirement plan at their workplace and are eligible to 

engage in tax-favored retirement saving by taking the initiative and making the decisions 
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required to establish and contribute to an IRA, the IRA participation rate tends to be less than 

one out of ten.

 

Numerous employers, especially those with smaller or lower-wage work forces, have been 

reluctant to adopt a retirement plan for their employees, in part out of concern about their ability 

to afford the cost of making employer contributions or the per-capita cost of complying with taxqualification and ERISA (Employee Retirement Income Security Act) requirements. These 

employers could help their employees save -- without employer contributions or plan 

qualification or ERISA compliance -- simply by making their payroll systems available as a 

conduit for regularly transmitting employee contributions to an employee’s IRA. Such “payroll 

deduction IRAs” could build on the success of workplace-based payroll-deduction saving by 

using the capacity to promote saving that is inherent in employer payroll systems, and the effort 

to help employees save would be especially effective if automatic enrollment were used. 

However, despite efforts more than a decade ago by the Department of the Treasury, the IRS, 

and the Department of Labor to approve and promote the option of payroll deduction IRAs, few 

employers have adopted them or even are aware that this option exists. 

Accordingly, requiring employers that do not sponsor any retirement plan (and meet other 

criteria such as being above a certain size) to make their payroll systems available to employees 

and automatically enroll them in IRAs could achieve a major breakthrough in retirement savings 

coverage. In addition, requiring automatic IRAs may lead many employers to take the next step 

and adopt an employer plan, thereby permitting much greater tax-favored employee 

contributions than an IRA, plus the option of employer contributions. The potential for the use 

of automatic IRAs to lead to the adoption of 401(k)s, SIMPLEs, and other employer plans would 

be enhanced by raising the existing small employer tax credit for the start-up costs of adopting a 

new retirement plan to an amount significantly higher than both its current level and the level of 

the proposed new automatic IRA tax credit for employers. 

In addition, the process of saving and choosing investments in automatic IRAs could be 

simplified for employees, and costs minimized, through a standard default investment as well as 

electronic information and fund transfers. Workplace retirement savings arrangements made 

accessible to most workers also could be used as a platform to provide and promote retirement 

distributions over the worker’s lifetime. 

Proposal

The proposal would require employers in business for at least two years that have more than ten 

employees to offer an automatic IRA option to employees, under which regular contributions 

would be made to an IRA on a payroll-deduction basis. If the employer sponsored a qualified 

retirement plan, SEP, or SIMPLE for its employees, it would not be required to provide an 

automatic IRA option for its employees. Thus, for example, a qualified plan sponsor would not 

have to offer automatic IRAs to employees it excludes from qualified plan eligibility because 

they are covered by a collective bargaining agreement, are under age eighteen, are nonresident 

aliens, or have not completed the plan’s eligibility waiting period. However, if the qualified plan 

excluded from eligibility a portion of the employer’s work force or a class of employees such as 
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all employees of a subsidiary or division, the employer would be required to offer the automatic 

IRA option to those excluded employees.

The employer offering automatic IRAs would give employees a standard notice and election 

form informing them of the automatic IRA option and allowing them to elect to participate or opt 

out. Any employee who did not provide a written participation election would be enrolled at a 

default rate of three percent of the employee’s compensation in an IRA. Employees could opt 

out or opt for a lower or higher contribution rate up to the IRA dollar limits. Employees could 

choose either a traditional IRA or a Roth IRA, with Roth being the default. For most employees, 

the payroll deductions would be made by direct deposit similar to the direct deposit of 

employees’ paychecks to their accounts at financial institutions. 

Payroll-deduction contributions from all participating employees could be transferred, at the 

employer’s option, to a single private-sector IRA trustee or custodian designated by the 

employer. Alternatively, the employer, if it preferred, could allow each participating employee 

to designate the IRA provider for that employee’s contributions or could designate that all 

contributions would be forwarded to a savings vehicle specified by statute or regulation. 

Employers making payroll deduction IRAs available would not have to choose or arrange default 

investments. Instead, a low-cost, standard type of default investment and a handful of standard, 

low-cost investment alternatives would be prescribed by statute or regulation. In addition, this 

approach would involve no employer contributions, no employer compliance with qualified plan 

requirements, and no employer liability or responsibility for determining employee eligibility to 

make tax-favored IRA contributions or for opening IRAs for employees. A national web site 

would provide information and basic educational material regarding saving and investing for 

retirement, including IRA eligibility, but, as under current law, individuals (not employers) 

would bear ultimate responsibility for determining their IRA eligibility. 

Contributions by employees to automatic IRAs would qualify for the saver’s credit to the extent 

the contributor and the contributions otherwise qualified.

Small employers (those that have no more than 100 employees) that offer an automatic IRA 

arrangement could claim a temporary non-refundable tax credit for the employer’s expenses 

associated with the arrangement up to $500 for the first year and $250 for the second year. 

Furthermore, these employers would be entitled to an additional non-refundable credit of $25 per 

enrolled employee up to $250 for six years. The credit would be available both to employers 

required to offer automatic IRAs and employers not required to do so (for example, because they 

have ten or fewer employees).

In conjunction with the automatic IRA proposal, to encourage employers not currently 

sponsoring a qualified retirement plan, SEP, or SIMPLE to do so, the non-refundable “start-up 

costs” tax credit for a small employer that adopts a new qualified retirement, SEP, or SIMPLE 

would be doubled from the current maximum of $500 per year for three years to a maximum of 

$1,000 per year for three years and extended to four years (rather than three) for any employer 

that adopts a new qualified retirement plan, SEP, or SIMPLE during the three years beginning 

when it first offers (or first is required to offer) an automatic IRA arrangement. This expanded 
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“start-up costs” credit for small employers, like the current “start-up costs” credit, would not 

apply to automatic or other payroll deduction IRAs. The expanded credit would encourage small 

employers that would otherwise adopt an automatic IRA to adopt a new 401(k), SIMPLE, or 

other employer plan instead, while also encouraging other small employers to adopt a new 

employer plan.

The proposal would become effective after December 31, 2015.
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EXPAND THE CHILD AND DEPENDENT CARE TAX CREDIT

Current Law

Taxpayers with child or dependent care expenses who are working or looking for work are 

eligible for a nonrefundable tax credit that partially offsets these expenses. Married couples are 

eligible only if they file a joint return, and either both spouses are working or looking for work or 

one spouse is working or looking for work and the other is attending school full-time. To qualify 

for this benefit, the child and dependent care expenses must be for either (1) a child under age 

thirteen when the care was provided or (2) a disabled dependent of any age with the same place 

of abode as the taxpayer. Any allowable credit is reduced by the aggregate amount excluded 

from income under an employer-provided dependent care assistance program. 

Eligible taxpayers may claim the credit of up to 35 percent of up to $3,000 in eligible expenses 

for one child or dependent and up to $6,000 in eligible expenses for more than one child or 

dependent. The credit rate decreases by one percentage point for every $2,000 (or part thereof) 

of adjusted gross income (AGI) over $15,000 until the percentage of expenses reaches 20 percent 

(at incomes above $43,000). There are no other income limits. The phase-down point and the 

amount of expenses eligible for the credit are not indexed for inflation. 

Reasons for Change

Access to affordable child care is a barrier to employment or further schooling for some 

individuals. Child care costs are particularly high among families with children under age five

because these children are generally too young to attend elementary school and because care for 

very young children may be more expensive. In addition to imposing a financial burden on 

working families, these additional costs are an impediment to reentry into the workforce by 

parents. Existing empirical evidence suggests that mothers of children under age five have lower 

rates of labor force participation and employment than mothers of older children, suggesting that 

childcare costs may delay employment even for mothers planning to return to work. Expanding 

child care assistance to taxpayers with young children increases the ability of these parents to 

participate in the labor force or in education programs.

Proposal

The proposal would allow all taxpayers to claim the child and dependent care tax credit as under 

current law. In addition, the proposal would provide eligible taxpayers an additional credit on 

total expenses of up to $4,000 per child under age 5, for up to two children. The credit rate for 

the additional young child credit would be 30 percent, and would phase down at a rate of one

percentage point for every $2,000 (or part thereof) of AGI over $61,000 until the rate reaches 

zero at incomes above $119,000. The phase down point and amount of expenses eligible for the 

additional credit would not be indexed for inflation. Together, the current law child and 

dependent care tax credit and the additional credit would provide a total credit of up to 65 

percent of the first $3,000 in child care expenses for one child under age five and up to 65 

percent of the first $6,000 in child care expenses for two children under age five. The additional 
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credit would also provide a credit of up to 30 percent on the next $1,000 in child care expenses 

for each child under age five, for up to two children.

The proposal would be effective for taxable years beginning after December 31, 2014.
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EXTEND EXCLUSION FROM INCOME FOR CANCELLATION OF CERTAIN HOME 

MORTGAGE DEBT

Current Law

Gross income generally includes income that is realized by a debtor from the discharge of 

indebtedness. Exceptions to this general rule include exclusions for debtors in Title 11 

bankruptcy cases, for insolvent debtors, for discharges of certain farm and non-farm business 

indebtedness, and for discharges of qualified principal residence indebtedness (QPRI). Most of 

the exceptions require taxpayers to take steps (such as reducing basis) to merely defer the income 

from the discharge rather than excluding it permanently. 

The amount of discharge generally is the excess of the adjusted issue price of the debt being 

discharged over the amount, if any, that the borrower uses to satisfy the debt. If a modification 

of indebtedness is treated as an exchange of an old debt instrument for a new one, then the 

amount of discharge is measured as the difference between the adjusted issue price of the old 

debt instrument and the issue price of the new debt instrument. 

QPRI is acquisition indebtedness with respect to the taxpayer’s principal residence (limited to $2 

million). Acquisition indebtedness with respect to a principal residence generally means 

indebtedness that is incurred in the acquisition, construction, or substantial improvement of the 

taxpayer’s principal residence and that is secured by the residence. It also includes refinancing 

of preexisting acquisition indebtedness to the extent the amount of the new debt does not exceed 

the old. If, immediately before the discharge, only a portion of discharged indebtedness is QPRI, 

then the discharge is treated as applying first to the portion of the debt that is not QPRI, and thus 

the exclusion applies only to the extent that the total discharge was greater than that non-QPRI 

portion. The basis of the taxpayer’s principal residence is reduced by the amount excluded from 

income under the provision. 

The exclusion for discharges of QPRI was added to the Internal Revenue Code by the Mortgage 

Forgiveness Debt Relief Act of 2007, effective for discharges in 2007 through 2009. The 

Emergency Economic Stabilization Act of 2008 extended the exclusion to discharges in 2010,

2011, and 2012. The American Taxpayer Relief Act of 2012 extended the exclusion 

through 2013.

Reasons for Change

In recent years, home values in regions across the country have fallen substantially, leaving 

millions of homeowners now owing more on their mortgage loans than the value of the homes 

securing those loans. Many homeowners are also experiencing difficulty making timely 

payments on their mortgage loans. In these circumstances, there is a substantial volume of 

foreclosures. In addition, it is often in the best interests of both the homeowner and the holder of 

the mortgage to avoid foreclosure in one of several ways. For example, the homeowner may sell 

the home for less than the amount owed on the mortgage loan, and (despite the shortfall) the

holder of the loan accepts the sales proceeds in full satisfaction of the loan. Alternatively, the 

homeowner may transfer title to the house to the lender in return for cancellation of the 
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mortgage. Or, the homeowner and the holder may agree for the loan to be modified so that the 

homeowner can again become timely in making payments. Although there has been 

improvement in the residential real estate market, there is still an elevated number of cases in 

which homeowners may have discharge of indebtedness income with respect to their home 

mortgage loans.

Beyond the many modifications being made without Government assistance, there are large 

numbers of mortgage modifications under the Treasury program Making Home Affordable, 

including the Home Affordable Modification Program® (HAMP®). Facilitating home mortgage 

modifications remains important for the continued recovery of the residential real estate market. 

The importance is demonstrated by the fact that HAMP® has been extended through the end of 

2015. Also, many lenders have reached settlements with Federal and State authorities, which 

include terms committing lenders to engage in certain borrower-favorable conduct, and writing 

down mortgage loan principal in many instances counts toward meeting this requirement.

Proposal

The exclusion for income from the discharge of QPRI would be extended to amounts that are 

discharged before January 1, 2017, and to amounts that are discharged pursuant to an 

arrangement entered into before that date. 
149

PROVIDE EXCLUSION FROM INCOME FOR STUDENT LOAN FORGIVENESS FOR 

STUDENTS IN CERTAIN INCOME-BASED OR INCOME-CONTINGENT 

REPAYMENT PROGRAMS WHO HAVE COMPLETED PAYMENT OBLIGATIONS

Current Law

In general, loan amounts that are forgiven are considered gross income to the borrower and 

subject to individual income tax in the year of discharge. Exceptions exist for certain student 

loan repayment programs. Specifically, students who participate in the National Health Service 

Corps Loan Repayment program, the Public Sector Loan Forgiveness program, certain state loan 

repayment programs, and certain profession-based loan programs may exclude discharged 

amounts from gross income. 

Students with higher education expenses may be eligible to borrow money for their education 

through the Federal Direct Loan Program. Prior to July 1, 2010, they may also have been 

eligible to borrow money through the Federal Family Education Loan Program. Both programs 

are administered by the Department of Education. These programs provide borrowers with 

options for repaying their loans that are related to the borrowers’ income after completing their 

educations (the income-contingent and the income-based repayment options). Under these 

options a borrower completes the repayment obligation when he or she has repaid the loan in 

full, with interest, or has made all payments that are required under the terms of the specific plan. 

For borrowers who reach this point, any remaining loan balance is forgiven. Under current law, 

any debt forgiven by these programs is considered gross income to the borrower and thus subject 

to individual income tax. 

Reasons for Change

At the time the loans are forgiven, the individuals who have met the requirements for debt 

forgiveness in the income-contingent and the income-based repayment programs would have 

been making payments for many years. In general, these individuals will have had low incomes 

relative to their debt burden for much or all of this time. For many of these individuals, paying 

the tax on the forgiven amounts will be difficult. Furthermore, the potential tax consequence 

may be making some student loan borrowers reluctant to avail themselves of these loan 

repayment options. 

Proposal

The proposal would exclude from gross income amounts forgiven at the end of the repayment 

period for certain borrowers using the income-contingent repayment option or the income-based 

repayment option. 

The provision would be effective for loans forgiven after December 31, 2014. 
150

PROVIDE EXCLUSION FROM INCOME FOR STUDENT LOAN FORGIVENESS AND 

FOR CERTAIN SCHOLARSHIP AMOUNTS FOR PARTICIPANTS IN THE INDIAN 

HEALTH SERVICE (IHS) HEALTH PROFESSIONS PROGRAMS

Current Law

Gross income generally does not include certain scholarship amounts that are used to pay tuition, 

required fees, and related expenses (e.g., books, certain computing equipment, fees, and 

supplies). Amounts for other expenses, including child care and travel not incidental to the 

scholarship, are included in income. However, if the scholarship represents payment for 

teaching, research, or other services required as a condition for receiving the scholarship, 

including a future work obligation, the scholarship is considered ordinary income (i.e., wages) 

and is thus taxable. An exception to this rule exists for recipients of National Health Service 

Corp (NHSC) scholarships and Armed Forces Health Professions scholarships. (Scholarship 

amounts used to pay nonqualified expenses are taxable as ordinary income.)

In most cases, loan amounts forgiven or repaid on an individual’s behalf are considered ordinary 

income and thus, are taxable. However, certain student loan debt that is forgiven or cancelled is 

excluded from income. This includes debt repaid under the NHSC Loan Repayment Program 

and under certain state programs intended to increase the availability of health care services in 

underserved areas. 

The IHS Health Professions Scholarship Program and IHS Loan Forgiveness Program improve 

access to medical care for Indian and Alaska Natives by providing physicians and other health 

professionals to IHS facilities. Participants in the scholarship program commit to a term of 

employment at IHS facilities upon completion of their training. Participants in the loan 

repayment program serve at IHS facilities in exchange for loan repayment. Similarly, NHSC 

participants commit to employment at approved facilities that provide health care to underserved 

populations in exchange for scholarship funds and/or repayment of their student loans. IHS 

facilities are approved locations for NHSC participants.

Reasons for Change

The IHS Health Professions Scholarship and IHS Loan Forgiveness Program are very similar to 

other programs that receive preferred tax treatment, and therefore should receive the same tax 

treatment. 

Proposal 

The proposal would allow scholarship funds for qualified tuition and related expenses received 

under the IHS Health Professions Scholarship program to be excluded from income, even though 

recipients incur a work requirement. Furthermore, the proposal would allow participants in the 

IHS Loan Repayment Program to exclude from income student loan amounts that are forgiven 

by the IHS Loan Repayment program. The proposal would apply exclusively to the programs 

described in section 104 and 108 of the Indian Health Care Improvement Act (P.L. 94-437). The 

tax treatment of all other IHS programs would be unchanged. 
151

The proposal would be effective for tax years beginning after December 31, 2014.
152

MAKE PELL GRANTS EXCLUDABLE FROM INCOME AND FROM TAX CREDIT 

CALCULATIONS

Current Law

Pell Grants are the foundation of the Federal student aid system, and the recipients are among the 

neediest students. Yet, many families who receive Federal Pell Grants have to choose between 

paying tax on their Pell Grant and reducing their American Opportunity Tax Credit (AOTC). 

A scholarship (including a Pell Grant) is generally excluded from gross income, and so not 

taxable, to the extent it is used to pay for qualified tuition and related expenses (i.e., tuition, fees, 

and course-related expenses such as the cost of books). Scholarship money used to pay for 

living expenses, such as room and board, is not excluded from gross income, and so generally is 

taxable. 

A taxpayer who meets certain income and other eligibility requirements may claim an AOTC of 

up to $2,500 per year for qualified tuition and related expenses incurred during the first four 

years of a student’s postsecondary education. The amount of AOTC that may be claimed is 

equal to 100 percent of the first $2,000 of qualified tuition and related expenses paid plus 25

percent of the next $2,000 of qualified tuition and related expenses paid. Taxpayers with little or 

no income tax liability may claim 40 percent of the AOTC, or a maximum of $1,000, as a 

refundable credit. In addition, taxpayers who do not claim the AOTC may be eligible to claim a 

Lifetime Learning Credit (LLC) for a student in any year of postsecondary study. The LLC is 

equal to 20 percent of up to $10,000 of qualified tuition and related expenses. Qualified tuition 

and related expenses paid for a student who is claimed as a dependent on a taxpayer’s return are 

treated as paid by the taxpayer, regardless of who actually paid such expenses. The taxpayer 

must reduce qualified tuition and related expenses by the amount of any scholarship that is not 

included as gross income on a federal income tax return filed by the student. 

Many students eligible for the AOTC or the LLC are also eligible for a Pell Grant. Pell Grants 

may be used by the student to pay for qualified tuition and related expenses, as well as expenses 

that are not excludable from income, such as room and board and other living expenses. 

When preparing a tax return, a taxpayer must choose how much of his or her Pell Grant (and 

other scholarships) to treat as paying for qualified tuition and related expenses, in which case that 

portion of the Pell Grant or scholarship generally is excludable from gross income, and how 

much to treat as paying for other expenses, in which case that portion of the Pell Grant or 

scholarship generally is includable in gross income. While the portion of the Pell Grant or 

scholarship treated as paying for qualified tuition and related expenses may be excluded from 

gross income, the expenses paid for with this portion of the Pell Grant or scholarship may not be 

taken into account in claiming an education credit, e.g., the AOTC. 

The maximum Pell Grant for the 2014-2015 award year is $5,730. Students who receive a 

maximum Pell Grant and who have relatively low levels of tuition and related expenses (i.e., less 

than $5,730) may not be eligible for an AOTC unless they use some or all of their Pell Grant to 

pay for living expenses and include that portion of the Pell Grant in income. 
153

Reasons for Change

To receive the maximum AOTC without counting scholarships as income, students must have at 

least $4,000 in tuition and related expenses after subtracting the sum of all scholarships received. 

Because of the rules defining which part of scholarships are taxable and the base of the AOTC, 

students with lower levels of tuition and related fees must calculate the optimal amount of 

scholarships to include in gross income to maximize their total education benefits, i.e., the aftertax value of the Pell Grant received plus the AOTC. 

To maximize a student’s ability to receive all of the education benefits to which he or she is

entitled, the taxpayer needs to consider the amount of all of the student’s scholarship(s) and 

grants, the amount of the student’s tuition and related expenses, the amount of the student’s nonexcludable expenses, such as room and board, and the marginal tax rate of the person claiming 

the AOTC. Because of this complexity, many students and their families do not claim all of the 

tax benefits to which they may be entitled. Excluding the Pell Grant from gross income will 

simplify these calculations.

Further, even if a Pell Grant recipient is able to figure out how to maximize his or her tax 

benefits, in many cases the value of the AOTC will be reduced because the student received a 

Pell Grant. This seems inappropriate. In nearly all cases, family income for Pell Grant 

recipients is less than $60,000 and the vast majority of recipients have family income under 

$30,000. Excluding the Pell Grant from the base of the AOTC would ensure that the tax benefits 

that a student receives are not reduced by the Pell Grant. 

Proposal

Under the proposal, Pell Grants would be excludable from gross income without regard to which 

expenses they are applied, so long as the proceeds are spent in accordance with the Pell Grant 

program. For purposes of the AOTC and LLC, taxpayers would be able to treat the entire 

amount of the Pell Grant as used to pay expenses other than qualified tuition and related 

expenses. The treatment of other scholarships would not be changed.

The proposal would be effective for tax years beginning after December 31, 2014.
154

UPPER-INCOME TAX PROVISIONS

REDUCE THE VALUE OF CERTAIN TAX EXPENDITURES 

Current Law

Under current law, individual taxpayers may reduce their taxable income by excluding certain 

types or amounts of income, claiming certain deductions in the computation of adjusted gross 

income (AGI), and claiming either itemized deductions or a standard deduction. The tax 

reduction from the last dollar excluded or deducted is $1.00 times the taxpayer’s marginal 

income tax rate (e.g., if the marginal tax rate were 39.6 percent, then the tax value of the last 

dollar deducted would be 39.6 cents). 

Certain types of income are excluded permanently or deferred temporarily from income subject 

to tax. These items include interest on State or local bonds, amounts paid by employers and 

employees for employer-sponsored health coverage, contributions to health savings accounts and 

Archer MSAs, amounts paid by employees and employers for defined contribution retirement 

plans, certain premiums for health insurance for self-employed individuals, certain income 

attributable to domestic production activities, certain trade and business deductions of 

employees, moving expenses, interest on education loans, and certain higher education expenses.

Individual taxpayers may elect to itemize their deductions instead of claiming a standard 

deduction. In general, itemized deductions include medical and dental expenses (in excess of 7.5 

percent of AGI in 2014 for taxpayers age 65 or over and 10 percent of AGI for other taxpayers), 

state and local property taxes and income taxes, interest paid, gifts to charities, casualty and theft 

losses (in excess of 10 percent of AGI), job expenses and certain miscellaneous expenses (some 

only in excess of two percent of AGI). 

For higher-income taxpayers, otherwise allowable itemized deductions (other than medical 

expenses, investment interest, theft and casualty losses, and gambling losses) are reduced if AGI 

exceeds a statutory floor that is indexed annually for inflation (so called Pease limitation). 

Reasons for Change

Increasing the income tax liability of higher-income taxpayers would reduce the deficit, make the 

income tax system more progressive, and distribute the cost of government more fairly among 

taxpayers of various income levels. In particular, limiting the value of tax expenditures 

including itemized deductions, certain exclusions in income subject to tax, and certain 

deductions in the computation of AGI, would reduce the benefit that high-income taxpayers 

receive from those tax expenditures and help close the gap between the value of these tax 

expenditures for high-income Americans and the value for middle-class Americans. 

Proposal

The proposal would limit the tax value of specified deductions or exclusions from AGI and all 

itemized deductions. This limitation would reduce the value to 28 percent of the specified 
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exclusions and deductions that would otherwise reduce taxable income in the 33-percent, 35-

percent, or 39.6-percent tax brackets. A similar limitation also would apply under the alternative 

minimum tax. 

The income exclusions and deductions limited by this provision would include any tax-exempt 

state and local bond interest, employer-sponsored health insurance paid for by employers or with 

before-tax employee dollars, health insurance costs of self-employed individuals, employee 

contributions to defined contribution retirement plans and individual retirement arrangements, 

the deduction for income attributable to domestic production activities, certain trade or business 

deductions of employees, moving expenses, contributions to health savings accounts and Archer 

MSAs, and interest on education loans. 

The proposal would apply to itemized deductions after they have been reduced by the statutory 

limitation on certain itemized deductions for higher-income taxpayers. If a deduction or 

exclusion for contributions to retirement plans or individual retirement arrangements is limited 

by this proposal, then the taxpayer’s basis will be adjusted to reflect the additional tax imposed.

The proposal would be effective for taxable years beginning after December 31, 2014. 
156

IMPLEMENT THE BUFFETT RULE BY IMPOSING A NEW “FAIR SHARE TAX”

Current Law

Under current law, individual taxpayers may reduce their taxable income by excluding certain 

types or amounts of income, claiming certain deductions in the computation of adjusted gross 

income (AGI), and claiming either itemized deductions or a standard deduction. Major 

exclusions include the value of health insurance premiums paid by employers and interest on taxexempt bonds. Major itemized deductions include those for State and local taxes and for home 

mortgage interest.

Qualified dividends and long-term capital gains are taxed at a maximum rate of 23.8 percent, 

while ordinary income, including wages, is taxed at graduated rates that rise as high as 39.6 

percent. In addition, wages and self-employment earnings are subject to payroll taxes as high as

15.3 percent (7.65 percent each for employee and employer), but average and marginal payroll 

tax rates are much lower for higher-income families, because the wage base for much of the 

payroll tax is capped at $117,000 in 2014. 

Reasons for Change

Deductions can significantly reduce tax liability for high-income taxpayers. For example, under 

current law, over 10 percent of itemized deductions would accrue to the top 0.1 percent of 

families in 2014. Higher-income families also face lower payroll tax rates than do middle 

income families.

In addition, many high-income taxpayers derive large benefits from the preferentially low tax 

rates on dividends and capital gains. For example, nearly 90 percent of families in the top 0.1 

percent of the income distribution benefit from the lower tax rate on dividends and capital gains, 

compared to less than 10 percent of families in the bottom 60 percent of the income distribution. 

High-income investors, who have large amounts of dividends and capital gains, can have tax 

burdens that are much lower than those paid by equally well-off high-income workers. In 

addition, the maximum 23.8-percent tax rate on dividends and capital gains is well below the 

statutory tax rates on wages faced by many lower-income families. Consequently, a highincome taxpayer whose income is largely derived from capital gains or dividend income may 

have a lower average tax rate than a lower-income taxpayer whose income is largely or 

exclusively derived from wages.

Increasing the income tax liability of higher-income taxpayers with relatively low tax burdens 

would reduce the deficit, make the tax system more progressive, and distribute the cost of 

government more fairly among taxpayers. 

Proposal

The proposal would impose a new minimum tax, called the Fair Share Tax (FST), on highincome taxpayers. The tentative FST equals 30 percent of AGI less a credit for charitable 

contributions. The charitable credit equals 28 percent of itemized charitable contributions 
157

allowed after the overall limitation on itemized deductions (so called Pease limitation). The final 

FST is the excess, if any, of the tentative FST over the sum of the taxpayer’s (1) regular income 

tax (after certain credits) including the 3.8-percent net investment income tax, (2) the alternative 

minimum tax, and (3) the employee portion of payroll taxes. The set of certain credits subtracted 

from regular income tax excludes the foreign tax credit, the credit for tax withheld on wages, and 

the credit for certain uses of gasoline and special fuels. 

The amount of FST payable (i.e., the excess of tentative FST over regular tax) is phased in 

linearly starting at $1 million of AGI ($500,000 in the case of a married individual filing a 

separate return). The FST is fully phased in at $2 million of AGI ($1 million in the case of a 

married individual filing a separate return). For example, if a single taxpayer had AGI of $1.25 

million, tentative FST of $375,000 and regular tax of $250,000, his payable FST would be 

(($1.25 million - $1 million) / ($2 million - $1 million)) × ($375,000-$250,000) = $31,250. The 

AGI thresholds are indexed for inflation beginning after 2015.

The proposal would be effective for taxable years beginning after December 31, 2014.
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MODIFY ESTATE AND GIFT TAX PROVISIONS

RESTORE THE ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER (GST)

TAX PARAMETERS IN EFFECT IN 2009 

Current Law

The current estate, GST, and gift tax rate is 40 percent, and each individual has a lifetime 

exclusion for all three types of taxes of $5 million (indexed after 2011 for inflation from 2010). 

The surviving spouse of a person who dies after December 31, 2010, may be eligible to increase 

the surviving spouse’s exclusion amount for estate and gift tax purposes by the portion of the 

predeceased spouse’s exclusion that remained unused at the predeceased spouse’s death (in other 

words, the exclusion is “portable”). 

Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 

(EGTRRA), the maximum tax rate was 55 percent, plus a five-percent surcharge on the amount 

of the taxable estate between approximately $10 million and $17.2 million (designed to recapture 

the benefit of the lower rate brackets). The exclusion for estate and gift tax purposes was 

$675,000 and was scheduled to increase to $1 million by 2006. Under EGTRRA, beginning in 

2002, the top tax rate for all three types of taxes was reduced incrementally until it was 45 

percent in 2007. In 2004, the exemption for estate taxes (but not for gift taxes) began to increase 

incrementally until it was $3.5 million in 2009, and the GST tax exemption and rate became 

unified with the estate tax exemption and rate. During this post-EGTRRA period through 2009, 

the gift tax exemption remained $1 million. Under EGTRRA, for 2010, the estate tax was to be 

replaced with carryover basis treatment of bequests, the GST tax was to be not applicable, and 

the gift tax was to remain in effect with a $1 million exclusion and a 35-percent tax rate. The 

EGTRRA provisions were scheduled to expire at the end of 2010, meaning that the estate tax and 

GST tax would be inapplicable for only one year.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 

(TRUIRJCA) retroactively changed applicable law for 2010 by providing a top estate tax rate of 

35 percent for taxpayers electing estate tax rather than carryover-basis treatment. It retroactively 

reinstated the GST tax and unified the exemption for estate, GST, and gift taxes beginning in 

2011 with a $5 million total lifetime exclusion for all three taxes (indexed after 2011 for inflation 

from 2010). It also enacted the portability of the exemption between spouses for both gift and 

estate tax purposes. The TRUIRJCA provisions were scheduled to expire at the end of 2012.

The American Taxpayer Relief Act of 2012 (ATRA) permanently raised the top tax rate for 

estate, GST, and gift taxes to 40 percent. It also made permanent all the substantive estate, GST 

and gift tax provisions as in effect during 2012.

Reasons for Change

ATRA retained a substantial portion of the tax cut provided to the most affluent taxpayers under 

TRUIRJCA that we cannot afford to continue. We need an estate tax law that is fair and raises 

an appropriate amount of revenue.
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Proposal

Beginning in 2018, the proposal would make permanent the estate, GST, and gift tax parameters 

as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount 

would be $3.5 million for estate and GST taxes, and $1 million for gift taxes. There would be no 

indexing for inflation. The proposal would confirm that, in computing gift and estate tax 

liabilities, no estate or gift tax would be incurred by reason of decreases in the applicable 

exclusion amount with respect to a prior gift that was excluded from tax at the time of the 

transfer. Finally, the unused estate and gift tax exclusion of a decedent electing portability and 

dying on or after the effective date of the proposal would be available to the decedent’s surviving 

spouse in full on the surviving spouse’s death, but would be limited during the surviving 

spouse’s life to the amount of remaining exemption the decedent could have applied to his or her 

gifts made in the year of his or her death. 

The proposal would be effective for the estates of decedents dying, and for transfers made, after 

December 31, 2017.
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REQUIRE CONSISTENCY IN VALUE FOR TRANSFER AND INCOME TAX 

PURPOSES 

Current Law

Section 1014 provides that the basis of property acquired from a decedent generally is the fair 

market value of the property on the decedent’s date of death. Similarly, property included in the 

decedent’s gross estate for estate tax purposes generally must be valued at its fair market value 

on the date of death. Although the same valuation standard applies to both provisions, current 

law does not explicitly require that the recipient’s basis in that property be the same as the value 

reported for estate tax purposes. 

Section 1015 provides that the donee’s basis in property received by gift during the life of the 

donor generally is the donor’s adjusted basis in the property, increased by gift tax paid on the 

transfer. If, however, the donor’s basis exceeds the fair market value of the property on the date 

of the gift, the donee’s basis is limited to that fair market value for purposes of determining any 

subsequent loss. 

Section 1022, applicable to the estates of decedents dying during 2010 if a timely election to that 

effect was made, provides that the basis of property acquired from such a decedent is the lesser 

of the fair market value of the property on the decedent’s date of death, or the decedent’s 

adjusted basis in that property as increased by the additional basis (if any) allocated to that 

property by the executor under section 1022.

Section 6034A imposes a consistency requirement – specifically, that the recipient of a 

distribution of income from a trust or estate must report on the recipient’s own income tax return 

the exact information included on the Schedule K-1 of the trust’s or estate’s income tax return –

but this provision applies only for income tax purposes, and the Schedule K-1 does not include 

basis information.

Reasons for Change

Taxpayers should be required to take consistent positions in dealing with the Internal Revenue 

Service. The basis of property acquired from a decedent generally is the fair market value of the 

property on the decedent’s date of death. Consistency requires that the same value be used by 

the recipient (unless that value is in excess of the accurate value). In the case of property 

transferred on death or by gift during life, often the executor of the estate or the donor, 

respectively, will be in the best position to ensure that the recipient receives the information that 

will be necessary to accurately determine the recipient’s basis in the transferred property.

Proposal

The proposal would impose both a consistency and a reporting requirement. The basis of 

property received by reason of death under section 1014 must equal the value of that property for 

estate tax purposes. The basis of property received by gift during the life of the donor must 

equal the donor’s basis determined under section 1015. The basis of property acquired from a 
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decedent to whose estate section 1022 is applicable is the basis of that property, including any 

additional basis allocated by the executor, as reported on the Form 8939 that the executor filed. 

The proposal would require that the basis of the property in the hands of the recipient be no 

greater than the value of that property as determined for estate or gift tax purposes (subject to 

subsequent adjustments). 

A reporting requirement would be imposed on the executor of the decedent’s estate and on the 

donor of a lifetime gift to provide the necessary valuation and basis information to both the 

recipient and the Internal Revenue Service. 

