II 

108TH CONGRESS 

2D SESSION S. 2761 

To amend the Internal Revenue Code of 1986 to provide tax relief for 

farmers, ranchers, and fishermen, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JULY 22, 2004 

Mr. GRASSLEY (for himself, Mr. BAUCUS, Mr. SMITH, Mr. CONRAD, and Mr. 

DASCHLE) introduced the following bill; which was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

tax relief for farmers, ranchers, and fishermen, and for 

other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE; ETC. 

4 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘Heartland Investment and Rural Employment (HIRE) 

6 Act’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment 
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•S 2761 IS 

1 to, or repeal of, a section or other provision, the reference 

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986. 

4 (c) TABLE OF CONTENTS.— 

Sec. 1. Short title; etc. 

TITLE I—AGRICULTURAL TAX RELIEF 

Subtitle A—Provisions Relating To Cooperatives 

Sec. 101. Modification to cooperative marketing rules to include value added 

processing involving animals. 

Sec. 102. Extension of declaratory judgment procedures to farmers’ cooperative 

organizations. 

Sec. 103. Payment of dividends on stock of cooperatives without reducing patronage dividends. 

Sec. 104. Apportionment of credits. 

Sec. 105. Subchapter T Commission. 

Subtitle B—General Provisions 

Sec. 111. Exclusion of rental income from self-employment tax. 

Sec. 112. Exclusion of conservation reserve program payments from self-employment tax. 

Sec. 113. Exemption of agricultural bonds from private activity bond volume 

limits. 

Sec. 114. Modifications to section 512(b)(13). 

Sec. 115. Coordinate farmers and fishermen income averaging and the alternative minimum tax. 

Sec. 116. Special rules for livestock sold on account of weather-related conditions. 

Sec. 117. Reduction of holding period to 12 months for purposes of determining whether horses are section 1231 assets. 

Sec. 118. Charitable deduction for contributions of food inventories. 

Sec. 119. Farm, Fishing, and Ranch Risk Management Accounts. 

TITLE II—PROVISIONS RELATING TO SMALL BUSINESS 

Subtitle A—Maximum Number of Shareholders of an S Corporation 

Sec. 201. Members of family treated as 1 shareholder. 

Sec. 202. Increase in number of eligible shareholders to 100. 

Sec. 203. Nonresident aliens allowed as beneficiaries of an electing small business trust. 

Subtitle B—Termination of Election and Additions To Tax Due To Passive 

Investment Income 

Sec. 211. Modifications to passive income rules. 

Subtitle C—Treatment of S Corporation Shareholders 

Sec. 221. Transfer of suspended losses incident to divorce. 
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•S 2761 IS 

Sec. 222. Use of passive activity loss and at-risk amounts by qualified subchapter S trust income beneficiaries. 

Sec. 223. Disregard of unexercised powers of appointment in determining potential current beneficiaries of ESBT. 

Sec. 224. Clarification of electing small business trust distribution rules. 

Subtitle D—Provisions Relating To Banks 

Sec. 231. Sale of stock in IRA relating to S corporation election exempt from 

prohibited transaction rules. 

Sec. 232. Exclusion of investment securities income from passive income test 

for bank S corporations. 

Sec. 233. Treatment of qualifying director shares. 

Subtitle E—Qualified Subchapter S Subsidiaries 

Sec. 241. Relief from inadvertently invalid qualified subchapter S subsidiary 

elections and terminations. 

Sec. 242. Information returns for qualified subchapter S subsidiaries. 

Subtitle F—Additional Provisions 

Sec. 251. Elimination of all earnings and profits attributable to pre-1983 years. 

Sec. 252. Reduced recognition period for built-in gains. 

Sec. 253. Repeal of special occupational taxes on producers and marketers of 

alcoholic beverages. 

TITLE III—RURAL TAX RELIEF 

Sec. 301. Expansion of designated renewal community area based on 2000 census data. 

Sec. 302. Exemption of qualified 501(c)(3) bonds for nursing homes from Federal guarantee prohibitions. 

Sec. 303. Rural investment tax credit. 

Sec. 304. Qualified rural small business investment credit. 

Sec. 305. Modifications of treatment of qualified zone academy bonds. 

Sec. 306. Certain expenses of rural letter carriers. 

Sec. 307. New markets tax credit for Native American reservations. 

Sec. 308. Modifications of authority of Indian tribal governments to issue taxexempt bonds. 

Sec. 309. Indian school construction. 

Sec. 310. Community homeownership credit. 
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•S 2761 IS 

1 TITLE I—AGRICULTURAL TAX 

2 RELIEF 

3 Subtitle A—Provisions Relating To 

4 Cooperatives 

5 SEC. 101. MODIFICATION TO COOPERATIVE MARKETING 

6 RULES TO INCLUDE VALUE ADDED PROC7 ESSING INVOLVING ANIMALS. 

8 (a) IN GENERAL.—Section 1388 (relating to defini9 tions and special rules) is amended by adding at the end 

10 the following new subsection: 

11 ‘‘(k) COOPERATIVE MARKETING INCLUDES VALUE12 ADDED PROCESSING INVOLVING ANIMALS.—For pur13 poses of section 521 and this subchapter, the term ‘mar14 keting the products of members or other producers’ in15 cludes feeding the products of members or other producers 

16 to cattle, hogs, fish, chickens, or other animals and selling 

17 the resulting animals or animal products.’’. 

18 (b) CONFORMING AMENDMENT.—Section 521(b) is 

19 amended by adding at the end the following new para20 graph: 

21 ‘‘(7) CROSS REFERENCE.— 

‘‘For treatment of value-added processing involving animals, see section 1388(k).’’. 

22 (c) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to taxable years beginning after 

24 the date of the enactment of this Act. 
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1 SEC. 102. EXTENSION OF DECLARATORY JUDGMENT PRO2 CEDURES TO FARMERS’ COOPERATIVE ORGA3 NIZATIONS. 

4 (a) IN GENERAL.—Section 7428(a)(1) (relating to 

5 declaratory judgments of tax exempt organizations) is 

6 amended by striking ‘‘or’’ at the end of subparagraph (B) 

7 and by adding at the end the following new subparagraph: 

8 ‘‘(D) with respect to the initial classifica9 tion or continuing classification of a cooperative 

10 as described in section 521(b) which is exempt 

11 from tax under section 521(a), or’’. 

12 (b) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply with respect to pleadings filed after 

14 the date of the enactment of this Act. 

15 SEC. 103. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA16 TIVES WITHOUT REDUCING PATRONAGE 

17 DIVIDENDS. 

18 (a) IN GENERAL.—Subsection (a) of section 1388 

19 (relating to patronage dividend defined) is amended by 

20 adding at the end the following new sentence: ‘‘For pur21 poses of paragraph (3), net earnings shall not be reduced 

22 by amounts paid during the year as dividends on capital 

23 stock or other proprietary capital interests of the organiza24 tion to the extent that the articles of incorporation or by25 laws of such organization or other contract with patrons 

26 provide that such dividends are in addition to amounts 
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•S 2761 IS 

1 otherwise payable to patrons which are derived from busi2 ness done with or for patrons during the taxable year.’’. 

3 (b) EFFECTIVE DATE.—The amendment made by 

4 this section shall apply to distributions in taxable years 

5 beginning after the date of the enactment of this Act. 

6 SEC. 104. APPORTIONMENT OF CREDITS. 

7 (a) IN GENERAL.—Section 1388 (relating to defini8 tions and special rules), as amended by this Act, is amend9 ed by adding at the end the following new subsection: 

10 ‘‘(l) APPORTIONMENT OF CREDIT.— 

11 ‘‘(1) IN GENERAL.—In the case of any organi12 zation to which part I of this subchapter applies, 

13 any portion of any credit determined under any sec14 tion of this chapter for the taxable year may, at the 

15 election of the organization, be apportioned among 

16 patrons eligible to share in patronage dividends on 

17 the basis of the quantity or value of business done 

18 with or for such patrons for the taxable year. Such 

19 an election shall be made on a timely filed return for 

20 the taxable year and, once made, shall be irrevocable 

21 for such taxable year. 

22 ‘‘(2) TREATMENT OF ORGANIZATIONS AND PA23 TRONS.— 

24 ‘‘(A) ORGANIZATIONS.—The amount of the 

25 credit not apportioned to patrons pursuant to 
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1 paragraph (1) shall be included in the amount 

2 determined under the applicable section of this 

3 chapter for the taxable year of the organization. 

4 ‘‘(B) PATRONS.—The amount of the credit 

5 apportioned to patrons pursuant to paragraph 

6 (1) shall be included in the amount determined 

7 under such applicable section for the first tax8 able year of each patron ending on or after the 

9 last day of the payment period (as defined in 

10 section 1382(d)) for the taxable year of the or11 ganization or, if earlier, for the taxable year of 

12 each patron ending on or after the date on 

13 which the patron receives notice from the coop14 erative of the apportionment. 

15 ‘‘(C) SPECIAL RULES FOR DECREASE IN

16 CREDITS FOR TAXABLE YEAR.—If the amount 

17 of the credit of the organization determined 

18 under such applicable section for a taxable year 

19 is less than the amount of such credit shown on 

20 the return of the organization for such year, an 

21 amount equal to the excess of— 

22 ‘‘(i) such reduction, over 

23 ‘‘(ii) the amount not apportioned to 

24 such patrons under paragraph (1) for the 

25 taxable year, 
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1 shall be treated as an increase in tax imposed 

2 by this chapter on the organization. Such in3 crease shall not be treated as tax imposed by 

4 this chapter for purposes of determining the 

5 amount of any credit under this chapter or for 

6 purposes of section 55.’’. 

7 (b) EFFECTIVE DATE.—The amendment made by 

8 this section shall apply to taxable years beginning after 

9 the date of the enactment of this Act. 

10 SEC. 105. SUBCHAPTER T COMMISSION. 

11 (a) FINDINGS.—The Senate finds the following: 

12 (1) The National Conference of Commissioners 

13 on Uniform State Laws adopted a resolution at its 

14 2002 Annual Meeting authorizing the formation of 

15 a Study Committee on a Business Cooperative Act. 

16 The text of the resolution charges the Study Com17 mittee ‘‘to review State cooperative law, with an ini18 tial charge to contact potentially interested groups 

19 . . . to evaluate the viability, need, and support for 

20 such a project.’’ The initial scope of the study is to 

21 be limited to farm and related cooperatives. 

22 (2) Cooperatives and specifically cooperative 

23 taxation does not exist in a vacuum. As business 

24 corporations, cooperatives are subject to many of the 

25 tax rules applicable to other business forms. How-
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1 ever, cooperatives have special features that justify 

2 unique approaches to certain aspects of taxation. 

3 (3) The Committee on Finance of the Senate 

4 has specific interest in the future of cooperatives or5 ganized under subchapter T of the Internal Revenue 

6 Code of 1986. Subchapter T is the basis for coopera7 tive taxation and the taxation of patrons. 

8 (4) Soon after the income tax was enacted, a 

9 statutory exemption was created for farmer coopera10 tives that met certain operational tests. In 1951, the 

11 tax law was changed through a repeal of the farmer 

12 cooperative exemption and the addition of deductions 

13 for previously exempt farmer cooperatives for stock 

14 dividends and patronage-based distributions on non15 patronage income. In 1962, the tax law was rewrit16 ten to ensure that a single current tax was paid on 

17 cooperative margins, because the courts began allow18 ing both cooperatives and patrons to exclude patron19 age refunds from taxable income. 

20 (5) It has been over 40 years since the coopera21 tive tax laws were examined by Congress. 

22 (b) ESTABLISHMENT OF COMMISSION.— 

23 (1) IN GENERAL.—There is established the 

24 ‘‘Subchapter T Commission’’ (in this section re25 ferred to as the ‘‘Commission’’). 
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1 (2) MEMBERSHIP.— 

2 (A) COMPOSITION.—The Commission shall 

3 be composed of 8 members of whom— 

4 (i) 5 shall be appointed by the chair5 man of the Committee on Finance of the 

6 Senate, and shall consist of the chairman 

7 of the Commission, 1 cooperative tax spe8 cialist, 1 cooperative attorney, and 2 coop9 erative chief executive officers; 

10 (ii) 2 shall be appointed by the Sec11 retary of Agriculture, and shall consist of 

12 1 cooperative bank chief executive officer 

13 and 1 farmer; and 

14 (iii) 1 shall be appointed by the Sec15 retary of the Treasury, and shall consist of 

16 a cooperative specialist from the Depart17 ment of the Treasury. 

18 (B) DATE.—The appointments of the 

19 members of the Commission shall be made not 

20 later than 30 days after the enactment of this 

21 Act. 

22 (3) PERIOD OF APPOINTMENT; VACANCIES.— 

23 Members shall be appointed for the life of the Com24 mission. Any vacancy in the Commission shall not 
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1 affect its powers, but shall be filled in the same 

2 manner as the original appointment. 

3 (4) INITIAL MEETING.—Not later than 30 days 

4 after the date on which all members of the Commis5 sion have been appointed, the Commission shall hold 

6 its first meeting. 

7 (5) MEETINGS.—The Commission shall meet at 

8 the call of the Chairman. 

9 (6) QUORUM.—A majority of the members of 

10 the Commission shall constitute a quorum, but a 

11 lesser number of members may hold hearings. 

12 (c) DUTIES OF THE COMMISSION.— 

13 (1) STUDY.—The Commission shall conduct a 

14 thorough study of subchapter T of chapter 1 of the 

15 Internal Revenue Code of 1986 and shall deter16 mine— 

17 (A) whether the subchapter should be mod18 ernized; 

19 (B) what are the barriers to raising equity 

20 within a cooperative; 

21 (C) whether a new limited liability coopera22 tive structure should be created for cooperatives 

23 that would benefit from being taxed, and for 

24 business purposes be treated under the more 

25 flexible rules of a limited liability company, 
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1 while at the same time benefiting from the own2 ership structure of traditional cooperatives; and 

3 (D) whether Federal securities law and 

4 other Federal law other than tax law are bar5 riers to the ongoing development and growth of 

6 cooperatives. 

7 (2) RECOMMENDATIONS.—The Commission 

8 shall develop recommendations based on the deter9 minations made under paragraph (1). 

10 (3) REPORT.—Not later than 1 year after the 

11 date of the enactment of this Act, the Commission 

12 shall submit a report to the President and Congress 

13 which shall contain a detailed statement of the find14 ings and conclusions of the Commission, together 

15 with its recommendations for such legislation and 

16 administrative actions as it considers appropriate. 

17 (d) POWERS OF THE COMMISSION.— 

18 (1) HEARINGS.—The Commission may hold 

19 such hearings, sit and act at such times and places, 

20 take such testimony, and receive such evidence as 

21 the Commission considers advisable to carry out this 

22 Act. 

23 (2) INFORMATION FROM FEDERAL AGENCIES.— 

24 The Commission may secure directly from any Fed25 eral department or agency such information as the 
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1 Commission considers necessary to carry out this 

2 Act. Upon request of the Chairman of the Commis3 sion, the head of such department or agency shall 

4 furnish such information to the Commission. 

5 (3) POSTAL SERVICES.—The Commission may 

6 use the United States mails in the same manner and 

7 under the same conditions as other departments and 

8 agencies of the Federal Government. 

9 (4) GIFTS.—The Commission may accept, use, 

10 and dispose of gifts or donations of services or prop11 erty. 

12 (e) COMMISSION PERSONNEL MATTERS.— 

13 (1) COMPENSATION OF MEMBERS.—Each mem14 ber of the Commission who is not an officer or em15 ployee of the Federal Government shall be com16 pensated at a rate equal to the daily equivalent of 

17 the annual rate of basic pay prescribed for level IV 

18 of the Executive Schedule under section 5315 of title 

19 5, United States Code, for each day (including travel 

20 time) during which such member is engaged in the 

21 performance of the duties of the Commission. All 

22 members of the Commission who are officers or em23 ployees of the United States shall serve without com24 pensation in addition to that received for their serv25 ices as officers or employees of the United States. 
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1 (2) TRAVEL EXPENSES.—The members of the 

2 Commission shall be allowed travel expenses, includ3 ing per diem in lieu of subsistence, at rates author4 ized for employees of agencies under subchapter I of 

5 chapter 57 of title 5, United States Code, while 

6 away from their homes or regular places of business 

7 in the performance of services for the Commission. 

8 (3) STAFF.— 

9 (A) IN GENERAL.—The Chairman of the 

10 Commission may, without regard to the civil 

11 service laws and regulations, appoint and termi12 nate such other additional personnel as may be 

13 necessary to enable the Commission to perform 

14 its duties. 

15 (B) COMPENSATION.—The Chairman of 

16 the Commission may fix the compensation of 

17 the Commission personnel without regard to 

18 chapter 51 and subchapter III of chapter 53 of 

19 title 5, United States Code, relating to classi20 fication of positions and General Schedule pay 

21 rates, except that the rate of pay for such per22 sonnel may not exceed the rate payable for level 

23 V of the Executive Schedule under section 5316 

24 of such title. 
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1 (4) DETAIL OF GOVERNMENT EMPLOYEES.— 

2 Any Federal Government employee may be detailed 

3 to the Commission without reimbursement, and such 

4 detail shall be without interruption or loss of civil 

5 service status or privilege. 

6 (5) PROCUREMENT OF TEMPORARY AND INTER7 MITTENT SERVICES.—The Chairman of the Commis8 sion may procure temporary and intermittent serv9 ices under section 3109(b) of title 5, United States 

10 Code, at rates for individuals which do not exceed 

11 the daily equivalent of the annual rate of basic pay 

12 prescribed for level V of the Executive Schedule 

13 under section 5316 of such title. 

14 (f) TERMINATION OF THE COMMISSION.—The Com15 mission shall terminate 90 days after the date on which 

16 the Commission submits its report under subsection (b). 

17 (g) AUTHORIZATION OF APPROPRIATIONS.—There 

18 are authorized to be appropriated such sums as are nec19 essary to the Commission to carry out this section. 

20 Subtitle B—General Provisions 

21 SEC. 111. EXCLUSION OF RENTAL INCOME FROM SELF-EM22 PLOYMENT TAX. 

23 (a) INTERNAL REVENUE CODE.—Section 

24 1402(a)(1)(A) (relating to net earnings from self-employ-
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•S 2761 IS 

1 ment) is amended by striking ‘‘an arrangement’’ and in2 serting ‘‘a written lease agreement’’. 

3 (b) SOCIAL SECURITY ACT.—Section 211(a)(1)(A) of 

4 the Social Security Act is amended by striking ‘‘an ar5 rangement’’ and inserting ‘‘a written lease agreement’’. 

6 (c) EFFECTIVE DATE.—The amendments made by 

7 this section shall apply to taxable years beginning after 

8 the date of the enactment of this Act. 