A grant of regulatory authority would be included to provide details about the implementation 

and administration of these requirements, including rules for situations in which no estate tax 

return is required to be filed or gifts are excluded from gift tax under section 2503, for situations 

in which the surviving joint tenant or other recipient may have better information than the 

executor, and for the timing of the required reporting in the event of adjustments to the reported 

value subsequent to the filing of an estate or gift tax return.

The proposal would be effective for transfers after the year of enactment.
162

REQUIRE A MINIMUM TERM FOR GRANTOR RETAINED ANNUITY TRUSTS 

(GRATS) 

Current Law

Section 2702 provides that, if an interest in a trust is transferred to a family member, the value of 

any interest retained by the grantor is valued at zero for purposes of determining the transfer tax 

value of the gift to the family member(s). This rule does not apply if the retained interest is a 

“qualified interest.” A fixed annuity, such as the annuity interest retained by the grantor of a 

GRAT, is one form of qualified interest, so the value of the gift of the remainder interest in the 

GRAT is determined by deducting the present value of the retained annuity during the GRAT 

term from the fair market value of the property contributed to the trust. 

Generally, a GRAT is an irrevocable trust funded with assets expected to appreciate in value, in 

which the grantor retains an annuity interest for a term of years that the grantor expects to 

survive. At the end of that term, the assets then remaining in the trust are transferred to (or held 

in further trust for) the beneficiaries. The value of the grantor’s retained annuity is based in part 

on the applicable federal rate under section 7520 in effect for the month in which the GRAT is 

created. Therefore, to the extent the GRAT’s assets appreciate at a rate that exceeds that 

statutory interest rate, that appreciation will have been transferred to the GRAT free of gift tax. 

If the grantor dies during the GRAT term, the trust assets (at least the portion needed to produce 

the retained annuity) are included in the grantor’s gross estate for estate tax purposes. To this 

extent, although the beneficiaries will own the remaining trust assets, the estate tax benefit of 

creating the GRAT (specifically, the tax-free transfer of the appreciation during the GRAT term 

in excess of the annuity payments) is not realized.

Reasons for Change

GRATs have proven to be a popular and efficient technique for transferring wealth while 

minimizing the gift tax cost of transfers, providing that the grantor survives the GRAT term and 

the trust assets do not depreciate in value. The greater the appreciation, the greater the transfer 

tax benefit achieved. Taxpayers have become adept at maximizing the benefit of this technique, 

often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during 

the term), in many cases to two years, and by retaining annuity interests significant enough to 

reduce the gift tax value of the remainder interest to zero or to a number small enough to 

generate only a minimal gift tax liability.

Proposal

The proposal would require, in effect, some downside risk in the use of this technique by 

imposing the requirement that a GRAT have a minimum term of ten years and a maximum term 

of the life expectancy of the annuitant plus ten years. The proposal also would include a 

requirement that the remainder interest have a value greater than zero at the time the interest is 

created and would prohibit any decrease in the annuity during the GRAT term. Although a 

minimum term would not prevent “zeroing-out” the gift tax value of the remainder interest, it 
163

would increase the risk that the grantor fails to outlive the GRAT term and the resulting loss of 

any anticipated transfer tax benefit.

The proposal would apply to trusts created after the date of enactment.
164

LIMIT DURATION OF GENERATION-SKIPPING TRANSFER (GST) TAX 

EXEMPTION

Current Law

GST tax is imposed on gifts and bequests to transferees who are two or more generations 

younger than the transferor. The GST tax was enacted to prevent the avoidance of estate and gift 

taxes through the use of a trust that gives successive life interests to multiple generations of 

beneficiaries. In such a trust, no estate tax would be incurred as beneficiaries died, because their 

respective life interests would die with them and thus would cause no inclusion of the trust assets 

in the deceased beneficiary’s gross estate. The GST tax is a flat tax on the value of a transfer at 

the highest estate tax bracket applicable in that year. Each person has a lifetime GST tax 

exemption ($5.34 million in 2014) that can be allocated to transfers made, whether directly or in 

trust, by that person to a grandchild or other “skip person.” The allocation of GST exemption to 

a transfer or to a trust excludes from the GST tax not only the amount of the transfer or trust 

assets equal to the amount of GST exemption allocated, but also all appreciation and income on 

that amount during the existence of the trust.

Reasons for Change

At the time of the enactment of the GST provisions, the law of most (all but about three) states 

included the common law Rule Against Perpetuities (RAP) or some statutory version of it. The 

RAP generally requires that every trust terminate no later than 21 years after the death of a 

person who was alive (a life in being) at the time of the creation of the trust. 

Many states now either have repealed or limited the application of their RAP statutes, with the 

effect that trusts created subject to the law of those jurisdictions may continue in perpetuity. (A 

trust may be sitused anywhere; a grantor is not limited to the jurisdiction of the grantor’s 

domicile for this purpose.) As a result, the transfer tax shield provided by the GST exemption 

effectively has been expanded from trusts funded with $1 million (the exemption at the time of 

enactment of the GST tax) and a maximum duration limited by the RAP, to trusts funded with 

$5.34 million and continuing (and growing) in perpetuity. 

Proposal

The proposal would provide that, on the 90th anniversary of the creation of a trust, the GST 

exclusion allocated to the trust would terminate. Specifically, this would be achieved by 

increasing the inclusion ratio of the trust (as defined in section 2642) to one, thereby rendering 

no part of the trust exempt from GST tax. Because contributions to a trust from different 

grantors are deemed to be held in separate trusts under section 2654(b), each such separate trust 

would be subject to the same 90-year rule, measured from the date of the first contribution by the 

grantor of that separate trust. The special rule for pour-over trusts under section 2653(b)(2) 

would continue to apply to pour-over trusts and to trusts created under a decanting authority, and 

for purposes of this rule, such trusts will be deemed to have the same date of creation as the 

initial trust, with one exception, as follows. If, prior to the 90th anniversary of the trust, trust 

property is distributed to a trust for a beneficiary of the initial trust, and the distributee trust is as 
165

described in section 2642(c)(2), the inclusion ratio of the distributee trust will not be changed to 

one (with regard to the distribution from the initial trust) by reason of this rule. This exception is 

intended to permit an incapacitated beneficiary’s share to continue to be held in trust without 

incurring GST tax on distributions to that beneficiary as long as that trust is to be used for the 

sole benefit of that beneficiary and any trust balance remaining on that beneficiary’s death will 

be included in that beneficiary’s gross estate for Federal estate tax purposes. The other rules of 

section 2653 also would continue to apply, and would be relevant in determining when a taxable 

distribution or taxable termination occurs after the 90th anniversary of the trust. An express grant 

of regulatory authority would be included to facilitate the implementation and administration of 

this provision. 

The proposal would apply to trusts created after enactment, and to the portion of a pre-existing 

trust attributable to additions to such a trust made after that date (subject to rules substantially 

similar to the grandfather rules currently in effect for additions to trusts created prior to the 

effective date of the GST tax).
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COORDINATE CERTAIN INCOME AND TRANSFER TAX RULES APPLICABLE TO 

GRANTOR TRUSTS

Current Law

A grantor trust is a trust, whether revocable or irrevocable, of which an individual is treated as 

the owner for income tax purposes. For income tax purposes, a grantor trust is taxed as if the 

grantor or another person owns the trust assets directly, and the deemed owner and the trust are 

treated as the same person. Thus, transactions between the trust and the deemed owner are 

ignored. For transfer tax purposes, however, the trust and the deemed owner are separate 

persons, and under certain circumstances, the trust is not included in the deemed owner’s gross 

estate for estate tax purposes at the death of the deemed owner. 

Reasons for Change

The lack of coordination between the income and transfer tax rules applicable to a grantor trust 

creates opportunities to structure transactions between the deemed owner and the trust that can 

result in the transfer of significant wealth by the deemed owner without transfer tax 

consequences.

Proposal

If a person who is a deemed owner under the grantor trust rules of all or a portion of a trust 

engages in a transaction with that trust that constitutes a sale, exchange, or comparable 

transaction that is disregarded for income tax purposes by reason of the person’s treatment as a 

deemed owner of the trust, then the portion of the trust attributable to the property received by 

the trust in that transaction (including all retained income therefrom, appreciation thereon, and 

reinvestments thereof, net of the amount of the consideration received by the person in that 

transaction) will be subject to estate tax as part of the gross estate of the deemed owner, will be 

subject to gift tax at any time during the deemed owner’s life when his or her treatment as a 

deemed owner of the trust is terminated, and will be treated as a gift by the deemed owner to the 

extent any distribution is made to another person (except in discharge of the deemed owner’s 

obligation to the distributee) during the life of the deemed owner. The proposal would reduce 

the amount subject to transfer tax by any portion of that amount that was treated as a prior 

taxable gift by the deemed owner. The transfer tax imposed by this proposal would be payable 

from the trust.

The proposal would not change the treatment of any trust that is already includable in the 

grantor’s gross estate under existing provisions of the Internal Revenue Code, including without 

limitation the following: grantor retained income trusts; grantor retained annuity trusts; personal 

residence trusts; and qualified personal residence trusts. Similarly, it would not apply to any 

trust having the exclusive purpose of paying deferred compensation under a nonqualified 

deferred compensation plan if the assets of such trust are available to satisfy claims of general 

creditors of the grantor. It also would not apply to any irrevocable trust whose only assets 

typically consist of one or more life insurance policies on the life of the grantor and/or the 

grantor’s spouse.
167

The proposal would be effective with regard to trusts that engage in a described transaction on or 

after the date of enactment. Regulatory authority would be granted, including the ability to 

create exceptions to this provision.
168

EXTEND THE LIEN ON ESTATE TAX DEFERRALS WHERE ESTATE CONSISTS 

LARGELY OF INTEREST IN CLOSELY HELD BUSINESS

Current Law

Section 6166 of the Internal Revenue Code allows the deferral of estate tax on certain closely 

held business interests for up to fourteen years from the (unextended) due date of the estate tax 

payment (up to fifteen years and three months from date of death). This provision was enacted 

to reduce the possibility that the payment of the estate tax liability could force the sale or failure 

of the business. Section 6324(a)(1) imposes a lien on estate assets generally for the ten-year 

period immediately following the decedent’s death to secure the full payment of the estate tax. 

Thus, the estate tax lien under section 6324(a)(1) expires approximately five years before the due 

date of the final payment of the deferred estate tax under section 6166. 

Reasons for Change

In many cases, the Internal Revenue Service (IRS) has had difficulty collecting the deferred 

estate tax, often because of business failures during that tax deferral period. The IRS sometimes 

requires either an additional lien or some form of security, but these security interests generally 

are prohibitively expensive and damaging to the day-to-day conduct and financing of the 

business. In addition, unless these other security measures are put in place toward the beginning 

of the deferral period, there is a risk that other creditors could have a higher priority interest than 

the Government. This proposal is expected to substantially eliminate the need for IRS to 

determine whether and when additional security is needed, and the significant burdens on the 

closely held business from having to provide such additional security.

Proposal

The proposal would extend the estate tax lien under section 6324(a)(1) throughout the section 

6166 deferral period.

The proposal would be effective for the estates of all decedents dying on or after the date of 

enactment, as well as for all estates of decedents dying before the date of enactment as to which 

the section 6324(a)(1) lien has not then expired.
169

MODIFY GENERATION-SKIPPING TRANSFER (GST) TAX TREATMENT OF 

HEALTH AND EDUCATION EXCLUSION TRUSTS (HEETS)

Current Law

Payments made by a donor directly to the provider of medical care for another person or directly 

to a school for another person’s tuition are exempt from gift tax under section 2503(e). For 

purposes of the GST tax, section 2611(b)(1) excludes “any transfer which, if made during the 

donor’s life, would not be treated as a taxable gift by reason of section 2503(e).” Thus, direct 

payments made during life by an older generation donor for the payment of these qualifying 

expenses for a younger generation beneficiary are exempt from both gift and GST taxes. 

Reasons for Change

Some taxpayers have interpreted the language of section 2611(b)(1) as permitting the avoidance 

of GST tax through the use of a trust known as a HEET. A HEET provides for the medical 

expenses and tuition of multiple generations of descendants. Taxpayers using this technique take 

the position that section 2611(b)(1) exempts these trust distributions from GST tax (generally, in 

perpetuity) because the distributions are used for the payment of medical care expenses and 

tuition. The substantial amounts contributed to HEETs will appreciate in these trusts, and 

taxpayers claim that no estate, gift, or GST tax will ever be incurred after the initial funding of 

these trusts.

The intent of section 2611(b)(1) is to exempt from GST tax only those payments that are not 

subject to gift tax, that is, payments made by a living donor directly to the provider of medical 

care for another person or directly to a school for another person’s tuition. 

Proposal

The proposal would provide that the exclusion from the definition of a GST under section 

2611(b)(1) applies only to a payment by a donor directly to the provider of medical care or to the 

school in payment of tuition and not to trust distributions, even if for those same purposes. 

The proposal would apply to trusts created after the introduction of the bill proposing this 

change, and to transfers after that date made to pre-existing trusts.
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SIMPLIFY GIFT TAX EXCLUSION FOR ANNUAL GIFTS 

Current Law

The first $14,000 of gifts made to each donee in 2014 is excluded from the donor’s taxable gifts 

(and therefore does not use up any of the donor’s applicable exclusion amount for gift and estate 

tax purposes). This annual gift tax exclusion is indexed for inflation and there is no limit on the 

number of donees to whom such excluded gifts may be made by a donor in any one year. To 

qualify for this exclusion, each gift must be of a present interest rather than a future interest in 

the donated property. For these purposes, a present interest is an unrestricted right to the 

immediate use, possession, or enjoyment of property or the income from property (including life 

estates and term interests). Generally, a contribution to a trust for the donee is a future interest.

The Ninth Circuit held in Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968), that a transfer to a 

trust that otherwise would be a gift of a future interest can qualify as a present interest if the 

beneficiary (or the beneficiary’s legal representative) has the unrestricted right to withdraw the 

contribution from the trust, even if such withdrawal right exists for only a limited period of time 

and thereafter lapses if not exercised. Short-term withdrawal rights are thus called “Crummey

powers.”

Reasons for Change

To take advantage of this annual gift tax exclusion without having to transfer the property 

outright to the donee, a donor often contributes property to a trust and gives each trust 

beneficiary (donee) a Crummey power. Crummey powers are widely used, particularly in 

irrevocable trusts to hold property for the benefit of minor children. 

In order for a Crummey power to convert a donor’s transfer into the gift of a present interest, the 

trustee of the recipient trust must timely notify each beneficiary of the existence and scope of his 

or her right to withdraw funds from the trust. If the appropriate records cannot be produced at 

the time of any gift or estate tax audit of the grantor, the gift tax exclusion may be denied to the 

grantor, thereby causing retroactive changes in the grantor’s tax liabilities and remaining 

applicable exclusion amount. Because of the common use of these withdrawal powers, the 

number of beneficiaries typically involved, and the differing terms of each such withdrawal 

power, the cost to taxpayers of complying with the Crummey rules is significant, as is the cost to 

Internal Revenue Service (IRS) of enforcing the rules. 

In addition, the IRS is concerned about the lack of a limit on the number of beneficiaries to 

whom Crummey powers are given. The IRS’s concern has been that Crummey powers could be 

given to multiple discretionary beneficiaries, most of whom would never receive a distribution 

from the trust, and thereby inappropriately exclude from gift tax a large total amount of 

contributions to the trust. (For example, a power could be given to each beneficiary of a 

discretionary trust for the grantor’s descendants and friendly accommodation parties in the hope 

that the accommodation parties will not exercise their Crummey powers.) The IRS has sought 

(unsuccessfully) to limit the number of available Crummey powers by requiring each powerholder to have some meaningful vested economic interest in the trust over which the power 
171

extends. See Estate of Cristofani v. Comm’r, 97 T.C. 74 (1991); Kohlsaat v. Comm’r, 73 TCM 

2732 (1997). 

Proposal

The proposal would eliminate the present interest requirement for gifts that qualify for the gift 

tax annual exclusion. Instead, the proposal would define a new category of transfers (without 

regard to the existence of any withdrawal or put rights), and would impose an annual limit of 

$50,000 per donor on the donor’s transfers of property within this new category that will qualify 

for the gift tax annual exclusion. Thus, a donor’s transfers in the new category in a single year in 

excess of a total amount of $50,000 would be taxable, even if the total gifts to each individual 

donee did not exceed $14,000. The new category would include transfers in trust (other than to a 

trust described in section 2642(c)(2)), transfers of interests in passthrough entities, transfers of 

interests subject to a prohibition on sale, and other transfers of property that, without regard to 

withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the 

donee. 

The proposal would be effective for gifts made after the year of enactment. 
172

EXPAND APPLICABILITY OF DEFINITION OF EXECUTOR 

Current Law

The Internal Revenue Code defines “executor” for purposes of the estate tax to be the person 

who is appointed, qualified, and acting within the United States as executor or administrator of 

the decedent’s estate or, if none, then “any person in actual or constructive possession of any 

property of the decedent.” This could include, for example, the trustee of the decedent’s 

revocable trust, an IRA or life insurance beneficiary, or a surviving joint tenant of jointly owned 

property. 

Reasons for Change

Because the tax code’s definition of executor currently applies only for purposes of the estate 

tax, no one (including the decedent’s surviving spouse who filed a joint income tax return) has 

the authority to act on behalf of the decedent with regard to a tax liability that arose prior to the 

decedent’s death. Thus, there is no one with authority to extend the statute of limitations, claim a 

refund, agree to a compromise or assessment, or pursue judicial relief in connection with the 

decedent’s share of a tax liability. This problem has started to arise with more frequency, as 

reporting obligations, particularly with regard to an interest in a foreign asset or account, have 

increased, and survivors have attempted to resolve a decedent’s failure to comply.

In addition, in the absence of an appointed executor, multiple persons may meet the definition of 

“executor” and, on occasion, more than one of them has each filed a separate estate tax return for 

the decedent’s estate or made conflicting tax elections. 

Proposal

To empower an authorized party to act on behalf of the decedent in all matters relating to the 

decedent’s tax liability, the proposal would expressly make the tax code’s definition of executor 

applicable for all tax purposes, and authorize such executor to do anything on behalf of the 

decedent in connection with the decedent’s pre-death tax liabilities or obligations that the 

decedent could have done if still living. In addition, the proposal would grant regulatory 

authority to adopt rules to resolve conflicts among multiple executors authorized by this 

provision.

The proposal would apply upon enactment, regardless of a decedent’s date of death.
173

REFORM TREATMENT OF FINANCIAL INDUSTRY INSTITUTIONS 

AND PRODUCTS

IMPOSE A FINANCIAL CRISIS RESPONSIBILITY FEE

Current Law 

There is no sector-specific Federal tax applied to financial firms (although these firms are subject 

to the general corporate income tax and potentially a wide range of excise taxes). Financial 

sector firms are subject to a range of fees, depending on the lines of business in which they 

participate. For example, banks are assessed fees by the Federal Deposit Insurance Corporation 

to cover the costs of insuring deposits made at these institutions.

Reasons for Change

Excessive risk undertaken by major financial firms was a significant cause of the recent financial 

crisis. Extraordinary steps were taken by the Federal government to inject funds into the 

financial system, guarantee certain types of securities, and purchase securities from weakened 

firms. The law that enabled some of these actions and that created the Troubled Asset Relief 

Program (TARP) requires the President to propose an assessment on the financial sector to pay 

back the costs of these extraordinary actions. Accordingly, the Financial Crisis Responsibility 

Fee is intended to recoup the costs of the TARP program as well as discourage excessive risktaking, as the combination of high levels of risky assets and less stable sources of funding were 

key contributors to the financial crisis. The structure of this fee would be broadly consistent with 

the principles agreed to by the G-20 leaders and similar to fees that have been adopted or 

proposed by other countries.

Proposal

The Financial Crisis Responsibility Fee would be assessed on certain liabilities of the largest 

firms in the financial sector. Specific components of the proposal are described below.

Firms Subject to the Fee: The fee would apply to U.S.-based bank holding companies, thrift 

holding companies, certain broker-dealers, companies that control certain broker-dealers, and 

insured depository institutions. U.S. companies owning or controlling these types of entities as 

of January 14, 2010 also would be subject to the fee. Firms with worldwide consolidated assets 

of less than $50 billion would not be subject to the fee for the period when their assets are below 

this threshold. U.S. subsidiaries of foreign firms that fall into these categories and that have 

assets in excess of $50 billion also would be covered. 

Base of Fee: The fee would be based on the covered liabilities of a financial firm. Covered 

liabilities are generally the consolidated risk-weighted assets of a financial firm, less its capital, 

insured deposits, and certain loans to small business. These would be computed using 

information filed with the appropriate Federal or State regulators. For insurance companies, 
174

certain policy reserves and other policyholder obligations also would be deducted in computing 

covered liabilities. In addition, adjustments would be provided to prevent avoidance.

Fee Rates: The rate of the fee applied to covered liabilities would be 17 basis points. A 50-

percent discount would apply to more stable sources of funding, including long-term liabilities.

Deductibility: The fee would be deductible in computing corporate income tax.

Filing and Payment Requirements: A financial entity subject to the fee would report it on its 

annual Federal income tax return. Estimated payments of the fee would be made on the same 

schedule as estimated income tax payments.

The fee would be effective as of January 1, 2016.
175

REQUIRE CURRENT INCLUSION IN INCOME OF ACCRUED MARKET DISCOUNT 

AND LIMIT THE ACCRUAL AMOUNT FOR DISTRESSED DEBT

Current Law

Market discount is generally the difference between a bond’s acquisition price and its stated 

redemption price at maturity. In most instances, market discount arises when a bond is 

purchased in the secondary market for a price less than its principal amount (or its adjusted issue 

price in the case of a bond originally issued at a discount). Market discount is generally created 

when interest rates increase after a bond is issued, the creditworthiness of the issuer declines, or 

both of these events occur.

Market discount that accrues while a taxpayer holds a bond is treated as ordinary income, and 

taxed when the bond matures or the taxpayer otherwise disposes of it. The amount of accrued 

market discount treated as ordinary income is limited to the amount of gain recognized on the 

disposition of the bond. A partial principal payment on a bond also causes accrued market 

discount to be recognized. Market discount accrues on a ratable basis unless the taxpayer elects 

to accrue on the basis of a constant interest rate. 

Reasons for Change

Market discount generated by a change in interest rates, or by a decrease in an issuer’s 

creditworthiness, is economically similar to original issue discount (OID). Unlike market 

discount, however, OID is includible in income of the holder currently using a constant interest 

rate. Given the economic similarities between market discount and OID, the tax treatment 

should also be aligned.

Including market discount in income annually has previously been complicated by the fact that 

each purchaser of debt may have an amount of market discount that differs from other purchasers 

because the debt will be purchased at different times and for different prices. Moreover, 

historically market discount has not been reportable by brokers. New information reporting 

rules, however, will require that market discount be reported along with basis and other 

information with respect to a debt instrument. Once information reporting for debt instruments 

goes into effect, market discount will be reported to holders on their annual information returns. 

Proposal

The proposal would require taxpayers to take accrued market discount into income currently, in 

the same manner as OID. To prevent over-accrual of market discount on distressed debt, the 

accrual would be limited to the greater of (1) an amount equal to the bond’s yield to maturity at 

issuance plus five percentage points, or (2) an amount equal to the applicable federal rate plus 10 

percentage points. 

The proposal would apply to debt securities acquired after December 31, 2014. 
176

REQUIRE THAT THE COST BASIS OF STOCK THAT IS A COVERED SECURITY

MUST BE DETERMINED USING AN AVERAGE BASIS METHOD

Current Law

Gain or loss generally is recognized for Federal income tax purposes when it is realized 

(typically, when property is sold). A taxpayer’s gain or loss on the disposition of property is the 

difference between the amount realized and the property’s adjusted basis. To compute adjusted 

basis, a taxpayer first determines the property’s unadjusted or original basis and then makes any 

adjustments prescribed by the Internal Revenue Code (Code). The original basis of property is 

its cost, except as otherwise determined under the Code (for example, in the case of property 

acquired by gift or bequest or in a tax-free exchange). 

When a taxpayer sells or otherwise disposes of identical shares of stock that have different cost 

basis, current regulations permit the taxpayer to identify the specific shares of stock sold. This 

“specific identification” method allows a taxpayer to determine the amount of gain or loss to 

recognize on the disposition by choosing among identical shares of stock with different cost 

bases. 

Reasons for Change

The use of specific identification allows taxpayers to manipulate recognition of gain or loss on 

fungible shares of portfolio stock. Once portfolio stock has acquired a long-term holding period, 

it becomes economically indistinguishable from other identical shares held long term by the 

taxpayer, and it should be treated accordingly for tax purposes. 

Proposal

The proposal would require the use of average basis for all identical shares of portfolio stock 

held by a taxpayer that have a long-term holding period. Thus, the provision would require that 

the cost of any portfolio stock sold, exchanged, or otherwise disposed of be determined in 

accordance with the average basis method now permitted for regulated investment company 

stock. The provision would apply to all identical shares of portfolio stock held by the taxpayer, 

including identical shares of portfolio stock held by the taxpayer in separate accounts with the 

same broker or with different brokers. Shares held by a taxpayer in a nontaxable account, 

however, such as an individual retirement account, would not be subject to the requirement to 

use average basis. The statute would provide the Secretary with authority to draft regulations 

applying the average basis method to stock other than portfolio stock. Special rules may also be 

required to coordinate the average basis method with the rules applicable to stock in a passive 

foreign investment company. 

The proposal would apply to portfolio stock acquired on or after January 1, 2015. 
177

LOOPHOLE CLOSERS

TAX CARRIED (PROFITS) INTERESTS AS ORDINARY INCOME 

Current Law

A partnership is not subject to Federal income tax. Instead, an item of income or loss of the 

partnership retains its character and flows through to the partners, who must include such item on 

their tax returns. Generally, certain partners receive partnership interests in exchange for 

contributions of cash and/or property, while certain partners (not necessarily other partners) 

receive partnership interests, typically interests in future profits (“profits interests” or “carried 

interests”), in exchange for services. Accordingly, if and to the extent a partnership recognizes 

long-term capital gain, the partners, including partners who provide services, will reflect their 

shares of such gain on their tax returns as long-term capital gain. If the partner is an individual, 

such gain would be taxed at the reduced rates for long-term capital gains. Gain recognized on 

the sale of a partnership interest, whether it was received in exchange for property, cash, or 

services, is generally treated as capital gain. 

Under current law, income attributable to a profits interest of a general partner is generally 

subject to self-employment tax, except to the extent the partnership generates types of income 

that are excluded from self-employment taxes, e.g., capital gains, certain interest, and dividends. 

Reasons for Change

Although profits interests are structured as partnership interests, the income allocable to such 

interests is received in connection with the performance of services. A service provider’s share 

of the income of a partnership attributable to a carried interest should be taxed as ordinary 

income and subject to self-employment tax because such income is derived from the 

performance of services. By allowing service partners to receive capital gains treatment on labor 

income without limit, the current system creates an unfair and inefficient tax preference. The 

recent explosion of activity among large private equity firms and hedge funds has increased the 

breadth and cost of this tax preference, with some of the highest-income Americans benefiting 

from the preferential treatment. 

Proposal 

The proposal would tax as ordinary income a partner’s share of income on an “investment 

services partnership interest” (ISPI) in an investment partnership, regardless of the character of 

the income at the partnership level. Accordingly, such income would not be eligible for the 

reduced rates that apply to long-term capital gains. In addition, the proposal would require the 

partner to pay self-employment taxes on such income. In order to prevent income derived from 

labor services from avoiding taxation at ordinary income rates, this proposal assumes that the 

gain recognized on the sale of an ISPI would generally be taxed as ordinary income, not as 

capital gain. To ensure more consistent treatment with the sales of other types of businesses, the 

Administration remains committed to working with Congress to develop mechanisms to assure 
178

the proper amount of income recharacterization where the business has goodwill or other assets 

unrelated to the services of the ISPI holder.

An ISPI is a carried interest in an investment partnership that is held by a person who provides 

services to the partnership. A partnership is an investment partnership if substantially all of its 

assets are investment-type assets (certain securities, real estate, interests in partnerships, 

commodities, cash or cash equivalents, or derivative contracts with respect to those assets), but 

only if over half of the partnership’s contributed capital is from partners in whose hands the 

interests constitute property not held in connection with a trade or business. To the extent (1) the 

partner who holds an ISPI contributes “invested capital” (which is generally money or other 

property) to the partnership, and (2) such partner’s invested capital is a qualified capital interest 

(which generally requires that (a) the partnership allocations to the invested capital be in a same 

manner as allocations to other capital interests held by partners who do not hold an ISPI and (b) 

the allocations to these non-ISPI holders are significant), income attributable to the invested 

capital would not be recharacterized. Similarly, the portion of any gain recognized on the sale of 

an ISPI that is attributable to the invested capital would be treated as capital gain. However, 

“invested capital” will not include contributed capital that is attributable to the proceeds of any 

loan or other advance made or guaranteed by any partner or the partnership.

Also, any person who performs services for an entity and holds a “disqualified interest” in the 

entity is subject to tax at rates applicable to ordinary income on any income or gain received with 

respect to the interest. A “disqualified interest” is defined as convertible or contingent debt, an 

option, or any derivative instrument with respect to the entity (but does not include a partnership 

interest, stock in certain taxable corporations, or stock in an S corporation). This is an anti-abuse 

rule designed to prevent the avoidance of the proposal through the use of compensatory 

arrangements other than partnership interests. Other anti-abuse rules may be necessary. 

The proposal is not intended to adversely affect qualification of a real estate investment trust 

owning a carried interest in a real estate partnership. 

The proposal would be effective for taxable years ending after December 31, 2014.
179

REQUIRE NON-SPOUSE BENEFICIARIES OF DECEASED INDIVIDUAL 

RETIREMENT ACCOUNT OR ANNUITY (IRA) OWNERS AND RETIREMENT PLAN 

PARTICIPANTS TO TAKE INHERITED DISTRIBUTIONS OVER NO MORE THAN 

FIVE YEARS

Current Law

Minimum distribution rules apply to employer sponsored tax-favored retirement plans and to 

individual retirement arrangements. In general, under these rules, distributions must begin no 

later than the required beginning date and a minimum amount must be distributed each year. For 

traditional IRAs, the required beginning date is April 1 following the calendar year in which the 

IRA owner attains age 701⁄2. For employer-sponsored tax-favored retirement plans, the required 

beginning date for a participant who is not a five-percent owner is April 1 after the later of the 

calendar year in which the participant attains age 701⁄2 or retires. Under a defined contribution 

plan or IRA, the minimum amount required to be distributed is based on the joint life expectancy 

of the participant or employee and a designated beneficiary (who is generally assumed to be 10 

years younger), calculated at the end of each year.

Minimum distribution rules also apply to balances remaining after a plan participant or IRA 

owner has died. The after-death rules vary depending on (1) whether a participant or IRA owner 

dies on or after the required beginning date or before the required beginning date, and (2) 

whether there is an individual designated as a beneficiary under the plan. The rules also vary 

depending on whether the participant’s or IRA owner’s spouse is the sole designated beneficiary.

If a plan participant or IRA owner dies on or after the required beginning date and there is a nonspouse individual designated as beneficiary, the distribution period is the beneficiary’s life 

expectancy, calculated in the year after the year of death. The distribution period for later years 

is determined by subtracting one year from the initial distribution period for each year that 

elapses. If there is no individual designated as beneficiary, the distribution period is equal to the 

expected remaining years of the participant’s or IRA owner’s life, calculated as of the year of 

death.

If a participant or IRA owner dies before the required beginning date and any portion of the 

benefit is payable to a non-spouse designated beneficiary, distributions must either begin within 

one year of the participant’s or IRA owner’s death and be paid over the life or life expectancy of 

the designated beneficiary or be paid entirely by the end of the fifth year after the year of death. 

If the designated beneficiary dies during the distribution period, distributions continue to any 

subsequent beneficiaries over the remaining years in the distribution period.

If a participant or IRA owner dies before the required beginning date and there is no individual 

designated as beneficiary, then the entire remaining interest of the participant or IRA owner must 

generally be distributed by the end of the fifth year following the individual’s death.

The minimum distribution rules do not apply to Roth IRAs during the life of the account owner, 

but do apply to balances remaining after the death of the owner.
180

Reasons for Change

The Internal Revenue Code gives tax preferences for retirement savings accounts primarily to 

provide retirement security for individuals and their spouses. The preferences were not created 

with the intent of providing tax preferences to the non-spouse heirs of individuals. Because the 

beneficiary of an inherited account can be much younger than a plan participant or IRA owner, 

the current rules allowing such a beneficiary to stretch the receipt of distributions over many 

years permit the beneficiary to enjoy tax-favored accumulation of earnings over long periods of 

time.

Proposal

Under the proposal, non-spouse beneficiaries of retirement plans and IRAs would generally be 

required to take distributions over no more than five years. Exceptions would be provided for 

eligible beneficiaries.

Eligible beneficiaries include any beneficiary who, as of the date of death, is disabled, a 

chronically ill individual, an individual who is not more than 10 years younger than the 

participant or IRA owner, or a child who has not reached the age of majority. For these 

beneficiaries, distributions would be allowed over the life or life expectancy of the beneficiary 

beginning in the year following the year of the death of the participant or owner. However, in 

the case of a child, the account would need to be fully distributed no later than five years after 

the child reaches the age of majority.

Any balance remaining after the death of a beneficiary (including an eligible beneficiary 

excepted from the five-year rule or a spouse beneficiary) would be required to be distributed by 

the end of the calendar year that includes the fifth anniversary of the beneficiary’s death. 

The proposal is effective for distributions with respect to plan participants or IRA owners who 

die after December 31, 2014. The requirement that any balance remaining after the death of a 

beneficiary be distributed by the end of the calendar year that includes the fifth anniversary of 

the beneficiary’s death would also apply to participants or IRA owners who die before January 1, 

2014, but only if the beneficiary dies after December 31, 2014. The proposal would not apply in 

the case of a participant whose benefits are determined under a binding annuity contract in effect 

on the date of enactment. 
181

LIMIT THE TOTAL ACCRUAL OF TAX-FAVORED RETIREMENT BENEFITS

Current Law

Under current law, the maximum benefit permitted to be paid under a qualified defined benefit 

plan in 2014 is generally $210,000 per year and is adjusted for increases in the cost of living. 

The maximum benefit limit is reduced if distributions begin before age 62 and is increased if 

distributions begin after age 65. The maximum benefit is also adjusted if it is paid in a form 

other than a straight life annuity or a qualified joint and survivor annuity.

 

For a defined contribution plan, current law limits the amount of annual contributions or other 

additions to the account and applies a separate limit to elective deferrals made by taxpayers to 

the plan, but does not limit the amount that can be accumulated within the account. For 2014, 

the annual contribution limit is $52,000, and the elective deferral limit is $17,500. Each of these 

limits is adjusted for increases in the cost of living, and each limit is increased by $5,500 for 

taxpayers who are 50 or over. Similarly, current law limits the amount of the annual contribution 

to an individual retirement account or annuity (IRA), but does not limit the amount that can be 

accumulated within the IRA. The annual contribution limit for 2014 is $5,500 (adjusted for 

changes in the cost of living) with an additional $1,000 for taxpayers who are 50 or over.

While the limitations on the extent to which a taxpayer can make contributions to an IRA are 

applied based on aggregating all of the taxpayer’s IRAs, the limitations on accruals under 

defined benefit plans and the limitations on contributions under defined contribution plans are 

not applied by aggregating all such arrangements. Instead, the aggregation is applied solely for 

multiple plans sponsored by the same employer or related employers, and for this purpose 

defined benefit plans are not aggregated with defined contribution plans. (Under a combined 

limit that was in effect from 1976 to 1996, an individual’s projected benefits under defined 

benefit plans were combined with the individual’s cumulative contributions under defined 

contribution plans maintained by the same employer). Furthermore, there is no aggregation for 

plans that are sponsored by unrelated employers and no coordination between the contribution 

limits that apply to IRAs and the limits that apply to plans. However, the Tax Reform Act of 

1986 imposed an excise tax on excess distributions (and accumulations remaining at death in 

excess of approximately $1 million) from (or accumulated in) all qualified plans in which a 

taxpayer participated (including both defined contribution and defined benefit plans and both 

related and unrelated employers) and all of the taxpayer’s IRAs. The excise tax was repealed in 

1997.

Under current law, the annual limit on elective deferrals for a plan also serves as an overall limit 

on elective deferrals for a taxpayer who participates in 401(k) plans sponsored by unrelated 

employers. If a taxpayer’s aggregate elective deferrals for a year exceed the limit for the year, 

the taxpayer must include the excess in income for the year of the excess deferral. A grace 

period is provided to allow taxpayers the opportunity to remove the excess deferrals. If the 

taxpayer fails to avail himself of this grace period and leaves the excess deferrals in the 401(k) 

account, then the excess deferrals and attributable earnings will be subject to income tax when 

distributed, without any adjustment for basis (and without regard to whether the distribution is 

made from a designated Roth account within a plan).
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Reasons for Change

The current law limitations on retirement contributions and benefits for each plan in which a 

taxpayer may participate do not adequately limit the extent to which a taxpayer can accumulate 

amounts in a tax-favored arrangement through the use of multiple plans. Such accumulations 

can be considerably in excess of amounts needed to fund reasonable levels of consumption in 

retirement and are well beyond the level of accumulation that justifies tax-advantaged treatment 

of retirement savings accounts. Requiring a taxpayer who, in the aggregate, has accumulated 

very large amounts within the tax-favored retirement system to discontinue adding to those 

accumulations would reduce the deficit, make the income tax system more progressive, and 

distribute the cost of government more fairly among taxpayers of various income levels, while 

still providing substantial tax incentives for reasonable levels of retirement saving. 

Proposal

A taxpayer who has accumulated amounts within the tax-favored retirement system (i.e., IRAs, 

section 401(a) plans, section 403(b) plans, and funded section 457(b) arrangements maintained 

by governmental entities) in excess of the amount necessary to provide the maximum annuity 

permitted for a tax-qualified defined benefit plan under current law (currently an annual benefit 

of $210,000) payable in the form of a joint and 100-percent survivor benefit commencing at age 

62 and continuing each year for the life of the participant and, if longer, the life of a spouse, 

assumed to be of the same age would be prohibited from making additional contributions or 

receiving additional accruals under any of those arrangements. Currently, the maximum 

permitted accumulation for an individual age 62 is approximately $3.2 million.

The limitation would be determined as of the end of a calendar year and would apply to 

contributions or accruals for the following calendar year. Plan sponsors and IRA trustees would 

report each participant’s account balance as of the end of the year as well as the amount of any 

contribution to that account for the plan year. For a taxpayer who is under age 62, the 

accumulated account balance would be converted to an annuity payable at 62, in the form of a 

100-percent joint and survivor benefit using the actuarial assumptions that apply to converting 

between annuities and lump sums under defined benefit plans. For a taxpayer who is older than 

age 62, the accumulated account balance would be converted to an annuity payable in the same 

form, where actuarial equivalence is determined by treating the individual as if he or she was still 

62. In either case, the maximum permitted accumulation would continue to be adjusted for cost 

of living increases. Plan sponsors of defined benefit plans would generally report the amount of 

the accrued benefit and the accrual for the year, payable in the same form. Regulations would 

provide for simplified reporting for defined benefit plans. As one example, a sponsor of a cash 

balance plan would be permitted to treat a participant’s hypothetical account balance under the 

plan as an accumulated account balance under a defined contribution plan for purposes of 

reporting under this provision. It is anticipated that other simplifications would be considered in 

order to ease administration.

If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals 

would be permitted, but the taxpayer’s account balance could continue to grow with investment 

earnings and gains. If a taxpayer’s investment return for a year was less than the rate of return 
183

built into the actuarial equivalence calculation (so that the updated calculation of the equivalent 

annuity is less than the maximum annuity for a tax-qualified defined benefit plan), there would 

be room to make additional contributions. In addition, when the maximum defined benefit level 

increases as a result of the cost-of-living adjustment, the maximum permitted accumulation will 

automatically increase as well. This also could allow a resumption of contributions for a 

taxpayer who previously was subject to a suspension of contributions by reason of the overall 

limitation.

If a taxpayer received a contribution or an accrual that would result in an accumulation in excess 

of the maximum permitted amount, the excess would be treated in a manner similar to the 

treatment of an excess deferral under current law. Thus, the taxpayer would have to include the 

amount of the resulting excess accumulation in current income and would be allowed a grace 

period during which the taxpayer could withdraw the excess from the account or plan in order to 

comply with the limit. If the taxpayer did not withdraw the excess contribution (or excess 

accrual), then the excess amounts and attributable earnings would be subject to income tax when 

distributed, without any adjustment for basis (and without regard to whether the distribution is 

made from a Roth IRA or a designated Roth account within a plan). 

The proposal would be effective with respect to contributions and accruals for taxable years 

beginning after December 31, 2014.
184

CONFORM SELF-EMPLOYMENT CONTRIBUTIONS ACT (SECA) TAXES FOR 

PROFESSIONAL SERVICE BUSINESSES

Current Law

Social Security and Medicare benefits are financed via taxes on wages and self-employment 

earnings. Wages are subject to Federal Insurance Contribution Act (FICA) taxes while 

individuals’ self-employment earnings are subject to SECA taxes. Both FICA taxes and SECA 

taxes apply in full (at a 15.3-percent rate) to employment earnings up to a threshold (e.g., 

$117,000 in 2014) and at a reduced rate of 2.9 percent on employment earnings above that 

threshold. The tax on employment earnings above the threshold is devoted to funding Medicare. 

The Affordable Care Act (ACA) imposed an additional 0.9-percent Medicare tax on wages and 

self-employment earnings of high income taxpayers.

General partners and sole proprietors typically pay SECA taxes on the full amount of their net 

trade or business income. Limited partners pay SECA taxes only on the fairly narrow category 

of payments from the partnership that are for services provided and that are determined without 

regard to the income of the partnership. The application of SECA taxes to members of most 

limited liability companies (LLCs) is unclear because LLC members are neither general partners 

nor limited partners under state law. S corporation shareholders are not subject to SECA taxes. 

Instead, they are subject to FICA taxes on wages paid for services like any other employee. 

Nonwage distributions to employee-shareholders of S corporations are not subject to either FICA 

or SECA taxes, although the Internal Revenue Service (IRS) may reclassify such distributions as 

wages to the extent that any wages paid do not represent reasonable compensation for services 

provided by the employee-shareholder. 

The ACA imposed a 3.8-percent net investment income tax (NIIT) for certain high income 

earners. The NIIT applies to investment income of individuals whose income exceeds a

threshold, including passive income from partnerships and S corporations. The distributive share 

of trade or business income of active S corporation owners and active partners generally is not 

subject to the 3.8-percent NIIT. 

Reasons for Change

The taxation of employment income earned by owners of pass-through entities is outdated, 

unfair, and inefficient. It treats business owners differently according to the legal form of their 

ownership and the legal form of the payment that they receive. In part, this is a hold-over from 

earlier years when limited partners were prohibited by state law from holding managerial roles in 

their firms and LLCs did not exist. The differential treatment distorts choice of organizational 

form and provides tax planning opportunities for business owners, e.g., by some S corporation

owners who receive substantial income in the form of distributions rather than as wages. As a 

result of these differences, some business owners pay employment taxes on nearly all their 

earnings (general partners and sole proprietors), other similarly situated owners pay employment 

taxes on only a portion of their earnings (S corporation owner-employees), and others pay little 

employment tax at all (limited partners and many LLC members). Thus, many owners of pass-
185

through entities successfully avoid payroll tax on income that is equivalent to self-employment 

earnings and that would be subject to employment taxes if the business had a different legal 

structure. 

High income owners of most businesses are subject either to the NIIT or to FICA/SECA on 

income from that business. However, active owners of S corporations and partnerships are not 

subject to the NIIT on their shares of income from those entities. Because active S corporation 

owners and certain active partners are not subject to SECA, high income owners of businesses 

conducted in these forms may be subject to neither the NIIT nor FICA/SECA taxes. Conforming 

SECA taxes for professional service businesses will close this unintended gap between the 

application of the NIIT and FICA/SECA taxes for such businesses.

The current system is also a challenge for the IRS to administer. The determination of 

“reasonable compensation” of S corporation owners generally depends on facts and 

circumstances and requires a valuation analysis, so this requirement is difficult for the IRS to 

enforce. The uncertainty surrounding the treatment of LLC members undermines the IRS’s

ability to ensure payment of SECA. As a result, small business owners’ avoidance of

employment taxes presents a serious enforcement challenge for the IRS.

The problems in appropriately subjecting the income earned by owners of pass-through 

businesses to employment taxes seems most obvious and most severe where the income derives 

primarily from services provided by these owners. 

Proposal

Individual owners of professional service businesses organized as S corporations, limited 

partnerships, general partnerships, and LLCs taxed as partnerships would all be treated as subject 

to SECA taxes in the same manner and to the same degree. Owners providing services who 

materially participate would be subject to SECA taxes on their distributive shares of partnership 

(or LLC or S corporation) income. The exemptions provided under current law for certain types 

of partnership income (e.g., rents, dividends, capital gains, and certain retired partner income) 

would apply to professional service business organized as S corporations and LLC, in addition to 

those organized as partnerships. Owners who do not materially participate would be subject to 

SECA taxes only on an amount of income equal to reasonable compensation, if any, for services 

provided to the business. (“Reasonable compensation” would be as large as any guaranteed 

payments received from the business for their services.) Distributions of compensation to 

owners of professional service S corporations would no longer be treated as wages subject to 

FICA taxes but would be included in earnings subject to SECA taxes. 

Material participation standards would apply to individuals who participate in a business in 

which they have a direct or indirect ownership interest. Taxpayers are generally considered to 

materially participate in a business if they are involved in a regular, continuous, and substantial 

way. Often this means they work for the business for at least 500 hours per year. Material 

participation would generally be determined as under the passive activity loss rules and 

associated regulations, except that the limited partner exception would not apply in the SECA 

context. 
186

“Professional service businesses” would be defined as partnerships, S corporations, or other 

entities taxed as partnerships substantially all the activities of which involve the performance of

services in the fields of health, law, engineering, architecture, accounting, actuarial science, 

performing arts, and consulting (fields similar to those referenced in sec. 448(d)(2)(A)), as well 

as athletics, investment advice or management, brokerage services, and lobbying. 

Treasury would have authority to issue regulations to implement the legislation. 

This proposal would be effective for taxable years beginning after December 31, 2014.
187

OTHER REVENUE RAISERS

INCREASE OIL SPILL LIABILITY TRUST FUND FINANCING RATE BY ONE CENT 

AND UPDATE THE LAW TO INCLUDE OTHER SOURCES OF CRUDES

Current Law

An excise tax is imposed on: (1) crude oil received at a U.S. refinery; (2) imported petroleum 

products (including crude oil) entered into the United States for consumption, use, or 

warehousing; and (3) any domestically produced crude oil that is used (other than on the 

premises where produced for extracting oil or natural gas) in or exported from the United States 

if, before such use or exportation, no taxes were imposed on the crude oil. The tax is eight cents 

per barrel for periods before January 1, 2017, and nine cents per barrel for periods after 

December 31, 2016. Crudes such as those that are produced from bituminous deposits as well as 

kerogen-rich rock are not treated as crude oil or petroleum products for purposes of the tax. The 

tax is deposited in the Oil Spill Liability Trust Fund to pay costs associated with oil removal and 

damages resulting from oil spills, as well as to provide annual funding to certain agencies for a 

wide range of oil pollution prevention and response programs, including research and 

development. In the case of an oil spill, the fund makes it possible for the Federal government to 

pay for removal costs up front, and then seek full reimbursement from the responsible parties. 

Reasons for Change

The Deepwater Horizon oil spill was the worst oil spill in American history, releasing nearly five

million barrels of oil into the Gulf of Mexico, and led to the nation’s largest oil spill response. 

The magnitude of the Federal response reinforced the importance of the Oil Spill Liability Trust 

Fund and the need to maintain a sufficient balance, particularly in order to accommodate spills of 

national significance. In addition to increasing the rate of tax, it is appropriate to extend the tax 

to other sources of crudes that present environmental risks comparable to those associated with 

crude oil and petroleum products.

Proposal

The proposal would increase the rate of the Oil Spill Liability Trust Fund tax to nine cents per 

barrel for periods after December 31, 2014, and to 10 cents per barrel for periods after December 

31, 2016. In addition, the proposal would extend the tax to crudes such as those produced from

bituminous deposits as well as kerogen-rich rock. The Superfund tax, which would be reinstated 

under a proposal discussed elsewhere in this volume, would also be imposed on these substances. 

The tax would be imposed at the applicable rate on such crudes received at a U.S. refinery, 

entered into the United States, or used or exported as described above after December 31, 2014.
188

Reinstate Superfund Taxes

REINSTATE AND EXTEND SUPERFUND EXCISE TAXES

Current Law

The following Superfund excise taxes were imposed before January 1, 1996:

(1) An excise tax on domestic crude oil and on imported petroleum products at a rate of 9.7 cents 

per barrel;

(2) An excise tax on listed hazardous chemicals at a rate that varied from 22 cents to $4.87 per 

ton; and

(3) An excise tax on imported substances that use as materials in their manufacture or production 

one or more of the hazardous chemicals subject to the excise tax described in (2) above.

Amounts equivalent to the revenues from these taxes were dedicated to the Hazardous Substance 

Superfund Trust Fund (the Superfund Trust Fund). Amounts in the Superfund Trust Fund are 

available for expenditures incurred in connection with releases or threats of releases of hazardous 

substances into the environment under specified provisions of the Comprehensive Environmental 

Response, Compensation, and Liability Act of 1980 (as amended). 

Reasons for Change

The Superfund excise taxes should be reinstated because of the continuing need for funds to 

remedy damages caused by releases of hazardous substances. In addition, it is appropriate to 

extend the tax to other crudes such as those produced from bituminous deposits as well as 

kerogen-rich rock.

Proposal

The proposal would reinstate the three Superfund excise taxes for periods after December 31, 

2014 and before January 1, 2025. In addition, the proposal would extend the excise tax on 

domestic crude oil and imported petroleum products to other crudes such as those produced from 

bituminous deposits as well as kerogen-rich rock. Under a proposal discussed elsewhere in this 

volume, the Oil Spill Liability Trust Fund tax would also be imposed on these substances.
189

REINSTATE SUPERFUND ENVIRONMENTAL INCOME TAX

Current Law

For taxable years beginning before January 1, 1996, a corporate environmental income tax was 

imposed at a rate of 0.12 percent on the amount by which the modified alternative minimum 

taxable income of a corporation exceeded $2 million. Modified alternative minimum taxable 

income was defined as a corporation's alternative minimum taxable income, determined without 

regard to the alternative tax net operating loss deduction and the deduction for the corporate 

environmental income tax.

The tax was dedicated to the Hazardous Substance Superfund Trust Fund (the Superfund Trust 

Fund). Amounts in the Superfund Trust Fund are available for expenditures incurred in 

connection with releases or threats of releases of hazardous substances into the environment 

under specified provisions of the Comprehensive Environmental Response, Compensation, and 

Liability Act of 1980 (as amended). 

Reasons for Change

The corporate environmental income tax should be reinstated because of the continuing need for 

funds to remedy damages caused by releases of hazardous substances where no viable, liable 

party has been identified.

Proposal

The proposal would reinstate the corporate environmental income tax for taxable years beginning 

after December 31, 2014 and before January 1, 2025.
190

INCREASE TOBACCO TAXES AND INDEX FOR INFLATION

Current Law 

Tobacco products are taxed at rates set in 2009 as part of the Children’s Health Insurance 

Program Reauthorization Act. These rates impose a tax of $50.33 per 1,000 cigarettes (or just 

over $1.00 per pack), as well as taxes on other tobacco products. These tax rates are not indexed 

for inflation. 

Reasons for Change

Despite strong evidence of the negative health effects of tobacco use more than 14 billion packs 

of cigarettes were sold in the U.S in 2011. The Centers for Disease Control estimates that there 

are roughly 443,000 smoking related deaths annually and 8.6 million individuals suffer from 

smoking-related illnesses each year. Excise taxes, levied on manufacturers and importers of 

tobacco products, are one of the main ways that policymakers can affect tobacco production and 

consumption. Studies have shown that these taxes can decrease harmful consumption and 

improve health substantially. Taxes on tobacco products are also a relatively efficient way to 

generate revenue for important national priorities, such as providing high-quality preschool. 

Proposal

The proposal would increase the tax on cigarettes from just under $1.01 per pack to about $1.95 

per pack and increase all other excise taxes on tobacco products and cigarette papers and tubes 

by roughly the same proportion beginning in 2015. Excise tax rates would be increased for 

inflation annually.

The proposal includes a one-time floor stocks tax that generally applies to tobacco products,

cigarette papers, and tubes that are held for sale on January 1, 2015. Because large cigars are 

taxed as a percentage of price, rather than per cigar, administering a floor tax on them would be 

difficult, so large cigars are exempted from the floor tax. No other tobacco products are 

exempted from the floor tax. The floor stocks tax is payable on or before April 1, 2015. 

The Administration also proposes to clarify that roll-your-own tobacco includes any processed 

tobacco that is removed or transferred for delivery to anyone without a proper permit, but does 

not include export shipments of processed tobacco. 

The proposal would be effective for articles removed after December 31, 2014. 
191

MAKE UNEMPLOYMENT INSURANCE SURTAX PERMANENT

Current Law

The Federal Unemployment Tax Act (FUTA) currently imposes a Federal payroll tax on 

employers of 6.0 percent of the first $7,000 paid annually to each employee. The tax funds a 

portion of the Federal/State unemployment benefits system. States also impose an 

unemployment tax on employers. Employers in States that meet certain Federal requirements are 

allowed a credit for State unemployment taxes of up to 5.4 percent, making the minimum net 

Federal tax rate 0.6 percent. Generally, Federal and State unemployment taxes are collected 

quarterly and deposited in Federal trust fund accounts.

Before July 1, 2011, the Federal payroll tax had included a temporary surtax of 0.2 percent, 

which was added to the permanent FUTA tax rate. The surtax had been extended several times

since its enactment in 1976, but it expired on July 1, 2011.

Reasons for Change

Reinstating the surtax will support the continued solvency of the Federal unemployment trust 

funds.

Proposal

The proposal would reinstate the 0.2-percent surtax and make it permanent.

The proposal would be effective for wages paid on or after January 1, 2015.
192

PROVIDE SHORT-TERM TAX RELIEF TO EMPLOYERS AND EXPAND FEDERAL 

UNEMPLOYMENT TAX ACT (FUTA) BASE

Current Law

The FUTA currently imposes a Federal payroll tax on employers of 6.0 percent of the first 

$7,000 paid annually to each employee. Generally, these funds support the administrative costs 

of the unemployment insurance (UI) benefits system. Employers in States that meet certain 

Federal requirements are allowed a credit against FUTA taxes of up to 5.4 percent, making the 

minimum net Federal rate 0.6 percent. States that become non-compliant are subject to a 

reduction in FUTA credit, causing employers to face a higher Federal UI tax.

Each State also imposes an unemployment insurance tax on employers to fund its State UI trust 

fund. State UI trust funds are used to pay unemployment benefits. When State trust funds are 

exhausted, States borrow from the Federal UI trust fund to pay for unemployment 

benefits. States that borrow from the Federal UI trust fund are required to pay back the borrowed 

amount including interest. This debt is partly repaid by increases in the Federal UI tax 

(reductions in the credit) on employers in these States.

Reasons for Change

In aggregate, States entered the last recession with extremely low levels of reserves in their trust 

funds. Partly because of this, States have accrued large amounts of debt to the Federal UI trust 

fund. Employers in indebted States face immediate tax increases to repay these debts. These tax 

increases may discourage job creation at a time when growth is needed. At the same time, many 

States do not have a long-term plan to restore solvency to their trust funds. Short-term relief 

from State debt burdens coupled with longer-term increases in States’ minimum taxable wage 

base will encourage economic growth and lead many States to more rapidly repay the debts they 

owe, restoring solvency to the UI system. 

Proposal

The proposal would provide short-term relief to employers by suspending interest payments on 

State UI debt and suspending the FUTA credit reduction for employers in borrowing States in 

2014 and 2015. The proposal would also raise the FUTA wage base in 2017 to $15,000 per 

worker paid annually, index the wage base to wage growth for subsequent years, and reduce the 

net Federal UI tax from 0.8 percent (after the proposed permanent reenactment and extension of 

the FUTA surtax) to 0.37 percent. States with wage bases below $15,000 would need to 

conform to the new FUTA base. States would maintain the ability to set their own tax rates, as 

under current law.

The proposal would be effective upon the date of enactment.
193

Enhance and Modify the Conservation Easement Deduction

ENHANCE AND MAKE PERMANENT INCENTIVES FOR THE DONATION OF 

CONSERVATION EASEMENTS

Current Law

A deduction is generally available for charitable contributions of cash and property to certain 

tax-exempt organizations. A donor must generally contribute his or her entire interest in donated 

property to take a deduction; donations of partial interests (i.e., only some of the owner’s 

property rights) are generally not deductible. However, under a special provision, a donor may 

deduct the fair market value of a qualified conservation contribution – including a contribution of 

a restriction granted in perpetuity on the use of real property made to a qualified charitable 

organization exclusively for conservation purposes (a “conservation easement”). This deduction 

is generally limited to a certain percentage of a taxpayer’s income. For individual taxpayers, the 

deduction is limited to 30 percent of the individual’s contribution base (generally, adjusted gross 

income) in the year of the contribution. If the value of the property contributed exceeds this 

limitation, the individual may deduct the remaining value over the succeeding five years. For 

corporate taxpayers, the deduction is limited to 10 percent of their taxable income. 

The Pension Protection Act of 2006 temporarily raised the percentage-of-income limitations for 

gifts of conservation easements made after December 31, 2005, allowing individuals to deduct 

up to 50 percent of their contribution base and allowing individuals who are qualified farmers 

and ranchers to deduct up to 100 percent of their contribution base. In addition, certain corporate 

farmers and ranchers could deduct the value of contributions of property used in agriculture or 

livestock production (and restricted so as to remain available for such production) up to 100 

percent of taxable income. Additionally, all of these donors could deduct any remaining value of 

the donated easement over the succeeding 15 years. Although these provisions were extended

three times, they lapsed on December 31, 2013.

Reasons for Change

A deduction is permitted for contributions of conservation easements to encourage land owners 

to restrict development of their land, thereby preserving fragile ecosystems and wildlife habitats, 

environmentally important open spaces, public recreational areas, and historic buildings. 

Because conservation easements may significantly reduce the value of the underlying land 

interests, economic incentives are needed to encourage landowners to voluntarily restrict 

development. 

The current tax deduction for conservation easement donations has been an important incentive 

for conservation, but it has been of limited value to some donors. Although these donors may 

own very valuable property, if they have relatively modest incomes, then the current percentage 

of income limitations and five-year carryforward provision limit their ability to deduct the full 

value of their conservation easement donations. The proposal would expand the ability of 

conservation easement donors – particularly qualified farmers and ranchers – to deduct the full 

value of the property contributed, increasing the effectiveness of this conservation incentive. 
194

Proposal

This proposal would make permanent the temporary enhanced incentives for conservation 

easement contributions that expired on December 31, 2013.

This proposal would be effective for contributions made on and after January 1, 2014. 
195

ELIMINATE THE DEDUCTION FOR CONTRIBUTIONS OF CONSERVATION 

EASEMENTS ON GOLF COURSES

Current Law

A deduction is generally available for charitable contributions of cash and property. This 

deduction is limited - or disallowed entirely - for certain types of hard-to-value property. In 

general, no charitable deduction is allowed for a contribution of a partial interest in property. An 

exception to this rule provides that a donor may deduct the value of a conservation easement (a 

partial interest) that is donated to a qualified charitable organization exclusively for conservation 

purposes. The value of the deduction for any contribution that produces a return benefit to the 

donor must be reduced by the value of the benefit received. 

Reasons for Change

Recent court decisions have upheld large deductions taken for contributions of easements 

preserving recreational amenities, including golf courses, surrounded by upscale, private home 

sites. These contributions have raised concerns both that the deduction amounts claimed for 

such easements (often by the developers of the private home sites) are excessive, and also that 

the conservation easement deduction is not narrowly tailored to promote only bona fide 

conservation activities, as opposed to the private interests of donors. These concerns are 

particularly strong in the case of the deduction for contributions of easements on golf courses. 

The benefit of an easement on a private golf course, especially one that is part of a luxury 

housing development, may accrue to a limited number of users such as members of the course 

club or the owners of the surrounding homes, not the general public, and the construction and 

operation of the course may even result in environmental degradation. Easements on golf 

courses are particularly susceptible to overvaluation, as private interests often profit from the 

contribution of the easement. Because of the difficulty determining both the value of the 

easement and the value of the return benefits provided to the donor – including indirect benefits, 

such as the increase in the value of home sites surrounding the golf course – it is difficult and 

costly for the Internal Revenue Service to challenge inflated golf course easement deductions. 

Thus, to promote the kinds of public benefits intended by the charitable deduction provision and 

to prevent abuses, no charitable deduction should be allowed for contributions of easements on 

golf courses. 

Proposal

The proposal would amend the charitable contribution deduction provision to prohibit a 

deduction for any contribution of a partial interest in property that is, or is intended to be, used as 

a golf course. 

The proposal would be effective for contributions made after the date of enactment.
196

RESTRICT DEDUCTIONS AND HARMONIZE THE RULES FOR CONTRIBUTIONS 

OF CONSERVATION EASEMENTS FOR HISTORIC PRESERVATION

Current Law

A deduction is generally available for charitable contributions of cash and property. The value 

of the deduction for any contribution resulting in a return benefit to the donor is reduced by the 

value of the benefit received. The charitable deduction is limited - or disallowed entirely - for 

certain types of hard-to-value property. In general, no charitable deduction is allowed for a 

contribution of a partial interest in property. An exception to this rule allows a donor to deduct 

the value of a conservation easement (a partial interest) that is donated to a qualified charitable 

organization exclusively for conservation purposes, including for the preservation of certain 

certified historic structures. To qualify as a certified historic structure, a building must either be 

located in a registered historic district or be listed in the National Register of Historic Places. A 

2006 amendment to the Internal Revenue Code added several special rules, including additional 

substantiation rules, for contributions of easements protecting the exterior of buildings located in 

registered historic districts. These rules do not apply to buildings listed in the National Register. 

Reasons for Change

Concerns have been raised that the deduction amounts claimed for historic preservation 

easements are excessive and may not appropriately take into account existing limitations on the 

property. Because it can be difficult to determine the fair market value of such easements 

directly, the value of the deduction is generally determined by assessing the drop in the value of 

the property caused by the imposition of the easement. The value of the easement may be zero if 

it does not restrict future development more than the restrictions already imposed on the 

building, for example, by local zoning or historic preservation authorities. Some taxpayers, 

however, have taken large deductions for contributions of easements restricting the upward 

development of historic urban buildings even though such development was already restricted by 

local authorities. Because of the difficulty of determining the value of the contributed easement, 

it is difficult and costly for the Internal Revenue Service to challenge deductions for historic 

preservation easements. To prevent abuses, no deduction should be allowed for the value 

associated with forgone upward development above an historic building. 

In addition, to maintain consistency, the special rules applicable to buildings in registered 

historic districts should be extended to apply to buildings listed in the National Register. 

Proposal

The proposal would disallow a deduction for any value of an historic preservation easement 

associated with forgone upward development above an historic building. It would also require 

contributions of conservation easements on buildings listed in the National Register to comply 

with the same special rules currently applicable to buildings in a registered historic district.

The proposal would be effective for contributions made after the date of enactment.
197

ELIMINATE DEDUCTION FOR DIVIDENDS ON STOCK OF PUBLICLY-TRADED 

CORPORATIONS HELD IN EMPLOYEE STOCK OWNERSHIP PLANS

Current Law

Generally, corporations do not receive an income tax deduction for dividends paid to their 

shareholders. However, a deduction for dividends paid with respect to employer stock held in an 

employee stock ownership plan (ESOP) is allowed if certain conditions are met. The deduction 

is available even if the ESOP is merely an “ESOP account” that is one of the investment options 

available to employees under a section 401(k) plan (which holds salary reduction contributions 

elected by employees and, often, contributions that match those elective contributions). In 

addition, the special deduction is available regardless of the extent of the ESOP’s ownership 

interest in the corporation. 

To be deductible, the dividend paid must be an “applicable dividend.” A dividend qualifies as an 

applicable dividend only if the dividend is paid or used in accordance with one of four available 

alternatives. Specifically, a dividend qualifies as an applicable dividend if the dividend is (i) 

paid directly to the plan’s participants or their beneficiaries, (ii) paid to the plan and distributed 

to participants or their beneficiaries not later than 90 days after the end of the plan year, or (iii) at 

the election of the participants or their beneficiaries, could be paid either as described in (i) or 

(ii). Additionally, a dividend qualifies as an applicable dividend if it is used to repay a loan 

originally used to purchase the stock with respect to which the dividend is paid. For this 

purpose, the dividend qualifies as an applicable dividend only to the extent that employer 

securities with a fair market value of not less than the amount of the dividend are allocated to the 

accounts to which the dividend would have been allocated. The limitation on deductibility of 

dividends used to repay loans to those paid with respect to stock acquired with those loans does 

not apply to employer securities acquired by an ESOP prior to August 4, 1989 (if the plan was an 

ESOP prior to that date).

A deduction for a dividend that otherwise qualifies as an applicable dividend may be disallowed 

if the Secretary determines that the dividend is, in substance, an “avoidance or evasion” of 

taxation. This includes authority to disallow a deduction of unreasonable dividends, which has 

been used to recharacterize excess dividends as contributions subject to the limit on annual 

additions under section 415. Thus, the authority to disallow a deduction for a dividend serves 

not only to disallow the deduction but also to constrain any dividend that, in substance, 

constitutes an employer contribution to the ESOP in excess of the otherwise applicable limit on 

annual additions.

When distributed to participants or their beneficiaries, either directly or from the plan, applicable 

dividends constitute taxable plan distributions (ordinary income) but are not subject to the 10-

percent early distribution tax. Applicable dividends are not treated as wages for purposes of 

income tax withholding or federal employment taxes.
198

Reasons for Change

Current law extends several tax benefits to ESOPs that are in addition to those applicable to other 

tax-qualified retirement plans. The ESOP dividend deduction is one of these benefits. Thus, 

while current law generally does not allow a paying corporation a deduction for dividends paid 

with respect to its stock, including stock that is held in a retirement plan, the deduction for 

dividends on employer stock held in an ESOP is an exception to this rule. The difference in 

treatment creates an additional incentive for employers to encourage investment in employer 

stock through ESOPs. However, concentration of employees’ retirement savings in the stock of 

the employees’ employer entails a risk that poor corporate performance or other factors will lead 

to a loss in value of the stock and hence of employees’ retirement savings (which is the same risk 

that could also affect their job security) without necessarily offering a commensurate return. 

Providing special tax benefits for ESOPs, including the tax deduction for current payments of 

dividends to ESOP participants, has been justified as encouraging employee ownership, which in 

turn has been viewed as having a productivity incentive effect, but this effect is more likely for 

employers that have a significant degree of employee ownership, where there may be a greater 

possibility that the benefits of any such incentives could justify the risks associated with the 

concentration of retirement savings in employer stock. Ownership of stock of a publicly traded 

corporation through an ESOP seems unlikely to offer significant productivity incentives to 

employees because their aggregate ownership interests in the corporation are more likely to be 

small relative to the ownership interests of public shareholders. Instead, in the context of 

publicly held corporations, the special dividend deduction for stock held in ESOPs has frequently 

served to encourage 401(k) plan sponsors to amend an existing employer stock fund investment 

option in a 401(k) plan to constitute an ESOP in order to benefit from the dividend deduction 

without significant changes in the character of the account or the extent of employee ownership. 

By eliminating the ESOP dividend deduction for dividends on employer stock of a publicly 

traded corporation held in an ESOP, the proposal seeks to strike a balance between the 

competing policy considerations. 

Proposal

The proposal would repeal the deduction for dividends paid with respect to employer stock held 

by an ESOP that is sponsored by a publicly traded corporation. Rules allowing for immediate 

payment of an applicable dividend would continue as would rules permitting the use of an 

applicable dividend to repay a loan used to purchase the stock of the publicly traded corporation. 

The Secretary would continue to have authority to disallow an unreasonable dividend or 

distribution (as described in section 1368(a)) for this purpose.

The proposal would apply to dividends and distributions that are paid after the date of enactment.
199

REDUCE THE TAX GAP AND MAKE REFORMS

Expand Information Reporting

REQUIRE INFORMATION REPORTING FOR PRIVATE SEPARATE ACCOUNTS OF 

LIFE INSURANCE COMPANIES

Current Law

Earnings from direct investment in securities generally result in taxable income to the holder. In 

contrast, investments in comparable assets through a separate account of a life insurance 

company generally give rise to tax-free or tax-deferred income. This favorable tax treatment for 

investing through a life insurance company is not available if the policyholder has so much 

control over the investments in the separate account that the policyholder, rather than the 

insurance company, is treated as the owner of those investments.