9 SEC. 112. EXCLUSION OF CONSERVATION RESERVE PRO10 GRAM PAYMENTS FROM SELF-EMPLOYMENT 

11 TAX. 

12 (a) INTERNAL REVENUE CODE.—Section 1402(a)(1) 

13 (relating to net earnings from self-employment) is amend14 ed by inserting ‘‘and including payments under section 

15 1233(2) of the Food Security Act of 1985 (16 U.S.C. 

16 3833(2))’’ after ‘‘crop shares’’. 

17 (b) SOCIAL SECURITY ACT.—Section 211(a)(1) of 

18 the Social Security Act is amended by inserting ‘‘and in19 cluding payments under section 1233(2) of the Food Secu20 rity Act of 1985 (16 U.S.C. 3833(2))’’ after ‘‘crop 

21 shares’’. 

22 (c) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to payments made after the date 

24 of the enactment of this Act. 
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•S 2761 IS 

1 SEC. 113. EXEMPTION OF AGRICULTURAL BONDS FROM 

2 PRIVATE ACTIVITY BOND VOLUME LIMITS. 

3 (a) IN GENERAL.—Section 146(g) (relating to excep4 tion for certain bonds) is amended by striking ‘‘and’’ at 

5 the end of paragraph (3), by striking the period at the 

6 end of paragraph (4) and inserting ‘‘, and’’, and by insert7 ing after paragraph (4) the following new paragraph: 

8 ‘‘(5) any qualified small issue bond described in 

9 section 144(a)(12)(B)(ii).’’. 

10 (b) EFFECTIVE DATE.—The amendments made by 

11 this section shall apply to bonds issued after the date of 

12 the enactment of this Act. 

13 SEC. 114. MODIFICATIONS TO SECTION 512(b)(13). 

14 (a) IN GENERAL.—Paragraph (13) of section 512(b) 

15 (relating to special rules for certain amounts received from 

16 controlled entities) is amended by redesignating subpara17 graph (E) as subparagraph (F) and by inserting after sub18 paragraph (D) the following new subparagraph: 

19 ‘‘(E) PARAGRAPH TO APPLY ONLY TO EX20 CESS PAYMENTS.— 

21 ‘‘(i) IN GENERAL.—Subparagraph (A) 

22 shall apply only to the portion of a speci23 fied payment received or accrued by the 

24 controlling organization that exceeds the 

25 amount which would have been paid or ac-
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•S 2761 IS 

1 crued if such payment met the require2 ments prescribed under section 482. 

3 ‘‘(ii) ADDITION TO TAX FOR VALU4 ATION MISSTATEMENTS.—The tax imposed 

5 by this chapter on the controlling organiza6 tion shall be increased by an amount equal 

7 to 20 percent of the larger of— 

8 ‘‘(I) such excess determined with9 out regard to any amendment or sup10 plement to a return of tax, or 

11 ‘‘(II) such excess determined 

12 with regard to all such amendments 

13 and supplements.’’. 

14 (b) EFFECTIVE DATE.— 

15 (1) IN GENERAL.—The amendment made by 

16 this section shall apply to payments received or ac17 crued after December 31, 2000. 

18 (2) PAYMENTS SUBJECT TO BINDING CONTRACT

19 TRANSITION RULE.—If the amendments made by 

20 section 1041 of the Taxpayer Relief Act of 1997 did 

21 not apply to any amount received or accrued in the 

22 first 2 taxable years beginning on or after the date 

23 of the enactment of the Taxpayer Relief Act of 1997 

24 under any contract described in subsection (b)(2) of 

25 such section, such amendments also shall not apply 
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1 to amounts received or accrued under such contract 

2 before January 1, 2001. 

3 SEC. 115. COORDINATE FARMERS AND FISHERMEN INCOME 

4 AVERAGING AND THE ALTERNATIVE MIN5 IMUM TAX. 

6 (a) IN GENERAL.—Section 55(c) (defining regular 

7 tax) is amended by redesignating paragraph (2) as para8 graph (3) and by inserting after paragraph (1) the fol9 lowing new paragraph: 

10 ‘‘(2) COORDINATION WITH INCOME AVERAGING

11 FOR FARMERS AND FISHERMEN.—Solely for pur12 poses of this section, section 1301 (relating to aver13 aging of farm and fishing income) shall not apply in 

14 computing the regular tax.’’. 

15 (b) ALLOWING INCOME AVERAGING FOR FISHER16 MEN.— 

17 (1) IN GENERAL.—Section 1301(a) is amended 

18 by striking ‘‘farming business’’ and inserting ‘‘farm19 ing business or fishing business’’. 

20 (2) DEFINITION OF ELECTED FARM INCOME.— 

21 (A) IN GENERAL.—Clause (i) of section 

22 1301(b)(1)(A) is amended by inserting ‘‘or fish23 ing business’’ before the semicolon. 

24 (B) CONFORMING AMENDMENT.—Subpara25 graph (B) of section 1301(b)(1) is amended by 
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1 inserting ‘‘or fishing business’’ after ‘‘farming 

2 business’’ both places it occurs. 

3 (3) DEFINITION OF FISHING BUSINESS.—Sec4 tion 1301(b) is amended by adding at the end the 

5 following new paragraph: 

6 ‘‘(4) FISHING BUSINESS.—The term ‘fishing 

7 business’ means the conduct of commercial fishing 

8 as defined in section 3 of the Magnuson-Stevens 

9 Fishery Conservation and Management Act (16 

10 U.S.C. 1802).’’. 

11 (c) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to taxable years beginning after 

13 the date of the enactment of this Act. 

14 SEC. 116. SPECIAL RULES FOR LIVESTOCK SOLD ON AC15 COUNT OF WEATHER-RELATED CONDITIONS. 

16 (a) REPLACEMENT OF LIVESTOCK WITH OTHER

17 FARM PROPERTY.—Subsection (f) of section 1033 (relat18 ing to involuntary conversions) is amended— 

19 (1) by inserting ‘‘drought, flood, or other 

20 weather-related conditions, or’’ after ‘‘because of’’, 

21 (2) by inserting ‘‘in the case of soil contamina22 tion or other environmental contamination’’ after 

23 ‘‘including real property’’, and 
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•S 2761 IS 

1 (3) by striking ‘‘WHERE THERE HAS BEEN

2 ENVIRONMENTAL CONTAMINATION’’ in the heading 

3 and inserting ‘‘IN CERTAIN CASES’’. 

4 (b) EXTENSION OF REPLACEMENT PERIOD OF IN5 VOLUNTARILY CONVERTED LIVESTOCK.—Subsection (e) 

6 of section 1033 (relating to involuntary conversions) is 

7 amended— 

8 (1) by striking ‘‘CONDITIONS.—For purposes’’ 

9 and inserting ‘‘CONDITIONS.— 

10 ‘‘(1) IN GENERAL.—For purposes’’, and 

11 (2) by adding at the end the following new 

12 paragraph: 

13 ‘‘(2) EXTENSION OF REPLACEMENT PERIOD.— 

14 ‘‘(A) IN GENERAL.—In the case of 

15 drought, flood, or other weather-related condi16 tions described in paragraph (1) which result in 

17 the area being designated as eligible for assist18 ance by the Federal Government, subsection 

19 (a)(2)(B) shall be applied with respect to any 

20 converted property by substituting ‘4 years’ for 

21 ‘2 years’. 

22 ‘‘(B) FURTHER EXTENSION BY SEC23 RETARY.—The Secretary may extend on a re24 gional basis the period for replacement under 

25 this section (after the application of subpara-
22 

•S 2761 IS 

1 graph (A)) for such additional time as the Sec2 retary determines appropriate if the weather-re3 lated conditions which resulted in such applica4 tion continue for more than 3 years.’’. 

5 (c) INCOME INCLUSION RULES.—Section 451(e) (re6 lating to special rule for proceeds from livestock sold on 

7 account of drought, flood, or other weather-related condi8 tions) is amended by adding at the end the following new 

9 paragraph: 

10 ‘‘(3) SPECIAL ELECTION RULES.—If section 

11 1033(e)(2) applies to a sale or exchange of livestock 

12 described in paragraph (1), the election under para13 graph (1) shall be deemed valid if made during the 

14 replacement period described in such section.’’. 

15 (d) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to taxable years beginning after 

17 December 31, 2001. 

18 SEC. 117. REDUCTION OF HOLDING PERIOD TO 12 MONTHS 

19 FOR PURPOSES OF DETERMINING WHETHER 

20 HORSES ARE SECTION 1231 ASSETS. 

21 (a) IN GENERAL.—Subparagraph (A) of section 

22 1231(b)(3) (relating to definition of property used in the 

23 trade or business) is amended by striking ‘‘and horses’’. 
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•S 2761 IS 

1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2003. 

4 SEC. 118. CHARITABLE DEDUCTION FOR CONTRIBUTIONS 

5 OF FOOD INVENTORIES. 

6 (a) IN GENERAL.—Subsection (e) of section 170 (re7 lating to certain contributions of ordinary income and cap8 ital gain property) is amended by adding at the end the 

9 following new paragraph: 

10 ‘‘(7) APPLICATION OF PARAGRAPH (3) TO CER11 TAIN CONTRIBUTIONS OF FOOD INVENTORY.—For 

12 purposes of this section— 

13 ‘‘(A) EXTENSION TO INDIVIDUALS.—In the 

14 case of a charitable contribution of apparently 

15 wholesome food— 

16 ‘‘(i) paragraph (3)(A) shall be applied 

17 without regard to whether the contribution 

18 is made by a C corporation, and 

19 ‘‘(ii) in the case of a taxpayer other 

20 than a C corporation, the aggregate 

21 amount of such contributions from any 

22 trade or business (or interest therein) of 

23 the taxpayer for any taxable year which 

24 may be taken into account under this sec25 tion shall not exceed 10 percent of the tax-
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1 payer’s net income from any such trade or 

2 business, computed without regard to this 

3 section, for such taxable year. 

4 ‘‘(B) LIMITATION ON REDUCTION.—In the 

5 case of a charitable contribution of apparently 

6 wholesome food, notwithstanding paragraph 

7 (3)(B), the amount of the reduction determined 

8 under paragraph (1)(A) shall not exceed the 

9 amount by which the fair market value of such 

10 property exceeds twice the basis of such prop11 erty. 

12 ‘‘(C) DETERMINATION OF BASIS.—If a 

13 taxpayer— 

14 ‘‘(i) does not account for inventories 

15 under section 471, and 

16 ‘‘(ii) is not required to capitalize indi17 rect costs under section 263A, 

18 the taxpayer may elect, solely for purposes of 

19 paragraph (3)(B), to treat the basis of any ap20 parently wholesome food as being equal to 25 

21 percent of the fair market value of such food. 

22 ‘‘(D) DETERMINATION OF FAIR MARKET

23 VALUE.—In the case of a charitable contribu24 tion of apparently wholesome food which is a 

25 qualified contribution (within the meaning of 
25 

•S 2761 IS 

1 paragraph (3), as modified by subparagraph (A) 

2 of this paragraph) and which, solely by reason 

3 of internal standards of the taxpayer or lack of 

4 market, cannot or will not be sold, the fair mar5 ket value of such contribution shall be deter6 mined— 

7 ‘‘(i) without regard to such internal 

8 standards or such lack of market and 

9 ‘‘(ii) by taking into account the price 

10 at which the same or substantially the 

11 same food items (as to both type and qual12 ity) are sold by the taxpayer at the time of 

13 the contribution (or, if not so sold at such 

14 time, in the recent past). 

15 ‘‘(E) APPARENTLY WHOLESOME FOOD.— 

16 For purposes of this paragraph, the term ‘ap17 parently wholesome food’ has the meaning given 

18 such term by section 22(b)(2) of the Bill Emer19 son Good Samaritan Food Donation Act (42 

20 U.S.C. 1791(b)(2)), as in effect on the date of 

21 the enactment of this paragraph. 

22 ‘‘(F) APPORTIONMENT OF DEDUCTION.— 

23 In the case of any organization to which part 

24 I of subchapter T applies, any portion of any 

25 deduction determined under this section with 
26 

•S 2761 IS 

1 respect to any charitable contribution of appar2 ently wholesome food for the taxable year may, 

3 at the election of the organization, be appor4 tioned among patrons eligible to share in pa5 tronage dividends on the basis of the quantity 

6 or value of business done with or for such pa7 trons for the taxable year. Such an election 

8 shall be made on a timely filed return for the 

9 taxable year and, once made, shall be irrev10 ocable for such taxable year.’’. 

11 (b) EFFECTIVE DATE.—The amendment made by 

12 this section shall apply to contributions made after the 

13 date of the enactment of this Act. 

14 SEC. 119. FARM, FISHING, AND RANCH RISK MANAGEMENT 

15 ACCOUNTS. 

16 (a) IN GENERAL.—Subpart C of part II of sub17 chapter E of chapter 1 (relating to taxable year for which 

18 deductions taken) is amended by inserting after section 

19 468B the following new section: 

20 ‘‘SEC. 468C. FARM, FISHING, AND RANCH RISK MANAGE21 MENT ACCOUNTS. 

22 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi23 vidual engaged in an eligible farming business or commer24 cial fishing, there shall be allowed as a deduction for any 

25 taxable year the amount paid in cash by the taxpayer dur-
27 

•S 2761 IS 

1 ing the taxable year to a Farm, Fishing, and Ranch Risk 

2 Management Account (hereinafter referred to as the 

3 ‘FFARRM Account’). 

4 ‘‘(b) LIMITATION.— 

5 ‘‘(1) CONTRIBUTIONS.—The amount which a 

6 taxpayer may pay into the FFARRM Account for 

7 any taxable year shall not exceed 20 percent of so 

8 much of the taxable income of the taxpayer (deter9 mined without regard to this section) which is at10 tributable (determined in the manner applicable 

11 under section 1301) to any eligible farming business 

12 or commercial fishing. 

13 ‘‘(2) DISTRIBUTIONS.—Distributions from a 

14 FFARRM Account may not be used to purchase, 

15 lease, or finance any new fishing vessel, add capacity 

16 to any fishery, or otherwise contribute to the over17 capitalization of any fishery. The Secretary of Com18 merce shall implement regulations to enforce this 

19 paragraph. 

20 ‘‘(c) ELIGIBLE BUSINESSES.—For purposes of this 

21 section— 

22 ‘‘(1) ELIGIBLE FARMING BUSINESS.—The term 

23 ‘eligible farming business’ means any farming busi24 ness (as defined in section 263A(e)(4)) which is not 
28 

•S 2761 IS 

1 a passive activity (within the meaning of section 

2 469(c)) of the taxpayer. 

3 ‘‘(2) COMMERCIAL FISHING.—The term ‘com4 mercial fishing’ has the meaning given such term by 

5 section (3) of the Magnuson-Stevens Fishery Con6 servation and Management Act (16 U.S.C. 1802) 

7 but only if such fishing is not a passive activity 

8 (within the meaning of section 469(c)) of the tax9 payer. 

10 ‘‘(d) FFARRM ACCOUNT.—For purposes of this sec11 tion— 

12 ‘‘(1) IN GENERAL.—The term ‘FFARRM Ac13 count’ means a trust created or organized in the 

14 United States for the exclusive benefit of the tax15 payer, but only if the written governing instrument 

16 creating the trust meets the following requirements: 

17 ‘‘(A) No contribution will be accepted for 

18 any taxable year in excess of the amount al19 lowed as a deduction under subsection (a) for 

20 such year. 

21 ‘‘(B) The trustee is a bank (as defined in 

22 section 408(n)) or another person who dem23 onstrates to the satisfaction of the Secretary 

24 that the manner in which such person will ad-
29 

•S 2761 IS 

1 minister the trust will be consistent with the re2 quirements of this section. 

3 ‘‘(C) The assets of the trust consist en4 tirely of cash or of obligations which have ade5 quate stated interest (as defined in section 

6 1274(c)(2)) and which pay such interest not 

7 less often than annually. 

8 ‘‘(D) All income of the trust is distributed 

9 currently to the grantor. 

10 ‘‘(E) The assets of the trust will not be 

11 commingled with other property except in a 

12 common trust fund or common investment 

13 fund. 

14 ‘‘(2) ACCOUNT TAXED AS GRANTOR TRUST.— 

15 The grantor of a FFARRM Account shall be treated 

16 for purposes of this title as the owner of such Ac17 count and shall be subject to tax thereon in accord18 ance with subpart E of part I of subchapter J of 

19 this chapter (relating to grantors and others treated 

20 as substantial owners). 

21 ‘‘(e) INCLUSION OF AMOUNTS DISTRIBUTED.— 

22 ‘‘(1) IN GENERAL.—Except as provided in para23 graph (2), there shall be includible in the gross in24 come of the taxpayer for any taxable year— 
30 

•S 2761 IS 

1 ‘‘(A) any amount distributed from a 

2 FFARRM Account of the taxpayer during such 

3 taxable year, and 

4 ‘‘(B) any deemed distribution under— 

5 ‘‘(i) subsection (f )(1) (relating to de6 posits not distributed within 5 years), 

7 ‘‘(ii) subsection (f )(2) (relating to ces8 sation in eligible farming business), and 

9 ‘‘(iii) subparagraph (B) or (C) of sub10 section (f )(3) (relating to prohibited trans11 actions and pledging account as security). 

12 ‘‘(2) EXCEPTIONS.—Paragraph (1)(A) shall not 

13 apply to— 

14 ‘‘(A) any distribution to the extent attrib15 utable to income of the Account, and 

16 ‘‘(B) the distribution of any contribution 

17 paid during a taxable year to a FFARRM Ac18 count to the extent that such contribution ex19 ceeds the limitation applicable under subsection 

20 (b) if requirements similar to the requirements 

21 of section 408(d)(4) are met. 

22 For purposes of subparagraph (A), distributions 

23 shall be treated as first attributable to income and 

24 then to other amounts. 

25 ‘‘(f ) SPECIAL RULES.— 
31 

•S 2761 IS 

1 ‘‘(1) TAX ON DEPOSITS IN ACCOUNT WHICH

2 ARE NOT DISTRIBUTED WITHIN 5 YEARS.— 

3 ‘‘(A) IN GENERAL.—If, at the close of any 

4 taxable year, there is a nonqualified balance in 

5 any FFARRM Account— 

6 ‘‘(i) there shall be deemed distributed 

7 from such Account during such taxable 

8 year an amount equal to such balance, and 

9 ‘‘(ii) the taxpayer’s tax imposed by 

10 this chapter for such taxable year shall be 

11 increased by 10 percent of such deemed 

12 distribution. 

13 The preceding sentence shall not apply if an 

14 amount equal to such nonqualified balance is 

15 distributed from such Account to the taxpayer 

16 before the due date (including extensions) for 

17 filing the return of tax imposed by this chapter 

18 for such year (or, if earlier, the date the tax19 payer files such return for such year). 