Reasons for Change

In some cases, private separate accounts are being used to avoid tax that would be due if the 

assets were held directly. Better reporting of investments in private separate accounts will help 

the Internal Revenue Service (IRS) to ensure that income is properly reported. Moreover, such 

reporting will enable the IRS to identify more easily which variable insurance contracts qualify 

as insurance contracts under current law and which contracts should be disregarded under the 

investor control doctrine.

Proposal

The proposal would require life insurance companies to report to the IRS, for each contract 

whose cash value is partially or wholly invested in a private separate account for any portion of 

the taxable year and represents at least 10 percent of the value of the account, the policyholder’s 

taxpayer identification number, the policy number, the amount of accumulated untaxed income, 

the total contract account value, and the portion of that value that was invested in one or more 

private separate accounts. For this purpose, a private separate account would be defined as any 

account with respect to which a related group of persons owns policies whose cash values, in the 

aggregate, represent at least 10 percent of the value of the separate account. Whether a related 

group of persons owns policies whose cash values represent at least 10 percent of the value of 

the account would be determined quarterly, based on information reasonably within the issuer's 

possession.

The proposal would be effective for taxable years beginning after December 31, 2014.
200

REQUIRE A CERTIFIED TAXPAYER IDENTIFICATION NUMBER (TIN) FROM 

CONTRACTORS AND ALLOW CERTAIN WITHHOLDING

Current Law

In the course of a trade or business, service recipients (“businesses”) making payments 

aggregating to $600 or more in a calendar year to any non-employee service provider 

(“contractor”) that is not a corporation are required to send an information return to the Internal 

Revenue Service (IRS) setting forth the amount, as well as name, address, and TIN of the 

contractor. The information returns, required annually after the end of the year, are made on 

Form 1099-MISC based on identifying information furnished by the contractor but not verified 

by the IRS. Copies are provided both to the contractor and to the IRS. Withholding is not 

required or permitted for payments to contractors. Since contractors are not subject to 

withholding, they may be required to make quarterly payments of estimated income taxes and 

self-employment (SECA) taxes near the end of each calendar quarter. The contractor is required 

to pay any balance due when the annual income tax return is subsequently filed. 

Reasons for Change

Without accurate taxpayer identifying information, information reporting requirements impose 

avoidable burdens on businesses and the IRS, and cannot reach their potential to improve 

compliance.

Estimated tax filing is relatively burdensome, especially for less sophisticated and lower-income 

taxpayers. Moreover, by the time estimated tax payments (or final tax payments) are due, some 

contractors will not have put aside the necessary funds. Given that the SECA tax rate is 15.3 

percent (up to certain income limits), the required estimated tax payments can be more than 25 

percent of a contractor’s gross receipts, even for a contractor with modest income. 

An optional withholding method for contractors would reduce the burdens of having to make 

quarterly payments, would help contractors automatically set aside funds for tax payments, and 

would help increase compliance.

Proposal

The proposal would require a contractor receiving payments of $600 or more in a calendar year 

from a particular business to furnish to the business (on Form W-9) the contractor’s certified 

TIN. A business would be required to verify the contractor’s TIN with the IRS, which would be 

authorized to disclose, solely for this purpose, whether the certified TIN-name combination 

matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business 

would be required to withhold a flat-rate percentage of gross payments. Contractors receiving 

payments of $600 or more in a calendar year from a particular business could require the 

business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage 

of 15, 25, 30, or 35 percent being selected by the contractor. 

The proposal would be effective for payments made to contractors after December 31, 2014.
201

MODIFY REPORTING OF TUITION EXPENSES AND SCHOLARSHIPS ON FORM 

1098-T

Current Law 

Form 1098-T is used to verify education spending for education-related tax benefits. Eligible 

institutions of higher learning are required to file each year an information return (Form 1098-T) 

for each enrolled student for whom a reportable transaction is made. An eligible educational 

institution is a college, university, vocational school, or other postsecondary educational 

institution that is described in section 481 of the Higher Education Act of 1965 as in effect on 

August 5, 1997, and that is eligible to participate in the Department of Education's student aid 

programs. This includes most accredited public, nonprofit, and private postsecondary 

institutions.

When filing the Form 1098-T, institutions have the choice of reporting payments received for 

qualified tuition and related expenses (Box 1) or amounts billed for qualified tuition and related 

expenses (Box 2) in a given tax year. The eligible educational institution must use the same 

reporting method for all calendar years unless the Internal Revenue Service (IRS) grants 

permission to change the reporting method. Qualified tuition and related expenses are tuition, 

fees, and course materials required for a student to be enrolled at or attend an eligible educational 

institution. 

Institutions of higher education are also required to report scholarships and grants (Box 5) that 

they administer or distribute (for instance Pell grants). Other entities that provide scholarships 

and grants are not required to file Form 1098-T to report these amounts to students or to the IRS. 

Scholarships and grants that are used to pay for tuition and fees, books, supplies, and equipment 

are not taxable if the student is a degree candidate. Other uses of scholarships and grants, 

including room and board and travel, are taxable for degree candidates. (Scholarship and grants 

are taxable for all uses for non-degree students.) Only education spending net of scholarships 

and grants qualifies for education tax credits.

Reasons for Change

 

Currently, Form 1098-T may not provide all the information that taxpayers need to claim an 

education tax credit or to properly report taxable scholarship income. Among institutions that 

file Form 1098-T, many report amounts billed. However only amounts paid in a given tax year 

qualify for a tax credit in that tax year. (Amounts billed will not qualify for the credits if the 

amount was paid in a different tax year.) Scholarships that are paid directly to students rather 

than administered by schools are not reported on Form 1098-T to students or to the IRS. 

Requiring institutions of higher learning to report amounts paid and requiring reporting of all 

scholarships will assist taxpayers in preparing their returns and allow IRS to monitor and 

improve compliance.
202

Proposal

The proposal would require institutions of higher learning to report amounts paid and not 

amounts billed on the Form 1098-T. 

The proposal would also require any entity issuing a scholarship or grant in excess of $500 that

is not processed or administered by an institution of higher learning to report the scholarship or 

grant on Form 1098-T. The threshold amount is indexed for inflation after 2015. Institutions of 

higher learning would continue to report the scholarship and grants that they process or 

administer.

The proposal would be effective for tax years beginning after December 31, 2014. 
203

PROVIDE FOR RECIPROCAL REPORTING OF INFORMATION IN CONNECTION 

WITH THE IMPLEMENTATION OF THE FOREIGN ACCOUNT TAX COMPLIANCE

ACT

Current Law

Under current law, U.S. source interest paid to a nonresident alien individual on deposits 

maintained at U.S. offices of certain financial institutions must be reported to the IRS if the 

aggregate amount of interest paid during the calendar year is 10 dollars or more. Withholding 

agents, including financial institutions, also are required to report other payments such as U.S. 

source dividends, royalties, and annuities paid to any foreign recipient. 

The Foreign Account Tax Compliance Act (FATCA) provisions of the Hiring Incentives to 

Restore Employment Act of 2010 generally require foreign financial institutions, in order to 

avoid the imposition of a new U.S. withholding tax, to report to the IRS comprehensive 

information about U.S. account holders of financial accounts. For example, FATCA requires 

foreign financial institutions to report account balances, as well as amounts such as dividends, 

interest, and gross proceeds paid or credited to a U.S. account without regard to the source of 

such payments. With respect to accounts held by certain passive foreign entities, FATCA 

requires the reporting of information about any substantial U.S. owners of the entity. Under 

FATCA and the Treasury regulations issued thereunder, foreign financial institutions generally 

include foreign depository institutions, custodial institutions, investment entities, and insurance 

companies that issue cash value insurance. Financial accounts are generally defined as accounts 

maintained by a financial institution, including, in the case of investment entities, certain debt or 

equity interests in the investment entity that are not publicly traded. 

Reasons for Change

The United States has established a broad network of information exchange relationships with 

other jurisdictions based on established international standards. The information obtained 

through those information exchange relationships has been central to recent successful IRS 

enforcement efforts against offshore tax evasion. The success of those information exchange 

relationships depends, however, on cooperation and reciprocity. A jurisdiction’s willingness to 

share information with the United States often depends on the United States’ willingness and 

ability to reciprocate by exchanging comparable information.

The ability to exchange information reciprocally is particularly important in connection with the 

implementation of FATCA. In many cases, foreign law would prevent foreign financial 

institutions from complying with the FATCA reporting provisions. Such legal impediments can 

be addressed through intergovernmental agreements under which the foreign government agrees 

to provide the information required by FATCA to the IRS. Requiring financial institutions in the 

United States to report to the IRS the comprehensive information required under FATCA with 

respect to accounts held by certain foreign persons, or by certain passive entities with substantial 

foreign owners, would facilitate the intergovernmental cooperation contemplated by the 

intergovernmental agreements by enabling the IRS to provide equivalent levels of information to 
204

cooperative foreign governments in appropriate circumstances to support their efforts to address 

tax evasion by their residents. 

Proposal

The proposal would require certain financial institutions to report the account balance (including, 

in the case of a cash value insurance contract or annuity contract, the cash value or surrender 

value) for all financial accounts maintained at a U.S. office and held by foreign persons. The 

proposal also would expand the current reporting required with respect to U.S. source income 

paid to accounts held by foreign persons to include similar non-U.S. source payments. Finally, 

the Secretary would be granted authority to issue Treasury regulations to require financial 

institutions to report the gross proceeds from the sale or redemption of property held in, or with 

respect to, a financial account, information with respect to financial accounts held by certain 

passive entities with substantial foreign owners, and such other information that the Secretary or 

his delegate determines is necessary to carry out the purposes of the proposal. 

The proposal would be effective for returns required to be filed after December 31, 2015.
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Improve Compliance by Businesses

REQUIRE GREATER ELECTRONIC FILING OF RETURNS

Current Law

Corporations that have assets of $10 million or more and file at least 250 returns during a 

calendar year, including income tax, information, excise tax, and employment tax returns, are 

required to file electronically their Form 1120/1120S income tax returns. In addition, 

partnerships with more than 100 partners are required to file electronically, regardless of how 

many returns they file. Taxpayers may request waivers of the electronic filing requirement if 

they cannot meet that requirement due to technological constraints, or if compliance with the 

requirement would result in undue financial burden on the taxpayer. Although electronic filing 

is required of certain corporations and other taxpayers, others may voluntarily file electronic 

returns. 

Generally, regulations may require businesses that file at least 250 returns annually to file 

electronically. Before requiring electronic filing, the Internal Revenue Service (IRS) and 

Treasury Department are required to take into account the ability of taxpayers to comply at a 

reasonable cost. 

Reasons for Change

Electronic filing supports the broader goals of improving IRS service to taxpayers, enhancing 

compliance, and modernizing tax administration. Typically, compliance increases when 

taxpayers are required to provide information to the IRS in a usable form. Expanding electronic 

filing will help provide tax return information in a more uniform electronic form, which will 

enhance the ability of the IRS to more productively focus its audit activities. This can reduce 

burdens on businesses where the need for an audit can be avoided. Overall, increased electronic 

filing of returns may improve customer satisfaction and confidence in the filing process.

Furthermore, requiring electronic filing of returns is unlikely to impose a large burden on 

business taxpayers. Corporations and partnerships generally maintain financial records in 

electronic form, and generally either hire tax professionals who use tax preparation software or 

use tax preparation software themselves. Electronic filing may prove more cost effective for 

many affected businesses.

Proposal

The proposal would require all corporations and partnerships with $10 million or more in assets 

to file their tax returns electronically. In addition, regardless of asset size, corporations with 

more than ten shareholders and partnerships with more than ten partners would be required to 

file their tax returns electronically. Regulatory authority would be expanded to allow reduction 

of the 250-return threshold in the case of information returns such as Forms 1042-S, 1099, 1098, 

1096, 5498, 8805, and 8966. Any new regulations would be required to balance the benefits of 

electronic filing against any burden that might be imposed on taxpayers, and implementation 
206

would take place incrementally to afford adequate time for transition to electronic filing. 

Taxpayers would be able to request waivers of this requirement if they cannot meet the 

requirement due to technological constraints, if compliance with the requirement would result in 

undue financial burden, or as otherwise specified in regulations. 

The proposal would be effective for taxable years ending after December 31, 2014.
207

IMPLEMENT STANDARDS CLARIFYING WHEN EMPLOYEE LEASING 

COMPANIES CAN BE HELD LIABLE FOR THEIR CLIENTS’ FEDERAL 

EMPLOYMENT TAXES 

Current Law

Employers are required to withhold and pay Federal Insurance Contribution Act taxes and to 

withhold and remit income taxes, and are required to pay Federal Unemployment Tax Act taxes 

(collectively “Federal employment taxes”) with respect to wages paid to their employees. 

Liability for Federal employment taxes generally lies with the taxpayer that is determined to be 

the employer under a multi-factor common law test or under specific statutory provisions. For 

example, a third party that is not the common law employer can be a statutory employer if the 

third party has control over the payment of wages. In addition, certain designated agents are 

jointly and severally liable with their principals for employment taxes with respect to wages paid 

to the principals’ employees. These designated agents prepare and file employment tax returns 

using their own name and employer identification number. In contrast, reporting agents (often 

referred to as payroll service providers) are generally not liable for the employment taxes 

reported on their clients’ returns. Reporting agents prepare and file employment tax returns for 

their clients using the client’s name and employer identification number. 

Employee leasing is the practice of contracting with an outside business to handle certain 

administrative, personnel, and payroll matters for a taxpayer’s employees. Employee leasing 

companies (often referred to as professional employer organizations) typically prepare and file 

employment tax returns for their clients using the leasing company’s name and employer 

identification number, often taking the position that the leasing company is the statutory or 

common law employer of their clients’ workers. 

Reasons for Change

Under present law, there is often uncertainty as to whether the employee leasing company or its 

client is liable for unpaid Federal employment taxes arising with respect to wages paid to the 

client’s workers. Thus, when an employee leasing company files employment tax returns using 

its own name and employer identification number, but fails to pay some or all of the taxes due, or 

when no returns are filed with respect to wages paid by a taxpayer that uses an employee leasing 

company, there can be uncertainty as to how the Federal employment taxes are assessed and 

collected. 

Providing standards for when an employee leasing company and its clients will be held liable for 

Federal employment taxes will facilitate the assessment, payment, and collection of those taxes 

and will preclude taxpayers who have control over withholding and payment of those taxes from 

denying liability when the taxes are not paid. 

Proposal

The proposal would set forth standards for holding employee leasing companies jointly and 

severally liable with their clients for Federal employment taxes. The proposal would also 
208

provide standards for holding employee leasing companies solely liable for such taxes if they 

meet specified requirements. 

The provision would be effective for employment tax returns required to be filed with respect to 

wages paid after December 31, 2014.
209

INCREASE CERTAINTY WITH RESPECT TO WORKER CLASSIFICATION

Current Law

For both tax and nontax purposes, workers must be classified into one of two mutually exclusive 

categories: employees or self-employed (sometimes referred to as independent contractors). 

Worker classification generally is based on a common-law test for determining whether an 

employment relationship exists. The main determinant is whether the service recipient 

(employer) has the right to control not only the result of the worker’s services but also the means 

by which the worker accomplishes that result. For classification purposes, it does not matter 

whether the service recipient exercises that control, only that he or she has the right to exercise it. 

Even though it is generally recognized that more highly skilled workers may not require much 

guidance or direction from the service recipient, the underlying concept of the right to control is 

the same for them. In determining worker status, the Internal Revenue Service (IRS) looks to 

three categories of evidence that may be relevant in determining whether the requisite control 

exists under the common-law test: behavioral control, financial control, and the relationship of 

the parties. 

For employees, employers are required to withhold income and Federal Insurance Contribution 

Act (FICA) taxes and to pay the employer’s share of FICA taxes. Employers are also required to 

pay Federal Unemployment Tax Act taxes and generally state unemployment compensation 

taxes. Liability for Federal employment taxes and the obligation to report the wages generally 

lie with the employer.

For workers who are classified as independent contractors, service recipients engaged in a trade 

or business and making payments totaling $600 or more in a calendar year to an independent 

contractor that is not a corporation are required to send an information return to the IRS and to 

the independent contractor stating the total payments made during the year. The service 

recipient generally does not need to withhold taxes from the payments reported unless the 

independent contractor has not provided its taxpayer identification number to the service 

recipient. Independent contractors pay Self-Employment Contributions Act (SECA) tax on their 

net earnings from self-employment (which generally is equivalent to both the employer and 

employee shares of FICA tax). Independent contractors generally are required to pay their 

income tax, including SECA liabilities, by making quarterly estimated tax payments.

For workers, whether employee or independent contractor status is more beneficial depends on 

many factors including the extent to which an independent contractor is able to negotiate for 

gross payments that include the value of nonwage costs that the service provider would have to 

incur in the case of an employee. In some circumstances, independent contractor status is more 

beneficial; in other circumstances, employee status is more advantageous.

Under a special provision (section 530 of the Revenue Act of 1978 which was not made part of 

the Internal Revenue Code), a service recipient may treat a worker as an independent contractor 

for Federal employment tax purposes even though the worker actually may be an employee 

under the common law rules if the service recipient has a reasonable basis for treating the worker 
210

as an independent contractor and certain other requirements are met. The special provision 

applies only if (1) the service recipient has not treated the worker (or any worker in a 

substantially similar position) as an employee for any period beginning after 1977, and (2) the 

service recipient has filed all Federal tax returns, including all required information returns, on a 

basis consistent with treating the worker as an independent contractor. 

If an employer meets the requirements for the special provision with respect to a class of 

workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively 

and even as to newly hired workers in the same class. Since 1996, the IRS has considered the 

availability of the special provision as the first part of any examination concerning worker 

classification. If the IRS determines that the special provision applies to a class of workers, it 

does not determine whether the workers are in fact employees or independent contractors. Thus, 

the worker classification continues indefinitely even if it is incorrect. 

The special provision also prohibits the IRS from issuing generally applicable guidance 

addressing the proper classification of workers. Current law and procedures also provide for 

reduced penalties for misclassification where the special provision is not available but where, 

among other things, the employer agrees to prospective reclassification of the workers as 

employees. 

Reasons for Change

Since 1978, the IRS has not been permitted to issue general guidance addressing worker 

classification, and in many instances has been precluded from reclassifying workers – even 

prospectively – who may have been misclassified. Since 1978, there have been many changes in

working relationships between service providers and service recipients. As a result, there has 

been continued and growing uncertainty about the correct classification of some workers. 

Many benefits and worker protections are available only for workers who are classified as 

employees. Incorrect classification as an independent contractor for tax purposes may spill over 

to other areas and, for example, lead to a worker not receiving benefits for unemployment 

(unemployment insurance) or on-the-job injuries (workers’ compensation), or not being 

protected by various on-the-job health and safety requirements.

The incorrect classification of workers also creates opportunities for competitive advantages over 

service recipients who properly classify their workers. Such misclassification may lower the 

service recipient’s total cost of labor by avoiding workers’ compensation and unemployment 

compensation premiums, and could also provide increased opportunities for noncompliance by 

service providers. 

Workers, service recipients, and tax administrators would benefit from reducing uncertainty 

about worker classification, eliminating potential competitive advantages and incentives to 

misclassify workers associated with worker misclassification by competitors, and reducing 

opportunities for noncompliance by workers classified as self-employed, while maintaining the 

benefits and worker protections associated with an administrative and social policy system that is 

based on employee status.
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Proposal

The proposal would permit the IRS to require prospective reclassification of workers who are 

currently misclassified and whose reclassification has been prohibited under current law. The 

reduced penalties for misclassification provided under current law would be retained, except that 

lower penalties would apply only if the service recipient voluntarily reclassifies its workers 

before being contacted by the IRS or another enforcement agency and if the service recipient had 

filed all required information returns (Forms 1099) reporting the payments to the independent 

contractors. For service recipients with only a small number of employees and a small number 

of misclassified workers, even reduced penalties would be waived if the service recipient (1) had 

consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed 

to prospective reclassification of misclassified workers. It is anticipated that, after enactment, 

new enforcement activity would focus mainly on obtaining the proper worker classification 

prospectively, since in many cases the proper classification of workers may not have been clear. 

(Statutory employee or nonemployee treatment as specified under current law would be 

retained.)

The Department of the Treasury and the IRS also would be permitted to issue generally 

applicable guidance on the proper classification of workers under common law standards. This 

would enable service recipients to properly classify workers with much less concern about future 

IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting 

common law in a neutral manner recognizing that many workers are, in fact, not employees. 

Further, Treasury and the IRS would develop guidance that would provide safe harbors and/or 

rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful 

for service recipients, it would generally be industry- or job-specific. Priority for the 

development of guidance would be given to industries and jobs in which application of the 

common law test has been particularly problematic, where there has been a history of worker 

misclassification, or where there have been failures to report compensation paid. 

Service recipients would be required to give notice to independent contractors, when they first 

begin performing services for the service recipient, that explains how they will be classified and 

the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and 

hour implications.

The IRS would be permitted to disclose to the Department of Labor information about service 

recipients whose workers are reclassified.

To ease compliance burdens for independent contractors, independent contractors receiving 

payments totaling $600 or more in a calendar year from a service recipient would be permitted to 

require the service recipient to withhold for Federal tax purposes a flat rate percentage of their 

gross payments, with the flat rate percentage being selected by the contractor.

The proposal would be effective upon enactment, but prospective reclassification of those 

covered by the current special provision would not be effective until the first calendar year 

beginning at least one year after date of enactment. The transition period could be up to two 

years for independent contractors with existing written contracts establishing their status.
212

INCREASE INFORMATION SHARING TO ADMINISTER EXCISE TAXES

Current Law

The Internal Revenue Code (Code) permits the Internal Revenue Service (IRS) and the Alcohol 

Tobacco Tax and Trade Bureau (TTB) to disclose tax return information to Treasury employees 

whose official duties involve tax administration (Section 6103(h)(1)). Prior to 2003, customs 

officials who had responsibilities for enforcing and/or collecting excise taxes on imports were 

employees of the Treasury Department. Thus, prior to 2003, the Code allowed disclosure of tax 

return information to these customs officials in the performance of their duties. In 2003, these 

customs officials were transferred to the Department of Homeland Security (DHS).

Reason for Change

The transfer of customs officials to DHS, without a corresponding amendment to the Code, 

resulted in limitations on the information that the IRS and TTB might share with customs 

officials and hinders effective administration and enforcement of tax laws. (Both IRS and TTB 

cooperate with Customs and Border Protection in matters involving collection and enforcement 

of excise taxes.). As a result, DHS, the IRS, and TTB are limited in cooperating on

administering excise taxes and tax noncompliance may go undetected and uncorrected. 

Allowing the limited disclosure of tax return information to customs officials would facilitate tax 

administration and improve compliance. 

Proposal

The proposal would add employees of DHS (customs officials) involved in tax administration to 

the list of federal officers and employees to whom the IRS and TTB may disclose tax returns and 

return information. The proposal would be effective on the date of enactment.
213

Strengthen Tax Administration

IMPOSE LIABILITY ON SHAREHOLDERS TO COLLECT UNPAID INCOME TAXES 

OF APPLICABLE CORPORATIONS

Current Law

The Internal Revenue Service (IRS) and Treasury Department have identified “Intermediary 

Transaction Tax Shelters” as listed transactions that require disclosure on a tax return to avoid 

certain penalties. These transactions typically involve (1) a sale of a controlling interest in the 

stock of a C corporation to another entity (an intermediary entity) (2) that is undertaken as part of 

a plan (3) to cause the C corporation to recognize income or gain from the sale of its assets 

shortly before or shortly after the sale of the C corporation’s stock. 

In a typical case, an intermediary entity borrows funds to purchase the stock of the C corporation 

from the C corporation’s shareholders, and the consideration received by the C corporation from 

the sale of its assets is effectively used to repay that loan. These transactions are structured so 

that when a C corporation’s assets are sold, the C corporation is ultimately left with insufficient 

assets from which to pay the tax owed from the asset sale. In many cases, the intermediary does 

not pay the corporate income tax liability and is judgment-proof, frustrating the IRS’ ability to 

collect taxes that are legally owed. 

The transaction may yield the selling shareholders a higher sales price for their C corporation 

stock than could be supported if the corporate income tax liability were to be paid. However, 

outside of the consolidated return context, former shareholders of a C corporation generally are 

not liable for any unpaid income taxes, interest, additions to tax, or penalties owed by the C 

corporation.

Reasons for Change

Despite such transactions being identified by the IRS as listed transactions since 2001, 

shareholders, corporate officers, directors, and their advisors have continued to engage in 

Intermediary Transaction Tax Shelters or substantially similar transactions. Because the unpaid 

Federal tax evaded through these transactions is reflected in the price paid for the corporation’s 

stock, either the buyer or the seller could be liable for such unpaid amounts. Although the 

Federal government generally has adequate tools under current law to collect amounts from the 

buyer or its lenders, these parties typically do not have assets in the United States against which 

the IRS can proceed to collect the unpaid taxes. The selling shareholders are typically the only 

parties with sufficient assets in the United States against which the IRS could proceed for 

collection; however, it has proven difficult for the IRS to effectively collect the unpaid Federal 

taxes from these selling shareholders under current law. Even though the IRS has pursued 

litigation to enforce collection from the selling shareholders of several corporations, these 

actions have yielded mixed results in factually similar cases. Thus, existing law does not 

adequately protect the Federal government’s interest in collecting the amounts due from selling 

shareholders as a result of these transactions.
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Proposal

The proposal would add a new section to the Internal Revenue Code (Code) that would impose 

on shareholders who sell the stock of an “applicable C corporation” secondary liability (without 

resort to any State law) for payment of the applicable C corporation’s income taxes, interest, 

additions to tax, and penalties to the extent of the sales proceeds received by the shareholders. 

The proposal applies to shareholders who, directly or indirectly, dispose of a controlling interest 

(at least 50 percent) in the stock of an applicable C corporation within a 12-month period in 

exchange for consideration other than stock issued by the acquirer of the applicable C 

corporation stock. The secondary liability would arise only after the applicable C corporation 

was assessed income taxes, interest, additions to tax, and penalties with respect to any taxable 

year within the 12-month period before or after the date that its stock was disposed of and the 

applicable C corporation did not pay such amounts within 180 days after assessment.

For purposes of the proposal, an applicable C corporation is any C corporation (or successor) two 

thirds or more of whose assets consist of cash, passive investment assets, or assets that are the 

subject of a contract of sale or whose sale has been substantially negotiated on the date that a 

controlling interest in its stock is sold. The proposal would grant the Treasury Department 

authority to prescribe regulations necessary or appropriate to carry out the proposal.

The proposal would not apply with respect to dispositions of a controlling interest (1) in the 

stock of a C corporation or real estate investment trust with shares traded on an established 

securities market in the United States, (2) in the shares of a regulated investment company that 

offers shares to the public, or (3) to an acquirer whose stock or securities are publicly traded on 

an established market in the United States, or is consolidated for financial reporting purposes 

with such a public issuer of stock or securities.

The proposal would close the taxable year of an applicable C corporation as of the later of a 

disposition of a controlling interest in its stock or a disposition of all of its assets. The proposal 

would also amend the Code to provide that the amount that the selling shareholder was 

secondarily liable for under this proposal would constitute a deficiency that was governed by the 

general notice and demand rules of the Code but with an additional year added to the statute of 

limitations for assessment. The proposal would not limit the government’s ability to pursue any 

cause of action available under current law against any person.

The proposal would be effective for sales of controlling interests in the stock of applicable C 

corporations occurring on or after April 10, 2013.
215

INCREASE LEVY AUTHORITY FOR PAYMENTS TO MEDICARE PROVIDERS 

WITH DELINQUENT TAX DEBT

Current Law

Under the Medicare Improvement for Patients and Providers Act of 2008, the Treasury 

Department is authorized to continuously levy up to 15 percent of a payment to a Medicare 

provider in order to collect delinquent tax debt. Through the Federal Payment Levy Program, 

Treasury deducts (levies) a portion of a Government payment to an individual or business in 

order to collect unpaid taxes. 

Reasons for Change

Certain Medicare providers fail to comply with their Federal income tax and/or employment tax 

obligations. Expanding to 100 percent the amount of Federal payments that can be levied for 

such providers will help recover a greater amount of delinquent taxes and will promote these 

providers’ compliance with their Federal tax obligations.

Proposal 

The proposal would allow Treasury to levy up to 100 percent of a payment to a Medicare 

provider to collect unpaid taxes.

The proposal would be effective for payments made after the date of enactment.
216

IMPLEMENT A PROGRAM INTEGRITY STATUTORY CAP ADJUSTMENT FOR 

TAX ADMINISTRATION

Current Law 

Previous Administrations and Congresses have used a budget mechanism called a program 

integrity cap adjustment to increase congressional allocations for annual budget appropriations. 

Under the mechanism, funding above the spending ceiling that is specified in the annual 

congressional appropriations process is granted for specified “program integrity” purposes. 

“Program integrity” broadly refers to maintaining the effectiveness of a specific government 

program. In the past, Congress has appropriated additional funding to the Internal Revenue 

Service (IRS) through allocation adjustments for certain enforcement and compliance activities 

that generate positive net revenue. 

Reasons for Change 

The IRS currently collects over $50 billion in enforcement revenue each year through various 

enforcement and compliance activities, funded partially through a cap adjustment. These 

resources have been critical to maintaining the IRS enforcement and compliance functions, 

allowing the IRS to initiate new programs that generate high returns on investment, and 

encouraging taxpayers to comply with the tax laws. Additional funding for IRS enforcement and 

compliance programs will yield increases in enforcement revenue through activities with high

returns and will help the IRS further expand and improve its effectiveness and efficiency as a tax 

administrator. 

Proposal 

The Administration proposes an adjustment to the discretionary spending limits for IRS tax 

enforcement, compliance, and related activities, including tax administration activities at the 

Alcohol and Tobacco Tax and Trade Bureau, through an amendment to the Balanced Budget and 

Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011. The 

proposed cap adjustment for fiscal year 2015 will fund about $480 million in enforcement and 

compliance initiatives and investments above current levels of activity. These resources will 

help the IRS continue to target international tax compliance and restore previously reduced 

enforcement levels. Beyond 2015, the Administration proposes further increases in new 

enforcement and compliance initiatives each fiscal year from 2016 through 2019 and to sustain 

all of the new initiatives and inflationary costs via cap adjustments through FY 2024. The total 

cost of supporting new initiatives above the funding needed to maintain current levels of 

enforcement and compliance activity would be approximately $17 billion over the budget 

window. 
217

STREAMLINE AUDIT AND ADJUSTMENT PROCEDURES FOR LARGE 

PARTNERSHIPS

Current Law

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established unified audit rules 

applicable to all but certain small partnerships. 

These rules require the tax treatment of all “partnership items” to be determined at the 

partnership, rather than the partner, level. The rules also require a partner to report all 

partnership items consistently with the partnership return, unless the partner notifies the Internal 

Revenue Service (IRS) of any inconsistency. The IRS may challenge the reporting position of a 

partnership by conducting a single administrative proceeding to resolve the issue with respect to 

all partners. Nevertheless, the IRS must still assess any resulting adjustment against each of the 

taxpayers who were partners in the year in which the misstatement of tax liability arose. In 

addition, any partner can request an administrative adjustment or a refund for his own separate 

tax liability and participate in partnership-level administrative proceedings. The TEFRA 

partnership rules also require the IRS to give notice of the beginning of partnership-level 

administrative proceedings and any resulting administrative adjustment to all partners whose 

names and addresses are furnished to the IRS. For partnerships with more than 100 partners, 

however, the IRS generally is not required to give notice to any partner whose profits interest is 

less than one percent. 

Because “[the TEFRA] audit and adjustment procedures for large partnerships are inefficient and 

more complex than those for other large entities,”1 the Taxpayer Relief Act of 1997 established 

streamlined audit and adjustment procedure, as well as a simplified reporting system, for electing 

large partnerships (ELPs), which are generally defined as partnerships that have 100 or more 

partners during the preceding taxable year and elect to be treated as an ELP. 

Under the streamlined ELP audit and adjustment procedures, the IRS generally makes 

adjustments at the partnership level that flow through to the partners for the year in which the 

adjustment takes effect. Thus, the current-year partners’ share of current-year partnership items 

of income, gains, losses, deductions, or credits are adjusted to reflect partnership adjustments 

that take effect in that year. The adjustments generally will not affect prior-year returns of any 

partners (except in the case of changes to any partner’s distributive shares). Unlike the TEFRA 

partnership rules, only the partnership can request a refund and the partners of an ELP do not 

have the right to participate in partnership-level administrative proceedings. Under the ELP 

audit rules, the IRS need not give notice to individual partners of the beginning of an 

administrative proceeding or of a final adjustment. Instead, a notice of partnership adjustments 

is generally sent to the partnership, and only the partner designated by the partnership may act on 

behalf of the partnership. In addition, the ELP regime allows for simplified reporting to the IRS. 

 1 House Conference Report No. 105-220.
218

Reasons for Change

The present TEFRA partnership audit and adjustment procedures for large partnerships remain 

inefficient and more complex than those applicable to other large entities. Although the ELP 

regime was enacted to mitigate the problem, few large partnerships have elected into the ELP 

regime. In addition, there has been substantial growth in the number and complexity of large 

partnerships, magnifying the difficulty of auditing large partnerships under the TEFRA 

partnership procedures. 

Proposal

The proposal would mandate the streamlined ELP audit and adjustment procedures, but not the 

simplified reporting, for any partnership that has 1,000 or more partners at any time during the 

taxable year, a “Required Large Partnership” (RLP). 

An RLP, like an ELP, would not include any partnership if substantially all the partners are: 

(1) individuals performing substantial services in connection with the partnership’s activities, or 

personal service corporations the owner-employees of which perform those services; (2) retired 

partners who had performed those services; or (3) spouses of partners who had performed those 

services. 

An RLP will continue to be treated as an RLP unless it can demonstrate that the number of 

partners fell below the 1,000 partner threshold for the 60-month period ending with the last day 

of its most recently ended taxable year. An RLP, however, may elect to continue to be an RLP. 

In addition, a partnership that has 100 or more partners at any time during the taxable year may 

elect to be an RLP. If a partnership makes an election provided for in the prior two sentences, 

the election cannot be revoked for any year without the consent of the Secretary. 

For purposes of determining whether a partnership has 1,000 or more partners, any person that 

owns an interest directly or indirectly in the partnership through one or more pass-thru partners 

(as defined in section 6231(a)(9)) is treated as a partner. The proposal would require any 

partnership, estate, trust, S corporation, nominee, or other similar person (“pass-through person”) 

that owns a direct interest in another pass-through person (“lower-tier pass-through person”) to 

provide to the lower-tier pass-through person the information necessary for the lower-tier passthrough person to determine the number of owners that the pass-through person has. A passthrough person and a lower-tier pass-through person may agree that the pass-through person 

need not provide the above information to the lower-tier pass-through person if the parties 

determine the information is not necessary to determine that the lower-tier partnership has 1,000 

or more partners. 

The partnership would be required to certify that it had at least 1,000 partners at some time 

during the taxable year by filing an RLP return. The treatment provided by the certification 

would be binding on the partnership, all partners of the partnership, and on the IRS. Thus, if a 

partnership incorrectly filed an RLP return, the RLP procedures would continue to apply for that 

taxable year. Conversely, if a partnership incorrectly failed to file an RLP return, the TEFRA 

partnership audit procedures would continue to apply to the partnership for that taxable year. 
219

The proposal, however, would provide that if a partnership incorrectly failed to file an RLP 

return, the period of limitations on assessment would not expire before the date that is three years 

after the date that the Secretary determined that an RLP return should have been filed. This 

would allow the IRS sufficient time to carry out the TEFRA partnership procedures. In addition, 

the partnership would be treated as an RLP for the partnership’s taxable year ending on or after 

the date the Secretary determines and notifies the partnership that an RLP return should have 

been filed. For example, if on June 1, 2016, the Secretary determines and notifies a calendaryear partnership that it incorrectly failed to file an RLP return for its 2014 taxable year, the 

partnership would be treated as an RLP for its taxable year ending December 31, 2016. 

If a partnership incorrectly failed to file the proper return, a penalty will be imposed on the 

partnership equal to the product of $5,000 multiplied by the number of direct and indirect 

partners of the partnership. The partnership would be liable for any penalty imposed by this 

provision. No penalty will be imposed if the partnership establishes that there was reasonable 

cause for, and the partnership acted in good faith with respect to, incorrectly failing to file the 

proper return. 

The proposal would also make simplifying changes to the existing ELP regime. The proposal 

would eliminate the requirement that an ELP provide information returns to its partners within 

21⁄2 months following the close of its taxable year and, instead, require the information returns be 

provided by the time required for non-ELP partnerships. Additionally, the definition of an ELP 

would be amended to provide that the number of persons who were partners in the partnership 

must equal or exceed 100 at any time during the partnership taxable year, as opposed to in the 

preceding partnership taxable year.

The proposal would allow the Secretary to promulgate regulations to further define these rules, 

including rules to ensure that taxpayers do not transfer partnership interests with a principal 

purpose of utilizing the RLP regime to alter the taxpayers’ aggregate tax liability, and rules to 

address foreign pass-through partners including, where appropriate, treating a foreign passthrough partner that is a partnership as an RLP.

The proposal would apply to a partnership’s taxable year ending on or after the date that is two 

years from the date of enactment.
220

REVISE OFFER-IN-COMPROMISE APPLICATION RULES 

Current Law

Current law provides that the Internal Revenue Service (IRS) may compromise any civil or 

criminal case arising under the internal revenue laws prior to a reference to the Department of 

Justice for prosecution or defense. In 2006, a new provision was enacted to require taxpayers to 

make certain nonrefundable payments with any initial offer-in-compromise of a tax case. The 

new provision requires taxpayers making a lump-sum offer-in-compromise to include a 

nonrefundable payment of 20 percent of the lump-sum with the initial offer. In the case of an 

offer-in-compromise involving periodic payments, the initial offer must be accompanied by a 

nonrefundable payment of the first installment that would be due if the offer were accepted. 

Reasons for Change

Requiring nonrefundable payments with an offer-in-compromise may substantially reduce access 

to the offer-in-compromise program. The offer-in-compromise program is designed to settle 

cases in which taxpayers have demonstrated an inability to pay the full amount of a tax liability. 

The program allows the IRS to collect the portion of a tax liability that the taxpayer has the 

ability to pay. Reducing access to the offer-in-compromise program makes it more difficult and 

costly to obtain the collectable portion of existing tax liabilities. 

Proposal

The proposal would eliminate the requirements that an initial offer-in-compromise include a 

nonrefundable payment of any portion of the taxpayer’s offer. 

The proposal would be effective for offers-in-compromise submitted after the date of enactment.
221

EXPAND INTERNAL REVENUE SERVICE (IRS) ACCESS TO INFORMATION IN 

THE NATIONAL DIRECTORY OF NEW HIRES FOR TAX ADMINISTRATION 

PURPOSES 

Current Law

The Office of Child Support Enforcement of the Department of Health and Human Services 

maintains the National Directory of New Hires (NDNH), which is a database that contains data 

from Form W-4 for newly-hired employees, quarterly wage data from State workforce and 

Federal agencies for all employees, and unemployment insurance data from State workforce 

agencies for all individuals who have applied for or received unemployment benefits. The 

NDNH was created to help State child support enforcement agencies enforce obligations of 

parents across State lines. 

Under current provisions of the Social Security Act, the IRS may obtain data from the NDNH, 

but only for the purpose of administering the earned income tax credit (EITC) and verifying 

employment reported on a tax return. 

Generally, the IRS obtains employment and unemployment data less frequently than quarterly, 

and there are significant internal costs of preparing these data for use. Under various State laws, 

the IRS may negotiate for access to employment and unemployment data directly from State 

agencies that maintain these data. 

Reasons for Change

Employment data are useful to the IRS in administering a wide range of tax provisions beyond 

the EITC, including verifying taxpayer claims and identifying levy sources. Currently, the IRS 

may obtain employment and unemployment data on a state-by-state basis, which is a costly and 

time-consuming process. NDNH data are timely, uniformly compiled, and electronically 

accessible. Access to the NDNH would increase the productivity of the IRS by reducing the 

amount of IRS resources dedicated to obtaining and processing data without reducing the current 

levels of taxpayer privacy. 

Proposal

The proposal would amend the Social Security Act to expand IRS access to NDNH data for 

general tax administration purposes, including data matching, verification of taxpayer claims 

during return processing, preparation of substitute returns for non-compliant taxpayers, and 

identification of levy sources. Data obtained by the IRS from the NDNH would be protected by 

existing taxpayer privacy law, including civil and criminal sanctions. 

The proposal would be effective upon enactment.
222

MAKE REPEATED WILLFUL FAILURE TO FILE A TAX RETURN A FELONY

Current Law

Current law provides that willful failure to file a tax return is a misdemeanor punishable by a 

term of imprisonment of not more than one year, a fine of not more than $25,000 ($100,000 in 

the case of a corporation), or both. A taxpayer who fails to file returns for multiple years 

commits a separate misdemeanor offense for each year. 

Reasons for Change

Increased criminal penalties would help to deter multiple willful failures to file tax returns. 

Proposal

The proposal would provide that any person who willfully fails to file tax returns in any three 

years within any five consecutive year period, if the aggregated tax liability for such period is at 

least $50,000, would be subject to a new aggravated failure to file criminal penalty. The 

proposal would classify such failure as a felony and, upon conviction, impose a fine of not more 

than $250,000 ($500,000 in the case of a corporation) or imprisonment for not more than five 

years, or both. 

The proposal would be effective for returns required to be filed after December 31, 2014.
223

FACILITATE TAX COMPLIANCE WITH LOCAL JURISDICTIONS

Current Law 

Although Federal tax returns and return information (FTI) generally are confidential, the Internal 

Revenue Service (IRS) and Treasury Department may share FTI with States as well as certain 

local government entities that are treated as States for this purpose. Generally, the purpose of 

information sharing is to facilitate tax administration. Where sharing of FTI is authorized, 

reciprocal provisions generally authorize disclosure of information to the IRS by State and local 

governments. State and local governments that receive FTI must safeguard it according to 

prescribed protocols that require secure storage, restricted access, reports to IRS, and shredding 

or other proper disposal. Criminal and civil sanctions apply to unauthorized disclosure or 

inspection of FTI. Indian Tribal Governments (ITGs) are treated as States by the tax law for 

several purposes, such as certain charitable contributions, excise tax credits, and local tax 

deductions, but not for purposes of information sharing. 

Reasons for Change 

IRS and Treasury compliance activity, especially with respect to alcohol, tobacco, and fuel 

excise taxes, may necessitate information sharing with ITGs. For example, the IRS may wish to 

confirm if a fuel supplier’s claim to have delivered particular amounts to adjacent jurisdictions is 

consistent with that reported to the IRS. If not, the IRS in conjunction with the ITG, which 

would have responsibility for administering taxes imposed by the ITG, can take steps to ensure 

compliance with both Federal and ITG tax laws. Where the local government is treated as a 

State for information sharing purposes, IRS, Treasury, and local officials can support each 

other’s efforts. Where the local government is not so treated, there is an impediment to 

compliance activity. 

Proposal 

For purposes of information sharing, the proposal would treat as States those ITGs that impose 

alcohol, tobacco, or fuel excise or income or wage taxes, to the extent necessary for ITG tax 

administration. An ITG that receives FTI would be required to safeguard it according to 

prescribed protocols. The criminal and civil sanctions would apply. 

The proposal would be effective for disclosures made after enactment.
224

EXTEND STATUTE OF LIMITATIONS WHERE STATE ADJUSTMENT AFFECTS

FEDERAL TAX LIABILITY 

Current Law

In general, additional Federal tax liabilities in the form of tax, interest, penalties, and additions to 

tax must be assessed by the Internal Revenue Service (IRS) within three years after the date a 

return is filed. If an assessment is not made within the required time period, the additional 

liabilities generally cannot be assessed or collected at any future time. In general, the statute of 

limitations with respect to claims for refund expires three years from the time the return was filed 

or two years from the time the tax was paid, whichever is later. The Internal Revenue Code 

contains exceptions to the general statute of limitations.

State and local authorities employ a variety of statutes of limitations for State and local tax 

assessments. Pursuant to agreement, the IRS and State and local revenue agencies exchange 

reports of adjustments made through examination so that corresponding adjustments can be made 

by each taxing authority. In addition, States provide the IRS with reports of potential 

discrepancies between State returns and Federal returns. 

Reasons for Change

The general statute of limitations serves as a barrier to the effective use by the IRS of State and 

local tax adjustment reports when the reports are provided by the State or local revenue agency 

to the IRS with little time remaining for assessments to be made at the Federal level. Under the 

current statute of limitations framework, taxpayers may seek to extend the State statute of 

limitations or postpone agreement to State proposed adjustments until such time as the Federal 

statute of limitations expires in order to preclude assessment at the Federal level. In addition, it 

is not always the case that a taxpayer that files an amended State or local return reporting 

additional liabilities at the State or local level that also affect Federal tax liability will file an 

amended return at the Federal level. 

Proposal

The proposal would create an additional exception to the general three-year statute of limitations 

for assessment of Federal tax liability resulting from adjustments to State or local tax liability. 

The statute of limitations would be extended to the greater of: (1) one year from the date the 

taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local 

tax return; or (2) two years from the date the IRS first receives information from the State or 

local revenue agency under an information sharing agreement in place between the IRS and a 

State or local revenue agency. The statute of limitations would be extended only with respect to 

the increase in Federal tax attributable to the State or local tax adjustment. The statute of 

limitations would not be further extended if the taxpayer files additional amended returns for the 

same tax periods as the initial amended return or if the IRS receives additional information from 

the State or local revenue agency under an information sharing agreement. The statute of 

limitations on claims for refund would be extended correspondingly so that any overall increase 
225

in tax assessed by the IRS as a result of the State or local examination report would take into 

account agreed-upon tax decreases or reductions attributable to a refund or credit. 

The proposal would be effective for returns required to be filed after December 31, 2014.
226

IMPROVE INVESTIGATIVE DISCLOSURE STATUTE

Current Law 

Generally, tax return information is confidential, unless a specific exception in the Internal 

Revenue Code (Code) applies. In the case of tax administration, the Code permits Treasury and 

Internal Revenue Service (IRS) officers and employees to disclose return information to the 

extent necessary to obtain information that is not otherwise reasonably available, in the course of 

an audit or investigation, as prescribed by regulation. Thus, for example, a revenue agent may 

identify himself or herself as affiliated with the IRS, and may disclose the nature and subject of 

an investigation, as necessary to elicit information from a witness in connection with that 

investigation. Criminal and civil sanctions apply to unauthorized disclosures of return 

information. 

Reasons for Change 

Treasury Regulations effective since 2003 state that the term “necessary” in this context does not 

mean essential or indispensable, but rather appropriate and helpful in obtaining the information 

sought. In other contexts, a “necessary” disclosure is one without which performance cannot be 

accomplished reasonably without the disclosure. Determining if an investigative disclosure is 

“necessary” is inherently factual, leading to inconsistent opinions by the courts. Eliminating this 

uncertainty from the statute would facilitate investigations by IRS officers and employees, while 

setting forth clear guidance for taxpayers, thus enhancing compliance with the tax Code. 

Proposal 

The proposal would clarify the taxpayer privacy law by stating that the law does not prohibit 

Treasury and IRS officers and employees from identifying themselves, their organizational 

affiliation, and the nature and subject of an investigation, when contacting third parties in 

connection with a civil or criminal tax investigation. 

The proposal would be effective for disclosures made after enactment.
227

REQUIRE TAXPAYERS WHO PREPARE THEIR RETURNS ELECTRONICALLY 

BUT FILE THEIR RETURNS ON PAPER TO PRINT THEIR RETURNS WITH A

SCANNABLE CODE

Current Law

Taxpayers can prepare their tax returns electronically (either by utilizing a tax return preparer or 

using tax return preparation software at home) and, instead of filing their returns electronically, 

may print out a paper copy and mail it to the Internal Revenue Service (IRS).

Reasons for Change

Electronically filed tax returns are processed more efficiently and more accurately than paper tax 

returns. When tax returns are filed on paper–even if that paper return was prepared 

electronically–the IRS is unable to scan the return and the information contained on the return 

must be manually entered into the IRS’s computer systems. 

New scanning technology would allow the IRS to scan paper tax returns and capture all data 

shown on the return, if the paper return contains a scannable code that would allow conversion of 

the paper return into an electronic format. This would reduce transcription errors and the amount 

of training, recruiting, and staffing that the IRS requires to process paper tax returns. In addition, 

the IRS would have greater access to more accurate tax data, thereby improving case selection, 

assisting in the detection of fraudulent tax returns, and allowing more comprehensive analysis of 

taxpayer behavior.

Proposal

The proposal would provide the Secretary with regulatory authority to require all taxpayers who 

prepare their tax returns electronically but print their returns and file them on paper to print their 

returns with a scannable code that would enable the IRS to convert the paper return into an 

electronic format.

The proposal would be effective for tax returns filed after December 31, 2014.
228

ALLOW THE INTERNAL REVENUE SERVICE (IRS) TO ABSORB CREDIT AND

DEBIT CARD PROCESSING FEES FOR CERTAIN TAX PAYMENTS

Current Law

Section 6311 permits the IRS to receive payment of taxes by any commercially acceptable means 

that the Secretary deems appropriate. Taxpayers may make credit or debit card payments by 

phone through IRS-designated third-party service providers, but these providers charge the 

taxpayer a convenience fee over and above the taxes due. Taxpayers cannot make a credit or 

debit card payment by phone directly to IRS collection representatives. Under current law, if the 

IRS were to accept credit or debit card payments directly from taxpayers, the IRS is prohibited 

from absorbing credit or debit card processing fees.

Reasons for Change

When taxpayers agree to make additional payments during telephone consultations with IRS 

agents, it is inefficient for both taxpayers and the IRS to require taxpayers to contact a third party 

service provider to make credit and debit card payments. Both the requirement for a separate 

call to a service provider and the additional processing fee for such payments may also 

discourage payment of outstanding liabilities, resulting in greater collection costs for the IRS, 

fewer IRS resources available to contact additional taxpayers, and lower tax collections. 

Allowing the IRS to accept credit and debit card payments directly and allowing the IRS to 

absorb the credit and debit card processing fees would increase efficiency and the number of 

collection cases worked. Permitting the IRS to absorb the processing fee would increase 

payment options available to taxpayers.

Proposal

The proposal would amend section 6311(d) to allow, but not require, the IRS to accept credit or 

debit card payments directly from taxpayers and to absorb the credit and debit card processing 

fees for delinquent tax payments, without charging a separate processing fee to the taxpayer.

The proposal would be effective for payments made after the date of enactment.
229

PROVIDE THE INTERNAL REVENUE SERVICE (IRS) WITH GREATER 

FLEXIBILITY TO ADDRESS CORRECTABLE ERRORS

Current Law

The Internal Revenue Code (Code) imposes certain procedural requirements on the IRS when it 

determines that a taxpayer has a deficiency; that is, owes more tax (or is due a smaller refund) 

than is shown on a tax return. If the IRS conducts an audit and determines that there is a 

deficiency, a statutory notice of deficiency must be issued, and the taxpayer is provided an 

opportunity to challenge the proposed deficiency in Tax Court before the deficiency is assessed. 

Code section 6213(b) contains an exception to the general deficiency procedures that provides

the IRS authority to correct certain mathematical or clerical errors made on tax returns (such 

authority is generally referred to as “math error authority”) to reflect the taxpayer’s correct tax 

liability. “Mathematical or clerical error” (defined in section 6213(g)(2)) currently includes, 

among other things: (1) errors in addition, subtraction, multiplication, or division shown on any 

return; (2) an entry on a return of an item that is inconsistent with another entry of the same or 

another item on the return; (3) an omission of a correct taxpayer identification number (TIN) 

required to be included on a tax return for certain tax credits; and (4) the inclusion of a TIN 

indicating that the individual’s age disqualifies them from certain credits.

Currently, section 6213(g)(2) must be amended each time Congress wishes to expand the scope 

of math error authority.

Reasons for Change

Using math error authority allows the IRS to adjust tax returns in cases where the IRS has 

reliable information that a taxpayer has an error on his or her return. Using math error authority 

in these circumstances is an efficient use of IRS resources. 

Under current practices, the definition of “mathematical and clerical error” is infrequently 

revised to account for new or amended Code provisions where the use of math error authority 

would be an effective use of IRS resources. For example, current law permits the IRS to use 

math error authority in cases where a taxpayer claiming the First Time Home Buyer Credit does 

not attach a copy of the settlement statement used to complete the purchase to the taxpayer’s 

income tax return (as required by the statute). However, the IRS may not use math error 

authority in other cases where a taxpayer is statutorily required to include documentation with a 

return but fails to do so and, instead, must use general deficiency procedures.

Changing the current practice would increase efficiency by eliminating the need to enact 

legislation extending math error authority to the IRS on a case by case basis for particular Code 

amendments and would promote the efficient use of IRS and taxpayer resources. Granting 

Treasury regulatory authority to permit the IRS to correct errors in certain narrow circumstances 

provides an appropriate balance between using IRS resources efficiently and effectively and 

maintaining the procedural protections available to taxpayers.
230

Proposal

The proposal would remove the existing specific grants of math error authority, and provide that 

“math error authority” will refer only to computational errors and the incorrect use of any table 

provided by the IRS. In addition, the proposal would add a new category of “correctable 

errors.” Under this new category, Treasury would have regulatory authority to permit the IRS to 

correct errors in cases where (1) the information provided by the taxpayer does not match the 

information contained in government databases, (2) the taxpayer has exceeded the lifetime limit 

for claiming a deduction or credit, or (3) the taxpayer has failed to include with his or her return 

documentation that is required by statute.

The proposal would be effective on the date of enactment. However, the IRS’ current grant of 

math error authority would continue to apply until Treasury and the IRS issue final regulations 

addressing correctable errors.
231

MAKE E-FILING MANDATORY FOR EXEMPT ORGANIZATIONS

Current Law

Current law requires that a tax-exempt organization must file its Form 990 series return (Form 

990, 990-PF, or 990-EZ) electronically if it files at least 250 returns during the calendar year. 

Organizations that are excused from filing Form 990 or Form 990-EZ, generally because their 

gross receipts are normally less than $50,000 annually, must file an annual notice (Form 990-N) 

in electronic format. Thus, currently only very small and very large organizations are required to 

file electronically. Churches and governmental entities, as well as certain related organizations, 

generally do not have to file annual returns or notices. However, all tax-exempt organizations, 

including churches, must report unrelated business taxable income on Form 990-T, which 

currently cannot be filed electronically. In addition, tax-exempt political organizations must file 

Form 8872 periodically to report certain political contributions and expenditures. Form 8872 

must be filed electronically only if the organization has, or expects to have, annual contributions 

or expenditures in excess of $50,000. 

Reasons for Change

Expanding e-filing of Form 990 series and Form 8872 returns would help promote a stronger 

tax-exempt sector by improving the quality of the data used by the Internal Revenue Service 

(IRS) for tax administration and the timeliness of the public disclosure of the return data. 

Electronic filing results in more accurate and complete data being provided to the IRS. E-filing 

also results in more usable data becoming publicly available more quickly than paper-filed 

returns, which must first be converted to machine readable format. Once publicly available, the 

Form 990 series return data may be used by donors to make more informed contribution 

decisions and by researchers, analysts, and entrepreneurs to understand the tax-exempt sector 

better and to create information tools and services to meet the needs of the sector. The Form 990 

series and Form 8872 return data would also be useful to state and local regulators, charity 

watch-dog groups, charitable beneficiaries, and the press. In addition, e-filing would allow the 

IRS to process returns more quickly and at a lower cost than when paper returns are filed.

Proposal

The proposal would require all tax-exempt organizations that must file Form 990 series returns 

or Forms 8872 to file them electronically. The proposal would also require the IRS to make the 

electronically filed Form 990 series returns and Forms 8872 publicly available in a machine 

readable format in a timely manner, as provided in regulations.

The proposal would generally be effective for taxable years beginning after the date of 

enactment. Transition relief would allow up to three additional years to begin electronic filing 

for smaller organizations and organizations for which electronic filing would be an undue 

hardship without additional transition time. In addition, the proposal would give the IRS 

discretion to delay the effective date for Form 990-T filers for up to three taxable years.
232

AUTHORIZE THE DEPARTMENT OF THE TREASURY TO REQUIRE ADDITIONAL 

INFORMATION TO BE INCLUDED IN ELECTRONICALLY FILED FORM 5500 

ANNUAL REPORTS AND ELECTRONIC FILING OF CERTAIN OTHER EMPLOYEE 

BENEFIT PLAN REPORTS

Current Law

Section 6058 of the Internal Revenue Code (Code) requires the employer or employers 

maintaining a funded plan of deferred compensation (or the administrator of the plan) to file an 

annual return containing certain information in accordance with regulations prescribed by the 

Secretary of the Treasury. Section 6059 requires that the administrator of a pension plan subject 

to the minimum funding requirements of section 412 file an actuarial report prepared by an 

enrolled actuary. Similarly, Title I of the Employee Retirement Income Security Act of 1974 

(ERISA) requires that certain pension and welfare benefit plans file an annual report disclosing 

certain information to the Department of Labor (DOL). These Code and ERISA filing 

requirements have been consolidated into a single series of forms (Form 5500 and attachments) 

that is filed with the DOL and then shared with the Internal Revenue Service (IRS). This filing 

serves as the primary tool for gathering information and for appropriate targeting of enforcement 

activity regarding such plans. It also serves to satisfy certain requirements for filing with the 

Pension Benefit Guaranty Corporation. 

Section 6057 requires the administrator of a plan that is subject to the vesting standards of 

ERISA to file, within the time prescribed by regulations, a registration statement with the 

Secretary of the Treasury, and to provide the registration statement to affected participants. The 

registration statement must set forth certain information relating to the plan, including a list of 

plan participants who separate from service covered by the plan and are entitled to deferred 

vested retirement benefits, and the nature, amount, and form of deferred vested retirement 

benefits to which the plan participants are entitled. The registration statement is provided to the 

Social Security Administration (SSA), and the SSA uses the information in the registration 

statement to notify participants of potential plan benefits when they begin receiving social 

security benefits. Historically, the registration statement has been a schedule to Form 5500, 

however, it is now filed with the IRS as a stand-alone Form 8955-SSA.

Reasons for Change

The Department of Labor has the authority to require electronic filing of information relevant to 

Title I of ERISA and has exercised its authority to require that Form 5500 and its attachments be 

filed electronically. However, under section 6011(e), the Treasury and IRS lack general 

statutory authority to require electronic filing of returns unless the person subject to the filing 

requirement must file at least 250 returns during the year. As a result, information relevant only 

to tax Code requirements (such as data on coverage needed to test compliance with 

nondiscrimination rules) and not to DOL’s ERISA Title I jurisdiction cannot be requested on the 

electronically-filed joint Form 5500 and currently is not collected. Collecting it would require a 

separate “IRS only” form that could be filed on paper, a process that would be neither simple nor 

efficient for taxpayers or for the IRS and DOL.
233

This same 250-filings threshold for mandatory electronic filing applies to Form 8955-SSA.

Proposal

The proposal would provide the IRS the authority to require in the electronically filed annual 

reports the inclusion of information that is relevant only to employee benefit plan tax 

requirements, giving the IRS authority with respect to such tax information comparable to the 

authority that DOL already has with respect to information relevant to ERISA Title I. The 

proposal would also provide the IRS with the authority to require electronic filing of Form 8955-

SSA 

The proposal would be effective for plan years beginning after December 31, 2014.
234

IMPOSE A PENALTY ON FAILURE TO COMPLY WITH ELECTRONIC FILING

REQUIREMENTS 

Current Law

Additions to tax are imposed for the failure to file tax returns that report a liability. Certain 

corporations and tax-exempt organizations (including certain charitable trusts and private 

foundations) are required to file their returns electronically. There is no specific penalty for a 

failure to comply with a requirement to file electronically. 

Reasons for Change

A penalty may be an effective incentive for taxpayers to satisfy the electronic filing requirement. 

Generally, electronic filing increases efficiency of tax administration because electronic returns 

can be processed more quickly and at a lower cost than paper returns, and providing tax return 

information in an electronic form enables the Internal Revenue Service to focus audit activities 

where they can have the greatest impact. This also assists taxpayers where the need for audit is 

reduced. 

Proposal

The proposal would establish an assessable penalty for a failure to comply with a requirement of 

electronic (or other machine-readable) format for a return that is filed on paper. The amount of 

the penalty would be $25,000 for a corporation or $5,000 for a tax-exempt organization. For 

failure to file in any format, the existing penalties would remain, and the proposed penalty for 

failing to file electronically would not apply. The penalty would be waived if it is shown that the 

failure to file electronically is due to reasonable cause.

The proposal would be effective for returns required to be electronically filed after December 31, 

2014. 
235

PROVIDE WHISTLEBLOWERS WITH PROTECTION FROM RETALIATION

Current Law

Section 7623 of the Internal Revenue Code (Code) allows whistleblowers to file claims for an 

award where the whistleblower submitted information that allowed the Internal Revenue Service 

(IRS) to detect tax underpayments or detect and bring to trial and punishment persons guilty of 

violating the internal revenue laws. 

Other whistleblower statutes, such as the False Claims Act, explicitly provide whistleblowers 

with protection from retaliatory actions and whistleblowers who suffer retaliatory action may file 

a claim in U.S. district court for relief, including reinstatement, back pay, and other damages. 

There are currently no protections from retaliatory action for whistleblowers who file claims 

under the Code.

Reasons for Change

The lack of protection from retaliation for whistleblowers who file claims under section 7623 of 

the Code may discourage whistleblowers from filing claims with the IRS, even though the IRS’s 

general policy is to protect whistleblowers’ identities. These safeguards do not fully protect the 

whistleblower’s identity because the IRS may need to identify the whistleblower as a trial 

witness in the underlying tax case. Moreover, some taxpayers have brought lawsuits against the 

IRS to discover whether there is a whistleblower who has submitted information about their tax 

issues and, if so, the whistleblower’s identity. Explicitly protecting whistleblowers from 

retaliatory actions should encourage potential whistleblowers to file claims, which would 

increase the tax administration benefit of the whistleblower program.

Proposal

The proposal would amend section 7623 to explicitly protect whistleblowers from retaliatory 

actions, consistent with the protections currently available to whistleblowers under the False 

Claims Act.

The proposal would be effective upon enactment.
236

PROVIDE STRONGER PROTECTION FROM IMPROPER DISCLOSURE OF 

TAXPAYER INFORMATION IN WHISTLEBLOWER ACTIONS

Current Law

Section 6103 provides that tax returns and tax return information are confidential, unless an 

exception applies. Section 6103(p) imposes safeguarding requirements on certain disclosures of 

tax return information. In addition, civil and criminal penalties may be imposed on an 

unauthorized inspection or disclosure of tax return information.

Currently, the Whistleblower Office may share tax return information with whistleblowers and 

their legal representatives in a whistleblower administrative proceeding under section 6103(h) or 

by entering into a written agreement with the Internal Revenue Service (IRS) under section 

6103(n). Whistleblowers and their representatives who receive tax return information under a 

section 6103(n) agreement are subject to the section 6103(p) safeguarding requirements, and 

civil and criminal penalties may apply for unauthorized inspections and disclosures of tax return 

information. These same protections do not currently extend to information disclosed to 

whistleblowers in an administrative proceeding under section 6103(h).

Reasons for Change

Most disclosures of tax return information are subject to the section 6103(p) safeguarding 

requirements, and civil and criminal penalties may apply for unauthorized inspections and 

disclosures of tax return information. The few exceptions are generally cases where redisclosure of the tax return information may be beneficial or necessary; for example, the 

safeguarding requirements do not apply to disclosures made under section 6103(i)(4), which 

permits the IRS to disclose tax return information to federal officers to administer laws that do 

not relate to tax administration for use in a judicial or administrative proceeding (i.e., using tax 

returns as evidence in a non-tax case). There is not a similar policy rationale for exempting 

whistleblower administrative proceedings from the safeguarding requirements. Furthermore, 

whistleblowers and their representatives who receive tax return information under section 

6103(h) should be subject to the same requirements as whistleblowers and their representatives 

who receive tax return information under a section 6103(n) agreement because, in both instances, 

the tax return information is being disclosed to further tax administration and the goals of the 

whistleblower program.

Proposal

The proposal would amend section 6103 to provide that the section 6103(p) safeguarding 

requirements apply to whistleblowers and their legal representatives who receive tax return 

information in whistleblower administrative proceedings. In addition, the proposal extends the 

penalties for unauthorized inspections and disclosures of tax return information to 

whistleblowers and their legal representatives. The proposal will not affect a potential 

whistleblower’s ability to file a claim for award or participate in a whistleblower administrative 

proceeding. The proposal would be effective upon enactment.
237

INDEX ALL PENALTIES FOR INFLATION

Current Law

The Internal Revenue Code (Code) contains numerous penalty provisions where a fixed penalty 

amount was established when the penalty was initially added to the Code. These provisions 

contain no mechanism to adjust the amount of the penalty for inflation, and thus, these penalties 

are only increased by amending the Code.

Reasons for Change

One of the key goals of an effective tax penalty regime is to encourage compliance, which can be 

achieved, in part, by setting penalty amounts at a level that serves as a meaningful economic 

deterrent to non-compliant behavior. Under current practices, however, penalties are only 

infrequently adjusted for inflation, if they are adjusted at all. Thus, the amount of a penalty often 

declines for many years in real, inflation adjusted terms, and so becomes too low to continue 

serving as an effective deterrent. Moreover, increasing penalty amounts through amending the 

Code is inefficient.

Changing current practice would foster the goal of encouraging compliance, increase the penalty 

regime’s effectiveness in deterring negative behavior, and increase efficiency by eliminating the 

need to enact legislation to increase individual penalties.

Proposal

The proposal would index all penalties to inflation and round the indexed amount to the next 

hundred dollars. 

The proposal would be effective upon enactment.
238

EXTEND PAID PREPARER EARNED INCOME TAX CREDIT (EITC) DUE 

DILIGENCE REQUIREMENTS TO THE CHILD TAX CREDIT

Current Law

Paid preparers who prepare federal income tax returns that involve an EITC must meet certain 

due diligence requirements. Those who fail to meet the requirements may face a penalty of $500 

for each return for which the requirement was not met. For each tax return, a paid preparer must 

complete the Paid Preparer’s Earned Income Credit Checklist (Form 8867) and the checklist 

must be filed with the taxpayer’s return. The paid preparer is also responsible for fulfilling 

record-keeping requirements. Prior to 2011, paid preparers were not required to file the checklist 

with the taxpayer’s return and the penalty for noncompliance was $100.

To meet the due diligence requirements, preparers must complete the checklist based on current 

and reasonable information. Preparers must also complete the EITC worksheet found in the 

Form 1040 instructions (or complete a comparable worksheet of their own creation). Finally, 

preparers must take steps to ensure that all taxpayer information provided to them is correct and 

complete by asking follow-up questions to the taxpayer and requesting additional documentation. 

Preparers must keep a copy of all forms, a record of any additional questions asked and 

taxpayer’s answers, and other information for three years.

The eligibility requirements for the child tax credit, including the definition of a qualifying child, 

are similar to the eligibility requirements for the EITC. However, paid preparers do not face a 

similar due diligence requirement for the child tax credit. 

Reasons for Change

The Internal Revenue Service (IRS) estimates that the tax gap attributable to individual income 

tax credits was $28 billion in 2006 (before enforcement actions). One way to improve voluntary 

compliance is improve the accuracy of returns submitted by paid preparers. The IRS has a 

robust program to educate tax return preparers and to identify noncompliant EITC return 

preparers, who are audited and fined. Extending the due diligence requirement to the child tax 

credit, which shares many eligibility criteria with the EITC, could improve compliance without 

excessively increasing the level of burden on paid preparers or taxpayers. 

Proposal

The proposal would extend the due diligence requirement to include all federal income tax 

returns that claim the child tax credit, including the additional child tax credit. The existing 

checklist would be expanded and adapted to reflect the differences in requirements between the 

EITC and the child tax credit, while ensuring that the additional burden to preparers and filers is 

minimized. 

The proposal would be effective for tax years beginning after December 31, 2014.
239

EXTEND INTERNAL REVENUE SERVICE (IRS) AUTHORITY TO REQUIRE A

TRUNCATED SOCIAL SECURITY NUMBER (SSN) ON FORM W-2

Current Law

Employers are required to furnish written statements to their employees containing certain 

information. Employers satisfy this requirement by filing with the IRS Form W-2, Wage and 

Tax Statement, indicating the SSN, wages paid, taxes withheld, and other information, and 

providing a copy of the Form W-2 to each employee. Section 6051(a) specifically requires the 

inclusion of the employee’s SSN on the statement.