20 ‘‘(B) NONQUALIFIED BALANCE.—For pur21 poses of subparagraph (A), the term ‘non22 qualified balance’ means any balance in the Ac23 count on the last day of the taxable year which 

24 is attributable to amounts deposited in such Ac25 count before the 4th preceding taxable year. 
32 

•S 2761 IS 

1 ‘‘(C) ORDERING RULE.—For purposes of 

2 this paragraph, distributions from a FFARRM 

3 Account (other than distributions of current in4 come) shall be treated as made from deposits in 

5 the order in which such deposits were made, be6 ginning with the earliest deposits. 

7 ‘‘(2) CESSATION IN ELIGIBLE BUSINESS.—At 

8 the close of the first disqualification period after a 

9 period for which the taxpayer was engaged in an eli10 gible farming business or commercial fishing, there 

11 shall be deemed distributed from the FFARRM Ac12 count of the taxpayer an amount equal to the bal13 ance in such Account (if any) at the close of such 

14 disqualification period. For purposes of the pre15 ceding sentence, the term ‘disqualification period’ 

16 means any period of 2 consecutive taxable years for 

17 which the taxpayer is not engaged in an eligible 

18 farming business or commercial fishing. 

19 ‘‘(3) CERTAIN RULES TO APPLY.—Rules similar 

20 to the following rules shall apply for purposes of this 

21 section: 

22 ‘‘(A) Section 220(f )(8) (relating to treat23 ment after death of account holder). 
33 

•S 2761 IS 

1 ‘‘(B) Section 408(e)(2) (relating to loss of 

2 exemption of account where individual engages 

3 in prohibited transaction). 

4 ‘‘(C) Section 408(e)(4) (relating to effect 

5 of pledging account as security). 

6 ‘‘(D) Section 408(g) (relating to commu7 nity property laws). 

8 ‘‘(E) Section 408(h) (relating to custodial 

9 accounts). 

10 ‘‘(4) TIME WHEN PAYMENTS DEEMED MADE.— 

11 For purposes of this section, a taxpayer shall be 

12 deemed to have made a payment to a FFARRM Ac13 count on the last day of a taxable year if such pay14 ment is made on account of such taxable year and 

15 is made on or before the due date (without regard 

16 to extensions) for filing the return of tax for such 

17 taxable year. 

18 ‘‘(5) INDIVIDUAL.—For purposes of this sec19 tion, the term ‘individual’ shall not include an estate 

20 or trust. 

21 ‘‘(6) DEDUCTION NOT ALLOWED FOR SELF-EM22 PLOYMENT TAX.—The deduction allowable by reason 

23 of subsection (a) shall not be taken into account in 

24 determining an individual’s net earnings from self- 
34 

•S 2761 IS 

1 employment (within the meaning of section 1402(a)) 

2 for purposes of chapter 2. 

3 ‘‘(g) REPORTS.—The trustee of a FFARRM Account 

4 shall make such reports regarding such Account to the 

5 Secretary and to the person for whose benefit the Account 

6 is maintained with respect to contributions, distributions, 

7 and such other matters as the Secretary may require 

8 under regulations. The reports required by this subsection 

9 shall be filed at such time and in such manner and fur10 nished to such persons at such time and in such manner 

11 as may be required by such regulations.’’. 

12 (b) TAX ON EXCESS CONTRIBUTIONS.— 

13 (1) Subsection (a) of section 4973 (relating to 

14 tax on excess contributions to certain tax-favored ac15 counts and annuities) is amended by striking ‘‘or’’ 

16 at the end of paragraph (4), by adding ‘‘or’’ at the 

17 end of paragraph (5), and by inserting after para18 graph (5) the following new paragraph: 

19 ‘‘(6) a FFARRM Account (within the meaning 

20 of section 468C(d)),’’. 

21 (2) Section 4973 is amended by adding at the 

22 end the following new subsection: 

23 ‘‘(h) EXCESS CONTRIBUTIONS TO FFARRM AC24 COUNTS.—For purposes of this section, in the case of a 

25 FFARRM Account (within the meaning of section 
35 

•S 2761 IS 

1 468C(d)), the term ‘excess contributions’ means the 

2 amount by which the amount contributed for the taxable 

3 year to the Account exceeds the amount which may be con4 tributed to the Account under section 468C(b) for such 

5 taxable year. For purposes of this subsection, any con6 tribution which is distributed out of the FFARRM Ac7 count in a distribution to which section 468C(e)(2)(B) ap8 plies shall be treated as an amount not contributed.’’. 

9 (c) TAX ON PROHIBITED TRANSACTIONS.— 

10 (1) Subsection (c) of section 4975 (relating to 

11 tax on prohibited transactions) is amended by add12 ing at the end the following new paragraph: 

13 ‘‘(7) SPECIAL RULE FOR FFARRM ACCOUNTS.— 

14 A person for whose benefit a FFARRM Account 

15 (within the meaning of section 468C(d)) is estab16 lished shall be exempt from the tax imposed by this 

17 section with respect to any transaction concerning 

18 such account (which would otherwise be taxable 

19 under this section) if, with respect to such trans20 action, the account ceases to be a FFARRM Ac21 count by reason of the application of section 

22 468C(f )(3)(A) to such account.’’. 

23 (2) Paragraph (1) of section 4975(e) is amend24 ed by redesignating subparagraphs (F) and (G) as 

25 subparagraphs (G) and (H), respectively, and by in-
36

•S 2761 IS 

1 serting after subparagraph (E) the following new 

2 subparagraph: 

3 ‘‘(F) a FFARRM Account described in 

4 section 468C(d),’’. 

5 (d) FAILURE TO PROVIDE REPORTS ON FFARRM 

6 ACCOUNTS.—Paragraph (2) of section 6693(a) (relating 

7 to failure to provide reports on certain tax-favored ac8 counts or annuities) is amended by redesignating subpara9 graphs (C) and (D) as subparagraphs (D) and (E), re10 spectively, and by inserting after subparagraph (B) the 

11 following new subparagraph: 

12 ‘‘(C) section 468C(g) (relating to 

13 FFARRM Accounts),’’. 

14 (e) CLERICAL AMENDMENT.—The table of sections 

15 for subpart C of part II of subchapter E of chapter 1 is 

16 amended by inserting after the item relating to section 

17 468B the following new item:

‘‘Sec. 468C. Farm, Fishing, and Ranch Risk Management Accounts.’’.

18 (f ) EFFECTIVE DATE.—The amendments made by 

19 this section shall apply to taxable years beginning after 

20 the date of the enactment of this Act. 
37 

•S 2761 IS 

1 TITLE II—PROVISIONS 

2 RELATING TO SMALL BUSINESS 

3 Subtitle A—Maximum Number of 

4 Shareholders of an S Corporation 

5 SEC. 201. MEMBERS OF FAMILY TREATED AS 1 SHARE6 HOLDER. 

7 (a) IN GENERAL.—Paragraph (1) of section 1361(c) 

8 (relating to special rules for applying subsection (b)) is 

9 amended to read as follows: 

10 ‘‘(1) MEMBERS OF FAMILY TREATED AS 1

11 SHAREHOLDER.— 

12 ‘‘(A) IN GENERAL.—For purpose of sub13 section (b)(1)(A)— 

14 ‘‘(i) except as provided in clause (ii), 

15 a husband and wife (and their estates) 

16 shall be treated as 1 shareholder, and 

17 ‘‘(ii) in the case of a family with re18 spect to which an election is in effect 

19 under subparagraph (D), all members of 

20 the family shall be treated as 1 share21 holder. 

22 ‘‘(B) MEMBERS OF THE FAMILY.—For 

23 purpose of subparagraph (A)(ii)— 

24 ‘‘(i) IN GENERAL.—The term ‘mem25 bers of the family’ means the common an-
38 

•S 2761 IS 

1 cestor, lineal descendants of the common 

2 ancestor, and the spouses (or former 

3 spouses) of such lineal descendants or com4 mon ancestor. 

5 ‘‘(ii) COMMON ANCESTOR.—For pur6 poses of this paragraph, an individual shall 

7 not be considered a common ancestor if, as 

8 of the later of the effective date of this 

9 paragraph or the time the election under 

10 section 1362(a) is made, the individual is 

11 more than 3 generations removed from the 

12 youngest generation of shareholders who 

13 would (but for this clause) be members of 

14 the family. For purposes of the preceding 

15 sentence, a spouse (or former spouse) shall 

16 be treated as being of the same generation 

17 as the individual to which such spouse is 

18 (or was) married. 

19 ‘‘(C) EFFECT OF ADOPTION, ETC.—In de20 termining whether any relationship specified in 

21 subparagraph (B) exists, the rules of section 

22 152(b)(2) shall apply. 

23 ‘‘(D) ELECTION.—An election under sub24 paragraph (A)(ii)— 
39 

•S 2761 IS 

1 ‘‘(i) may, except as otherwise provided 

2 in regulations prescribed by the Secretary, 

3 be made by any member of the family, and 

4 ‘‘(ii) shall remain in effect until termi5 nated as provided in regulations prescribed 

6 by the Secretary.’’. 

7 (b) RELIEF FROM INADVERTENT INVALID ELECTION

8 OR TERMINATION.—Section 1362(f) (relating to inad9 vertent invalid elections or terminations), as amended by 

10 section 229, is amended— 

11 (1) by inserting ‘‘or section 1361(c)(1)(A)(ii)’’ 

12 after ‘‘section 1361(b)(3)(B)(ii),’’ in paragraph (1), 

13 and 

14 (2) by inserting ‘‘or section 1361(c)(1)(D)(iii)’’ 

15 after ‘‘section 1361(b)(3)(C),’’ in paragraph (1)(B). 

16 (c) EFFECTIVE DATES.— 

17 (1) SUBSECTION (a).—The amendment made 

18 by subsection (a) shall apply to taxable years begin19 ning after December 31, 2004. 

20 (2) SUBSECTION (b).—The amendments made 

21 by subsection (b) shall apply to elections and termi22 nations made after December 31, 2004. 
40 

•S 2761 IS 

1 SEC. 202. INCREASE IN NUMBER OF ELIGIBLE SHARE2 HOLDERS TO 100. 

3 (a) IN GENERAL.—Section 1361(b)(1)(A) (defining 

4 small business corporation) is amended by striking ‘‘75’’ 

5 and inserting ‘‘100’’. 

6 (b) EFFECTIVE DATE.—The amendment made by 

7 this section shall apply to taxable years beginning after 

8 December 31, 2003. 

9 SEC. 203. NONRESIDENT ALIENS ALLOWED AS BENE10 FICIARIES OF AN ELECTING SMALL BUSINESS 

11 TRUST. 

12 (a) IN GENERAL.—Section 1361(e)(1)(A)(i)(I) is 

13 amended by inserting ‘‘(including a nonresident alien indi14 vidual)’’ after ‘‘individual’’. 

15 (b) CONFORMING AMENDMENT.—Clause (v) of sec16 tion 1361(c)(2)(B) is amended by adding at the end the 

17 following new sentence: ‘‘This clause shall not apply for 

18 purposes of subsection (b)(1)(C).’’. 

19 (c) EFFECTIVE DATE.—The amendments made by 

20 this section shall take effect on the date of the enactment 

21 of this Act. 

22 Subtitle B—Termination of Elec23 tion and Additions To Tax Due 

24 To Passive Investment Income 

25 SEC. 211. MODIFICATIONS TO PASSIVE INCOME RULES. 

26 (a) INCREASED PERCENTAGE LIMIT.— 
41 

•S 2761 IS 

1 (1) IN GENERAL.—Subsection (a)(2) of section 

2 1375 (relating to tax imposed when passive invest3 ment income of corporation having accumulated 

4 earnings and profits exceeds 25 percent of gross re5 ceipts) is amended by striking ‘‘25 percent’’ and in6 serting ‘‘60 percent’’. 

7 (2) CONFORMING AMENDMENTS.— 

8 (A) Section 26(b)(2)(J) is amended by 

9 striking ‘‘25 percent’’ and inserting ‘‘60 per10 cent’’. 

11 (B) Section 1362(d)(3)(A)(i)(II) is amend12 ed by striking ‘‘25 percent’’ and inserting ‘‘60 

13 percent’’. 

14 (C) The heading for paragraph (3) of sec15 tion 1362(d) is amended by striking ‘‘25 PER16 CENT’’ and inserting ‘‘60 PERCENT’’. 

17 (D) Section 1375(b)(1)(A)(i) is amended 

18 by striking ‘‘25 percent’’ and inserting ‘‘60 per19 cent’’. 

20 (E) The heading for section 1375 is 

21 amended by striking ‘‘25 PERCENT’’ and in22 serting ‘‘60 PERCENT’’. 

23 (F) The table of sections for part III of 

24 subchapter S of chapter 1 is amended by strik-
42 

•S 2761 IS 

1 ing ‘‘25 percent’’ in the item relating to section 

2 1375 and inserting ‘‘60 percent’’. 

3 (b) CAPITAL GAIN NOT TREATED AS PASSIVE IN4 VESTMENT INCOME.—Section 1362(d)(3) is amended— 

5 (1) by striking ‘‘annuities,’’ and all that follows 

6 in subparagraph (C)(i) and inserting ‘‘and annu7 ities.’’, and 

8 (2) by striking subparagraphs (C)(iv) and (D) 

9 and by redesignating subparagraph (E) as subpara10 graph (D). 

11 (c) CONFORMING AMENDMENTS.—Section 1375(d) is 

12 amended by striking ‘‘subchapter C’’ both places it ap13 pears and inserting ‘‘accumulated’’. 

14 (d) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to taxable years beginning after 

16 December 31, 2003. 

17 Subtitle C—Treatment of S 

18 Corporation Shareholders 

19 SEC. 221. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 

20 DIVORCE. 

21 (a) IN GENERAL.—Section 1366(d) (relating to spe22 cial rules for losses and deductions) is amended by adding 

23 at the end the following new paragraph: 

24 ‘‘(4) TRANSFER OF SUSPENDED LOSSES AND

25 DEDUCTIONS WHEN STOCK IS TRANSFERRED INCI-
43 

•S 2761 IS 

1 DENT TO DIVORCE.—For purposes of paragraph (2), 

2 the transfer of any shareholder’s stock in an S cor3 poration incident to a decree of divorce shall include 

4 any loss or deduction described in such paragraph 

5 attributable to such stock.’’. 

6 (b) EFFECTIVE DATE.—The amendment made by 

7 this section shall apply to transfers in taxable years begin8 ning after December 31, 2003. 

9 SEC. 222. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 

10 AMOUNTS BY QUALIFIED SUBCHAPTER S 

11 TRUST INCOME BENEFICIARIES. 

12 (a) IN GENERAL.—Section 1361(d)(1) (relating to 

13 special rule for qualified subchapter S trust) is amended— 

14 (1) by striking ‘‘and’’ at the end of subpara15 graph (A), 

16 (2) by striking the period at the end of sub17 paragraph (B) and inserting ‘‘, and’’, and 

18 (3) by adding at the end the following new sub19 paragraph: 

20 ‘‘(C) for purposes of applying sections 465 

21 and 469(g) to the beneficiary of the trust, the 

22 disposition of the S corporation stock by the 

23 trust shall be treated as a disposition by such 

24 beneficiary.’’. 
44 

•S 2761 IS 

1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to transfers in taxable years begin3 ning after December 31, 2003. 

4 SEC. 223. DISREGARD OF UNEXERCISED POWERS OF AP5 POINTMENT IN DETERMINING POTENTIAL 

6 CURRENT BENEFICIARIES OF ESBT. 

7 (a) IN GENERAL.—Section 1361(e)(2) (defining po8 tential current beneficiary) is amended by inserting ‘‘(de9 termined without regard to any unexercised (in whole or 

10 in part) power of appointment during such period)’’ after 

11 ‘‘of the trust’’ in the first sentence. 

12 (b) EFFECTIVE DATE.—The amendment made by 

13 this section shall apply to taxable years beginning after 

14 December 31, 2003. 

15 SEC. 224. CLARIFICATION OF ELECTING SMALL BUSINESS 

16 TRUST DISTRIBUTION RULES. 

17 (a) IN GENERAL.—Section 641(c)(1) (relating to spe18 cial rules for taxation of electing small business trusts) 

19 is amended— 

20 (1) by striking ‘‘and’’ at the end of subpara21 graph (A), 

22 (2) by redesignating subparagraph (B) as sub23 paragraph (C), and 

24 (3) by inserting after subparagraph (A) the fol25 lowing new subparagraph: 
45 

•S 2761 IS 

1 ‘‘(B) any distribution attributable to the 

2 portion treated as a separate trust shall be 

3 treated separately from any distribution attrib4 utable to the portion not so treated, and’’. 

5 (b) EFFECTIVE DATE.—The amendments made by 

6 this section shall apply to taxable years beginning after 

7 December 31, 2003. 

8 Subtitle D—Provisions Relating To 

9 Banks 

10 SEC. 231. SALE OF STOCK IN IRA RELATING TO S CORPORA11 TION ELECTION EXEMPT FROM PROHIBITED 

12 TRANSACTION RULES. 

13 (a) IN GENERAL.—Section 4975(d) (relating to ex14 emptions) is amended by striking ‘‘or’’ at the end of para15 graph (14), by striking the period at the end of paragraph 

16 (15) and inserting ‘‘; or’’, and by adding at the end the 

17 following new paragraph: 

18 ‘‘(16) a sale of stock held by a trust which con19 stitutes an individual retirement account under sec20 tion 408(a) to the individual for whose benefit such 

21 account is established if such sale is pursuant to an 

22 election under section 1362(a).’’. 

23 (b) EFFECTIVE DATE.—The amendments made by 

24 this section shall apply to sales of stock held by individual 
46 

•S 2761 IS 

1 retirement accounts on the date of the enactment of this 

2 Act. 

3 SEC. 232. EXCLUSION OF INVESTMENT SECURITIES INCOME 

4 FROM PASSIVE INCOME TEST FOR BANK S 

5 CORPORATIONS. 

6 (a) IN GENERAL.—Section 1362(d)(3) (relating to 

7 where passive investment income exceeds certain percent8 age of gross receipts for 3 consecutive taxable years and 

9 corporation has accumulated earnings and profits), as 

10 amended by this Act, is amended by adding at the end 

11 the following new subparagraph: 

12 ‘‘(E) EXCEPTION FOR BANKS; ETC.—In 

13 the case of a bank (as defined in section 581), 

14 a bank holding company (as defined in section 

15 246A(c)(3)(B)(ii)), or a qualified subchapter S 

16 subsidiary which is a bank, the term ‘passive 

17 investment income’ shall not include— 

18 ‘‘(i) interest income earned by such 

19 bank, bank holding company, or qualified 

20 subchapter S subsidiary, or 

21 ‘‘(ii) dividends on assets required to 

22 be held by such bank, bank holding com23 pany, or qualified subchapter S subsidiary 

24 to conduct a banking business, including 

25 stock in the Federal Reserve Bank, the 
47 

•S 2761 IS 

1 Federal Home Loan Bank, or the Federal 

2 Agricultural Mortgage Bank or participa3 tion certificates issued by a Federal Inter4 mediate Credit Bank.’’. 

5 (b) EFFECTIVE DATE.—The amendment made by 

6 this section shall apply to taxable years beginning after 

7 December 31, 2003. 

8 SEC. 233. TREATMENT OF QUALIFYING DIRECTOR SHARES. 

9 (a) IN GENERAL.—Section 1361 (defining S corpora10 tion) is amended by adding at the end the following new 

11 subsection: 

12 ‘‘(f) TREATMENT OF QUALIFYING DIRECTOR

13 SHARES.— 

14 ‘‘(1) IN GENERAL.—For purposes of this sub15 chapter— 

16 ‘‘(A) qualifying director shares shall not be 

17 treated as a second class of stock, and 

18 ‘‘(B) no person shall be treated as a share19 holder of the corporation by reason of holding 

20 qualifying director shares. 