Other statements provided to taxpayers–such as Forms 1099–are subject to the more general 

rules under section 6109, which require the filer to include the taxpayer’s “identifying number” 

on the form. Section 6109 provides that, except as otherwise specified in regulations, an 

individual’s SSN is an individual’s identifying number for purposes of the Internal Revenue 

Code. As a result, for some statements, Treasury and the IRS have regulatory authority to 

require or permit filers to use a number other than the taxpayer’s SSN.

Reasons for Change

The incidence of identity theft is increasing, and Treasury and the IRS have taken a multipronged approach to combating identity theft. For example, in 2009, the IRS instituted a pilot 

program permitting filers of certain information returns to truncate a taxpayer’s identifying 

number, including an SSN, on copies of information returns provided to taxpayers. Under the 

pilot program, the first five digits of a taxpayer’s identifying number are replaced with X’s or 

*’s. The pilot program was implemented in response to concerns about identity theft, 

particularly the concern that a taxpayer’s identifying number could be stolen from a paper payee 

statement and used to file false or fraudulent returns. The pilot program was favorably received 

and, in January 2013, Treasury and the IRS published proposed regulations that would make the 

pilot program permanent. 

Because section 6051 explicitly requires the inclusion of an employee’s SSN, Form W-2 could 

not be included in the pilot program or the proposed regulations. The risk of identity theft from 

Form W-2 is high because employers are required to file a Form W-2 for each employee who 

receives wages. Moreover, both the IRS and many state taxing authorities require taxpayers to 

include a copy of their Form W-2 when filing their annual income tax returns, increasing the risk 

that a taxpayer’s SSN could be stolen. Providing the IRS authority to require or permit truncated 

SSNs on Forms W-2 would reduce the risk of identity theft and improper payments resulting 

from false or fraudulent returns. 

Proposal

The proposal would revise section 6051 to require employers to include an “identifying number” 

for each employee, rather than an employee’s SSN, on Form W-2. By revising section 6051 to 

require an identifying number, the general rules under section 6109 would apply and allow 
240

Treasury and the IRS to exercise regulatory authority to require or permit a truncated SSN on 

Form W-2. 

The proposal would be effective upon enactment.
241

ADD TAX CRIMES TO THE AGGRAVATED IDENTITY THEFT STATUTE

Current Law

The Aggravated Identity Theft Statute permits an increased sentence when the identity of another 

individual is used to commit certain crimes that are enumerated in the statute. This enumerated 

list does not include any tax offenses under the Internal Revenue Code in Title 26 or tax-related 

offenses under Title 18, including conspiracy to defraud the government with respect to claims 

(18 U.S.C. 286), false, fictitious, or fraudulent claims (18 U.S.C. 287), or conspiracy (18 U.S.C. 

371). A conviction for aggravated identity theft adds two years to the sentence imposed for the 

underlying felony.

Reasons for Change

Tax refund-related identity theft, where identity thieves use stolen Social Security numbers to 

file false or fraudulent tax returns to obtain an improper refund, has increased exponentially in 

recent years. The Internal Revenue Service (IRS) issued an Identity Protection Personal 

Identification Number (IP PIN) to 1.2 million individuals for the 2014 filing season, an increase 

from about 770,000 individual IP PINs that the IRS issued in the previous year. The IP PIN is a 

unique identifying number that is issued annually to victims of identity theft to use when filing 

their tax returns. Although Treasury and the IRS have implemented a multi-pronged approach to 

combating identity theft, additional tools are needed. Adding tax offenses to the list of predicate 

offenses for aggravated identity theft would increase the enforcement tools available to prosecute 

identity thieves and the potential for an increased prison sentence could serve as an additional 

deterrent to identity thieves.

Proposal

The proposal would add the tax-related offenses in Title 18 and the criminal tax offenses in Title 

26 to the list of predicate offenses contained in the Aggravated Identity Theft Statute. If this 

proposal is enacted, criminals who are convicted for tax-related identity theft may be subject to 

longer sentences than the sentences that apply to those criminals under current law. 

The proposal would be effective upon enactment.
242

IMPOSE A CIVIL PENALTY ON TAX IDENTITY THEFT CRIMES

Current Law

Current law does not impose a civil penalty for tax-related identity theft.

Reasons for Change

Tax-related identity theft has increased exponentially in recent years.. The Internal Revenue 

Service (IRS) issued an Identity Protection Personal Identification Number (IP PIN) to 1.2 

million individuals for the 2014 filing season, an increase from about 770,000 individual IP PINs 

that the IRS issued in the previous year. The IP PIN is a unique identifying number that is issued 

annually to victims of identity theft to use when filing their tax returns.

Although the IRS has a variety of tools that it can use to combat identity theft, these tools do not 

include a civil penalty. While criminal prosecutions can be effective, they are time-consuming 

and resource-intensive. Civil penalties can serve as an additional deterrent, particularly when 

used in conjunction with criminal prosecutions. In addition, civil penalties can be imposed more 

swiftly and efficiently, thereby discouraging identity thieves without imposing significant 

additional burdens on IRS resources. 

Proposal

The proposal would add a $5,000 civil penalty to the Internal Revenue Code to be imposed in tax 

identity theft cases on the individual who filed the fraudulent return. Under the proposal, the IRS 

would be able to immediately assess a separate civil penalty for each incidence of identity theft. 

There is no maximum penalty amount that may be imposed. 

The proposal would be effective upon enactment.
243

ALLOW STATES TO SEND NOTICES OF INTENT TO OFFSET FEDERAL TAX 

REFUNDS TO COLLECT STATE TAX OBLIGATIONS BY REGULAR FIRST-CLASS 

MAIL INSTEAD OF CERTIFIED MAIL

Current Law

Under current law, the U.S. Department of the Treasury, Bureau of the Fiscal Service (Fiscal 

Service), may offset Federal tax refunds to collect delinquent State income tax obligations only 

after the State sends the delinquent debtor a notice by certified mail with return receipt. With 

respect to other types of debts that can be collected via Federal tax refund offset, including

Federal nontax debt, unpaid child support, and State unemployment insurance compensation 

debt, the statute is silent as to the notice delivery method. However, the regulations require that, 

for all debts other than State income tax obligations, Federal and State creditor agencies send 

notices by regular first class mail. Similarly, notice requirements for other debt collection 

actions, including administrative wage garnishment, do not require delivery by certified mail.

Reasons for Change

With the recent postal increase, certified mail with return receipt costs $5.51 more per item than 

first class mail. Based on information received from 21 States before the postage increase, the 

estimated costs for states to send notices by certified mail totaled $14.3 million in 2012. 

There is no evidence that certified mail is more likely to reach the debtor than regular first class 

mail. In fact, it is more likely that the recipient will not receive the notice, because certified mail

either provides a recipient who is at home an opportunity to refuse delivery or requires a 

recipient who is not at home to go to the Post Office to sign for a letter. 

The legislative history of the Internal Revenue Service Restructuring and Reform Act of 1998 

(P.L. 105-206) does not provide a reason for the certified mail with return receipt requirement. 

Similarly, there appears to be no policy reason why offsets for State income tax debts should 

have different due process notice requirements from offsets to collect other types of debts, which 

generally allow the use of first class mail. The ability to use first class mail to send notices for 

delinquent State tax obligations would save the States considerable expense while providing 

uniformity of due process requirements for tax refund offsets.

Proposal

The proposal would remove the statutory requirement to use certified mail, thereby allowing the 

Fiscal Service to amend its regulations to permit States to send notices for delinquent State 

income tax obligations by first class mail. The proposal would be effective on the date of 

enactment.
244

EXPLICITLY PROVIDE THAT THE DEPARTMENT OF THE TREASURY AND THE 

INTERNAL REVENUE SERVICE (IRS) HAVE AUTHORITY TO REGULATE ALL 

PAID RETURN PREPARERS 

Current Law

Taxpayers are increasingly turning to paid tax return preparers and software to assist them in 

meeting their tax filing obligations. Under 31 U.S.C. §330, the Secretary has the authority to 

regulate practice before the IRS. Regulations under that section, referred to as “Circular 230,”

regulate the practice of licensed attorneys, certified public accountants, and enrolled agents and 

actuaries. In 2009, in response to concerns about the lack of regulation of unlicensed and 

unenrolled paid tax return preparers, IRS conducted a formal review of its regulation of paid tax 

return preparers. After significant consideration and input from taxpayers, tax professionals, and 

other stakeholders, Treasury and the IRS amended Circular 230 to regulate practice of all paid 

tax return preparers, including individuals who are unlicensed and unenrolled. Paid tax return 

preparers challenged these regulations in Loving v. Commissioner. The Court of Appeals for the 

District of Columbia Circuit determined that these regulations exceeded the IRS’ authority.

Reasons for Change

Paid tax return preparers have an important role in tax administration because they assist 

taxpayers in complying with their obligations under the tax laws. Incompetent and dishonest tax 

return preparers increase collection costs, reduce revenues, disadvantage taxpayers by potentially 

subjecting them to penalties and interest as a result of incorrect returns, and undermine 

confidence in the tax system. Regulation of paid tax return preparers, in conjunction with 

diligent enforcement, will help promote high quality services from paid tax return preparers, will 

improve voluntary compliance, and will foster taxpayer confidence in the fairness of the tax 

system.

Proposal

The proposal would explicitly provide that the Secretary has the authority to regulate all paid tax 

return preparers. The proposal would be effective on or after the date of enactment.
245

RATIONALIZE TAX RETURN FILING DUE DATES SO THEY ARE STAGGERED

Current Law

Individuals are generally required to file their income tax returns by April 15 of the year 

following the close of the taxable year. An individual may request a six-month extension of time 

to file his or her income tax return. 

Calendar year corporations (i.e., corporations with a tax year ending on December 31), including 

S corporations, are required to file their income tax returns by March 15 of the year following the 

close of the taxable year. Fiscal year corporations (i.e., corporations with a tax year ending on a 

date other than December 31), including S corporations, are required to file their income tax 

returns by the 15th day of the third month following the close of the taxable year. Corporations 

may request an automatic six-month extension of time to file their income tax returns. In 

addition, corporations classified as S corporations are required to provide shareholders with a 

copy of the Schedule K-1 by the due date (including extensions) of the S corporation’s income 

tax return.

Calendar year partnerships are required to file the Form 1065 with the Internal Revenue Service 

(IRS) and furnish a copy of the Schedule K-1 to each partner by April 15 of the year following 

the close of the taxable year. For fiscal year partnerships, the due date is the 15th day of the 

fourth month following the close of the taxable year. Partnerships may request an automatic 

five-month extension of time to file the Form 1065 and furnish copies of the Schedule K-1 to 

partners.

Most information returns, including Forms 1099, 1098, and 1096, are required to be filed with 

the IRS by February 28 of the year following the year for which the information is being 

reported. Form W-2 is required to be filed with the Social Security Administration (SSA) by the 

last day of February. A copy of the information filed with the IRS is generally required to be 

furnished to payees by January 31 of the year following the year for which the information is 

being reported. In the case of payments reported on the Form 1099-B, statements to payees are 

required to be furnished by February 15, rather than January 31. The due date for filing 

information returns with the IRS or SSA is generally extended until March 31 if the returns are 

filed electronically.

Reasons for Change

Third-party information is used by taxpayers to assist them in preparing their income tax returns. 

However, many taxpayers do not receive Schedules K-1 before their income tax returns are due. 

As a result, taxpayers may not have accurate information when they file their income tax returns. 

Accelerating the taxpayer’s receipt of third-party information will reduce burden on taxpayers by 

providing them with accurate information when preparing their original returns and potentially 

reduce the number of amended returns filed by taxpayers. 
246

The IRS also uses third-party information to determine a taxpayer’s compliance with federal tax 

obligations. Accelerating the IRS’s receipt of third-party information will facilitate detection of 

non-compliance earlier in the filing season. 

Proposal

The proposal would rationalize income tax return due dates so that taxpayers receive Schedules 

K-1 before the due date for filing their income tax returns. Under the proposal, calendar year S 

corporation filing deadlines would remain the same, and partnership filing deadlines would be 

made to conform to the current deadlines imposed on S corporations. Accordingly, all calendar 

year partnership and all calendar year S corporation returns (Forms 1065 and 1120-S) and 

Schedules K-1 furnished to partners and shareholders would be due March 15. In addition, 

returns of calendar year corporations other than S corporations would be due April 15 instead of 

March 15. 

The proposal would also accelerate the due date for filing information returns and eliminate the 

extended due date for electronically filed returns. Under the proposal, information returns would 

be required to be filed with the IRS (or SSA, in the case of Form W-2) by January 31, except that 

Form 1099-B would be required to be filed with the IRS by February 15. The due dates for the 

payee statements would remain the same. 

The proposal would be effective for returns required to be filed after December 31, 2014.
247

INCREASE THE PENALTY APPLICABLE TO PAID TAX PREPARERS WHO 

ENGAGE IN WILLFUL OR RECKLESS CONDUCT

Current Law

The Internal Revenue Code (Code), imposes a penalty on paid tax return preparers for 

understatements of tax due to unreasonable positions taken on a return or claim for refund 

(section 6694(a)). The penalty for understatements of tax due to unreasonable positions is the 

greater of $1,000 or 50 percent of the income derived (or to be derived) by the preparer with 

respect to the return or claim for refund. This penalty will not be imposed if there is reasonable 

cause for the understatement and the preparer acted in good faith. 

The Code imposes a separate penalty on paid tax return preparers for understatements of tax that 

occur as a result of a paid preparer’s willful or reckless conduct (section 6694(b)). The penalty 

for understatements due to willful or reckless conduct is the greater of $5,000 or 50 percent of 

the income derived (or to be derived) by the preparer with respect to the return or claim for 

refund, and no reasonable cause exception applies. 

Reasons for Change

In many cases, 50 percent of the income derived (or to be derived) by the preparer is greater than 

the fixed dollar penalties that may be imposed. As a result, often preparers are subject to the 

same penalty amount, regardless of whether the preparer’s conduct was willful and reckless. 

Having the same penalty for willful and non-willful conduct does not sufficiently discourage 

willful or reckless behavior and is unfair to paid tax return preparers whose conduct was not 

willful. 

Proposal

The proposal increases the penalty rate (in section 6694(b)) on paid tax return preparers for 

understatements due to willful or reckless conduct to the greater of $5,000 or 75 percent (instead 

of the current 50 percent) of the income derived (or to be derived) by the preparer with respect to 

the return or claim for refund. 

The proposal would be effective for returns required to be filed after December 31, 2014.
248

ENHANCE ADMINISTRABILITY OF THE APPRAISER PENALTY

Current Law

Internal Revenue Code (Code) section 6694 imposes a penalty on paid tax return preparers for 

understatements of tax due to unreasonable positions taken on a return or claim for refund and 

for understatements of tax that occur as a result of a paid preparer’s willful or reckless conduct. 

The penalty will not be imposed if there is reasonable cause for the understatement and the 

preparer acted in good faith. 

Code section 6695A imposes a penalty on any person who prepares an appraisal of the value of 

property, if the person knows or reasonably should have known that the appraisal would be used 

in connection with a return or claim for refund, and if the claimed value of the property based on 

the appraisal results in a substantial or gross valuation misstatement. There is an exception to the 

penalty if the value in the appraisal is “more likely than not” the proper value. 

Reasons for Change 

Taxpayers must determine the value of property to correctly determine the tax consequences of a 

gift, bequest, sale, exchange, or other transaction involving the property. An appraisal generally 

states the value of property as a specific dollar amount or as an amount within a certain range of 

dollar values. Unlike opinions on tax issues, whether a value is “more likely than not” the 

correct value is not typically addressed in an appraisal. Therefore, “more likely than not” is not 

an administrable standard for an exception to the appraisal penalty.

Further, there is no coordination between the section 6695A penalty on appraisers and the 

section 6694 understatement penalty on return preparers in cases where the person providing the 

appraisal is also treated as a paid tax return preparer with respect to the position on the return or 

claim for refund relying on the valuation in the appraisal. Therefore, a paid tax return preparer 

could be subject to penalties under both section 6694 and section 6695A with respect to the same 

conduct. 

Proposal

The proposal would replace the existing “more likely than not” exception to the section 6695A 

appraiser penalty with a reasonable cause exception. In addition, the proposal would coordinate 

the section 6694 and section 6695A penalties so that an appraiser would not be subject to the 

penalty under section 6695A if, by reason of that appraisal, the appraiser is also subject to a 

penalty under section 6694.

The proposal would be effective for returns required to be filed after December 31, 2014.
249

SIMPLIFY THE TAX SYSTEM

SIMPLIFY THE RULES FOR CLAIMING THE EARNED INCOME TAX CREDIT 

(EITC) FOR WORKERS WITHOUT QUALIFYING CHILDREN

Current Law

Low- and moderate-income workers may be eligible for a refundable EITC. Eligibility for the 

EITC is based on the number of qualifying children in the worker’s household, adjusted gross 

income (AGI), earned income, investment income, filing status, age, and immigration and work 

status in the United States. 

The EITC has a phase-in range (where each additional dollar of earned income results in a larger 

credit), a plateau (where additional dollars of earned income or AGI have no effect on the size of 

the credit), and a phase-out range (where each additional dollar of the larger of earned income or 

AGI results in a smaller total credit). The EITC for workers without qualifying children is much 

smaller and phases out at a lower income level than does the EITC for workers with qualifying 

children. 

In general, taxpayers with low wages who do not have any qualifying children may be eligible to 

claim the small EITC for workers without qualifying children. However, if the taxpayer resides 

with a qualifying child whom the taxpayer does not claim (perhaps because that child is claimed 

by another individual within the household), the taxpayer is not eligible for any EITC.

Reasons for Change

Prohibiting a taxpayer who resides with a qualifying child whom the taxpayer does not claim 

from claiming the EITC for workers without qualifying children is confusing to taxpayers and 

difficult for the Internal Revenue Service to enforce. The prohibition is also inequitable and 

weakens the work incentives of the credit. 

Proposal

The proposal would allow otherwise eligible taxpayers residing with qualifying children whom 

they do not claim to receive the EITC for workers without qualifying children. 

In addition, a separate proposal would expand the EITC for workers without qualifying children.

The proposal would be effective for taxable years beginning after December 31, 2014.
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MODIFY ADOPTION CREDIT TO ALLOW TRIBAL DETERMINATION OF

SPECIAL NEEDS

Current Law

Taxpayers that adopt children can receive a tax credit for qualified adoption expenses. The 

amount of the credit is increased in the case of adoption of a special needs child. To be eligible 

for the increased credit, a State must determine that the child meets the statutory requirements as 

a “child with special needs.” Under the statute, other governmental entities, such as Indian 

Tribal Governments (ITGs) do not have the authority to make this determination. 

Congress passed the Indian Child Welfare Act (ICWA) in 1978 in response to the high number 

of Indian children being removed from their homes by public agencies. Among other things, the 

ICWA allows tribes to manage and maintain adoption programs, in the place of the State, for the 

children of their tribal members. 

Reasons for Change

Like States, many ITGs facilitate adoptions involving special needs. The ICWA programs 

mirror the programs that are administered by State agencies, and ITGs should be accorded the 

same deference as State agencies for purposes of the tax credit for adoption expenses. 

Proposal

The proposal would amend the tax credit for adoption expenses to allow ITGs to make the status 

determination of a “child with special needs.” 

The proposal would be effective for taxable years beginning after December 31, 2014. 
251

SIMPLIFY MINIMUM REQUIRED DISTRIBUTION (MRD) RULES 

Current Law

The MRD rules generally require participants in tax-favored retirement plans, including qualified 

plans under section 401(a), section 401(k) cash or deferred arrangements, section 403(a) annuity 

plans, section 403(b) programs for public schools and charitable organizations, eligible deferred 

compensation plans under section 457(b), Simplified Employee Pensions (SEPs), and SIMPLE 

plans, as well as owners of individual retirement accounts and annuities (IRAs), to begin 

receiving distributions shortly after attaining age 701⁄2. The rules also generally require that these 

retirement assets be distributed to the plan participant or IRA owner (or their spouses or other 

beneficiaries), in accordance with regulations, over their life or a period based on their life 

expectancy (or the joint lives or life expectancies of the participant/owner and beneficiary).

1

 The 

MRD rules apply not only to distributions during the lifetime of the participant/owner but also to 

distributions from a plan or IRA after the participant/owner’s death. 

While designated Roth accounts held in employer-sponsored plans are subject to the MRD rules 

during the life of the designated Roth account holder, Roth IRAs are not subject to these MRD 

rules during the life of the Roth IRA holder. The MRD rules do apply, however, to both Roth 

IRAs and designated Roth accounts after the death of the holder.

If a participant or account owner fails to take, in part or in full, the minimum required 

distribution for a year by the applicable deadline, the amount not withdrawn is subject to a 50-

percent excise tax. 

In addition, taxpayers age 701⁄2 and older are prohibited from contributing to traditional IRAs 

(beginning with the year they turn 701⁄2).

Reasons for Change

The MRD rules are designed largely to prevent taxpayers from using for other purposes amounts 

that were accorded tax-favored treatment in order to provide financial security for the taxpayers 

during retirement. In particular, they are designed to prevent taxpayers from leaving these 

amounts to accumulate in tax-exempt arrangements for the benefit of the taxpayers’ heirs. Under 

current law, however, the MRD rules also apply to millions of senior citizens who do not have 

large tax-favored retirement benefits to fall back on during retirement. The rules require these 

individuals to calculate the annual amount of their minimum required distributions, subject to the 

50-percent excise tax for failure to withdraw a sufficient amount, even though they are highly 

unlikely to try to defer withdrawal and taxation of these benefits for estate planning purposes. 

Exempting those with modest balances from the rules would simplify tax compliance for 

millions of senior citizens without compromising important policy objectives. In addition, the 

 1 Participants in tax-favored retirement plans (excluding IRAs) other than owners of at least five percent of the 

business sponsoring the retirement plan may wait to begin distributions until the year of retirement, if that year is 

later than the year in which the participant reaches age 701⁄2 .
252

proposal permits these individuals greater flexibility in determining when and how rapidly to 

draw down their limited retirement savings. 

While no tax is due on distributions from Roth accounts, Roth account-holders, like savers using 

traditional retirement accounts, continue to benefit from the accumulation of tax-free earnings as 

long as the funds are not withdrawn. Therefore it is reasonable to apply the same MRD and 

contribution rules to Roth IRAs, to support the purpose of the accounts in providing resources for 

retirement. In addition, because Roth accounts in employee plans are subject to the MRD rules 

during the life of designated Roth account holders, but Roth IRAs are not, individuals have a tax 

incentive to save outside of employer-sponsored plans (or to roll over amounts saved in 

employer-sponsored plans into Roth IRAs). However, setting aside these tax considerations, 

individuals may not be better off saving in IRAs than in employer-sponsored plans. For 

example, employer plans may provide greater fiduciary protections, lower fees and expenses, 

better investment options and protection from creditors and legal judgments. 

Proposal

Eliminate MRD requirements for balances of $100,000 or less. The proposal would exempt an 

individual from the MRD requirements if the aggregate value of the individual’s IRA and taxfavored retirement plan accumulations does not exceed $100,000 (indexed for inflation) on a 

measurement date. However, benefits under qualified defined benefit pension plans that have 

already begun to be paid in life annuity form (including any form of life annuity, such as a joint 

and survivor annuity, a single life annuity, or a life annuity with a term certain) would be 

excluded in determining the dollar amount of the accumulations. The MRD requirements would 

phase in ratably for individuals with aggregate retirement benefits between $100,000 and 

$110,000. The initial measurement date for the dollar threshold would be the beginning of the 

calendar year in which the individual reaches age 701⁄2 or, if earlier, in which the individual dies, 

with additional measurement dates occurring only at the beginning of the calendar year 

immediately following any calendar year in which the individual’s IRAs or plans receive 

contributions, rollovers, or transfers of amounts that were not previously taken into account. 

The proposal would be effective for taxpayers attaining age 701⁄2 on or after December 31, 2014 

and for taxpayers who die on or after December 31, 2014 before attaining age 701⁄2.

Harmonize MRD requirements for tax-favored retirement accounts. The proposal would 

harmonize the application of the MRD requirements for holders of designated Roth accounts and 

of Roth IRAs by generally treating Roth IRAs in the same manner as all other tax-favored 

retirement accounts, i.e., requiring distributions to begin shortly after age 701⁄2, without regard to 

whether amounts are held in designated Roth accounts or in Roth IRAs. In addition, individuals 

would not be permitted to make additional contributions to Roth IRAs after they reach age 701⁄2. 

The proposal would be effective for individuals attaining age 701⁄2 after December 31, 2014. 
253

ALLOW ALL INHERITED PLAN AND INDIVIDUAL RETIREMENT ACCOUNT OR 

ANNUITY (IRA) BALANCES TO BE ROLLED OVER WITHIN 60 DAYS

Current Law

Generally, assets can be moved from a tax-favored employer retirement plan or from an IRA into 

an IRA or into an eligible retirement plan without adverse tax consequences. This movement of 

assets can generally be accomplished through a direct rollover of a distribution, a 60-day 

rollover, or a direct trustee-to-trustee transfer that is not a distribution. However, not all of these 

methods are available with respect to assets of a plan or IRA account inherited by a non-spouse 

beneficiary.

In particular, when a participant in a tax-favored employer retirement plan dies before all assets 

in the plan have been distributed, a beneficiary who is a surviving spouse may roll over the 

assets, by direct rollover or 60-day rollover, into an IRA that is treated either as a spousal 

inherited IRA or as the surviving spouse’s own IRA. A beneficiary who is not a surviving 

spouse, on the other hand, may roll over the assets into an IRA that is a non-spousal inherited 

IRA only by means of a direct rollover; a 60-day rollover is not available to a surviving nonspouse beneficiary. 

Similarly, when the owner of an IRA dies before all assets in the IRA have been distributed, a 

surviving spouse beneficiary may elect to treat the assets as his or her own IRA or as a spousal 

inherited IRA. In addition, a surviving spouse beneficiary may roll over the assets into an IRA 

that is treated either as the surviving spouse’s own IRA or as a spousal inherited IRA. A 

surviving non-spouse beneficiary, on the other hand, may treat the assets as a non-spousal 

inherited IRA, and may move the assets to another non-spousal inherited IRA only by means of a 

direct trustee-to-trustee transfer; rollovers from the deceased owner’s IRA to another IRA are not 

available for a surviving non-spouse beneficiary.

Reasons for Change

The rules that a surviving non-spouse beneficiary under a tax-favored employer retirement plan 

may roll over assets to an IRA only by means of a direct rollover and that a surviving non-spouse 

beneficiary under an IRA may move assets to a non-spousal inherited IRA only by means of a 

direct trustee-to-trustee transfer create traps for the unwary. These differences in rollover 

eligibility between surviving non-spouse beneficiaries and surviving spouse beneficiaries (and 

living participants) serve little purpose and generate confusion among plan and IRA 

administrators and beneficiaries. For example, IRA administrators often treat all transfers 

(whether or not an IRA account is a non-spousal inherited IRA) as rollovers, thereby causing 

confusion for individuals and the Internal Revenue Service. Similarly non-spouse beneficiaries 

may attempt to move assets to an inherited IRA by means of a 60-day rollover. 

Proposal

The proposal would expand the options that are available to a surviving non-spouse beneficiary 

under a tax-favored employer retirement plan or IRA for moving inherited plan or IRA assets to 
254

a non-spousal inherited IRA by allowing 60-day rollovers of such assets. This treatment would 

be available only if the beneficiary informs the new IRA provider that the IRA is being 

established as an inherited IRA, so that the IRA provider can title the IRA accordingly.

The proposal would be effective for distributions made after December 31, 2014.
255

REPEAL NON-QUALIFIED PREFERRED STOCK (NQPS) DESIGNATION

Current Law 

In 1997, Congress added a provision to section 351 that treats NQPS as taxable “boot” for 

certain purposes. In addition to its treatment as boot in corporate organizations, NQPS is also 

treated as boot in certain shareholder exchanges pursuant to a plan of corporate reorganization. 

NQPS is stock that (i) is limited and preferred as to dividends and does not participate in 

corporate growth to any significant extent; and (ii) has a dividend rate that varies with reference 

to an index, or, in certain circumstances, a put right, a call right, or a mandatory redemption 

feature. The addition of this provision reflected the belief that the receipt of certain types of 

preferred stock more appropriately represented taxable consideration because the 

investor/transferor obtained a more secure form of investment.

Reasons for Change 

NQPS is treated like debt for certain limited purposes but is otherwise generally treated as stock. 

This hybrid nature of NQPS has transformed it into a staple of affirmative corporate tax 

planning: its issuance often occurs in loss-recognition planning, where NQPS is treated as debtlike boot, or to avoid the application of a provision that treats a related-party stock sale as a 

dividend. Thus, for the unwary, the designation and treatment of NQPS represents a proverbial 

trap that adds additional complexity to the Internal Revenue Code (Code), while for the welladvised, the issuance of NQPS often arises in transactions that are inconsistent with the original 

purpose of the 1997 provision.

Proposal 

The proposal would repeal the NQPS provision and other cross-referencing provisions of the 

Code that treat NQPS as boot.

The proposal would be effective for stock issued after December 31, 2014.
256

REPEAL PREFERENTIAL DIVIDEND RULE FOR PUBLICLY TRADED AND 

PUBLICLY OFFERED REAL ESTATE INVESTMENT TRUSTS (REITS)

Current Law

REITs are allowed a deduction for dividends paid to their shareholders. In order to qualify for 

the deduction, a dividend must not be a “preferential dividend.” For this purpose, a dividend is 

preferential unless it is distributed pro rata to shareholders, with no preference to any share of 

stock compared with other shares of the same class, and with no preference to one class as 

compared with another except to the extent the class is entitled to a preference. Previously, a 

similar rule had applied to all regulated investment companies (RICs). Section 307 of the 

Regulated Investment Company Modernization Act of 2010 repealed application of that rule for 

publicly offered RICs.

Reasons for Change

The original purpose of the preferential dividend rule in 1936 was to prevent tax avoidance by 

closely held personal holding companies. The inflexibility of the rule can produce harsh results 

for inadvertent deviations in the timing or amount of distributions to some shareholders. 

Because an attempt to compensate for a preference in one distribution produces a preference in a 

second offsetting distribution, it is almost impossible to undo the impact of a prior error. As 

applied to publicly traded REITs and publicly offered REITs, the rule has ceased to serve a 

necessary function either in preventing tax avoidance or in ensuring fairness among

shareholders. Today, for these shareholders, corporate and securities laws bar preferences and 

ensure fair treatment.

Proposal

The proposal would repeal the preferential dividend rule for publicly traded REITs and publicly 

offered REITs. That is, the preferential dividend rule would not apply to a distribution with 

respect to stock if–

• As of the record date of the distribution, the REIT was publicly traded; or

• As of the record date of the distribution–

o The REIT was required to file annual and periodic reports with the Securities and 

Exchange Commission under the Securities Act of 1934; 

o Not more than one-third of the voting power of the REIT was held by a single 

person (including any voting power that would be attributed to that person under 

the rules of section 318); and

o Either the stock with respect to which the distribution was made is the subject of a 

currently effective offering registration, or such a registration has been effective 

with respect to that stock within the immediately preceding 10–year period.
257

The Secretary of the Treasury would also be given explicit authority to provide for cures of 

inadvertent violations of the preferential dividend rule where it continues to apply and, where 

appropriate, to require consistent treatment of shareholders.

The proposal would apply to distributions that are made (without regard to section 858) in 

taxable years beginning after the date of enactment.
258

REFORM EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE 

FOUNDATIONS

Current Law

Private foundations that are exempt from federal income tax generally are subject to a twopercent excise tax on their net investment income. The excise tax rate is reduced to one percent 

in any year in which the foundation’s distributions for charitable purposes exceed the average 

level of the foundation’s charitable distributions over the five preceding taxable years (with 

certain adjustments). Private foundations that are not exempt from federal income tax, including 

certain charitable trusts, must pay an excise tax equal to the excess (if any) of the sum of the 

excise tax on net investment income and the amount of the unrelated business income tax that 

would have been imposed if the foundation were tax exempt, over the income tax imposed on the 

foundation. Under current law, private nonoperating foundations generally are required to make 

annual distributions for charitable purposes equal to five percent of the fair market value of the 

foundation’s noncharitable use assets (with certain adjustments). The amount that a foundation 

is required to distribute annually for charitable purposes is reduced by the amount of the excise 

tax paid by the foundation. 

Reasons for Change

The current “two-tier” structure of the excise tax on private foundation net investment income 

may discourage foundations from significantly increasing their charitable distributions in any 

particular year. An increase in a private foundation’s distributions in one year will increase the 

foundation’s five-year average percentage payout, making it more difficult for the foundation to 

qualify for the reduced one-percent excise tax rate in subsequent years. Because amounts paid 

by foundations in excise tax generally reduce the funds available for distribution to charitable 

beneficiaries, eliminating the “two-tier” structure of this excise tax would ensure that a private 

foundation’s grantees do not suffer adverse consequences if the foundation increases its grantmaking in a particular year to respond to charitable needs (for example, disaster relief). Such a 

change would also simplify both the calculation of the excise tax and charitable distribution 

planning for private foundations. 

Proposal

The proposal would replace the two rates of tax on private foundations that are exempt from 

federal income tax with a single tax rate of 1.35 percent. The tax on private foundations not 

exempt from federal income tax would be equal to the excess (if any) of the sum of the 1.35-

percent excise tax on net investment income and the amount of the unrelated business income tax 

that would have been imposed if the foundation were tax exempt, over the income tax imposed 

on the foundation. The special reduced excise tax rate available to tax-exempt private 

foundations that maintain their historic levels of charitable distributions would be repealed. 

The proposal would be effective for taxable years beginning after the date of enactment.
259

REMOVE BONDING REQUIREMENTS FOR CERTAIN TAXPAYERS SUBJECT TO 

FEDERAL EXCISE TAXES ON DISTILLED SPIRITS, WINE, AND BEER

Current Law

The Alcohol and Tobacco Tax and Trade Bureau (TTB) collects taxes on distilled spirits, wines, 

and beer under the Internal Revenue Code (Code). 

The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users 

(SAFETEA-LU), was enacted into P.L. 109-59 on August 10, 2005. Section 11127, “Quarterly 

Excise Tax Filing for Small Alcohol Excise Taxpayers” of SAFETEA-LU amended section 

5061(d)(4) of the Code so that importers and producers of distilled spirits, wine, and beer with a 

reasonably expected excise tax liability of $50,000 or less in a calendar year, who were liable for 

not more than $50,000 in such taxes in the preceding calendar year, could file returns and pay 

taxes within 14 days after the end of the calendar quarter. 