21 ‘‘(2) QUALIFYING DIRECTOR SHARES DE22 FINED.—For purposes of this subsection, the term 

23 ‘qualifying director shares’ means any shares of 

24 stock in a bank (as defined in section 581) or in a 
48 

•S 2761 IS 

1 bank holding company registered as such with the 

2 Federal Reserve System— 

3 ‘‘(i) which are held by an individual 

4 solely by reason of status as a director of 

5 such bank or company or its controlled 

6 subsidiary; and 

7 ‘‘(ii) which are subject to an agree8 ment pursuant to which the holder is re9 quired to dispose of the shares of stock 

10 upon termination of the holder’s status as 

11 a director at the same price as the indi12 vidual acquired such shares of stock. 

13 ‘‘(3) DISTRIBUTIONS.—A distribution (not in 

14 part or full payment in exchange for stock) made by 

15 the corporation with respect to qualifying director 

16 shares shall be includible as ordinary income of the 

17 holder and deductible to the corporation as an ex18 pense in computing taxable income under section 

19 1363(b) in the year such distribution is received.’’. 

20 (b) CONFORMING AMENDMENT.—Section 1366(a) is 

21 amended by adding at the end the following new para22 graph: 

23 ‘‘(3) ALLOCATION WITH RESPECT TO QUALI24 FYING DIRECTOR SHARES.—The holders of quali25 fying director shares (as defined in section 1361(f)) 
49 

•S 2761 IS 

1 shall not, with respect to such shares of stock, be al2 located any of the items described in paragraph 

3 (1).’’. 

4 (c) EFFECTIVE DATE.—The amendments made by 

5 this section shall apply to taxable years beginning after 

6 December 31, 2003. 

7 Subtitle E—Qualified Subchapter S 

8 Subsidiaries 

9 SEC. 241. RELIEF FROM INADVERTENTLY INVALID QUALI10 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 

11 AND TERMINATIONS. 

12 (a) IN GENERAL.—Section 1362(f) (relating to inad13 vertent invalid elections or terminations) is amended— 

14 (1) by inserting ‘‘or under section 

15 1361(b)(3)(B)(ii)’’ after ‘‘subsection (a)’’ in para16 graph (1), 

17 (2) by inserting ‘‘or under section 

18 1361(b)(3)(C)’’ after ‘‘subsection (d)’’ in paragraph 

19 (1)(B), 

20 (3) by inserting ‘‘or a qualified subchapter S 

21 subsidiary, as the case may be’’ after ‘‘small busi22 ness corporation’’ in paragraph (3)(A), 

23 (4) by inserting ‘‘or a qualified subchapter S 

24 subsidiary, as the case may be’’ after ‘‘S corpora25 tion’’ in paragraph (4), and 
50 

•S 2761 IS 

1 (5) by inserting ‘‘or a qualified subchapter S 

2 subsidiary, as the case may be’’ after ‘‘S corpora3 tion’’ in the matter following paragraph (4). 

4 (b) EFFECTIVE DATE.—The amendments made by 

5 this section shall apply to taxable years beginning after 

6 December 31, 2003. 

7 SEC. 242. INFORMATION RETURNS FOR QUALIFIED SUB8 CHAPTER S SUBSIDIARIES. 

9 (a) IN GENERAL.—Section 1361(b)(3)(A) (relating 

10 to treatment of certain wholly owned subsidiaries) is 

11 amended by inserting ‘‘and in the case of information re12 turns required under part III of subchapter A of chapter 

13 61’’ after ‘‘Secretary’’. 

14 (b) EFFECTIVE DATE.—The amendment made by 

15 this section shall apply to taxable years beginning after 

16 December 31, 2003. 

17 Subtitle F—Additional Provisions 

18 SEC. 251. ELIMINATION OF ALL EARNINGS AND PROFITS 

19 ATTRIBUTABLE TO PRE-1983 YEARS. 

20 (a) IN GENERAL.—Subsection (a) of section 1311 of 

21 the Small Business Job Protection Act of 1996 is amend22 ed to read as follows: 

23 ‘‘(a) IN GENERAL.—If a corporation was an electing 

24 small business corporation under subchapter S of chapter 

25 1 of the Internal Revenue Code of 1986 for any taxable 
51 

•S 2761 IS 

1 year beginning before January 1, 1983, the amount of 

2 such corporation’s accumulated earnings and profits (as 

3 of the beginning of the first taxable year beginning after 

4 December 31, 2003) shall be reduced by an amount equal 

5 to the portion (if any) of such accumulated earnings and 

6 profits which were accumulated in any taxable year begin7 ning before January 1, 1983, for which such corporation 

8 was an electing small business corporation under such 

9 subchapter S.’’. 

10 (b) EFFECTIVE DATE.—The amendment made by 

11 this section shall apply to taxable years beginning after 

12 December 31, 2003. 

13 SEC. 252. REDUCED RECOGNITION PERIOD FOR BUILT-IN 

14 GAINS. 

15 (a) IN GENERAL.—Paragraph (7) of section 1374(d) 

16 (relating to definitions and special rules) is amended to 

17 read as follows: 

18 ‘‘(7) RECOGNITION PERIOD.—The term ‘rec19 ognition period’ means the 7-year period beginning 

20 with the 1st day of the 1st taxable year for which 

21 the corporation was an S corporation. For purposes 

22 of applying this section to any amount includible in 

23 income by reason of distributions to shareholders 

24 pursuant to section 593(e), the preceding sentence 

25 shall be applied without regard to the duration of 
52

•S 2761 IS 

1 the recognition period in effect on the date of such 

2 distribution.’’. 

3 (b) EFFECTIVE DATE.— 

4 (1) GENERAL RULE.—The amendment made by 

5 this section shall apply to any recognition period in 

6 effect on or after the date of the enactment of this 

7 Act. 

8 (2) SPECIAL APPLICATION TO EXISTING PERI9 ODS EXCEEDING 7 YEARS.— Any recognition period 

10 in effect on the date of the enactment of this Act, 

11 the length of which is greater than 7 years, shall end 

12 on such date. 

13 SEC. 253. REPEAL OF SPECIAL OCCUPATIONAL TAXES ON 

14 PRODUCERS AND MARKETERS OF ALCO15 HOLIC BEVERAGES. 

16 (a) REPEAL OF OCCUPATIONAL TAXES.—

17 (1) IN GENERAL.—The following provisions of 

18 part II of subchapter A of chapter 51 (relating to 

19 occupational taxes) are hereby repealed: 

20 (A) Subpart A (relating to proprietors of 

21 distilled spirits plants, bonded wine cellars, 

22 etc.). 

23 (B) Subpart B (relating to brewer). 

24 (C) Subpart D (relating to wholesale deal25 ers) (other than sections 5114 and 5116). 
53 

•S 2761 IS 

1 (D) Subpart E (relating to retail dealers) 

2 (other than section 5124). 

3 (E) Subpart G (relating to general provi4 sions) (other than sections 5142, 5143, 5145, 

5 and 5146). 

6 (2) NONBEVERAGE DOMESTIC DRAWBACK.— 

7 Section 5131 is amended by striking ‘‘, on payment 

8 of a special tax per annum,’’. 

9 (3) INDUSTRIAL USE OF DISTILLED SPIRITS.— 

10 Section 5276 is hereby repealed. 

11 (b) CONFORMING AMENDMENTS.— 

12 (1)(A) The heading for part II of subchapter A 

13 of chapter 51 and the table of subparts for such 

14 part are amended to read as follows: 

15 ‘‘PART II—MISCELLANEOUS PROVISIONS 

‘‘Subpart A. Manufacturers of stills. 

‘‘Subpart B. Nonbeverage domestic drawback claimants. 

‘‘Subpart C. Recordkeeping by dealers. 

‘‘Subpart D. Other provisions.’’. 

16 (B) The table of parts for such subchapter A 

17 is amended by striking the item relating to part II 

18 and inserting the following new item: 

‘‘Part II. Miscellaneous provisions.’’. 

19 (2) Subpart C of part II of such subchapter 

20 (relating to manufacturers of stills) is redesignated 

21 as subpart A. 
54 

•S 2761 IS 

1 (3)(A) Subpart F of such part II (relating to 

2 nonbeverage domestic drawback claimants) is redes3 ignated as subpart B and sections 5131 through 

4 5134 are redesignated as sections 5111 through 

5 5114, respectively. 

6 (B) The table of sections for such subpart B, 

7 as so redesignated, is amended— 

8 (i) by redesignating the items relating to 

9 sections 5131 through 5134 as relating to sec10 tions 5111 through 5114, respectively, and 

11 (ii) by striking ‘‘and rate of tax’’ in the 

12 item relating to section 5111, as so redesig13 nated. 

14 (C) Section 5111, as redesignated by subpara15 graph (A), is amended— 

16 (i) by striking ‘‘AND RATE OF TAX’’ in 

17 the section heading, 

18 (ii) by striking the subsection heading for 

19 subsection (a), and 

20 (iii) by striking subsection (b). 

21 (4) Part II of subchapter A of chapter 51 is 

22 amended by adding after subpart B, as redesignated 

23 by paragraph (3), the following new subpart: 

24 ‘‘Subpart C—Recordkeeping by Dealers 

‘‘Sec. 5121. Recordkeeping by wholesale dealers. 

‘‘Sec. 5122. Recordkeeping by retail dealers. 
55 

•S 2761 IS 

‘‘Sec. 5123. Preservation and inspection of records, and entry of premises for 

inspection.’’. 

1 (5)(A) Section 5114 (relating to records) is 

2 moved to subpart C of such part II and inserted 

3 after the table of sections for such subpart. 

4 (B) Section 5114 is amended— 

5 (i) by striking the section heading and in6 serting the following new heading: 

7 ‘‘SEC. 5121. RECORDKEEPING BY WHOLESALE DEALERS.’’, 

8 and 

9 (ii) by redesignating subsection (c) as sub10 section (d) and by inserting after subsection (b) 

11 the following new subsection: 

12 ‘‘(c) WHOLESALE DEALERS.—For purposes of this 

13 part— 

14 ‘‘(1) WHOLESALE DEALER IN LIQUORS.—The 

15 term ‘wholesale dealer in liquors’ means any dealer 

16 (other than a wholesale dealer in beer) who sells, or 

17 offers for sale, distilled spirits, wines, or beer, to an18 other dealer. 

19 ‘‘(2) WHOLESALE DEALER IN BEER.—The term 

20 ‘wholesale dealer in beer’ means any dealer who 

21 sells, or offers for sale, beer, but not distilled spirits 

22 or wines, to another dealer. 
56 

•S 2761 IS 

1 ‘‘(3) DEALER.—The term ‘dealer’ means any 

2 person who sells, or offers for sale, any distilled spir3 its, wines, or beer. 

4 ‘‘(4) PRESUMPTION IN CASE OF SALE OF 20

5 WINE GALLONS OR MORE.—The sale, or offer for 

6 sale, of distilled spirits, wines, or beer, in quantities 

7 of 20 wine gallons or more to the same person at 

8 the same time, shall be presumptive evidence that 

9 the person making such sale, or offer for sale, is en10 gaged in or carrying on the business of a wholesale 

11 dealer in liquors or a wholesale dealer in beer, as the 

12 case may be. Such presumption may be overcome by 

13 evidence satisfactorily showing that such sale, or 

14 offer for sale, was made to a person other than a 

15 dealer.’’. 

16 (C) Paragraph (3) of section 5121(d), as so re17 designated, is amended by striking ‘‘section 5146’’ 

18 and inserting ‘‘section 5123’’. 

19 (6)(A) Section 5124 (relating to records) is 

20 moved to subpart C of part II of subchapter A of 

21 chapter 51 and inserted after section 5121. 

22 (B) Section 5124 is amended— 

23 (i) by striking the section heading and in24 serting the following new heading: 
57 

•S 2761 IS 

1 ‘‘SEC. 5122. RECORDKEEPING BY RETAIL DEALERS.’’, 

2 (ii) by striking ‘‘section 5146’’ in sub3 section (c) and inserting ‘‘section 5123’’, and 

4 (iii) by redesignating subsection (c) as sub5 section (d) and inserting after subsection (b) 

6 the following new subsection: 

7 ‘‘(c) RETAIL DEALERS.—For purposes of this sec8 tion— 

9 ‘‘(1) RETAIL DEALER IN LIQUORS.—The term 

10 ‘retail dealer in liquors’ means any dealer (other 

11 than a retail dealer in beer or a limited retail dealer) 

12 who sells, or offers for sale, distilled spirits, wines, 

13 or beer, to any person other than a dealer. 

14 ‘‘(2) RETAIL DEALER IN BEER.—The term ‘re15 tail dealer in beer’ means any dealer (other than a 

16 limited retail dealer) who sells, or offers for sale, 

17 beer, but not distilled spirits or wines, to any person 

18 other than a dealer. 

19 ‘‘(3) LIMITED RETAIL DEALER.—The term ‘lim20 ited retail dealer’ means any fraternal, civic, church, 

21 labor, charitable, benevolent, or ex-servicemen’s or22 ganization making sales of distilled spirits, wine or 

23 beer on the occasion of any kind of entertainment, 

24 dance, picnic, bazaar, or festival held by it, or any 

25 person making sales of distilled spirits, wine or beer 

26 to the members, guests, or patrons of bona fide 
58 

•S 2761 IS 

1 fairs, reunions, picnics, carnivals, or other similar 

2 outings, if such organization or person is not other3 wise engaged in business as a dealer. 

4 ‘‘(4) DEALER.—The term ‘dealer’ has the 

5 meaning given such term by section 5121(c)(3).’’. 

6 (7) Section 5146 is moved to subpart C of part 

7 II of subchapter A of chapter 51, inserted after sec8 tion 5122, and redesignated as section 5123. 

9 (8) Part II of subchapter A of chapter 51 is 

10 amended by inserting after subpart C the following 

11 new subpart: 

12 ‘‘Subpart D—Other Provisions 

‘‘Sec. 5131. Packaging distilled spirits for industrial uses. 

‘‘Sec. 5132. Prohibited purchases by dealers.’’. 

13 (9) Section 5116 is moved to subpart D of part 

14 II of subchapter A of chapter 51, inserted after the 

15 table of sections, redesignated as section 5131, and 

16 amended by inserting ‘‘(as defined in section 

17 5121(c))’’ after ‘‘dealer’’ in subsection (a). 

18 (10) Subpart D of part II of subchapter A of 

19 chapter 51 is amended by adding at the end thereof 

20 the following new section: 

21 ‘‘SEC. 5132. PROHIBITED PURCHASES BY DEALERS. 

22 ‘‘(a) IN GENERAL.—Except as provided in regula23 tions prescribed by the Secretary, it shall be unlawful for 

24 a dealer to purchase distilled spirits for resale from any 
59 

•S 2761 IS 

1 person other than a wholesale dealer in liquors who is re2 quired to keep the records prescribed by section 5121. 

3 ‘‘(b) LIMITED RETAIL DEALERS.—A limited retail 

4 dealer may lawfully purchase distilled spirits for resale 

5 from a retail dealer in liquors. 

6 ‘‘(c) PENALTY AND FORFEITURE.— 

‘‘For penalty and forfeiture provisions applicable 

to violations of subsection (a), see sections 5687 and 

7302.’’. 

7 (11) Subsection (b) of section 5002 is amend8 ed— 

9 (A) by striking ‘‘section 5112(a)’’ and in10 serting ‘‘section 5121(c)(3)’’, 

11 (B) by striking ‘‘section 5112’’ and insert12 ing ‘‘section 5121(c)’’, 

13 (C) by striking ‘‘section 5122’’ and insert14 ing ‘‘section 5122(c)’’. 

15 (12) Subparagraph (A) of section 5010(c)(2) is 

16 amended by striking ‘‘section 5134’’ and inserting 

17 ‘‘section 5114’’. 

18 (13) Subsection (d) of section 5052 is amended 

19 to read as follows: 

20 ‘‘(d) BREWER.—For purposes of this chapter, the 

21 term ‘brewer’ means any person who brews beer or pro22 duces beer for sale. Such term shall not include any person 

23 who produces only beer exempt from tax under section 

24 5053(e).’’. 
60 

•S 2761 IS 

1 (14) The text of section 5182 is amended to 

2 read as follows: 

3 ‘‘For provisions requiring recordkeeping by 

4 wholesale liquor dealers, see section 5121, and by re5 tail liquor dealers, see section 5122.’’. 

6 (15) Subsection (b) of section 5402 is amended 

7 by striking ‘‘section 5092’’ and inserting ‘‘section 

8 5052(d)’’. 

9 (16) Section 5671 is amended by striking ‘‘or 

10 5091’’. 

11 (17)(A) Part V of subchapter J of chapter 51 

12 is hereby repealed. 

13 (B) The table of parts for such subchapter J is 

14 amended by striking the item relating to part V. 

15 (18)(A) Sections 5142, 5143, and 5145 are 

16 moved to subchapter D of chapter 52, inserted after 

17 section 5731, redesignated as sections 5732, 5733, 

18 and 5734, respectively, and amended by striking 

19 ‘‘this part’’ each place it appears and inserting ‘‘this 

20 subchapter’’. 

21 (B) Section 5732, as redesignated by subpara22 graph (A), is amended by striking ‘‘(except the tax 

23 imposed by section 5131)’’ each place it appears. 

24 (C) Paragraph (2) of section 5733(c), as redes25 ignated by subparagraph (A), is amended by striking 
61 

•S 2761 IS 

1 ‘‘liquors’’ both places it appears and inserting ‘‘to2 bacco products and cigarette papers and tubes’’. 

3 (D) The table of sections for subchapter D of 

4 chapter 52 is amended by adding at the end thereof 

5 the following: 

‘‘Sec. 5732. Payment of tax. 

‘‘Sec. 5733. Provisions relating to liability for occupational taxes. 

‘‘Sec. 5734. Application of State laws.’’. 

6 (E) Section 5731 is amended by striking sub7 section (c) and by redesignating subsection (d) as 

8 subsection (c). 

9 (19) Subsection (c) of section 6071 is amended 

10 by striking ‘‘section 5142’’ and inserting ‘‘section 

11 5732’’. 