The option for small beverage alcohol excise taxpayers (“small taxpayers”) to file and pay taxes 

quarterly, rather than semi-monthly, currently only applies to withdrawals, removals, and entries 

(and articles brought into the United States from Puerto Rico) under bond. 

Additionally, TTB has administratively allowed eligible wineries who paid excise taxes in an 

amount less than $1,000 during the previous calendar year to file taxes annually pursuant to the 

regulatory bond framework promulgated under the bond authority for wineries in section 5354 of 

the Code and the tax return period filing authority under section 5061 of the Code. 

Reasons for Change

For calendar year 2013, 88 percent (7,004 of 7,916) of beverage alcohol taxpayers 

(manufacturers, producers, and importers of distilled spirits, wine, and beer) had a tax liability of 

less than $50,000. Of these, 1,981 still filed semi-monthly, although they have the option to file 

quarterly.

Small taxpayers may choose to continue to file taxes semi-monthly because they would have to 

increase their deferral bond amounts if they were to file taxes quarterly. By eliminating the bond 

requirements for small taxpayers, quarterly filing would be less burdensome. This would also 

lessen the burden for TTB in processing the tax payments.

Distilled spirits and beer taxpayers who paid excise taxes in an amount less than $1,000 during 

the previous calendar year are not eligible to file taxes annually, as wineries are. 

Proposal

The proposal would require any distilled spirits, wines, and beer taxpayer who reasonably 

expects to be liable for not more than $50,000 per year in alcohol excise taxes (and who was 

liable for not more than $50,000 in such taxes in the preceding calendar year) to file and pay 

such taxes quarterly, rather than semi-monthly. The proposal would also create an exemption 
260

from the bond requirement in the Internal Revenue Code for these small taxpayers. The proposal 

includes conforming changes to the other sections of the Code describing bond requirements.

Additionally, the proposal would allow any distilled spirits, wine, or beer taxpayer with a 

reasonably expected alcohol excise tax liability of not more than $1,000 per year to file and pay 

such taxes annually rather than on a quarterly basis. The proposal will create parity among 

alcohol taxpayers by allowing eligible distilled spirits and beer taxpayers to file annually as well.

The proposal would be effective 90 days after the date of enactment.
261

SIMPLIFY ARBITRAGE INVESTMENT RESTRICTIONS

Current Law

Section 103 provides generally that interest on debt obligations issued by State and local 

governments for governmental purposes is excludable from gross income. Section 148 imposes 

two types of complex arbitrage investment restrictions on investments of tax-exempt bond 

proceeds pending use for governmental purposes. These restrictions generally limit investment 

returns that exceed the yield or effective interest rate on the tax-exempt bonds. One type of 

restriction, called “yield restriction,” limits investment returns in the first instance, and a second 

type, called “rebate,” requires issuers to repay arbitrage investment earnings to the Federal 

Government at prescribed intervals. These restrictions developed in different ways over a long 

period of time, beginning with yield restriction in 1969 and continuing with the extension of the 

rebate requirement to all tax-exempt bonds in 1986. Various exceptions apply in different ways 

to these two types of arbitrage restrictions, including exceptions for prompt expenditures of bond 

proceeds, reasonable debt service reserve funds, small issuers, and other situations.

With respect to spending exceptions, a two-year construction spending exception to arbitrage 

rebate under section 148(f)(4)(C) applies to certain categories of tax-exempt bonds (including 

bonds for governmental entities and nonprofit entities, but excluding most private activity 

bonds). This two-year construction spending exception has semiannual spending targets, 

bifurcation rules to isolate construction expenditures, and elective penalties in lieu of rebate for 

failures to meet spending targets. Separately, a longstanding regulatory three-year spending 

exception to yield restriction is available for all tax-exempt bonds used for capital projects.

A small issuer exception to arbitrage rebate under section 148(f)(4)(D) applies to certain 

governmental small issuers with general taxing powers if they issue no more than $5 million in 

tax-exempt bonds in a particular year. The small issuer exception has been in effect since 1986 

without change, except for an increase to $15 million for certain public school expenditures.

Reasons for Change

The arbitrage investment restrictions create unnecessary complexity and compliance burdens for 

State and local governments in several respects. In general, the two types of arbitrage 

restrictions (yield restriction and rebate) are duplicative and overlapping and they have the same 

tax policy objective to limit arbitrage profit incentives for excess issuance of tax-exempt bonds. 

While Treasury Regulations have integrated these restrictions partially, further statutory 

integration of the arbitrage restrictions could provide a simpler and more unified framework.

Moreover, the two-year construction spending exception to arbitrage rebate is extremely 

complex. This exception has restricted eligibility rules, unduly-short spending targets, and 

complex penalty elections that are rarely used. A streamlined spending exception could provide 

meaningful simplification and reduce compliance burdens. Limited arbitrage potential exists if 

issuers spend proceeds fairly promptly. By comparison, a recent uniform provision for qualified 

tax credit bonds under section 54A has a simplified three-year spending exception to arbitrage 

restrictions, along with a requirement to redeem bonds upon a failure to meet the spending rules.
262

An increase in the small issuer exception to arbitrage rebate would reduce compliance burdens 

for a large number of State and local governmental issuers while affecting a disproportionately 

smaller amount of tax-exempt bond dollar volume. For example, in 2008, issuers under a similar 

$10 million small issuer exception for bank-qualified tax-exempt bonds under section 265 issued 

about 39 percent of the total number of tax-exempt bond issues (4,195 out of 10,830 total bond 

issues), but only 3.9 percent of total dollar volume ($15.3 billion out of $389.6 billion).

Proposal

Unify Yield Restriction and Rebate Further. The proposal would unify yield restriction and 

rebate further by relying on arbitrage rebate as the principal type of arbitrage restriction on taxexempt bonds. The proposal generally would repeal yield restriction, subject to limited 

exceptions under which yield restriction would continue to apply to investments of refunding 

escrows in advance refunding issues under section 149(d) and to other situations identified in 

regulations.

Broader Streamlined Three-year Spending Exception. The proposal would provide a broader 

streamlined three-year spending exception to arbitrage rebate for tax-exempt bonds that meet the 

following requirements:

(1) Eligible Tax-exempt Bonds. Eligible tax-exempt bonds would include all 

governmental bonds and private activity bonds, excluding only bonds used for advance 

refundings under section 149(d) or restricted working capital expenditures (as defined in 

regulations).

(2) Long-term Fixed Rate Bonds. The tax-exempt bonds would be required to have a 

fixed yield and a minimum weighted average maturity of at least five years.

(3) Spending Period. The issuer would be required to spend 95 percent of the bond 

within three years after the issue date. (This 5-percent de minimis provision broadens the 

availability exception to cover many circumstances in which minor amounts of bond proceeds 

remain unspent for bona fide reasons.) 

(4) Due Diligence. The issuer would be required to satisfy a due diligence standard in 

spending the bond proceeds.

Upon a failure to meet the spending requirements for this exception, the tax-exempt bond issue 

would revert to become subject to the arbitrage rebate requirement.

Increase Small Issuer Exception. The proposal would increase the small issuer exception to the 

arbitrage rebate requirement for tax-exempt bonds from $5 million to $10 million and index the 

size limit for inflation. The proposal also would remove the general taxing power constraint on 

small issuer eligibility.

The proposal would be effective for bonds issued after the date of enactment.
263

SIMPLIFY SINGLE-FAMILY HOUSING MORTGAGE BOND TARGETING 

REQUIREMENTS 

Current Law

Section 143 allows use of tax-exempt qualified mortgage bonds to finance mortgage loans for 

owner-occupied single-family housing residences, subject to a number of targeting requirements, 

including, among others: a mortgagor income limitation (generally not more than 115 percent of 

applicable median family income, increased to 140 percent of such income for certain targeted 

areas, and also increased for certain high-cost areas); a purchase price limitation (generally not 

more than 90 percent of average area purchase prices, increased to 110 percent in targeted areas); 

refinancing limitation (generally only new mortgages for first-time homebuyers are eligible); and 

a targeted area availability requirement. In addition, the general restrictions on tax-exempt 

private activity bonds apply to these qualified mortgage bonds, including, among other 

restrictions, the State private activity bond volume cap under section 146.

Reasons for Change

The targeting requirements for qualified mortgage bonds are complex and excessive. The 

mortgagor income limit generally serves as an appropriate limit to target this lower cost 

borrowing subsidy to a needy class of low- and moderate-income beneficiaries. The mortgagor 

income limit typically is a more constraining factor than the purchase price limit. The restriction 

against refinancing limits the availability of this lower cost borrowing subsidy as a tool to 

address needs for affordable mortgage loan refinancing within a needy class of existing low- and 

moderate-income homeowners. 

Proposal

The proposal would repeal the purchase price limitation under section 143(e) and the refinancing 

limitation under section 143(d) on tax-exempt qualified mortgage bonds. 

The proposal would be effective for bonds issued after the date of enactment.
264

STREAMLINE PRIVATE BUSINESS LIMITS ON GOVERNMENTAL BONDS

Current Law

Section 141 treats tax-exempt bonds issued by State and local governments as governmental 

bonds if the issuer limits private business use and other private involvement sufficiently to avoid 

treatment as “private activity bonds.” Bonds generally are classified as private activity bonds 

under a two-part test if more than 10 percent of the bond proceeds are both (1) used for private 

business use, and (2) payable or secured from property or payments derived from private 

business use.

Subsidiary restrictions further reduce the permitted thresholds of private involvement for 

governmental bonds in several ways. Section 141(b)(3) imposes a five-percent unrelated or 

disproportionate private business use limit. Section 141(b)(4) imposes a $15 million cap on 

private business involvement for governmental output facilities (such as electric, gas, or other 

output generation, transmission, and distribution facilities, but excluding water facilities). 

Section 141(c) imposes a private loan limit equal to the lesser of five percent or $5 million of 

bond proceeds. Section 141(b)(5) requires a volume cap allocation for private business 

involvement that exceeds $15 million in larger transactions which otherwise comply with the 

general 10-percent private business limits.

Reasons for Change

The 10-percent private business limit generally represents a sufficient and workable threshold for 

governmental bond status. The volume cap requirement for private business involvement in 

excess of $15 million serves a control on private business involvement in larger transactions.

The particular subsidiary restriction which imposes a 5-percent limit on unrelated or 

disproportionate private business use introduces undue complexity, a narrow disqualification 

trigger, and attendant compliance burdens for State and local governments. The five-percent 

unrelated or disproportionate private business use test requires difficult factual determinations 

regarding the relationship of private business use to governmental use in financed projects. This 

test is difficult to apply, particularly in governmental bond issues that finance multiple projects.

Proposal

The proposal would repeal the five-percent unrelated or disproportionate private business use test 

under section 141(b)(3) to simplify the private business limits on tax-exempt governmental 

bonds.

The proposal would be effective for bonds issued after the date of enactment.
265

EXCLUDE SELF-CONSTRUCTED ASSETS OF SMALL TAXPAYERS FROM THE 

UNIFORM CAPITALIZATION (UNICAP) RULES

Current Law

Under the UNICAP rules, taxpayers that produce property for use in their trade or business or 

produce or acquire property for resale are required to capitalize the direct and indirect costs of 

the property produced or acquired. The term “produce” includes construct, build, install, 

manufacture, develop, or improve. A taxpayer is treated as producing any property that is 

produced for the taxpayer under a contract with the taxpayer. Costs required to be capitalized 

under the UNICAP rules include direct costs of property produced, a proper share of certain 

indirect costs allocable to the property produced, and, in certain cases, allocable interest costs. 

Direct costs include the costs of materials that become an integral part of the item and that are 

consumed in the ordinary course of the activity, and the cost of labor that can be identified or 

associated with the activity, such as basic compensation, overtime pay, vacation pay, and payroll 

taxes. Indirect costs include all other costs, such as repair and maintenance of equipment or 

facilities, utilities, rental fees, depreciation, amortization, supervisory wages, administrative 

costs, pension contributions, and engineering and design expenses. The regulations provide that 

indirect costs are properly allocable to property produced when the costs directly benefit or are 

incurred by reason of the performance of production. 

The UNICAP rules contain a number of exceptions. For example, personal property acquired by 

a taxpayer for resale is not subject to the UNICAP rules if the average annual gross receipts of 

the taxpayer do not exceed $10 million. A de minimis rule treats producers with total indirect 

costs of $200,000 or less as having no additional indirect costs beyond those normally 

capitalized for financial accounting purposes. Other rules exempt produced inventory of certain 

small producers from the UNICAP capitalization requirements.

Reasons for Change

The identification of capitalizable costs and the methods for allocating indirect costs, as well as 

rules relating to interest capitalization, are complex and require a sophisticated knowledge of the 

tax law. Appropriate use of allocation methodologies, interest capitalization, and overall 

compliance with the UNICAP rules is a frequent source of controversy between the Internal 

Revenue Service and taxpayers. 

Because of the breadth of activities that constitute production under the UNICAP rules, and other 

complexities in complying with these rules, many small taxpayers that improve or construct 

tangible property for use in their trade or business (self-constructed assets) are unknowingly 

subject to UNICAP. Compliance with UNICAP is a significant burden for such taxpayers, as 

general accounting principles would not otherwise require capitalization of many UNICAP costs 

or use cost allocation methodologies that are appropriate under UNICAP. Further, even small 

taxpayers that may be able to identify costs required to be capitalized under these general 

requirements may not have adequate recordkeeping capabilities or tax department resources to 

comply with the additional UNICAP requirements for self-constructed assets. 
266

An exception for small taxpayers from the requirements of UNICAP with respect to selfconstructed assets would relieve both small taxpayers and tax administrators from devoting 

valuable resources to compliance and enforcement activities. In addition, such an exception 

would allow small taxpayers to invest in improving or constructing new business assets without 

incurring costs to comply with UNICAP and will allow certain otherwise deductible indirect 

costs related to production to be expensed in the year incurred (instead of being recovered as part 

of the asset’s basis).

Proposal

The proposal would exempt taxpayers having average annual gross receipts of $10 million or 

less from the application of the UNICAP rules for costs incurred to produce real or personal 

property (including property produced for the taxpayer under a contract with another party) for 

use by the taxpayer in its trade or business. Average annual gross receipts would be calculated 

based on the taxpayer’s three-previous taxable years. All persons treated as a single employer 

under current statutory rules would be treated as a single taxpayer for the purpose of this test. 

The proposal would not exempt costs incurred in the taxpayer’s production of property that is 

held for sale.

The proposal would be effective for costs incurred in taxable years beginning after December 31, 

2014.
267

REPEAL TECHNICAL TERMINATIONS OF PARTNERSHIPS

Current Law

Under section 707(b)(1)(B) of the Internal Revenue Code, if within a 12-month period, there is a 

sale or exchange of 50 percent or more of the total interest in partnership capital and profits, the 

partnership is treated as having terminated for U.S. federal income tax purposes. 

Reasons for Change

A termination of this kind is commonly referred to as a “technical termination” because the 

termination occurs solely for U.S. federal income tax purposes, even though the entity continues 

to exist for local law purposes and the business of the partnership continues. Even though the 

business of the partnership continues in the same legal form, several unanticipated consequences 

occur as a result of a technical termination, including, among other things, the restart of section 

168 depreciation lives, the close of the partnership’s taxable year, and the loss of all partnership 

level elections. Accordingly, this rule currently serves as a trap for the unwary taxpayer or as an 

affirmative planning tool for the savvy taxpayer. 

Proposal

The proposal would repeal section 708(b)(1)(B) effective for transfers on or after December 31, 

2014.
268

REPEAL ANTI-CHURNING RULES OF SECTION 197

Current Law

In 1993, Congress enacted section 197 of the Internal Revenue Code to allow the amortization of 

certain intangibles (such as goodwill and going concern value). Prior to the enactment of section 

197, such intangibles were not amortizable. To “prevent taxpayers from converting existing 

goodwill, going concern value, or any other section 197 intangible for which a depreciation or 

amortization deduction would not have been allowable under [prior] law into amortizable 

property,” Congress enacted section 197(f)(9), which excludes an intangible from the definition 

of amortizable section 197 intangible if (1) the intangible was held or used at any time on or after 

July 25, 1991, and on or before August 10, 1993 (the “transition period”), by the taxpayer or 

related person; (2) the taxpayer acquired the intangible from a person who held it at any time 

during the transition period, and, as part of the transaction, the user of the intangible does not 

change; or (3) the taxpayer grants the right to use the intangible to a person (or a person related 

to that person) who held or used the intangible at any time during the transition period. 

Reasons for Change

The rules under section 197(f)(9) are complex. Because it has been almost 20 years since the 

enactment of section 197, most of the intangibles that exist today did not exist during the 

transition period and, thus, would not be subject to section 197(f)(9). Even though the number of 

intangibles subject to section 197(f)(9) may be minor, taxpayers must nevertheless engage in due 

diligence to determine whether such intangibles exist and then navigate the complex rules of 

section 197(f)(9). Accordingly, the complexity and administrative burden associated with 

section 197(f)(9) outweighs the current need for the provision.

Proposal

The proposal would repeal section 197(f)(9) effective for acquisitions after December 31, 2014.
269

REPEAL SPECIAL ESTIMATED TAX PAYMENT PROVISION FOR CERTAIN 

INSURANCE COMPANIES

Current Law

An insurance company uses reserve accounting to compute losses incurred. That is, losses 

incurred for the taxable year includes losses paid during the taxable year (net of salvage and 

reinsurance recovered), plus or minus the increase or decrease in discounted unpaid losses during 

the year. An adjustment is also made for the change in discounted estimated salvage and 

reinsurance recoverable.

Unpaid losses are determined on a discounted basis to account for the time that may elapse 

between an insured loss event and the payment or other resolution of the claim. Taxpayers may, 

however, elect under section 847 to take an additional deduction equal to the difference between 

the amount of their reserves computed on a discounted basis and the amount computed on an 

undiscounted basis. In order to do so, a taxpayer must make a special estimated tax payment 

(SETP) equal to the tax benefit attributable to the additional deduction. In addition, the 

additional deductions are added to a special loss discount account. In future years, as losses are 

paid, amounts are subtracted from the special discount account and included in gross income; the 

SETPs are used to offset tax generated by these income inclusions. To the extent an amount 

added to the special loss discount account is not subtracted within 15 years, it is automatically 

subtracted (and included in gross income) for the 15th year. This regime of additional deductions 

and SETPs is, by design, revenue neutral.

Reasons for Change

Although this provision is revenue neutral, it imposes a substantial recordkeeping burden on both 

taxpayers and the Internal Revenue Service. Records must be maintained for up to 15 years for 

both amounts added to the special loss discount account and amounts paid as SETPs. Additional 

complexities frequently arise, such as when a taxpayer has a net operating loss carryback, or 

when a taxpayer is subject to regular tax in one year and alternative minimum tax in another. 

Also, further complexity arises under section 847 because an insurance company must account 

for tax benefits that would arise from the filing of a consolidated return with other insurance 

companies without taking into account statutory limitations on the absorption of losses of nonlife insurers against income of life insurance companies.

Proposal

The proposal would repeal section 847 of the Internal Revenue Code, effective for taxable years 

beginning after December 31, 2014.

The entire balance of any existing special loss discount account would be included in gross 

income for the first taxable year beginning after December 31, 2014, and the entire amount of 

existing SETPs would be applied against additional tax that is due as a result of that inclusion. 

Any SETPs in excess of the additional tax that is due would be treated as an estimated tax 

payment under section 6655.
270

In lieu of immediate inclusion in gross income for the first taxable year beginning after 

December 31, 2014, taxpayers would be permitted to elect to include the balance of any existing 

special loss discount account in gross income ratably over a four taxable year period, beginning 

with the first taxable year beginning after December 31, 2014. During this period, taxpayers 

would be permitted to use existing SETPs to offset any additional tax that is due as a result of 

that inclusion. At the end of the fourth year, any remaining SETPs would be treated as an 

estimated tax payment under section 6655.
271

REPEAL THE TELEPHONE EXCISE TAX

Current Law 

The Internal Revenue Code imposes a three-percent excise tax on amounts paid for taxable 

communications services, which include local telephone service and toll telephone service. 

Local telephone service is defined as access to a local telephone system and the privilege of 

telephonic communication with substantially all persons having telephones in the local system. 

Toll telephone service is defined to include both (1) telephonic quality communication for which 

there is a toll charge that varies in amount with the distance and elapsed transmission time of 

each individual call, and (2) telephone service that (a) provides the right to an unlimited number 

of telephone calls to points in a specified area that is outside the local telephone system and (b) is 

subject to a periodic charge determined either as a flat amount or upon the basis of total elapsed 

transmission time.

Until the mid-1990s, most long-distance charges were based on the time and distance of each 

call. Since then, the industry has shifted to charges based solely on time, which are not subject 

to the tax. The Internal Revenue Service has announced that taxpayers are also not required to 

pay tax on similar services, such as plans that provide bundled local and long distance service for 

either a flat monthly fee or a charge that varies with the elapsed transmission time for which the 

service is used. As a result, the only communications services that remain subject to the tax are 

purely local telephone services. 

Reasons for Change 

It is likely that for most taxpayers, purely local telephone service will continue to be replaced 

over time by nontaxable services. Those who continue to purchase purely local services subject 

to the telephone excise tax will increasingly be poor and elderly. Thus the tax increasingly will 

be inequitable. 

Proposal 

All taxes on communications services, including the tax on local telephone service, would be 

repealed. The proposal would be effective for amounts paid pursuant to bills first rendered more 

than 90 days after enactment of legislation repealing the tax.
272

INCREASE THE STANDARD MILEAGE RATE FOR AUTOMOBILE USE BY 

VOLUNTEERS 

Current Law

Under current law, taxpayers may deduct unreimbursed expenses directly related to the use of an 

automobile in giving services to a charitable organization. As an alternative to tracking actual 

expenses, taxpayers may use a standard mileage rate of 14 cents per mile. This rate is set by 

statute and is not indexed for inflation or otherwise adjusted over time.

Similarly, a taxpayer may claim a deduction for expenses incurred when using an automobile for 

medical reasons or in the course of a move. The standard mileage rate applicable to medical and 

moving expenses is set annually by the Internal Revenue Service (IRS) to cover the variable 

costs of operating an automobile. For tax year 2014, the rate for medical and moving expenses is 

23.5 cents per mile.

Reasons for Change

Standard mileage rates simplify record-keeping and reduce compliance costs by eliminating the 

need to track actual expenses and offering the alternative of tracking only miles driven. 

However, since the mileage rate for charitable use of a vehicle was last increased in 1997, price 

increases have substantially eroded the value of a deduction computed using the standard rate 

relative to the actual expenses incurred. As a result, a taxpayer incurring typical expenses in 

operating his or her vehicle would need to give up a substantial fraction of the deduction to 

which he or she would otherwise be entitled to make use of the standard mileage rate. This 

reduction in value makes the standard mileage rate less effective in achieving the goals of 

facilitating compliance and reducing compliance costs.

Proposal

The proposal would set the standard mileage rate for the charitable contribution deduction equal 

to the rate set by the IRS for purposes of the medical and moving expense deduction. It would 

likewise be adjusted annually to reflect the estimated variable costs of operating a vehicle.

The proposal would be effective for tax years beginning after December 31, 2014.
273

USER FEE

REFORM INLAND WATERWAYS FUNDING

Current Law

The Inland Waterways Trust Fund is authorized to pay 50 percent of the capital costs of the locks 

and dams and other features that make commercial transportation possible on the inland and 

intracoastal waterways. This trust fund is supported by a 20-cents-per-gallon excise tax on 

liquids used as fuel in a vessel in commercial waterway transportation. The excise tax applies to 

commercial waterway transportation on a waterway listed in section 206 of the Inland 

Waterways Revenue Act of 1978, as amended. Commercial waterway transportation is defined 

as any use of a vessel on a listed waterway: (1) in the business of transporting property for 

compensation or hire; or (2) in transporting property in the business of the owner, lessee, or 

operator of the vessel (other than fish or other aquatic animal life caught on the voyage). 

Exceptions are provided for deep-draft ocean-going vessels, passenger vessels, State and local 

governments, and certain ocean-going barges.

Reasons for Change

The fuel excise tax does not raise enough revenue to pay the full amount of the authorized 

expenditures from this trust fund. Moreover, the tax is not the most efficient method for 

financing expenditures on those waterways. Additional funding to supplement the amount 

collected from the excise tax can be provided through a more efficient user fee system. 

Proposal

The proposal would reform the laws governing the Inland Waterways Trust Fund, including 

establishing a new user fee. The proposal would increase the amount paid by commercial 

navigation users sufficiently to meet their share of the costs of activities financed from this trust 

fund. The Secretary of the Army would set the amount of the user fee each year to collect a total 

of $1.1 billion from the user fee over the first 10 years. Thereafter, the Secretary of the Army 

would adjust the user fee over time, so that the combined amount collected from the excise tax 

and the user fee covers the user-financed share of spending for inland waterways construction, 

replacement, expansion, and rehabilitation work. The proposal would also expand the list of 

waterways subject to the inland waterways excise tax. The proposal would be effective for 

vessels used in commercial waterway transportation beginning after September 30, 2014. 
274 

OTHER INITIATIVES

ALLOW OFFSET OF FEDERAL INCOME TAX REFUNDS TO COLLECT 

DELINQUENT STATE INCOME TAXES FOR OUT-OF-STATE RESIDENTS 

Current Law

Generally, the Treasury will provide a refund of any overpayment of Federal tax made by a 

taxpayer (by withholding or otherwise). The overpayment amount is reduced by (i.e., offset by) 

debts of the taxpayer for past-due child support, debts to Federal agencies, fraudulently obtained 

unemployment compensation, and past-due, legally enforceable State income tax obligations. In 

the latter case, a refund offset is permitted only if the delinquent taxpayer resides in the State 

seeking the offset. 

Reasons for Change

Under current law, a delinquent taxpayer can escape offset of a Federal refund for a State tax 

liability as long as the taxpayer is not a resident of the State. Foreclosing this possibility would 

better leverage the capacity of the Federal tax refund offset program for the country as a whole. 

Proposal 

The proposal would permit offset of Federal refunds to collect State income tax, regardless of 

where the delinquent taxpayer resides. 

The proposal would be effective on the date of enactment. 
275 

AUTHORIZE THE LIMITED SHARING OF BUSINESS TAX RETURN 

INFORMATION TO IMPROVE THE ACCURACY OF IMPORTANT MEASURES OF

THE ECONOMY

Current Law

Current law authorizes the Internal Revenue Service (IRS) to disclose certain federal tax 

information (FTI) for governmental statistical use. Business FTI may be disclosed to officers 

and employees of the Census Bureau for all businesses. Similarly, business FTI may be 

disclosed to officers and employees of the Bureau of Economic Analysis (BEA), but only for 

corporate businesses. Specific items permitted to be disclosed are detailed in the associated 

Treasury Regulations. The Bureau of Labor Statistics (BLS) is currently not authorized to 

receive FTI. 

Reasons for Change 

BEA’s limited access to business FTI and BLS’s lack of access to business FTI prevents BEA, 

BLS, and Census from synchronizing their business lists. Synchronization of business lists 

would significantly improve the consistency and quality of sensitive economic statistics 

including productivity, payroll, employment, and average hourly earnings. 

In addition, given the growth of non-corporate businesses, especially in the service sector, the 

current limitation on BEA’s access to corporate FTI impedes the measurement of income and 

international transactions in the National Accounts. The accuracy and consistency of income 

data are important to the formulation of fiscal policies. 

Further, the Census’s Business Register is constructed using both FTI and non-tax business data 

derived from the Economic Census and current economic surveys. Because this non-tax 

business data is inextricably commingled with FTI, it is not possible for Census to share data 

with BEA and BLS in any meaningful way. 

Proposal 

The proposal would give officers and employees of BEA access to FTI of those sole 

proprietorships with receipts greater than $250,000 and of all partnerships. BEA contractors 

would not have access to FTI.

The proposal would also give officers and employees of BLS access to certain business (and taxexempt entities) FTI including: taxpayer identification number; name(s) of the business; business 

address (mailing address and physical location); principal industry activity (including business 

description); number of employees and total business-level wages (including wages, tips, and 

other compensation, quarterly from Form 941 and annually from Forms 943 and 944); and sales 

revenue for employer businesses only. BLS would not have access to individual employee FTI. 

In other words, the proposal would allow officers and employees of each of BLS, BEA, and 

Census to access the same FTI for businesses, and would permit BLS, BEA, and Census to share 

such FTI amongst themselves (subject to the restrictions described below).
276 

For the purpose of synchronizing BLS and Census business lists, the proposal would permit 

employees of state agencies to receive from BLS the following FTI identity items: taxpayer 

identification number, business name(s), business address(es), and principal industry activity 

(including business description). No BLS contractor or State agency contractor would have 

access to FTI. 

The proposal would require any FTI to which BEA and BLS would have access, either directly 

from IRS, from Census, or from each other, to be used for statistical purposes consistently with 

the Confidential Information Protection and Statistical Efficiency Act (CIPSEA). The three 

statistical agencies and state agencies would be subject to taxpayer privacy law, safeguards, and 

penalties. They would also be subject to CIPSEA confidentiality safeguard procedures, 

requirements, and penalties. Conforming amendments to applicable statutes would be made as 

necessary to apply the taxpayer privacy law, including safeguards and penalties to BLS as well 

as Census and BEA. BLS would be required to monitor compliance by state agencies with the 

prescribed safeguard protocols. 

The proposal would be effective upon enactment. 
277 

ELIMINATE CERTAIN REVIEWS CONDUCTED BY THE U.S. TREASURY 

INSPECTOR GENERAL FOR TAX ADMINISTRATION (TIGTA)

Current Law 

Section 7803(d) requires TIGTA to conduct reviews of certain administrative and civil actions 

and reviews of Internal Revenue Service (IRS) compliance with respect to certain requirements 

in order to comply with TIGTA’s reporting requirements. 

Reasons for Change 

The statutory reviews that are proposed to be eliminated are of relatively low value and yield 

little in the way of performance measures. In order to make more efficient use of TIGTA’s 

resources, TIGTA would prefer to redirect the resources applied to conduct these reviews to 

conducting high-risk audits.

Proposal 

As requested by TIGTA, the proposal would eliminate TIGTA’s obligation to report information 

regarding any administrative or civil actions related to Fair Tax Collection Practices violations in 

one of TIGTA’s Semiannual Reports, review and certify annually that the IRS is complying with 

the requirements of section 6103(e)(8) regarding information on joint filers, and annually report 

on the IRS’s compliance with sections 7521(b)(2) and (c) requiring IRS employees to stop a 

taxpayer interview whenever a taxpayer requests to consult with a representative and to obtain 

their immediate supervisor’s approval to contact the taxpayer instead of the representative if the 

representative has unreasonably delayed the completion of an examination or investigation. 

The proposal would revise the annual reporting requirement for all remaining provisions in the 

IRS Restructuring and Reform Act of 1998 to a biennial reporting requirement. 

The proposal would be effective after December 31, 2014. 
278 

MODIFY INDEXING TO PREVENT DEFLATIONARY ADJUSTMENTS

Current Law

Many parameters of the tax system – including the size of personal exemptions and standard 

deductions, the width of income tax rate brackets, the amount of certain other deductions and 

credits, and the maximum amount of various saving and retirement deductions – may be adjusted 

annually for the effects of inflation. Most of the adjustments are based on annual changes in the 

level of the Consumer Price Index for all Urban Consumers (CPI-U). Depending on the 

particular tax parameter, the adjustment may be based on CPI-U for a particular month, its 

average for a calendar quarter, or its average for a 12-month period (with various ending dates). 

The adjusted values are rounded differently, as specified in the Internal Revenue Code (Code). 

When inflation adjustment of tax parameters was enacted, it was generally contemplated that 

indexing would result in upward adjustments to reflect inflation. If price levels decline for the 

year, the inflation adjustment provisions for most adjusted tax parameters permit the tax 

parameters to become smaller, so long as they do not decline to less than their base period values 

specified in the Code. However, the statutory provisions for the indexing of those tax parameters 

adjusted pursuant to section 415(d) (generally relating to benefits and contributions under 

qualified plans) are held at their previous year’s level if the relevant price index declines. In 

subsequent years, they increase only to the extent that the relevant price index exceeds its highest 

preceding relevant level.

Reasons for Change 

Between 2008 and 2009, for the first time since inflation adjustments were enacted, the annual 

index values used for two of the indexing methods declined for the relevant annual period. The 

index level relevant for section 415(d) adjustments fell, but by statute those parameters remain at 

their 2009 levels for 2010. (They did not increase for 2011.) Also, the maximum size of a cash 

method debt instrument, as adjusted under section 1274A(d)(2) decreased for 2010. Other tax 

parameters did not decrease, since the price index relevant for their adjustments did not decline 

between 2008 and 2009. 

The 2008 to 2009 price index changes demonstrate that a year-to-year decrease is possible. 

Preventing tax parameters from falling if the underlying price levels fall would make the tax 

system a more effective automatic economic stabilizer than it is under current law. Holding tax 

parameters constant would also prevent reductions in certain tax benefits for saving and 

retirement which should not be affected by short-term price level reductions.

Proposal 

The proposal would modify inflation adjustment provisions so as to prevent tax parameters from 

declining from the previous year’s levels if the underlying price index falls. Future inflationrelated increases would be based on the highest previous level of the price index relevant for 

adjusting the particular tax parameter. The proposal would be effective beginning on the date of 

enactment.
TABLES OF REVENUE ESTIMATES

Table 1: Revenue Estimates of Adjustments to the Balanced Budget and Emergency Deficit Control Act (BBEDCA) Baseline

2014 2015

Fiscal Years

2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

Adjustments to the BBEDCA Baseline

Permanently extend increased refundability of the Child Tax Credit 1/ 

Permanently extend Earned Income Tax Credit (EITC) marriage penalty relief 1/ Permanently extend the EITC for larger families 1/ Permanently extend the American Opportunity Tax Credit (AOTC) 1/ 

Total, Adjustments to the BBEDCA Baseline 

Total receipt effect Total outlay effect 

0000000

(in millions of dollars)

0 00 00 00 00 00 00 0

0000000

-535-109-102-659

-1,405

-752

653

-10,688

-1,450-1,932-9,795

-23,865

-7,919

15,946

-10,660

-1,466-1,961

-11,939

-26,026

-7,427

18,599

-10,705

-1,488-1,997

-11,752

-25,942

-7,282

18,660

-10,732

-1,514-2,035

-11,489

-25,770

-7,050

18,720

-10,769

-1,544-2,075

-10,947

-25,335

-6,554

18,781

-10,810

-1,568-2,115

-10,726

-25,219

-6,374

18,845

-11,223

-1,559-2,034

-10,454

-25,270

-8,671

16,599

-64,899

-9,139

-12,217

-67,307

-153,562

-43,358

110,204

Department of the TreasuryNotes:

1/ This provision affects both receipts and outlays. The combined effects are shown here and the outlay effects included in these estimates are detailed in the table below.