12 (20) Paragraph (1) of section 7652(g) is 

13 amended— 

14 (A) by striking ‘‘subpart F’’ and inserting 

15 ‘‘subpart B’’, and 

16 (B) by striking ‘‘section 5131(a)’’ and in17 serting ‘‘section 5111’’. 

18 (c) EFFECTIVE DATE.—The amendments made by 

19 this section shall take effect on July 1, 2004, but shall 

20 not apply to taxes imposed for periods before such date. 
62

•S 2761 IS 

1 TITLE III—RURAL TAX RELIEF 

2 SEC. 301. EXPANSION OF DESIGNATED RENEWAL COMMU3 NITY AREA BASED ON 2000 CENSUS DATA. 

4 (a) RENEWAL COMMUNITIES.—Section 1400E (relat5 ing to designation of renewal communities) is amended by 

6 adding at the end the following new subsection: 

7 ‘‘(g) EXPANSION OF DESIGNATED AREAS.—

8 ‘‘(1) EXPANSION BASED ON 2000 CENSUS.—At 

9 the request of the nominating entity with respect to 

10 a renewal community, the Secretary of Housing and 

11 Urban Development may expand the area of a re12 newal community to include any census tract—

13 ‘‘(A) which, at the time such community 

14 was nominated, met the requirements of this 

15 section for inclusion in such community but for 

16 the failure of such tract to meet 1 or more of 

17 the population and poverty rate requirements of 

18 this section using 1990 census data, and 

19 ‘‘(B) which meets all failed population and 

20 poverty rate requirements of this section using 

21 2000 census data. 

22 ‘‘(2) EXPANSION TO CERTAIN AREAS WHICH DO

23 NOT MEET POPULATION REQUIREMENTS.—

24 ‘‘(A) IN GENERAL.—At the request of 1 or 

25 more local governments and the State or States 
63 

•S 2761 IS 

1 in which an area described in subparagraph (B) 

2 is located, the Secretary of Housing and Urban 

3 Development may expand a designated area to 

4 include such area. 

5 ‘‘(B) AREA.—An area is described in this 

6 subparagraph if— 

7 ‘‘(i) the area is adjacent to at least 1 

8 other area designated as a renewal commu9 nity, 

10 ‘‘(ii) the area has a population less 

11 than the population required under sub12 section (c)(2)(C), and 

13 ‘‘(iii)(I) the area meets the require14 ments of subparagraphs (A) and (B) of 

15 subsection (c)(2) and subparagraph (A) of 

16 subsection (c)(3), or 

17 ‘‘(II) the area contains a population 

18 of less than 100 people. 

19 ‘‘(3) APPLICABILITY.—Any expansion of a re20 newal community under this section shall take effect 

21 as provided in subsection (b).’’. 

22 (b) EFFECTIVE DATE.—The amendment made by 

23 this subsection shall take effect as if included in the 

24 amendments made by section 101 of the Community Re25 newal Tax Relief Act of 2000. 
64 

•S 2761 IS 

1 SEC. 302. EXEMPTION OF QUALIFIED 501(c)(3) BONDS FOR 

2 NURSING HOMES FROM FEDERAL GUAR3 ANTEE PROHIBITIONS. 

4 (a) IN GENERAL.—Section 149(b)(3) (relating to ex5 ceptions) is amended by adding at the end the following 

6 new subparagraph: 

7 ‘‘(E) EXCEPTION FOR QUALIFIED 501(c)(3)

8 BONDS FOR NURSING HOMES.— 

9 ‘‘(i) IN GENERAL.—Paragraph (1) 

10 shall not apply to any qualified 501(c)(3) 

11 bond issued before the date which is 1 year 

12 after the date of the enactment of this sub13 paragraph for the benefit of an organiza14 tion described in section 501(c)(3), if such 

15 bond is part of an issue the proceeds of 

16 which are used to finance 1 or more of the 

17 following facilities primarily for the benefit 

18 of the elderly: 

19 ‘‘(I) Licensed nursing home facil20 ity. 

21 ‘‘(II) Licensed or certified as22 sisted living facility. 

23 ‘‘(III) Licensed personal care fa24 cility. 

25 ‘‘(IV) Continuing care retirement 

26 community. 
65 

•S 2761 IS 

1 ‘‘(ii) LIMITATION.—With respect to 

2 any calendar year, clause (i) shall not 

3 apply to any bond described in such clause 

4 if the aggregate authorized face amount of 

5 the issue of which such bond is a part 

6 when increased by the outstanding amount 

7 of such bonds issued by the issuer for such 

8 calendar year exceeds $15,000,000. 

9 ‘‘(iii) CONTINUING CARE RETIREMENT

10 COMMUNITY.—For purposes of this sub11 paragraph, the term ‘continuing care re12 tirement community’ means a community 

13 which provides, on the same campus, a 

14 continuum of residential living options and 

15 support services to persons at least 60 

16 years of age under a written agreement. 

17 For purposes of the preceding sentence, 

18 the residential living options shall include 

19 independent living units, nursing home 

20 beds, and either assisted living units or 

21 personal care beds.’’. 

22 (b) EFFECTIVE DATE.—The amendment made by 

23 this section shall apply to bonds issued after the date of 

24 the enactment of this Act. 
66 

•S 2761 IS 

1 SEC. 303. RURAL INVESTMENT TAX CREDIT. 

2 (a) IN GENERAL.—Subpart D of part IV of sub3 chapter A of chapter 1 (relating to business related cred4 its) is amended by adding at the end the following: 

5 ‘‘SEC. 42A. RURAL INVESTMENT CREDIT. 

6 ‘‘(a) IN GENERAL.—For purposes of section 38, the 

7 amount of the rural investment credit determined under 

8 this section for any taxable year in the credit period shall 

9 be an amount equal to the applicable percentage of the 

10 eligible basis of each qualified rural investment building. 

11 ‘‘(b) APPLICABLE PERCENTAGE: 70 PERCENT

12 PRESENT VALUE CREDIT FOR NEW BUILDINGS; 30 PER13 CENT PRESENT VALUE CREDIT FOR EXISTING BUILD14 INGS.—For purposes of this section— 

15 ‘‘(1) IN GENERAL.—The term ‘applicable per16 centage’ means the appropriate percentage pre17 scribed by the Secretary for the earlier of— 

18 ‘‘(A) the first month of the credit period 

19 with respect to a rural investment building, or 

20 ‘‘(B) at the election of the taxpayer, the 

21 month in which the taxpayer and the rural in22 vestment credit agency enter into an agreement 

23 with respect to such building (which is binding 

24 on such agency, the taxpayer, and all successors 

25 in interest) as to the rural investment credit 

26 dollar amount to be allocated to such building. 
67 

•S 2761 IS 

1 A month may be elected under subparagraph (B) 

2 only if the election is made not later than the 5th 

3 day after the close of such month. Such an election, 

4 once made, shall be irrevocable. 

5 ‘‘(2) METHOD OF PRESCRIBING PERCENT6 AGES.—The percentages prescribed by the Secretary 

7 for any month shall be percentages which will yield 

8 over a 10-year period amounts of credit under sub9 section (a) which have a present value equal to— 

10 ‘‘(A) 70 percent of the eligible basis of a 

11 new building, and 

12 ‘‘(B) 30 percent of the eligible basis of an 

13 existing building. 

14 ‘‘(3) METHOD OF DISCOUNTING.—The present 

15 value under paragraph (2) shall be determined— 

16 ‘‘(A) as of the last day of the 1st year of 

17 the 10-year period referred to in paragraph (2), 

18 ‘‘(B) by using a discount rate equal to 72 

19 percent of the average of the annual Federal 

20 mid-term rate and the annual Federal long21 term rate applicable under section 1274(d)(1) 

22 to the month applicable under subparagraph 

23 (A) or (B) of paragraph (1) and compounded 

24 annually, and 
68 

•S 2761 IS 

1 ‘‘(C) by assuming that the credit allowable 

2 under this section for any year is received on 

3 the last day of such year. 

4 ‘‘(c) ELIGIBLE BASIS; QUALIFIED RURAL INVEST5 MENT BUILDING.—For purposes of this section— 

6 ‘‘(1) ELIGIBLE BASIS.— 

7 ‘‘(A) IN GENERAL.—The eligible basis of 

8 any qualified rural investment building for any 

9 taxable year shall be determined under rules 

10 similar to the rules under section 42(d), except 

11 that— 

12 ‘‘(i) the determination of the adjusted 

13 basis of any building shall be made as of 

14 the beginning of the credit period, and 

15 ‘‘(ii) such basis shall include develop16 ment costs properly attributable to such 

17 building. 

18 ‘‘(B) DEVELOPMENT COSTS.—For pur19 poses of subparagraph (A)(ii), the term ‘devel20 opment costs’ includes— 

21 ‘‘(i) site preparation costs, 

22 ‘‘(ii) State and local impact fees, 

23 ‘‘(iii) reasonable development costs, 

24 ‘‘(iv) professional fees related to basis 

25 items, 
69 

•S 2761 IS 

1 ‘‘(v) construction financing costs re2 lated to basis items other than land, and 

3 ‘‘(vi) on-site and adjacent improve4 ments required by State and local govern5 ments. 

6 ‘‘(2) QUALIFIED RURAL INVESTMENT BUILD7 ING.—The term ‘qualified rural investment building’ 

8 means any building which is part of a qualified rural 

9 investment project at all times during the period— 

10 ‘‘(A) beginning on the 1st day in the com11 pliance period on which such building is part of 

12 such an investment project, and 

13 ‘‘(B) ending on the last day of the compli14 ance period with respect to such building. 

15 ‘‘(d) REHABILITATION EXPENDITURES TREATED AS

16 SEPARATE NEW BUILDING.—Rehabilitation expenditures 

17 paid or incurred by the taxpayer with respect to any build18 ing shall be treated for purposes of this section as a sepa19 rate new building under the rules of section 42(e). 

20 ‘‘(e) DEFINITION AND SPECIAL RULES RELATING TO

21 CREDIT PERIOD.— 

22 ‘‘(1) CREDIT PERIOD DEFINED.—For purposes 

23 of this section, the term ‘credit period’ means, with 

24 respect to any building, the period of 10 taxable 
70 

•S 2761 IS 

1 years beginning with the taxable year in which the 

2 building is first placed in service. 

3 ‘‘(2) SPECIAL RULE FOR 1ST YEAR OF CREDIT

4 PERIOD.— 

5 ‘‘(A) IN GENERAL.—The credit allowable 

6 under subsection (a) with respect to any build7 ing for the 1st taxable year of the credit period 

8 shall be determined by multiplying such credit 

9 by the fraction— 

10 ‘‘(i) the numerator of which is the 

11 number of full months of such year during 

12 which such building was in service, and 

13 ‘‘(ii) the denominator of which is 12. 

14 ‘‘(B) DISALLOWED 1ST YEAR CREDIT AL15 LOWED IN 11TH YEAR.—Any reduction by rea16 son of subparagraph (A) in the credit allowable 

17 (without regard to subparagraph (A)) for the 

18 1st taxable year of the credit period shall be al19 lowable under subsection (a) for the 1st taxable 

20 year following the credit period. 

21 ‘‘(3) CREDIT PERIOD FOR EXISTING BUILDINGS

22 NOT TO BEGIN BEFORE REHABILITATION CREDIT

23 ALLOWED.—The credit period for an existing build24 ing shall not begin before the 1st taxable year of the 
71 

•S 2761 IS 

1 credit period for rehabilitation expenditures with re2 spect to the building. 

3 ‘‘(f) QUALIFIED RURAL INVESTMENT PROJECT; 

4 QUALIFYING COUNTY.—For purposes of this section— 

5 ‘‘(1) QUALIFIED RURAL INVESTMENT

6 PROJECT.—The term ‘qualified rural investment 

7 project’ means any investment project of 1 or more 

8 qualified rural investment buildings located in a 

9 qualifying county (and, if necessary to the project, 

10 any contiguous county) and selected by the State ac11 cording to its qualified rural investment plan. 

12 ‘‘(2) QUALIFYING COUNTY.—The term ‘quali13 fying county’ means any county which— 

14 ‘‘(A) is outside a metropolitan statistical 

15 area (defined as such by the Office of Manage16 ment and Budget), and 

17 ‘‘(B) during the 20-year period ending 

18 with the year in which the most recent census 

19 was conducted, has a net out-migration of in20 habitants from the county of at least 10 percent 

21 of the population of the county at the beginning 

22 of such period. 

23 ‘‘(g) LIMITATION ON AGGREGATE CREDIT ALLOW24 ABLE WITH RESPECT TO INVESTMENT PROJECTS LO25 CATED IN A STATE.— 
72 

•S 2761 IS 

1 ‘‘(1) CREDIT MAY NOT EXCEED CREDIT

2 AMOUNT ALLOCATED TO BUILDING.—The amount of 

3 the credit determined under this section for any tax4 able year with respect to any building shall not ex5 ceed the rural investment credit dollar amount allo6 cated to such building under rules similar to the 

7 rules of section 42(h)(1). 

8 ‘‘(2) ALLOCATED CREDIT AMOUNT TO APPLY

9 TO ALL TAXABLE YEARS ENDING DURING OR AFTER

10 CREDIT ALLOCATION YEAR.—Any rural investment 

11 credit dollar amount allocated to any building for 

12 any calendar year— 

13 ‘‘(A) shall apply to such building for all 

14 taxable years in the credit period ending during 

15 or after such calendar year, and 

16 ‘‘(B) shall reduce the aggregate rural in17 vestment credit dollar amount of the allocating 

18 agency only for such calendar year. 

19 ‘‘(3) RURAL INVESTMENT CREDIT DOLLAR

20 AMOUNT FOR AGENCIES.— 

21 ‘‘(A) IN GENERAL.—The aggregate rural 

22 investment credit dollar amount which a rural 

23 investment credit agency may allocate for any 

24 calendar year is the portion of the State rural 

25 investment credit ceiling allocated under this 
73 

•S 2761 IS 

1 paragraph for such calendar year to such agen2 cy. 

3 ‘‘(B) STATE CEILING INITIALLY ALLO4 CATED TO STATE RURAL INVESTMENT CREDIT

5 AGENCIES.—Except as provided in subpara6 graphs (D) and (E), the State rural investment 

7 credit ceiling for each calendar year shall be al8 located to the rural investment credit agency of 

9 such State. If there is more than 1 rural invest10 ment credit agency of a State, all such agencies 

11 shall be treated as a single agency. 

12 ‘‘(C) STATE RURAL INVESTMENT CREDIT

13 CEILING.—The State rural investment credit 

14 ceiling applicable to any State and any calendar 

15 year shall be an amount equal to the sum of— 

16 ‘‘(i) the unused State rural investment 

17 credit ceiling (if any) of such State for the 

18 preceding calendar year, 

19 ‘‘(ii) $185,000 for each qualifying 

20 county in the State, 

21 ‘‘(iii) the amount of State rural in22 vestment credit ceiling returned in the cal23 endar year, plus 
74 

•S 2761 IS 

1 ‘‘(iv) the amount (if any) allocated 

2 under subparagraph (D) to such State by 

3 the Secretary. 

4 For purposes of clause (i), the unused State 

5 rural investment credit ceiling for any calendar 

6 year is the excess (if any) of the sum of the 

7 amounts described in clauses (ii) through (iv) 

8 over the aggregate rural investment credit dol9 lar amount allocated for such year. For pur10 poses of clause (iii), the amount of State rural 

11 investment credit ceiling returned in the cal12 endar year equals the rural investment credit 

13 dollar amount previously allocated within the 

14 State to any investment project which fails to 

15 meet the 10 percent test under section 

16 42(h)(1)(E)(ii) on a date after the close of the 

17 calendar year in which the allocation was made 

18 or which does not become a qualified rural in19 vestment project within the period required by 

20 this section or the terms of the allocation or to 

21 any investment project with respect to which an 

22 allocation is canceled by mutual consent of the 

23 rural investment credit agency and the alloca24 tion recipient. 
75 

•S 2761 IS 

1 ‘‘(D) UNUSED RURAL INVESTMENT CREDIT

2 CARRYOVERS ALLOCATED AMONG CERTAIN

3 STATES.— 

4 ‘‘(i) IN GENERAL.—The unused rural 

5 investment credit carryover of a State for 

6 any calendar year shall be assigned to the 

7 Secretary for allocation among qualified 

8 States for the succeeding calendar year. 

9 ‘‘(ii) UNUSED RURAL INVESTMENT

10 CREDIT CARRYOVER.—For purposes of this 

11 subparagraph, the unused rural investment 

12 credit carryover of a State for any calendar 

13 year is the excess (if any) of the unused 

14 State rural investment credit ceiling for 

15 such year (as defined in subparagraph 

16 (C)(i)) over the excess (if any) of— 

17 ‘‘(I) the unused State rural in18 vestment credit ceiling for the year 

19 preceding such year, over 

20 ‘‘(II) the aggregate rural invest21 ment credit dollar amount allocated 

22 for such year. 

23 ‘‘(iii) FORMULA FOR ALLOCATION OF

24 UNUSED RURAL INVESTMENT CREDIT

25 CARRYOVERS AMONG QUALIFIED
76 

•S 2761 IS 

1 STATES.—The amount allocated under this 

2 subparagraph to a qualified State for any 

3 calendar year shall be the amount deter4 mined by the Secretary to bear the same 

5 ratio to the aggregate unused rural invest6 ment credit carryovers of all States for the 

7 preceding calendar year as such State’s 

8 population for the calendar year bears to 

9 the population of all qualified States for 

10 the calendar year. For purposes of the pre11 ceding sentence, population shall be deter12 mined in accordance with section 146(j). 

13 ‘‘(iv) QUALIFIED STATE.—For pur14 poses of this subparagraph, the term 

15 ‘qualified State’ means, with respect to a 

16 calendar year, any State— 

17 ‘‘(I) which allocated its entire 

18 State rural investment credit ceiling 

19 for the preceding calendar year, and 

20 ‘‘(II) for which a request is made 

21 (not later than May 1 of the calendar 

22 year) to receive an allocation under 

23 clause (iii). 

24 ‘‘(E) STATE MAY PROVIDE FOR DIF25 FERENT ALLOCATION.—Rules similar to the 
77 

•S 2761 IS 

1 rules of section 146(e) (other than paragraph 

2 (2)(B) thereof) shall apply for purposes of this 

3 paragraph. 

4 ‘‘(F) POPULATION.—For purposes of this 

5 paragraph, population shall be determined in 

6 accordance with section 146(j). 

7 ‘‘(G) COST-OF-LIVING ADJUSTMENT.— 

8 ‘‘(i) IN GENERAL.—In the case of a 

9 calendar year after 2005, the $185,000 

10 amount in subparagraph (C) shall be in11 creased by an amount equal to— 

12 ‘‘(I) such dollar amount, multi13 plied by 

14 ‘‘(II) the cost-of-living adjust15 ment determined under section 

16 1(f )(3) for such calendar year by sub17 stituting ‘calendar year 2004’ for ‘cal18 endar year 1992’ in subparagraph (B) 

19 thereof. 

20 ‘‘(ii) ROUNDING.—Any increase under 

21 clause (i) which is not a multiple of $5,000 

22 shall be rounded to the next lowest mul23 tiple of $5,000. 
78 

•S 2761 IS 

1 ‘‘(4) PORTION OF STATE CEILING SET-ASIDE

2 FOR CERTAIN INVESTMENT PROJECTS INVOLVING

3 QUALIFIED NONPROFIT ORGANIZATIONS.— 

4 ‘‘(A) IN GENERAL.—At least 10 percent of 

5 the State rural investment credit ceiling for any 

6 State for any calendar year shall be allocated to 

7 qualified rural investment projects described in 

8 subparagraph (B). 

9 ‘‘(B) INVESTMENT PROJECTS INVOLVING

10 QUALIFIED NONPROFIT ORGANIZATIONS.—For 

11 purposes of subparagraph (A), a qualified rural 

12 investment project is described in this subpara13 graph if a qualified nonprofit organization is to 

14 materially participate (within the meaning of 

15 section 469(h)) in the development and oper16 ation of the investment project throughout the 

17 compliance period. 

18 ‘‘(C) QUALIFIED NONPROFIT ORGANIZA19 TION.—For purposes of this paragraph, the 

20 term ‘qualified nonprofit organization’ means 

21 any organization if— 

22 ‘‘(i) such organization is described in 

23 any paragraph of section 501(c) and is ex24 empt from tax under section 501(a), 
79 

•S 2761 IS 

1 ‘‘(ii) such organization is determined 

2 by the State rural investment credit agency 

3 not to be affiliated with or controlled by a 

4 for-profit organization; and 

5 ‘‘(iii) 1 of the exempt purposes of 

6 such organization includes the fostering of 

7 rural investment. 

8 ‘‘(D) TREATMENT OF CERTAIN SUBSIDI9 ARIES.— 

10 ‘‘(i) IN GENERAL.—For purposes of 

11 this paragraph, a qualified nonprofit orga12 nization shall be treated as satisfying the 

13 ownership and material participation test 

14 of subparagraph (B) if any qualified cor15 poration in which such organization holds 

16 stock satisfies such test. 

17 ‘‘(ii) QUALIFIED CORPORATION.—For 

18 purposes of clause (i), the term ‘qualified 

19 corporation’ means any corporation if 100 

20 percent of the stock of such corporation is 

21 held by 1 or more qualified nonprofit orga22 nizations at all times during the period 

23 such corporation is in existence. 

24 ‘‘(E) STATE MAY NOT OVERRIDE SET25 ASIDE.—Nothing in subparagraph (F) of para-
80 

•S 2761 IS 

1 graph (3) shall be construed to permit a State 

2 not to comply with subparagraph (A) of this 

3 paragraph. 

4 ‘‘(F) CREDITS FOR QUALIFIED NONPROFIT

5 ORGANIZATIONS.— 

6 ‘‘(i) ALLOWANCE OF CREDIT.—Any 

7 credit which would be allowable under sub8 section (a) with respect to a qualified rural 

9 investment building of a qualified nonprofit 

10 organization if such organization were not 

11 exempt from tax under this chapter shall 

12 be treated as a credit allowable under sub13 part C to such organization. 

14 ‘‘(ii) USE OF CREDIT.—A qualified 

15 nonprofit organization may assign, trade, 

16 sell, or otherwise transfer any credit allow17 able to such organization under subpara18 graph (A) to any taxpayer. 

19 ‘‘(iii) CREDIT NOT INCOME.—A trans20 fer under subparagraph (B) of any credit 

21 allowable under subparagraph (A) shall not 

22 result in income for purposes of section 

23 511. 

24 ‘‘(5) SPECIAL RULES.— 
81 

•S 2761 IS 

1 ‘‘(A) BUILDING MUST BE LOCATED WITH2 IN JURISDICTION OF CREDIT AGENCY.—A rural 

3 investment credit agency may allocate its aggre4 gate rural investment credit dollar amount only 

5 to buildings located in the jurisdiction of the 

6 governmental unit of which such agency is a 

7 part. 

8 ‘‘(B) AGENCY ALLOCATIONS IN EXCESS OF

9 LIMIT.—If the aggregate rural investment cred10 it dollar amounts allocated by a rural invest11 ment credit agency for any calendar year exceed 

12 the portion of the State rural investment credit 

13 ceiling allocated to such agency for such cal14 endar year, the rural investment credit dollar 

15 amounts so allocated shall be reduced (to the 

16 extent of such excess) for buildings in the re17 verse of the order in which the allocations of 

18 such amounts were made. 

19 ‘‘(C) CREDIT REDUCED IF ALLOCATED

20 CREDIT DOLLAR AMOUNT IS LESS THAN CREDIT

21 WHICH WOULD BE ALLOWABLE WITHOUT RE22 GARD TO SALES CONVENTION, ETC.— 

23 ‘‘(i) IN GENERAL.—The amount of 

24 the credit determined under this section 

25 with respect to any building shall not ex-
82 

•S 2761 IS 

1 ceed the clause (ii) percentage of the 

2 amount of the credit which would (but for 

3 this subparagraph) be determined under 

4 this section with respect to such building. 

5 ‘‘(ii) DETERMINATION OF PERCENT6 AGE.—For purposes of clause (i), the 

7 clause (ii) percentage with respect to any 

8 building is the percentage which— 

9 ‘‘(I) the rural investment credit 

10 dollar amount allocated to such build11 ing bears to 

12 ‘‘(II) the credit amount deter13 mined in accordance with clause (iii). 

14 ‘‘(iii) DETERMINATION OF CREDIT

15 AMOUNT.—The credit amount determined 

16 in accordance with this clause is the 

17 amount of the credit which would (but for 

18 this subparagraph) be determined under 

19 this section with respect to the building if 

20 this section were applied without regard to 

21 paragraph (2)(A) of subsection (e). 

22 ‘‘(D) RURAL INVESTMENT CREDIT AGENCY

23 TO SPECIFY APPLICABLE PERCENTAGE AND

24 MAXIMUM ELIGIBLE BASIS.—In allocating a 

25 rural investment credit dollar amount to any 
83 

•S 2761 IS 

1 building, the rural investment credit agency 

2 shall specify the applicable percentage and the 

3 maximum eligible basis which may be taken 

4 into account under this section with respect to 

5 such building. The applicable percentage and 

6 maximum eligible basis so specified shall not ex7 ceed the applicable percentage and eligible basis 

8 determined under this section without regard to 

9 this subsection. 

10 ‘‘(6) OTHER DEFINITIONS.—For purposes of 

11 this subsection— 

12 ‘‘(A) RURAL INVESTMENT CREDIT AGEN13 CY.—The term ‘rural investment credit agency’ 

14 means any agency authorized to carry out this 

15 subsection. 

16 ‘‘(B) POSSESSIONS TREATED AS

17 STATES.—The term ‘State’ includes a posses18 sion of the United States. 

19 ‘‘(7) PORTION OF STATE CEILING SET-ASIDE

20 FOR QUALIFIED RURAL SMALL BUSINESS INVEST21 MENT CREDITS.—Not more than 20 percent of the 

22 State rural investment credit ceiling for any State 

23 for any calendar year may be allocated to qualified 

24 rural small business investment credits under section 

25 42B. 
84 

•S 2761 IS 

1 ‘‘(h) DEFINITIONS AND SPECIAL RULES.—For pur2 poses of this section— 

3 ‘‘(1) COMPLIANCE PERIOD.—The term ‘compli4 ance period’ means, with respect to any building, the 

5 period of 10 taxable years beginning with the 1st 

6 taxable year of the credit period with respect there7 to. 

8 ‘‘(2) NEW BUILDING.—The term ‘new building’ 

9 means a building the original use of which begins 

10 with the taxpayer. 

11 ‘‘(3) EXISTING BUILDING.—The term ‘existing 

12 building’ means any building which is not a new 

13 building. 

14 ‘‘(4) APPLICATION TO ESTATES AND TRUSTS.— 

15 In the case of an estate or trust, the amount of the 

16 credit determined under subsection (a) and any in17 crease in tax under subsection (i) shall be appor18 tioned between the estate or trust and the bene19 ficiaries on the basis of the income of the estate or 

20 trust allocable to each. 

21 ‘‘(i) RECAPTURE OF CREDIT.—If— 

22 ‘‘(1) as of the close of any taxable year in the 

23 compliance period, the amount of the eligible basis 

24 of any building with respect to the taxpayer is less 

25 than 
85 

•S 2761 IS 

1 ‘‘(2) the amount of such basis as of the close 

2 of the preceding taxable year, 

3 then the taxpayer’s tax under this chapter for the 

4 taxable year shall be increased by the credit recap5 ture amount determined under rules similar to the 

6 rules of section 42(j). 

7 ‘‘(j) CERTIFICATIONS AND OTHER REPORTS TO SEC8 RETARY.— 

9 ‘‘(1) CERTIFICATION WITH RESPECT TO 1ST

10 YEAR OF CREDIT PERIOD.—Following the close of 

11 the 1st taxable year in the credit period with respect 

12 to any qualified rural investment building, the tax13 payer shall certify to the Secretary (at such time 

14 and in such form and in such manner as the Sec15 retary prescribes)— 

16 ‘‘(A) the taxable year, and calendar year, 

17 in which such building was first placed in serv18 ice, 

19 ‘‘(B) the eligible basis of such building as 

20 of the beginning of the credit period, 

21 ‘‘(C) the maximum applicable percentage 

22 and eligible basis permitted to be taken into ac23 count by the appropriate rural investment cred24 it agency under subsection (g), 
86 

•S 2761 IS 

1 ‘‘(D) the election made under subsection 

2 (f) with respect to the qualified rural invest3 ment project of which such building is a part, 

4 and 

5 ‘‘(E) such other information as the Sec6 retary may require. 

7 In the case of a failure to make the certification re8 quired by the preceding sentence on the date pre9 scribed therefor, unless it is shown that such failure 

10 is due to reasonable cause and not to willful neglect, 

11 no credit shall be allowable by reason of subsection 

12 (a) with respect to such building for any taxable 

13 year ending before such certification is made. 

14 ‘‘(2) ANNUAL REPORTS TO THE SECRETARY.— 

15 The Secretary may require taxpayers to submit an 

16 information return (at such time and in such form 

17 and manner as the Secretary prescribes) for each 

18 taxable year setting forth— 

19 ‘‘(A) the eligible basis for the taxable year 

20 of each qualified rural investment building of 

21 the taxpayer, 

22 ‘‘(B) the information described in para23 graph (1)(C) for the taxable year, and 

24 ‘‘(C) such other information as the Sec25 retary may require. 
87 

•S 2761 IS 

1 The penalty under section 6652(j) shall apply to any 

2 failure to submit the return required by the Sec3 retary under the preceding sentence on the date pre4 scribed therefor. 

5 ‘‘(3) ANNUAL REPORTS FROM RURAL INVEST6 MENT CREDIT AGENCIES.—Each agency which allo7 cates any rural investment credit amount to any 

8 building for any calendar year shall submit to the 

9 Secretary (at such time and in such manner as the 

10 Secretary shall prescribe) an annual report speci11 fying— 

12 ‘‘(A) the amount of rural investment credit 

13 amount allocated to each building for such year, 

14 ‘‘(B) sufficient information to identify each 

15 such building and the taxpayer with respect 

16 thereto, and 

17 ‘‘(C) such other information as the Sec18 retary may require. 

19 The penalty under section 6652(j) shall apply to any 

20 failure to submit the report required by the pre21 ceding sentence on the date prescribed therefor. 

22 ‘‘(k) RESPONSIBILITIES OF RURAL INVESTMENT

23 CREDIT AGENCIES.— 

24 ‘‘(1) PLANS FOR ALLOCATION OF CREDIT

25 AMONG INVESTMENT PROJECTS.— 
88 

•S 2761 IS 

1 ‘‘(A) IN GENERAL.—Notwithstanding any 

2 other provision of this section, the rural invest3 ment credit dollar amount with respect to any 

4 building shall be zero unless— 

5 ‘‘(i) such amount was allocated pursu6 ant to a qualified rural investment plan of 

7 the agency which is approved by the gov8 ernmental unit (in accordance with rules 

9 similar to the rules of section 147(f)(2) 

10 (other than subparagraph (B)(ii) thereof)) 

11 of which such agency is a part, 

12 ‘‘(ii) such agency notifies the chief ex13 ecutive officer (or the equivalent) of the 

14 local jurisdiction within which the building 

15 is located of such investment project and 

16 provides such individual a reasonable op17 portunity to comment on the investment 

18 project, 

19 ‘‘(iii) a comprehensive market study 

20 of the development needs of individuals in 

21 the qualifying county to be served by the 

22 investment project is conducted before the 

23 credit allocation is made and at the devel24 oper’s expense by a disinterested party who 

25 is approved by such agency, and 
89 

•S 2761 IS 

1 ‘‘(iv) a written explanation is available 

2 to the general public for any allocation of 

3 a rural investment credit dollar amount 

4 which is not made in accordance with es5 tablished priorities and selection criteria of 

6 the rural investment credit agency. 

7 ‘‘(B) QUALIFIED RURAL INVESTMENT

8 PLAN.—For purposes of this section, the term 

9 ‘qualified rural investment plan’ means any 

10 plan— 

11 ‘‘(i) which sets forth selection criteria 

12 to be used to determine priorities of the 

13 rural investment credit agency which are 

14 appropriate to qualifying counties, 

15 ‘‘(ii) which also gives preference in al16 locating rural investment credit dollar 

17 amounts among selected investment 

18 projects to— 

19 ‘‘(I) investment projects that tar20 get those small rural counties with 

21 consistently high rates of net out-mi22 gration, 

23 ‘‘(II) investment projects that 

24 link the economic development and job 

25 creation efforts of 2 or more small 
90 

•S 2761 IS 

1 rural counties with high rates of net 

2 out-migration, and 

3 ‘‘(III) investment projects that 

4 link the economic development and job 

5 creation efforts of 1 or more small 

6 rural counties in the State with high 

7 rates of net out-migration to related 

8 efforts in regions of such State experi9 encing economic growth, and 

10 ‘‘(iii) which provides a procedure that 

11 the agency (or an agent or other private 

12 contractor of such agency) will follow in 

13 monitoring for noncompliance with the 

14 provisions of this section and in notifying 

15 the Internal Revenue Service of such non16 compliance which such agency becomes 

17 aware of and in monitoring for noncompli18 ance through regular site visits. 

19 ‘‘(C) CERTAIN SELECTION CRITERIA MUST

20 BE USED.—The selection criteria set forth in a 

21 qualified rural investment plan must include— 

22 ‘‘(i) investment project location, 

23 ‘‘(ii) technology and transportation in24 frastructure needs, and 

25 ‘‘(iii) private development trends. 
91 

•S 2761 IS 

1 ‘‘(2) CREDIT ALLOCATED TO BUILDING NOT TO

2 EXCEED AMOUNT NECESSARY TO ASSURE INVEST3 MENT PROJECT FEASIBILITY.— 

4 ‘‘(A) IN GENERAL.—The rural investment 

5 credit dollar amount allocated to an investment 

6 project shall not exceed the amount the rural 

7 investment credit agency determines is nec8 essary for the financial feasibility of the invest9 ment project and its viability as a qualified 

10 rural investment project throughout the compli11 ance period. 

12 ‘‘(B) AGENCY EVALUATION.—In making 

13 the determination under subparagraph (A), the 

14 rural investment credit agency shall consider— 

15 ‘‘(i) the sources and uses of funds and 

16 the total financing planned for the invest17 ment project, 

18 ‘‘(ii) any proceeds or receipts expected 

19 to be generated by reason of tax benefits, 

20 ‘‘(iii) the percentage of the rural in21 vestment credit dollar amount used for in22 vestment project costs other than the cost 

23 of intermediaries, and 
92 

•S 2761 IS 

1 ‘‘(iv) the reasonableness of the devel2 opmental and operational costs of the in3 vestment project. 

4 Clause (iii) shall not be applied so as to impede 

5 the development of investment projects in hard6 to-develop areas. 

7 ‘‘(C) DETERMINATION MADE WHEN CRED8 IT AMOUNT APPLIED FOR AND WHEN BUILDING

9 PLACED IN SERVICE.— 

10 ‘‘(i) IN GENERAL.—A determination 

11 under subparagraph (A) shall be made as 

12 of each of the following times: 

13 ‘‘(I) The application for the rural 

14 investment credit dollar amount. 

15 ‘‘(II) The allocation of the rural 

16 investment credit dollar amount. 

17 ‘‘(III) The date the building is 

18 first placed in service. 

19 ‘‘(ii) CERTIFICATION AS TO AMOUNT

20 OF OTHER SUBSIDIES.—Prior to each de21 termination under clause (i), the taxpayer 

22 shall certify to the rural investment credit 

23 agency the full extent of all Federal, State, 

24 and local subsidies which apply (or which 
93

•S 2761 IS 

1 the taxpayer expects to apply) with respect 

2 to the building. 

3 ‘‘(l) REGULATIONS.—The Secretary shall prescribe 

4 such regulations as may be necessary or appropriate to 

5 carry out the purposes of this section, including regula6 tions—

7 ‘‘(1) dealing with—

8 ‘‘(A) investment projects which include 

9 more than 1 building or only a portion of a 

10 building, and 

11 ‘‘(B) buildings which are sold in portions, 

12 ‘‘(2) providing for the application of this section 

13 to short taxable years, 

14 ‘‘(3) preventing the avoidance of the rules of 

15 this section, and 

16 ‘‘(4) providing the opportunity for rural invest17 ment credit agencies to correct administrative errors 

18 and omissions with respect to allocations and record 

19 keeping within a reasonable period after their dis20 covery, taking into account the availability of regula21 tions and other administrative guidance from the 

22 Secretary.’’. 

23 (b) CURRENT YEAR BUSINESS CREDIT CALCULA24 TION.—Section 38(b) (relating to current year business 

25 credit), as amended by this Act, is amended by striking 
94 

•S 2761 IS 

1 ‘‘plus’’ at the end of paragraph (15), by striking the period 

2 at the end of paragraph (16) and inserting ‘‘, plus’’, and 

3 by adding at the end the following: 

4 ‘‘(17) the rural investment credit determined 

5 under section 42A(a).’’. 

6 (c) LIMITATION ON CARRYBACK.—Subsection (d) of 

7 section 39 (relating to carryback and carryforward of un8 used credits), as amended by this Act, is amended by add9 ing at the end the following: 

10 ‘‘(12) NO CARRYBACK OF RURAL INVESTMENT

11 CREDIT BEFORE EFFECTIVE DATE.—No portion of 

12 the unused business credit for any taxable year 

13 which is attributable to the rural investment credit 

14 determined under section 42A may be carried back 

15 to a taxable year beginning before the date of the 

16 enactment of this paragraph.’’. 