 Permanently extend increased refundability of the Child Tax Credit 0 0 0 0 535 10,688 10,660

 Permanently extend EITC marriage penalty relief 0 0 0 0 23 93 97 Permanently extend the EITC for larger families 0 0 0 0 95 1,905 1,932 Permanently extend the AOTC 0 0 0 0 0 3 260 5 910

 Total outlay effect ........................................................................................... 0 0 0 0 653 15,946 18,599

10,705

103

1,965

5 887

18,660

10,732

111

2,000

5 877

18,720

10,769

117

2,037

5 858

18,781

10,810

122

2,075

5 838

18,845

11,223

116

2,000

3 260

16,599

64,899

666

12,009

32 630

110,204

279
Table 2: Revenue Estimates of Reserve for Long-Run Revenue-Neutral Business Tax Reform Proposals 1/ 2/

2014 2015

Fiscal Years

2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

Incentives for manufacturing, research, clean energy, and insourcing and creating jobs

Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas 

Enhance and make permanent the Research and Experimentation Tax Credit Extend and modify certain employment tax credits, including incentives for hiring veterans Modify and permanently extend the Renewable Electricity Production Tax Credit 3/ Modify and permanently extend the deduction for energy-efficient commercial building property

 Subtotal, incentives for manufacturing, research, clean energy, and insourcing and creating jobs 

Tax relief for small business

Extend increased expensing for small business 

Eliminate capital gains taxation on investments in small business stock Increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures Expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance 3/  Subtotal, tax relief for small business ...

Incentives to promote regional growth

Modify and permanently extend the New Markets Tax Credit 

Restructure assistance to New York City, provide tax incentives for transportation infrastructure 

Reform and expand the Low-Income Housing Tax Credit (LIHTC):

Allow conversion of private activity bond volume cap into LIHTCs 

Encourage mixed income occupancy by allowing LIHTC-supported projects to elect a criterion employing a restriction on average income Change formulas for 70 percent PV and 30 percent PV LIHTCs 

Add preservation of federally assisted affordable housing to allocation criteria 

Make the LIHTC beneficial to real estate investment trusts Implement requirement that LIHTC-supported housing protect victims of domestic abuse  Subtotal, reform and expand LIHTC .........................................................

...

 Subtotal, incentives to promote regional growth 

Reform U.S. international tax system

Defer deduction of interest expense related to deferred income of foreign subsidiaries Determine the Foreign Tax Credit on a pooling basis ...

Tax currently excess returns associated with transfers of intangibles offshore Limit shifting of income through intangible property transfers Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates Restrict deductions for excessive interest of members of financial reporting groups Modify tax rules for dual capacity taxpayers Tax gain from the sale of a partnership interest on look-through basis Prevent use of leveraged distributions from related corporations to avoid dividend treatment ...Extend section 338(h)(16) to certain asset acquisitions Remove foreign taxes from a section 902 corporation's foreign tax pool when earnings are eliminated .Create a new category of Subpart F income for transactions involving digital goods or services Prevent avoidance of foreign base company sales income through manufacturing service arrangements Restrict the use of hybrid arrangements that create stateless income Limit the application of exceptions under Subpart F for certain transactions that use reverse hybrids to create stateless income Limit the ability of domestic entities to expatriate  Subtotal, reform U.S. international tax system 

0

-3,259

-382

0

-61

-3,702-6,712

00

-219

-6,931

-17

0000

0

-17

0

00

0

000

0

000000000

(in millions of dollars)

-14 -18 -19

-6,524 -7,731 -8,671

-747 -821 -885

-141 -499 -848

-190 -371 -515

-7,616 -9,440 -10,938-9,321 -7,197 -6,246

000

-360 -449 -446

-313 -322 -219

-9,994 -7,968 -6,911

-77 -191 -351

-200 -200 -200

0 -20 -40

-3 -5 -7

-25 -41 -49

-28 -66 -96

-305 -457 -647

2,976 5,028 5,219

3,963 6,697 6,9521,578 2,693 2,787

71 137 172

366 632 682

1,944 3,434 3,778

527 906 953

139 241 253

188 318 331

60 100 10013 27 36

585 1,004 1,055

1,235 2,120 2,226

38 66 7367 115 121

150 415 706

13,900 23,933 25,444

-21 -21 -22

-9,591 -10,483 -11,309

-928 -964 -994

-1,193 -1,584 -2,002

-607 -675 -720

-12,340 -13,727 -15,047

-5,563 -4,981 -4,703

0 -227 -719

-440 -434 -431

-133 -95 -66

-6,136 -5,737 -5,919

-548 -772 -1,013-200 -200 -200

-70 -90 -110

Negligible revenue effect

-7 -7 -7

Negligible revenue effect

-50 -50 -51

Negligible revenue effect

-127 -147 -168

-875 -1,119 -1,381

5,444 5,651 5,864

7,251 7,527 7,8102,832 2,798 2,718

207 244 283

721 755 794

4,156 4,571 5,028

1,002 1,049 1,096

265 279 293

345 358 371100 100 100

46 50 50

1,107 1,163 1,2212,337 2,454 2,576

80 88 97

127 133 140

1,025 1,375 1,756

27,045 28,595 30,197

-23

-12,148

-1,029

-2,458

-738

-16,396

-4,586

-1,245

-428

-52

-6,311

-1,245

-200

-120

-7

-51

-178

-1,623

4,051

8,1152,664

325

833

5,531

1,147

307

386100

50

1,2822,705

107147

2,173

29,923

-24

-13,019

-1,072

-2,963

-745

-17,823

-4,622

-1,762

-427

-50

-6,861

-1,429

-200

-130

-7

-51

-188

-1,817

2,850

8,4362,636

373

882

6,084

1,179

323

401100

50

1,3462,840

117154

2,627

30,398

-24

-13,894

-1,115

-3,509

-751

-19,293

-4,735

-2,310

-424

-48

-7,517

-1,529

-200

-140

-7

-49

-196

-1,925

2,962

8,7662,626

427

928

6,693

1,233

339

417100

50

1,4132,983

129162

3,120

32,348

-26

-14,776

-1,159

-4,089

-756

-20,806

-4,874

-2,939

-419

-28

-8,260

-1,558

-200

-140

-7

-49

-196

-1,954

3,093

9,1552,633

489

975

7,362

1,290

356

433100

51

1,4843,132

142170

3,657

34,522

-93

-43,000

-4,345

-4,265

-2,358

-54,061

-33,308

-227

-2,129

-1 082

-36,746

-1,939

-1,000

-220

-29

-215

-464

-3,403

24,318

32,39012,688

831

3,156

17,883

4,4371,177

1,540

460

172

4,914

10,372

345563

3,671

118,917

-212

-108,146

-9,714

-19,286

-6,068

-143,426

-56,828

-9,202-4,258

-1 326

-71,614

-8,713

-2,000

-860

-64

-466

-1,390

-12,103

43,138

74,67225,965

2,7287,568

48,581

10,382

2,795

3,548

960

423

11,66024,608

937

1,336

17,004

276,305

280
2014 2015

Fiscal Years

2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

Reform treatment of financial and insurance industry institutions and products

Require that derivative contracts be marked to market with resulting gain or loss treated as ordinary .

Modify rules that apply to sales of life insurance contracts Modify proration rules for life insurance company general and separate accounts Expand pro rata interest expense disallowance for corporate-owned life insurance  Subtotal, reform treatment of financial and insurance industry institutions and

 products 

Eliminate fossil fuel preferences

Eliminate oil and natural gas preferences:Repeal enhanced oil recovery credit 4/ ...Repeal credit for oil and natural gas produced from marginal wells 4/ Repeal expensing of intangible drilling costs Repeal deduction for tertiary injectants Repeal exception to passive loss limitation for working interests in oil and natural gas properties

Repeal percentage depletion for oil and natural gas wells 

Repeal domestic manufacturing deduction for oil and natural gas production Increase geological and geophysical amortization period for independent producers to seven years  Subtotal, eliminate oil and natural gas preferences .......................................

Eliminate coal preferences:Repeal expensing of exploration and development costs Repeal percentage depletion for hard mineral fossil fuels Repeal capital gains treatment for royalties Repeal domestic manufacturing deduction for the production of coal and other hard mineral fossil fuels 

0000000

0

0000

0

0

0000

(in millions of dollars)

2,583 4,674 3,900

14 42 46

353 607 652

32 91 168

2,982 5,414 4,766

000000

2,317 3,244 2,348

10 10 10

577

1,502 1,568 1,469

963 1,614 1,585103 382 596

4,900 6,825 6,015

39 66 69

167 173 182

20 43 4736 63 67

2,600

48

682

268

3,598

00

1,803

10

7

1,3751,522

581

5,298

73

195

49

70

1,655

50

691

392

2,788

00

1,469

10

6

1,3061,453

463

4,707

77

203

52

73

1,132

54

688

540

2,414

00

1,110

10

6

1,2611,421

337

4,145

77

211

55

77

697

56

676

706

2,135

00

665

10

6

1,2191,410

224

3,534

75

218

58

80

506

58

668

900

2,132

00

463

10

5

1,1811,408

144

3,211

73

225

61

83

528

62

657

1 109

2,356

00

464

10

5

1,0891,416

123

3,107

70

234

61

87

529

65

643

1 340

2,577

00

467

10

5

1,0601,426

128

3,096

60

244

62

90

15,412

200

2,985

951

19,548

00

11,181

5032

7,2207,137

2 125

27,745

324

920

211

309

18,804

6,317

5 546

31,162

14,350

13,03014,218

3 081

44,838

2,052

726

 Subtotal, eliminate coal preferences ............................................................ Subtotal, eliminate fossil fuel preferences 

Other revenue changes and loophole closers

Repeal the excise tax credit for distilled spirits with flavor and wine additives 

Repeal last-in, first-out method of accounting for inventories .

Repeal lower-of-cost-or-market inventory accounting method ..

Modify depreciation rules for purchases of general aviation passenger aircraft 

Repeal gain limitation for dividends received in reorganization exchanges Expand the definition of substantial built-in loss for purposes of partnership loss transfers Extend partnership basis limitation rules to nondeductible expenditures 

Limit the importation of losses under related party loss limitation rules Deny deduction for punitive damages .

Modify like-kind exchange rules for real property Conform corporate ownership standards Prevent elimination of earnings and profits through distributions of certain stock  Subtotal, other revenue changes and loophole closers 

Total, Reserve for Long-Run Revenue-Neutral Business Tax Reform Proposals 

Total receipt effect Total outlay effect 

0

000

0

0000

0

00022

-10,648

-10,637

11

262 345 365

5,162 7,170 6,380

85 112 112

4,151 7,823 8,786

644 1,404 1,526

87 273 411

153 263 276

577

63 90 97

56 81 87

0 25 36

616 1,875 1,894

24 48 5122 33 35

5,906 12,034 13,318

10,035 30,686 31,412

10,113 30,853 31,694

78 167 282

387

5,685

112

8,965

1,537

456290

7

102

92

37

1,914

54

37

13,603

30,580

30,985

405

405

5,112

112

8,850

903

532305

7

105

95

38

1,936

57

39

12,979

28,891

29,427

536

420

4,565

112

8,778

270

549319

7

108

97

38

1,958

60

41

12,337

27,166

27,837

671

431

3,965

112

8,818

283

385335

8

110

99

40

1,981

63

43

12,277

23,970

24,787

817

442

3,653

112

8,917

296

209352

8

112

100

40

2,006

66

45

12,263

21,945

22,928

983

452

3,559

112

8,770

309

155370

10

114

102

41

2,031

69

47

12,130

21,658

22,823

1,165

456

3,552

112

8,850

323

153388

10

116

104

43

2,059

72

49

12,279

21,91023,264

1,354

1,764

29,509

533

38,575

6,014

1,7591,287

33

457

411136

8,235

234

166

57,840

131,604133,072

1,468

3,965

48,803

1,093

82,708

7,495

3,2103,0511,017

913338

18,270

391

119,126

248,253

254,711

6,458

Department of the TreasuryNotes:

1/ Presentation in this table does not reflect the order in which these proposals were estimated.2/ Because the Administration believes that these proposals should be enacted in the context of comprehensive business tax reform, the amounts are not reflected in the budget receipt estimates and are not counted toward meeting the Administration's

 deficit reduction goals. The Administration's proposals that are reflected in the budget estimates of receipts are presented in Table 12-4 in the Analytical Perspectives of the FY 2015 Budget. These include an allowance, also presented below, for

 temporary receipts that would be generated by the transition to a reformed business tax system. Transition to a reformed business tax system . 0 37,500 37,500 37,500 37,500 0 0 0 0 0 0 150,000 150,000

3/ This provision affects both receipts and outlays. The combined effects are shown here and the outlay effects included in these estimates are detailed in the table below.

 Modify and permanently extend the Renewable Electricity Production Tax Credit 0 28 120 241 382 523 661 811 978 1,158 1,349 1,294 6,251

 Expand and simplify the tax credit provided to qualified small employers for non- elective contributions to employee health insurance 11 50 47 41 23 13 10 6 5 7 5 174 207

 Total outlay effect ........................................................................................... 11 78 167 282 405 536 671 817 983 1,165 1,354 1,468 6,458

4/ This provision is estimated to have zero receipt effect under the Administration's current economic projections.

495

00

100

59

679508

76

564

281
Table 3: Revenue Estimates of FY 2015 Budget Proposals 1/ 2/

2014 2015

Fiscal Years

2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

Incentives for job creation, clean energy, and manufacturing

Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project Designate Promise Zones 3/ 

Provide new Manufacturing Communities Tax Credit Provide a tax credit for the production of advanced technology vehicles Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles Modify tax-exempt bonds for Indian tribal governments 

Extend the tax credit for cellulosic biofuels Modify and extend the tax credit for the construction of energy-efficient new homes Reduce excise taxes on liquefied natural gas to bring into parity with diesel  Subtotal, incentives for job creation, clean energy, and manufacturing 

Incentives for investment in infrastructure

Provide America Fast Forward Bonds (AFFB) and expand eligible uses 3/ Allow eligible uses of AFFB to include financing all qualified private activity bond program categories 3/ 

Allow current refundings of State and local governmental bonds 

Repeal the $150 million non-hospital bond limitation on qualified section 501(c)(3) bonds 

Increase national limitation amount for qualified highway or surface freight transfer facility bonds Eliminate the volume cap for private activity bonds for water infrastructure Increase the 25-percent limit on land acquisition restriction on private activity bonds 

Allow more flexible research arrangements for purposes of private business use limits 

Repeal the government ownership requirement for certain types of exempt facility bonds Exempt foreign pension funds from the application of the Foreign Investment in Real Property Tax Act .

 Subtotal, incentives for investment in infrastructure 

Tax cuts for families and individuals

Expand the EITC for workers without qualifying children 3/

Provide for automatic enrollment in IRAs, including a small employer tax credit, and double the tax credit for small employer plan start-up costs 3/ Expand the Child and Dependent Care Tax Credit 3/ Extend exclusion from income for cancellation of certain home mortgage debtProvide exclusion from income for student loan forgiveness for students in certain income-based or income-contingent repayment programs who have completed payment obligations .Provide exclusion from income for student loan forgiveness and for certain scholarship amounts for participants in the Indian Health Service Health Professions Programs Make Pell Grants excludable from income and from tax credit calculations 3/  Subtotal, tax cuts for families and individuals 

Upper-income tax provisions

Reduce the value of certain tax expenditures 

Implement the Buffet Rule by imposing a new "Fair Share Tax"  Subtotal, upper-income tax provisions 

Modify estate and gift tax provisions

Restore the estate, gift, and generation-skipping transfer (GST) tax parameters in effect in 2009 Require consistency in value for transfer and income tax purposes Require a minimum term for grantor retained annuity trusts Limit duration of GST tax exemption Coordinate certain income and transfer tax rules applicable to grantor trusts Extend the lien on estate tax deferrals where estate consists largely of interest in closely held business Modify GST tax treatment of Health and Education Exclusion Trusts Simplify gift tax exclusion for annual gifts Expand applicability of definition of executor  Subtotal, modify estate and gift tax provisions 

0

00000

-30-78

0

-108

0

0000

0

0

0000

0

00

-2,687

00

0

-2,687

0000000000

0

(in millions of dollars)

0 -86 -398

-366 -693 -641

-20 -104 -275

-705 -675 -753

-54 -86 -71

-4 -12 -12

-70 -121 -157

-127 -137 -163

-2 -2 -2

-1,348 -1,916 -2,472

0 -1 0

-1 -4 -10-3 -5 -5

0 -1 -30 -3 -16

0 -3 -5

0 -2 -4

000

-14 -66 -140

-114 -196 -205

-132 -281 -388

-490 -6,308 -6,335

0 -817 -1,276

-287 -1,064 -1,060

-3,497 -3,343 -825

000

-6 -14 -14

-23 -768 -1 184

-4,303 -12,314 -10,694

26,587 43,356 47,94310,536 -1,241 1,60937,123 42,115 49,552

000

0 215 2280 244 3250 59 770 19 200 -30 -290 70 138

0 577 759

-660 -641 -285

-609 -594 -588

-454 -589 -676

-875 -984 -850

-64 -65 -47

-12 -12 -12

-178 -204 -236

-182 -199 -215

-2 -2 -2

-3,036 -3,290 -2,911

001

-14 -21 -27

-5 -5 -5-5 -7 -9

-34 -52 -72

-9 -14 -20

-8 -11 -15

-1 -1 -1

-216 -290 -364

-216 -227 -238

-508 -628 -750

-6,362 -6,444 -6,536

-1,309 -1,410 -1,552-1,056 -1,045 -1,039

000

000

-15 -16 -18

-1 116 -1 068 -1 019

-9,858 -9,983 -10,164

53,259 58,632 63,750

4,383 5,598 5,874

57,642 64,230 69,624

0 15,930 17,309

242 257 272411 504 602

Negligible revenue effect

97 125 15721 22 23

-27 -26 -24

205 268 328

Negligible revenue effect

949 17,080 18,667

-8

-582

-737

-537

-14

-12

-237

-231

-2

-2,360

-1

-32

-5

-11

-92

-27

-19

-1

-437

-250

-875

-6,653

-1,728-1,030

0

0

-19

-977

-10,407

68,720

6,173

74,893

18,846

290711201

24

-23

358

20,407

61

-583

-749

-21

0

-12

-210

-246

-2

-1,762

-1

-39

-5

-13

-113

-33

-23

-3

-509

-262

-1,001

-6,760

-1,902-1,021

0

0

-20

-938

-10,641

73,649

6,427

80,076

20,412

310843256

26

-21

435

22,261

66

-598

-646

281

0

-12

-171

-261

-2

-1,343

0

-46

-5

-16

-133

-41

-27

-3

-579

-275

-1,125-6,874

-2,137-1,011

0

-2

-21

-904

-10,949

78,581

6,645

85,226

22,250

333

1,004

326

28

-20

517

24,438

55

-622

-414

294

0

-12

-114

-287

-2

-1,102

1

-52

-5

-17

-154

-49

-32

-3

-644

-289

-1,244

-6,978

-2,376

-997

0

-3

-22

-867

-11,243

83,589

7,022

90,611

23,535

354

1,067

346

30

-18

605

25,919

-1,785

-2,903

-1,442

-3,992

-340

-52

-730

-808

-10

-12,062

-1

-50

-23

-16

-105

-31

-25

-2

-726

-958

-1,937

-25,939

-4,812

-4,512

-7,665

0

-65

-4 159

-47,152

229,777

20,885

250,662

15,930

942

1,484

358

82

-112

681

19,365

-1,896

-5,876

-4,664

-4,825

-401

-112

-1,698

-2,048

-20

-21,540

-1

-246

-48

-82

-669-201-141

-13

-3,259

-2 272

-6,932

-59,740

-14,507

-9,610

-7,665

-5

-165

-8 864

-100,556

598,066

53,026

651,092

118,282

2,501

5,711

1,644

213

-218

2,924

131,057

282
Fiscal Years

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

(in millions of dollars)

Reform treatment of financial industry institutions and products

Impose a financial crisis responsibility fee 0 0 3,058 6,142 6,271 6,395 6,507 6,673 6,830 6,993 7,155 21,866 56,024

Require current inclusion in income of accrued market discount and limit the accrual amount for distressed debt 0 14 38 47 46 44 41 36 32 28 24 189 350Require that the cost basis of stock that is a covered security must be determined using an average cost basis method . 0 0 53 162 279 406 481 501 522 544 567 900 3 515 Subtotal, reform treatment of financial industry institutions and products 0 14 3,149 6,351 6,596 6,845 7,029 7,210 7,384 7,565 7,746 22,955 59,889

Loophole closers

Tax carried (profits) interests as ordinary income 0 2,153 1,951 1,762 1,474 1,403 1,443 1,219 972 765 655 8,743 13,797

Require non-spouse beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years 0 91 235 388 543 702 735 693 642 591 539 1,959 5,159

Limit the total accrual of tax-favored retirement benefits 0 1,482 2,157 2,334 2,512 2,697 2,940 3,233 3,479 3,638 3,905 11,182 28,377

Conform SECA taxes for professional service businesses 0 2,151 3,009 3,227 3,461 3,691 3,936 4,207 4,470 4,691 4,836 15,539 37,679

 Subtotal, loophole closers 0 5,877 7,352 7,711 7,990 8,493 9,054 9,352 9,563 9,685 9,935 37,423 85,012

Other revenue raisers

Increase Oil Spill Liability Trust Fund financing rate by one cent and update the law to include other sources of crudes 0 60 82 88 92 94 99 102 108 111 115 416 951

Reinstate Superfund taxes:Reinstate and extend Superfund excise taxes 0 633 852 863 870 879 888 895 903 911 917 4,097 8,611

Reinstate Superfund environmental income tax 0 969 1 333 1 422 1 467 1 501 1 515 1 549 1 592 1 634 1 677 6 692 14 659

 Subtotal, reinstate Superfund taxes ............................................................ 0 1,602 2,185 2,285 2,337 2,380 2,403 2,444 2,495 2,545 2,594 10,789 23,270

Increase tobacco taxes and index for inflation 0 7,797 9,936 9,350 8,738 8,203 7,721 7,267 6,840 6,438 5,927 44,024 78,217

Make unemployment insurance surtax permanent 0 1,051 1,461 1,493 1,524 1,551 1,575 1,599 1,623 1,649 1,674 7,080 15,200

Provide short-term tax relief to employers and expand FUTA base 0 -2,662 -3,119 9,344 10,817 6,988 7,295 8,080 7,155 8,036 7,048 21,368 58,982

Enhance and modify the conservation easement deduction:Enhance and make permanent incentives for the donation of conservation easements 0 0 -5 -8 -12 -16 -28 -51 -67 -70 -74 -41 -331

Eliminate the deduction for contributions of conservation easements on golf courses 0 37 53 55 59 61 64 68 71 74 77 265 619Restrict deductions and harmonize the rules for contributions of conservation easements for historic preservation 0 8 11 16 22 26 27 28 31 32 33 83 234

 Subtotal, enhance and modify the conservation easement deduction ............... 0 45 59 63 69 71 63 45 35 36 36 307 522

Eliminate deduction for dividends on stock of publicly-traded corporations held in employee stock ownership plans 0 618 767 777 788 798 808 818 827 837 845 3,748 7,883 Subtotal, other revenue raisers 0 8,511 11,371 23,400 24,365 20,085 19,964 20,355 19,083 19,652 18,239 87,732 185,025

Reduce the tax gap and make reforms

Expand information reporting:Require information reporting for private separate accounts of life insurance companies 0 001 1 1 1 1 1 1 1 3 8

Require a certified TIN from contractors and allow certain withholding 0 26 61 103 141 147 154 161 168 176 184 478 1,321

Modify reporting of tuition expenses and scholarships on Form 1098-T 3/ 0 5 65 65 65 65 66 67 68 70 70 265 606

Provide for reciprocal reporting of information in connection with the implementation of FATCA No revenue effect

 Subtotal, expand information reporting ......................................................... 0 31 126 169 207 213 221 229 237 247 255 746 1,935

Improve compliance by businesses:Require greater electronic filing of returns No revenue effectImplement standards clarifying when employee leasing companies can be held liable for their clients' Federal employment taxes 0 456 6 6 7 7 7 8 8 27 64

Increase certainty with respect to worker classification 4 79 386 759 914 1,000 1,091 1,187 1,289 1,396 1,509 3,138 9,610

Increase information sharing to administer excise taxes 0 4 9 13 14 15 17 18 19 19 20 55 148

 Subtotal, improve compliance by businesses ................................................ 4 87 400 778 934 1,021 1,115 1,212 1,315 1,423 1,537 3,220 9,822

Strengthen tax administration:Impose liability on shareholders to collect unpaid income taxes of applicable corporations 309 325 450 474 497 521 544 568 593 619 647 2,267 5,238

Increase levy authority for payments to Medicare providers with delinquent tax debt 0 50 71 74 76 76 77 78 80 80 81 347 743

Implement a program integrity statutory cap adjustment for tax administration 0 370 1,265 2,584 3,978 5,426 6,620 7,431 7,850 8,137 8,343 13,623 52,004

Streamline audit and adjustment procedures for large partnerships 0 144 192 191 188 183 177 177 180 182 184 898 1,798

Revise offer-in-compromise application rules 0 111 2 2 2 2 2 2 2 7 17Expand IRS access to information in the National Directory of New Hires for tax administration purposes No revenue effectMake repeated willful failure to file a tax return a felony 0 000 1 1 1 1 2 2 2 2 10Facilitate tax compliance with local jurisdictions 0 111 1 2 2 2 2 2 2 6 16Extend statute of limitations where State adjustment affects Federal tax liability 0 000 1 4 4 4 4 4 4 5 25Improve investigative disclosure statute 0 000 1 1 1 1 2 2 2 2 10Require taxpayers who prepare their returns electronically but file their returns on paper to print their returns with a scannable code No revenue effect

283
2014 2015

Fiscal Years

2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

Allow the IRS to absorb credit and debit card processing fees for certain tax payments 

Provide the RS with greater flexibility to address correctible errors 3/ Make e-filing mandatory for exempt organizations Authorize the Department of the Treasury to require additional information to be included in electronically filed Form 5500 Annual Reports and electronic filing of certain other

 employee benefit plan reportsImpose a penalty on failure to comply with electronic filing requirements Provide whistleblowers with protection from retaliation 

Provide stronger protection from improper disclosure of taxpayer information in whistleblower actions 

Index all penalties for inflation Extend paid preparer EITC due diligence requirements to the Child Tax Credit Extend IRS authority to require a truncated Social Security Number on Form W-2 

Add tax crimes to the Aggravated Identity Theft Statute 

Impose a civil penalty on tax identity theft crimes Allow States to send notices of intent to offset Federal tax refunds to collect State tax obligations by regular first-class mail instead of certified mail 

Explicitly provide that the Department of the Treasury and IRS have authority to regulate all paid return preparers 4/ 

Rationalize tax return filing due dates so they are staggered 3/ Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct Enhance administrability of the appraiser penalty  Subtotal, strengthen tax administration ......................................................

 Subtotal, reduce the tax gap and make reforms 

Simplify the tax system

Simplify the rules for claiming the EITC for workers without qualifying children 3/ 

Modify adoption credit to allow tribal determination of special needs

Simplify minimum required distribution rules 

Allow all inherited plan and RA balances to be rolled over within 60 days 

Repeal non-qualified preferred stock designation 

Repeal preferential dividend rule for publicly traded and publicly offered REITs Reform excise tax based on investment income of private foundations Remove bonding requirements for certain taxpayers subject to Federal excise taxes on distilled spirits, wine, and beerSimplify arbitrage investment restrictions Simplify single-family housing mortgage bond targeting requirements Streamline private business limits on governmental bonds Exclude self-constructed assets of small taxpayers from the uniform capitalization rules Repeal technical terminations of partnerships Repeal anti-churning rules of section 197 .

Repeal special estimated tax payment provision for certain insurance companies 

Repeal the telephone excise tax 

Increase the standard mileage rate for automobile use by volunteers  Subtotal, simplify the tax system

User fee

Reform inland waterways funding  Subtotal, user fee 

Other initiatives

Allow offset of Federal income tax refunds to collect delinquent state income taxes for out-of-state residents Authorize the limited sharing of business tax return information to improve the accuracy of important measures of the economy Eliminate certain reviews conducted by the U.S. Treasury Inspector General for Tax Administration Modify indexing to prevent deflationary adjustments  Subtotal, other initiatives 

Total, FY 2015 Budget Proposals 

Total receipt effect Total outlay effect 

0

0

0000

309

313

000

0

000

0

00

0

00000

0

-2,482-2,482

0

(in millions of dollars)

122

7 15 16

000

45 60 61

210 220 230

001

1,154 2,277 3,635

1,272 2,803 4,582

-44 -587 -599

000

-5 -5 -3

31 52 51

0 -4 -4

-2 -10 -18-1 -3 -5

-1 -3 -5

-47 -50 -68

16 20 21

-25 -106 -209

-419 -357 -302

-16 -47 -45

-513 -1,100 -1,186

82 113 11382 113 113

000

46,583 51,869 77,728

47,127 59,973 87,668

544 8,104 9,940

222

17 17 19

No revenue effectNo revenue effect

111

Negligible revenue effect

No revenue effect

62 63 65

Negligible revenue effectNegligible revenue effect

Negligible revenue effectNegligible revenue effect

No revenue effect

Negligible revenue effect

242 252 263

111

Negligible revenue effect5,070 6,552 7,779

6,211 7,786 9,115

-612 -598 -609

0 -1 -1

5 19 38

Negligible revenue effect

50 47 44

Negligible revenue effect

-5 -5 -5

Negligible revenue effect

-28 -38 -46

-7 -10 -12

-7 -9 -11

-71 -90 -95

22 23 23

-278 -313 -328

Negligible revenue effect

-253 -213 -178

-44 -44 -44

-1,228 -1,232 -1,224

113 113 113

113 113 113

No revenue effectNo revenue effectNo revenue effectNo revenue effect

000

89,236 109,499 118,517

100,609 122,465 133,219

11,373 12,966 14,702

2

19

1

66

273

1

8,626

10,067

-621

-1

60

39

-5

-58-17

-13

-98

24

-331

-148

-45

-1,214

113

113

0

127,541144,091

16,550

2

20

2

68

285

1

9,093

10,645

-632

-1

88

34

-6

-68-20

-15

-103

25

-331

-122

-46

-1,197

113

113

0

134,524152,977

18,453

2

21

2

70

297

1

9,423

11,093

-598

-1

122

30

-6

-76-22

-17

-107

25

-331

-102

-48

-1,131

113

113

0

143,224163,581

20,357

2

22

2

71

309

1

9,674

11,466

-609

-1

165

27

-7

-87-24

-19

-112

26

-331

-83

-49

-1,104

114

114

0

149,337171,656

22,319

9

72

2

291

1,154

3

18,688

22,654

-2,440

-1

11

231

-18

-96-26

-25

-326

102

-931

-1,544

-196

-5,259

534

534

0

374,915417,842

42,927

17

1910

18

-6

3

5

0

63

2,581

63,283

75,040

-5,509

484

405

-47

-431-121

-100

-841

22

-2,583

-2,177

-428

-11,129

1 100

1,100

1,048,058

1,183,366

135,308

Department of the Treasury

284
Fiscal Years

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024

(in millions of dollars)

Notes:

1/ Presentation in this table does not reflect the order in which these proposals were estimated.2/ Table 12-4 in the Analytical Perspectives of the FY 2015 Budget includes the effects of a number of proposals that are not reflected here. These proposals would: levy a fee on the production of hardrock minerals to restore abandoned mines, return

 fees on the production of coal to pre-2006 levels to restore abandoned mines, provide authority to readily share beneficial ownership of U.S. companies with law enforcement, enhance Unemployment Insurance integrity, increase fees for Migratory Bird Hunting and Conservation Stamps, establish a mandatory surcharge for air traffic services, reauthorize special assessment on domestic nuclear utilities, permanently extend and reallocate the travel promotion surcharge, extend the Generalized System of Preferences, transition to a reformed business tax system, and enact comprehensive immigration reform.

3/ This provision affects both receipts and outlays. The combined effects are shown here and the outlay effects included in these estimates are detailed in the table below.

 Designate Promise Zones 0 11 23 23 25 26 28 30 31 33 36 108 266 Provide America Fast Forward Bonds (AAFB) and expand eligible uses 0 216 966 2,051 3,221 4,505 5,878 7,325 8,826 10,360 11,914 10,959 55,262 Allow eligible uses of AFFB to include financing all qualified private activity bond program categories 0 50 227 489 765 1,054 1,356 1,668 1,990 2,319 2,651 2,585 12,569

 Expand the EITC for workers without qualifying children 0 272 5,436 5,457 5,476 5,545 5,623 5,722 5,811 5,900 5,981 22,186 51,223 Provide for automatic enrollment in IRAs, including a small employer tax credit, and  double the tax credit for small employer plan start-up costs 0 0 96 148 150 152 153 156 160 164 168 546 1,347 Expand the Child and Dependent Care Tax Credit 0 0 347 342 348 352 362 368 374 382 392 1,389 3,267 Make Pell Grants excludable from income and from tax credit calculations 0 0 547 959 906 862 824 793 764 735 704 3,274 7,094 Modify reporting of tuition expenses and scholarships on Form 1098-T 0 0 -20 -20 -20 -20 -20 -20 -20 -21 -21 -80 -182 Provide the IRS with greater flexibility to address correctible errors 0 -3 -6 -7 -7 -7 -8 -8 -8 -9 -9 -30 -72 Rationalize tax return filing due dates so they are staggered 0 -28 -28 -28 -29 -29 -30 -30 -31 -32 -33 -142 -298 Simplify the rules for claiming the EITC for workers without qualifying children 0 26 516 526 538 526 536 546 556 526 536 2,132 4,832

 Total outlay effect ........................................................................................... 0 544 8,104 9,940 11,373 12,966 14,702 16,550 18,453 20,357 22,319 42,927 135,308

4/ This estimate and the corresponding baseline revenue were prepared prior to the decision of the Court of Appeals in Loving v. Commissioner. The baseline thus assumed that the IRS's position in Loving v. Commissioner was correct. Consequently,

 the proposal generates only negligible revenue.

285