17 (d) CONFORMING AMENDMENTS.— 

18 (1) Section 55(c)(1) is amended by inserting 

19 ‘‘or subsection (i) or (j) of section 42A’’ after ‘‘sec20 tion 42’’. 

21 (2) Subsections (i)(c)(3), (i)(c)(6)(B)(i), and 

22 (k)(1) of section 469 are each amended by inserting 

23 ‘‘or 42A’’ after ‘‘section 42’’. 

24 (3) Section 772(a) is amended by striking 

25 ‘‘and’’ at the end of paragraph (10), by redesig-
95 

•S 2761 IS 

1 nating paragraph (11) as paragraph (12), and by in2 serting after paragraph (10) the following: 

3 ‘‘(11) the rural investment credit determined 

4 under section 42A, and’’. 

5 (4) Section 774(b)(4) is amended by inserting 

6 ‘‘, 42A(i),’’ after ‘‘section 42(j)’’. 

7 (e) CLERICAL AMENDMENT.—The table of sections 

8 for subpart D of part IV of subchapter A of chapter 1 

9 is amended by inserting after the item relating to section 

10 42 the following: 

‘‘Sec. 42A. Rural investment credit.’’. 

11 (f) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to expenditures made in taxable 

13 years beginning after the date of the enactment of this 

14 Act. 

15 SEC. 304. QUALIFIED RURAL SMALL BUSINESS INVEST16 MENT CREDIT. 

17 (a) IN GENERAL.—Subpart D of part IV of sub18 chapter A of chapter 1 (relating to business related cred19 its), as amended by this Act, is amended by adding at 

20 the end the following: 

21 ‘‘SEC. 42B. QUALIFIED RURAL SMALL BUSINESS INVEST22 MENT CREDIT. 

23 ‘‘(a) IN GENERAL.—For purposes of section 38, in 

24 the case of a qualified rural small business, the amount 

25 of the qualified rural small business investment credit de-
96 

•S 2761 IS 

1 termined under this section for any taxable year is equal 

2 to 30 percent of the qualified expenditures for the taxable 

3 year of such business. 

4 ‘‘(b) DOLLAR LIMITATION.— 

5 ‘‘(1) IN GENERAL.—The credit allowable under 

6 subsection (a) for any taxable year shall not exceed 

7 the lesser of— 

8 ‘‘(A) $5,000, or 

9 ‘‘(B) the amount when added to the aggre10 gate credits allowable to the taxpayer under 

11 subsection (a) for all preceding taxable years 

12 does not exceed $25,000. 

13 ‘‘(2) NO DOUBLE CREDIT ALLOWED.—In the 

14 case of any qualified rural small business which 

15 places in service a qualified rural investment build16 ing with respect to which a rural investment credit 

17 is allowed under section 42A for any taxable year, 

18 paragraph (1)(A) shall be applied with respect to 

19 such taxable year by substituting ‘zero’ for ‘$5,000’. 

20 ‘‘(c) QUALIFIED RURAL SMALL BUSINESS.—For 

21 purposes of this section, the term ‘qualified rural small 

22 business’ means any person if such person— 

23 ‘‘(1) employed not more than 5 full-time em24 ployees during the taxable year, 
97 

•S 2761 IS 

1 ‘‘(2) materially and substantially participates in 

2 management, 

3 ‘‘(3) is located in a qualifying county, and 

4 ‘‘(4) submitted a qualified business plan with 

5 respect to which the rural investment credit agency 

6 with jurisdiction over such qualifying county has al7 located a portion of the State rural investment ceil8 ing for such taxable year under section 42A(g)(7). 

9 For purposes of paragraph (1), an employee shall be con10 sidered full-time if such employee is employed at least 30 

11 hours per week for 20 or more calendar weeks in the tax12 able year. 

13 ‘‘(d) QUALIFIED EXPENDITURES.—For purposes of 

14 this section— 

15 ‘‘(1) IN GENERAL.—The term ‘qualified expend16 itures’ means expenditures normally associated with 

17 starting or expanding a business and included in a 

18 qualified business plan, including costs for capital, 

19 plant and equipment, inventory expenses, and wages, 

20 but not including interest costs. 

21 ‘‘(2) ONLY CERTAIN EXPENDITURES INCLUDED

22 FOR EXISTING BUSINESSES.—In the case of a quali23 fied rural small business with respect to which a 

24 credit under subsection (a) was allowed for a pre25 ceding taxable year, such term shall include only so 
98 

•S 2761 IS 

1 much of the expenditures described in paragraph (1) 

2 for the taxable year as exceed the aggregate of such 

3 expenditures for the preceding taxable year. 

4 ‘‘(e) QUALIFIED BUSINESS PLAN.—For purposes of 

5 this section, the term ‘qualified business plan’ means a 

6 business plan which— 

7 ‘‘(1) has been approved by the rural investment 

8 credit agency with jurisdiction over the qualifying 

9 county in which the qualified rural small business is 

10 located pursuant to such agency’s rural investment 

11 plan, and 

12 ‘‘(2) meets such requirements as the agency 

13 may specify. 

14 ‘‘(f) DENIAL OF DOUBLE BENEFIT.—In the case of 

15 the amount of the credit determined under this section— 

16 ‘‘(1) no deduction or credit shall be allowed for 

17 such amount under any other provision of this chap18 ter, and 

19 ‘‘(2) no increase in the adjusted basis of any 

20 property shall result from such amount. 

21 ‘‘(g) DEFINITIONS AND SPECIAL RULES.—For pur22 poses of this section— 

23 ‘‘(1) any term which is used in this section 

24 which is used in section 42A shall have the meaning 

25 given such term by section 42A, and 
99 

•S 2761 IS 

1 ‘‘(2) rules similar to the rules under subsections 

2 (j)(2), (j)(3), and (k) of section 42A shall apply.’’. 

3 (b) CURRENT YEAR BUSINESS CREDIT CALCULA4 TION.—Section 38(b) (relating to current year business 

5 credit), as amended by this Act, is amended by striking 

6 ‘‘plus’’ at the end of paragraph (16), by striking the period 

7 at the end of paragraph (17) and inserting ‘‘, plus’’, and 

8 by adding at the end the following: 

9 ‘‘(18) the qualified rural small business invest10 ment credit determined under section 42B(a).’’. 

11 (c) LIMITATION ON CARRYBACK.—Subsection (d) of 

12 section 39 (relating to carryback and carryforward of un13 used credits), as amended by this Act, is amended by add14 ing at the end the following: 

15 ‘‘(13) NO CARRYBACK OF QUALIFIED RURAL

16 SMALL BUSINESS INVESTMENT CREDIT BEFORE EF17 FECTIVE DATE.—No portion of the unused business 

18 credit for any taxable year which is attributable to 

19 the qualified rural small business investment credit 

20 determined under section 42B may be carried back 

21 to a taxable year beginning before the date of the 

22 enactment of this paragraph.’’. 

23 (d) CLERICAL AMENDMENT.—The table of sections 

24 for subpart D of part IV of subchapter A of chapter 1, 
100 

•S 2761 IS 

1 as amended by this Act, is amended by inserting after the 

2 item relating to section 42A the following: 

‘‘Sec. 42B. Qualified rural small business investment credit.’’. 

3 (e) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to expenditures made in taxable 

5 years beginning after the date of the enactment of this 

6 Act. 

7 SEC. 305. MODIFICATIONS OF TREATMENT OF QUALIFIED 

8 ZONE ACADEMY BONDS. 

9 (a) PROCEEDS OF BONDS MAY BE USED FOR CON10 STRUCTION AND LAND ACQUISITION.—Paragraph (5) of 

11 section 1397E(d) (defining qualified purpose) is amend12 ed— 

13 (1) by striking ‘‘rehabilitating or repairing’’ in 

14 subparagraph (A) and inserting ‘‘constructing, reha15 bilitating, or repairing’’, and 

16 (2) by redesignating subparagraphs (B), (C), 

17 and (D) as subparagraphs (C), (D), and (E), respec18 tively, and by inserting after subparagraph (A) the 

19 following: 

20 ‘‘(B) acquiring the land on which the facil21 ity is to be constructed,’’. 

22 (b) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to obligations issued after Decem24 ber 31, 2003. 
101 

•S 2761 IS 

1 SEC. 306. CERTAIN EXPENSES OF RURAL LETTER CAR2 RIERS. 

3 (a) IN GENERAL.—Section 162(o) (relating to treat4 ment of certain reimbursed expenses of rural mail car5 riers) is amended by redesignating paragraph (2) as para6 graph (3) and by inserting after paragraph (1) the fol7 lowing: 

8 ‘‘(2) SPECIAL RULE WHERE EXPENSES EXCEED

9 REIMBURSEMENTS.—Notwithstanding paragraph 

10 (1)(A), if the expenses incurred by an employee for 

11 the use of a vehicle in performing services described 

12 in paragraph (1) exceed the qualified reimburse13 ments for such expenses, such excess shall be taken 

14 into account in computing the miscellaneous 

15 itemized deductions of the employee under section 

16 67.’’. 

17 (b) CONFORMING AMENDMENT.—The heading for 

18 section 162(o) is amended by striking ‘‘REIMBURSED’’. 

19 (c) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to taxable years beginning after 

21 December 31, 2003. 

22 SEC. 307. NEW MARKETS TAX CREDIT FOR NATIVE AMER23 ICAN RESERVATIONS. 

24 (a) IN GENERAL.—Subpart D of part IV of sub25 chapter A of chapter 1 (relating to business related cred26 its) is amended by redesignating sections 45E and 45F 
102 

•S 2761 IS 

1 as sections 45F and 45G, respectively, and by inserting 

2 after section 45D the following new section: 

3 ‘‘SEC. 45E. NEW MARKETS TAX CREDIT FOR NATIVE AMER4 ICAN RESERVATIONS. 

5 ‘‘(a) ALLOWANCE OF CREDIT.— 

6 ‘‘(1) IN GENERAL.—For purposes of section 38, 

7 in the case of a taxpayer who holds a qualified eq8 uity investment on a credit allowance date of such 

9 investment which occurs during the taxable year, the 

10 Native American new markets tax credit determined 

11 under this section for such taxable year is an 

12 amount equal to the applicable percentage of the 

13 amount paid to the reservation development entity 

14 for such investment at its original issue. 

15 ‘‘(2) APPLICABLE PERCENTAGE.—For purposes 

16 of paragraph (1), the applicable percentage is— 

17 ‘‘(A) 5 percent with respect to the first 3 

18 credit allowance dates, and 

19 ‘‘(B) 6 percent with respect to the remain20 der of the credit allowance dates. 

21 ‘‘(3) CREDIT ALLOWANCE DATE.—For purposes 

22 of paragraph (1), the term ‘credit allowance date’ 

23 means, with respect to any qualified equity invest24 ment— 
103 

•S 2761 IS 

1 ‘‘(A) the date on which such investment is 

2 initially made, and 

3 ‘‘(B) each of the 6 anniversary dates of 

4 such date thereafter. 

5 ‘‘(b) QUALIFIED EQUITY INVESTMENT.—For pur6 poses of this section— 

7 ‘‘(1) IN GENERAL.—The term ‘qualified equity 

8 investment’ means any equity investment in a res9 ervation development entity if— 

10 ‘‘(A) such investment is acquired by the 

11 taxpayer at its original issue (directly or 

12 through an underwriter) solely in exchange for 

13 cash, 

14 ‘‘(B) substantially all of such cash is used 

15 by the reservation development entity to make 

16 qualified low-income reservation investments, 

17 and 

18 ‘‘(C) such investment is designated for 

19 purposes of this section by the reservation de20 velopment entity. 

21 Such term shall not include any equity investment 

22 issued by a reservation development entity more 

23 than 5 years after the date that such entity receives 

24 an allocation under subsection (f ). Any allocation 
104 

•S 2761 IS 

1 not used within such 5-year period may be reallo2 cated by the Secretary under subsection (f ). 

3 ‘‘(2) LIMITATION.—The maximum amount of 

4 equity investments issued by a reservation develop5 ment entity which may be designated under para6 graph (1)(C) by such entity shall not exceed the por7 tion of the limitation amount allocated under sub8 section (f ) to such entity. 

9 ‘‘(3) SAFE HARBOR FOR DETERMINING USE OF

10 CASH.—The requirement of paragraph (1)(B) shall 

11 be treated as met if at least 85 percent of the aggre12 gate gross assets of the reservation development en13 tity are invested in qualified low-income reservation 

14 investments. 

15 ‘‘(4) TREATMENT OF SUBSEQUENT PUR16 CHASERS.—The term ‘qualified equity investment’ 

17 includes any equity investment which would (but for 

18 paragraph (1)(A)) be a qualified equity investment 

19 in the hands of the taxpayer if such investment was 

20 a qualified equity investment in the hands of a prior 

21 holder. 

22 ‘‘(5) REDEMPTIONS.—A rule similar to the rule 

23 of section 1202(c)(3) shall apply for purposes of this 

24 subsection. 
105 

•S 2761 IS 

1 ‘‘(6) EQUITY INVESTMENT.—The term ‘equity 

2 investment’ means— 

3 ‘‘(A) any stock (other than nonqualified 

4 preferred stock as defined in section 351(g)(2)) 

5 in an entity which is a corporation, and 

6 ‘‘(B) any capital interest in an entity 

7 which is a partnership. 

8 ‘‘(c) RESERVATION DEVELOPMENT ENTITY.—For 

9 purposes of this section— 

10 ‘‘(1) IN GENERAL.—The term ‘reservation de11 velopment entity’ means any domestic corporation or 

12 partnership if— 

13 ‘‘(A) the primary mission of the entity is 

14 serving, or providing investment capital for, 

15 low-income reservations, 

16 ‘‘(B) the entity maintains accountability to 

17 residents of low-income reservations through 

18 their representation on any governing board of 

19 the entity or on any advisory board to the enti20 ty, and 

21 ‘‘(C) the entity is certified by the Secretary 

22 for purposes of this section as being a reserva23 tion development entity. 

24 ‘‘(2) EXCEPTION.—For purposes of subpara25 graph (C) of paragraph (1), the Secretary shall not 
106 

•S 2761 IS 

1 certify an entity as a reservation development entity 

2 if such entity is also certified as a qualified commu3 nity development entity under section 45D(c). 

4 ‘‘(d) QUALIFIED LOW-INCOME RESERVATION IN5 VESTMENTS.—For purposes of this section— 

6 ‘‘(1) IN GENERAL.—The term ‘qualified low-in7 come reservation investment’ means— 

8 ‘‘(A) any capital or equity investment in, 

9 or loan to, any qualified active low-income res10 ervation business, 

11 ‘‘(B) the purchase from another reserva12 tion development entity of any loan made by 

13 such entity which is a qualified low-income res14 ervation investment, 

15 ‘‘(C) financial counseling and other serv16 ices specified in regulations prescribed by the 

17 Secretary to businesses located in, and resi18 dents of, low-income reservations, and 

19 ‘‘(D) any equity investment in, or loan to, 

20 any reservation development entity. 

21 ‘‘(2) QUALIFIED ACTIVE LOW-INCOME RES22 ERVATION BUSINESS.— 

23 ‘‘(A) IN GENERAL.—For purposes of para24 graph (1), the term ‘qualified active low-income 

25 reservation business’ means, with respect to any 
107 

•S 2761 IS 

1 taxable year, any corporation (including a non2 profit corporation) or partnership if for such 

3 year— 

4 ‘‘(i) at least 50 percent of the total 

5 gross income of such entity is derived from 

6 the active conduct of a qualified business 

7 within any low-income reservation, 

8 ‘‘(ii) a substantial portion of the use 

9 of the tangible property of such entity 

10 (whether owned or leased) is within any 

11 low-income reservation, 

12 ‘‘(iii) a substantial portion of the serv13 ices performed for such entity by its em14 ployees are performed in any low-income 

15 reservation, 

16 ‘‘(iv) less than 5 percent of the aver17 age of the aggregate unadjusted bases of 

18 the property of such entity is attributable 

19 to collectibles (as defined in section 

20 408(m)(2)) other than collectibles that are 

21 held primarily for sale to customers in the 

22 ordinary course of such business, and 

23 ‘‘(v) less than 5 percent of the aver24 age of the aggregate unadjusted bases of 

25 the property of such entity is attributable 
108 

•S 2761 IS 

1 to nonqualified financial property (as de2 fined in section 1397C(e)). 

3 ‘‘(B) PROPRIETORSHIP.—Such term shall 

4 include any business carried on by an individual 

5 as a proprietor if such business would meet the 

6 requirements of subparagraph (A) were it incor7 porated. 

8 ‘‘(C) PORTIONS OF BUSINESS MAY BE

9 QUALIFIED ACTIVE LOW-INCOME RESERVATION

10 BUSINESS.—The term ‘qualified active low-in11 come reservation business’ includes any trades 

12 or businesses which would qualify as a qualified 

13 active low-income reservation business if such 

14 trades or businesses were separately incor15 porated. 

16 ‘‘(3) QUALIFIED BUSINESS.—For purposes of 

17 this subsection, the term ‘qualified business’ has the 

18 meaning given to such term by section 45D(d)(3). 

19 ‘‘(e) LOW-INCOME RESERVATION.—For purposes of 

20 this section, the term ‘low-income reservation’ means any 

21 Indian reservation (as defined in section 168(j)(6)) which 

22 has a poverty rate of at least 40 percent. 

23 ‘‘(f ) NATIONAL LIMITATION ON AMOUNT OF INVEST24 MENTS DESIGNATED.— 
109 

•S 2761 IS 

1 ‘‘(1) IN GENERAL.—There is a Native American 

2 new markets tax credit limitation of $50,000,000 for 

3 each of calendar years 2004 through 2007. 

4 ‘‘(2) ALLOCATION OF LIMITATION.—The limita5 tion under paragraph (1) shall be allocated by the 

6 Secretary among reservation development entities se7 lected by the Secretary. In making allocations under 

8 the preceding sentence, the Secretary shall give pri9 ority to any entity— 

10 ‘‘(A) with a record of having successfully 

11 provided capital or technical assistance to dis12 advantaged businesses or communities, or 

13 ‘‘(B) which intends to satisfy the require14 ment under subsection (b)(1)(B) by making 

15 qualified low-income reservation investments in 

16 1 or more businesses in which persons unre17 lated to such entity (within the meaning of sec18 tion 267(b) or 707(b)(1)) hold the majority eq19 uity interest. 

20 ‘‘(3) CARRYOVER OF UNUSED LIMITATION.—If 

21 the Native American new markets tax credit limita22 tion for any calendar year exceeds the aggregate 

23 amount allocated under paragraph (2) for such year, 

24 such limitation for the succeeding calendar year 

25 shall be increased by the amount of such excess. No 
110 

•S 2761 IS 

1 amount may be carried under the preceding sentence 

2 to any calendar year after 2014. 

3 ‘‘(g) RECAPTURE OF CREDIT IN CERTAIN CASES.— 

4 ‘‘(1) IN GENERAL.—If, at any time during the 

5 7-year period beginning on the date of the original 

6 issue of a qualified equity investment in a reserva7 tion development entity, there is a recapture event 

8 with respect to such investment, then the tax im9 posed by this chapter for the taxable year in which 

10 such event occurs shall be increased by the credit re11 capture amount. 

12 ‘‘(2) CREDIT RECAPTURE AMOUNT.—For pur13 poses of paragraph (1), the credit recapture amount 

14 is an amount equal to the sum of— 

15 ‘‘(A) the aggregate decrease in the credits 

16 allowed to the taxpayer under section 38 for all 

17 prior taxable years which would have resulted if 

18 no credit had been determined under this sec19 tion with respect to such investment, plus 

20 ‘‘(B) interest at the underpayment rate es21 tablished under section 6621 on the amount de22 termined under subparagraph (A) for each 

23 prior taxable year for the period beginning on 

24 the due date for filing the return for the prior 

25 taxable year involved. 
111

•S 2761 IS 

1 No deduction shall be allowed under this chapter for 

2 interest described in subparagraph (B). 

3 ‘‘(3) RECAPTURE EVENT.—For purposes of 

4 paragraph (1), there is a recapture event with re5 spect to an equity investment in a reservation devel6 opment entity if—

7 ‘‘(A) such entity ceases to be a reservation 

8 development entity, 

9 ‘‘(B) the proceeds of the investment cease 

10 to be used as required in subsection (b)(1)(B), 

11 or 

12 ‘‘(C) such investment is redeemed by such 

13 entity. 

14 ‘‘(4) SPECIAL RULES.—

15 ‘‘(A) TAX BENEFIT RULE.—The tax for 

16 the taxable year shall be increased under para17 graph (1) only with respect to credits allowed 

18 by reason of this section which were used to re19 duce tax liability. In the case of credits not so 

20 used to reduce tax liability, the carryforwards 

21 and carrybacks under section 39 shall be appro22 priately adjusted. 

23 ‘‘(B) NO CREDITS AGAINST TAX.—Any in24 crease in tax under this subsection shall not be 

25 treated as a tax imposed by this chapter for
112 

•S 2761 IS 

1 purposes of determining the amount of any cred2 it under this chapter or for purposes of section 

3 55. 

4 ‘‘(h) BASIS REDUCTION.—The basis of any qualified 

5 equity investment shall be reduced by the amount of any 

6 credit determined under this section with respect to such 

7 investment. This subsection shall not apply for purposes 

8 of sections 1202, 1400B, and 1400F. 

9 ‘‘(i) REGULATIONS.—The Secretary shall prescribe 

10 such regulations as may be appropriate to carry out this 

11 section, including regulations— 

12 ‘‘(1) which limit the credit for investments 

13 which are directly or indirectly subsidized by other 

14 Federal tax benefits (including the credit under sec15 tion 42 and the exclusion from gross income under 

16 section 103), 

17 ‘‘(2) which prevent the abuse of the purposes of 

18 this section, 

19 ‘‘(3) which provide rules for determining wheth20 er the requirement of subsection (b)(1)(B) is treated 

21 as met, 

22 ‘‘(4) which impose appropriate reporting re23 quirements, and 

24 ‘‘(5) which apply the provisions of this section 

25 to newly formed entities.’’. 
113 

•S 2761 IS 

1 (b) CREDIT MADE PART OF GENERAL BUSINESS

2 CREDIT.— 

3 (1) IN GENERAL.—Subsection (b) of section 38 

4 is amended by redesignating paragraphs (14) and 

5 (15) as paragraphs (15) and (16), respectively, and 

6 by inserting after paragraph (13) the following new 

7 paragraph: 

8 ‘‘(14) the Native American new markets tax 

9 credit determined under section 45E(a),’’. 

10 (2) LIMITATION ON CARRYBACK.—Subsection 

11 (d) of section 39 is amended by redesignating para12 graph (10) as paragraph (11) and by inserting after 

13 paragraph (9) the following new paragraph: 

14 ‘‘(10) NO CARRYBACK OF NATIVE AMERICAN

15 NEW MARKETS TAX CREDIT BEFORE JANUARY 1, 

16 2004.—No portion of the unused business credit for 

17 any taxable year which is attributable to the credit 

18 under section 45E may be carried back to a taxable 

19 year ending before January 1, 2004.’’. 

20 (c) DEDUCTION FOR UNUSED CREDIT.—Subsection 

21 (c) of section 196 is amended by redesignating paragraph 

22 (10) as paragraph (11), by striking ‘‘and’’ at the end of 

23 paragraph (9), and by inserting after paragraph (9) the 

24 following new paragraph: 
114 

•S 2761 IS 

1 ‘‘(10) the Native American new markets tax 

2 credit determined under section 45E(a), and’’. 

3 (d) CONFORMING AMENDMENTS.— 

4 (1) Section 38(b)(15), as redesignated by sub5 section (b)(1), is amended— 

6 (A) by striking ‘‘45E(c)’’ and inserting 

7 ‘‘45F(c)’’, and 

8 (B) by striking ‘‘45E(a)’’ and inserting 

9 ‘‘45F(a)’’. 

10 (2) Section 38(b)(16), as redesignated by sub11 section (b)(1), is amended by striking ‘‘45F(a)’’ and 

12 inserting ‘‘45G(a)’’. 

13 (3) Section 39(d)(11), as redesignated by sub14 section (b)(2), is amended by striking ‘‘section 45E’’ 

15 and inserting ‘‘section 45F’’. 

16 (4) Section 196(c)(11), as redesignated by sub17 section (c), is amended by striking ‘‘45E(a)’’ and in18 serting ‘‘45F(a)’’. 

19 (5) Section 1016(a)(28) is amended— 

20 (A) by striking ‘‘under section 45F’’ and 

21 inserting ‘‘under section 45G’’, and 

22 (B) by striking ‘‘section 45F(f)(1)’’ and in23 serting ‘‘section 45G(f)(1)’’. 

24 (e) CLERICAL AMENDMENT.—The table of sections 

25 for subpart D of part IV of subchapter A of chapter 1 
115 

•S 2761 IS 

1 is amended by striking the items relating to sections 45E 

2 and 45F and inserting the following: 

‘‘Sec. 45E. New markets tax credit for Native American reservations. 

‘‘Sec. 45F. Small employer pension plan startup costs. 

‘‘Sec. 45G. Employer-provided child care credit.’’. 

3 (e) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to investments made after Decem5 ber 31, 2003. 

6 (f ) GUIDANCE ON ALLOCATION OF NATIONAL LIMI7 TATION.—Not later than 120 days after the date of the 

8 enactment of this Act, the Secretary of the Treasury or 

9 the Secretary’s delegate shall issue guidance which speci10 fies— 

11 (1) how entities shall apply for an allocation 

12 under section 45E(f )(2) of the Internal Revenue 

13 Code of 1986, as added by this section; 

14 (2) the competitive procedure through which 

15 such allocations are made; and 

16 (3) the actions that such Secretary or delegate 

17 shall take to ensure that such allocations are prop18 erly made to appropriate entities. 

19 (g) AUDIT AND REPORT.—Not later than January 31 

20 of 2007 and 2010, the Comptroller General of the United 

21 States shall, pursuant to an audit of the Native American 

22 new markets tax credit program established under section 

23 45E of the Internal Revenue Code of 1986 (as added by 
116 

•S 2761 IS 

1 subsection (a)), report to Congress on such program, in2 cluding all reservation development entities that receive an 

3 allocation under the Native American new markets credit 

4 under such section. 

5 (h) GRANTS IN COORDINATION WITH CREDIT.— 

6 (1) IN GENERAL.—The Secretary of the Treas7 ury is authorized to award a grant of not more than 

8 $1,000,000 to the First Nations Oweesta Corpora9 tion. 

10 (2) USE OF FUNDS.—The grant awarded under 

11 paragraph (1) may be used— 

12 (A) to enhance the capacity of people living 

13 on low-income reservations (within the meaning 

14 of section 45E(e) of the Internal Revenue Code 

15 of 1986, as added by this section) to access, 

16 apply, control, create, leverage, utilize, and re17 tain the financial benefits to such low-income 

18 reservations which are attributable to qualified 

19 low-income reservation investments (within the 

20 meaning of section 45E(d) of such Code), and 

21 (B) to provide access to appropriate finan22 cial capital for the development of such low-in23 come reservations. 

24 (3) AUTHORIZATION OF APPROPRIATIONS.— 

25 There are authorized to be appropriated $1,000,000 
117 

•S 2761 IS 

1 for fiscal years 2005 through 2015 to carry out the 

2 provisions of this subsection. 

3 SEC. 308. MODIFICATIONS OF AUTHORITY OF INDIAN TRIB4 AL GOVERNMENTS TO ISSUE TAX-EXEMPT 

5 BONDS. 

6 (a) IN GENERAL.—Paragraph (1) of section 7871(c) 

7 (relating to Indian tribal governments treated as States 

8 for certain purposes) is amended to read as follows: 

9 ‘‘(1) IN GENERAL.—Subsection (a) of section 

10 103 shall apply to any obligation issued by an In11 dian tribal government (or subdivision thereof) only 

12 if— 

13 ‘‘(A) such obligation— 

14 ‘‘(i) is part of an issue 95 percent or 

15 more of the net proceeds of which are to 

16 be used to finance any facility located on 

17 an Indian reservation, and 

18 ‘‘(ii) is issued before January 1, 2006, 

19 or 

20 ‘‘(B) such obligation is part of an issue 

21 substantially all of the proceeds of which are to 

22 be used in the exercise of any essential govern23 mental function.’’. 
118 

•S 2761 IS 

1 (b) SPECIAL RULES AND DEFINITIONS.—Subsection 

2 (c) of section 7871 is amended by inserting at the end 

3 the following new paragraph: 

4 ‘‘(4) SPECIAL RULES AND DEFINITIONS.— 

5 ‘‘(A) EXCLUSION OF GAMING.—An obliga6 tion described in subparagraph (A) or (B) of 

7 paragraph (1) may not be used to finance any 

8 portion of a building in which class II or III 

9 gaming (as defined in section 4 of the Indian 

10 Gaming Regulatory Act (25 U.S.C. 2702)) is 

11 conducted or housed. 

12 ‘‘(B) INDIAN RESERVATION.—For pur13 poses of paragraph (1), the term ‘Indian res14 ervation’ means— 

15 ‘‘(i) a reservation, as defined in sec16 tion 4(10) of the Indian Child Welfare Act 

17 of 1978 (25 U.S.C. 1903(10)), and 

18 ‘‘(ii) lands held under the provisions 

19 of the Alaska Native Claims Settlement 

20 Act (43 U.S.C. 1601 et seq.) by a Native 

21 corporation as defined in section 3(m) of 

22 such Act (43 U.S.C. 1602(m)).’’. 

23 (c) EFFECTIVE DATE.—The amendments made by 

24 this section shall apply to obligations issued after the date 

25 of the enactment of this Act. 
119 

•S 2761 IS 

1 SEC. 309. INDIAN SCHOOL CONSTRUCTION. 

2 (a) DEFINITIONS.—In this section: 

3 (1) BUREAU.—The term ‘‘Bureau’’ means the 

4 Bureau of Indian Affairs of the Department. 

5 (2) DEPARTMENT.—The term ‘‘Department’’ 

6 means the Department of the Interior. 

7 (3) ESCROW ACCOUNT.—The term ‘‘escrow ac8 count’’ means the tribal school modernization escrow 

9 account established under subsection (b)(6)(B)(i). 

10 (4) INDIAN.—The term ‘‘Indian’’ means any in11 dividual who is a member of an Indian tribe. 

12 (5) INDIAN TRIBE.— 

13 (A) IN GENERAL.—The term ‘‘Indian 

14 tribe’’ has the meaning given the term ‘‘Indian 

15 tribal government’’ by section 7701(a)(40) of 

16 the Internal Revenue Code of 1986 (including 

17 the application of section 7871(d) of that 

18 Code). 

19 (B) INCLUSION.—The term ‘‘Indian tribe’’ 

20 includes a consortium of Indian tribes approved 

21 by the Secretary. 

22 (6) SECRETARY.—The term ‘‘Secretary’’ means 

23 the Secretary of the Interior. 

24 (7) TRIBAL SCHOOL.—The term ‘‘tribal school’’ 

25 means an elementary school, secondary school, or 

26 dormitory that— 
120 

•S 2761 IS 

1 (A) is operated by a tribal organization or 

2 the Bureau for the education of Indian chil3 dren; and 

4 (B) under a contract, a grant, or an agree5 ment, or for a Bureau-operated school, receives 

6 financial assistance to pay the costs of oper7 ation from funds made available under— 

8 (i) section 102, 103(a), or 208 of the 

9 Indian Self-Determination and Education 

10 Assistance Act (25 U.S.C. 450f, 450h(a), 

11 458d); or 

12 (ii) the Tribally Controlled Schools 

13 Act of 1988 (25 U.S.C. 2501 et seq.). 

14 (b) ISSUANCE OF BONDS.— 

15 (1) IN GENERAL.—The Secretary shall establish 

16 a pilot program under which eligible Indian tribes 

17 may issue qualified tribal school modernization 

18 bonds to provide funding for the construction, reha19 bilitation, or repair of tribal schools (including the 

20 advance planning and design of tribal schools). 

21 (2) ELIGIBILITY.— 

22 (A) IN GENERAL.—To be eligible to issue 

23 any qualified tribal school modernization bond 

24 under the program under paragraph (1), an In25 dian tribe shall— 
121 

•S 2761 IS 

1 (i) prepare and submit to the Sec2 retary a plan of construction that meets 

3 the requirements of subparagraph (B); 

4 (ii) provide for quarterly and final in5 spection of the project by the Bureau; and 

6 (iii) pledge that the facilities financed 

7 by the bond will be used primarily for ele8 mentary and secondary educational pur9 poses for not less than the period during 

10 which the bond remains outstanding. 

11 (B) PLAN OF CONSTRUCTION.—A plan of 

12 construction referred to in subparagraph (A)(i) 

13 meets the requirements of this subparagraph if 

14 the plan— 

15 (i) contains a description of the con16 struction to be carried out with funding 

17 provided under a qualified tribal school 

18 modernization bond; 

19 (ii) demonstrates that a comprehen20 sive survey has been completed to deter21 mine the construction needs of the tribal 

22 school involved; 

23 (iii) contains assurances that funding 

24 under the bond will be used only for the 

25 activities described in the plan; 
122 

•S 2761 IS 

1 (iv) contains a response to the evalua2 tion criteria contained in Instructions and 

3 Application for Replacement School Con4 struction, Revision 6, dated February 6, 

5 1999; and 

6 (v) contains any other reasonable and 

7 related information determined to be ap8 propriate by the Secretary. 

9 (C) PRIORITY.—In determining whether an 

10 Indian tribe is eligible to participate in the pro11 gram under this subsection, the Secretary shall 

12 give priority to an Indian tribe that, as dem13 onstrated by the relevant plans of construction, 

14 will fund projects— 

15 (i) described in the Education Facili16 ties Replacement Construction Priorities 

17 List, as of fiscal year 2000, of the Bureau 

18 (65 Fed. Reg. 4623); 

19 (ii) described in any subsequent prior20 ities list published in the Federal Register; 

21 or 

22 (iii) that meet the criteria for ranking 

23 schools as described in Instructions and 

24 Application for Replacement School Con-
123 

•S 2761 IS 

1 struction, Revision 6, dated February 6, 

2 1999. 

3 (D) ADVANCE PLANNING AND DESIGN

4 FUNDING.— 

5 (i) IN GENERAL.—An Indian tribe 

6 may propose in the plan of construction of 

7 the Indian tribe to receive advance plan8 ning and design funding from the escrow 

9 account. 

10 (ii) CONDITIONS ON ALLOCATION OF

11 FUNDS.—As a condition to the allocation 

12 to an Indian tribe of advance planning and 

13 design funds from the escrow account 

14 under clause (i), the Indian tribe shall 

15 agree— 

16 (I) to issue qualified tribal school 

17 modernization bonds after the date of 

18 receipt of the funds; and 

19 (II) as a condition of each bond 

20 issuance, that the Indian tribe will de21 posit into the escrow account, or a 

22 fund managed by the trustee as de23 scribed in paragraph (4)(C), an 

24 amount equal to the amount of funds 

25 received from the escrow account. 
124

•S 2761 IS 

1 (3) PERMISSIBLE ACTIVITIES.—In addition to 

2 the use of funds permitted under paragraph (1), an 

3 Indian tribe may use amounts received through the 

4 issuance of a qualified tribal school modernization 

5 bond—

6 (A) to enter into and make payments 

7 under contracts with licensed and bonded archi8 tects, engineers, and construction firms—

9 (i) to determine the needs of the tribal 

10 school; and 

11 (ii) for the design and engineering of 

12 the tribal school; 

13 (B) to enter into and make payments 

14 under contracts with financial advisers, under15 writers, attorneys, trustees, and other profes16 sionals who would be able to provide assistance 

17 to the Indian tribe in issuing bonds; and 

18 (C) to carry out other activities determined 

19 to be appropriate by the Secretary. 

20 (4) BOND TRUSTEE.—

21 (A) IN GENERAL.—Notwithstanding any 

22 other provision of law, any qualified tribal 

23 school modernization bond issued by an Indian 

24 tribe under this subsection shall be subject to a 
125 

•S 2761 IS 

1 trust agreement between the Indian tribe and a 

2 trustee. 

3 (B) TRUSTEE.—Any bank or trust com4 pany that meets requirements established by 

5 the Secretary may be designated as a trustee 

6 under subparagraph (A). 

7 (C) CONTENT OF TRUST AGREEMENT.—A 

8 trust agreement entered into by an Indian tribe 

9 under this paragraph shall specify that the 

10 trustee, with respect to any bond issued under 

11 this subsection, shall— 

12 (i) act as a repository for the proceeds 

13 of the bond; 

14 (ii) make payments to bondholders; 

15 (iii) receive, as a condition to the 

16 issuance of the bond, a transfer of funds 

17 from the escrow account, or from other 

18 funds furnished by or on behalf of the In19 dian tribe, in an amount that (including 

20 interest earnings from the investment of 

21 the funds in obligations of, or fully guaran22 teed by, the United States, or from other 

23 investments authorized by paragraph (10)) 

24 will produce funds sufficient to timely pay 

25 in full the entire principal amount of the 
126 

•S 2761 IS 

1 bond on the stated maturity date of the 

2 bond; 

3 (iv) invest the funds transferred under 

4 clause (iii) in an investment described in 

5 that clause; and 

6 (v)(I) hold and invest the funds trans7 ferred under clause (iii) in a segregated 

8 fund or account under the agreement; and 

9 (II) use the fund or account solely for 

10 payment of the costs of items described in 

11 paragraph (3). 

12 (D) REQUIREMENTS FOR MAKING DIRECT

13 PAYMENTS.— 

14 (i) PAYMENTS.— 

15 (I) IN GENERAL.—Notwith16 standing any other provision of law, 

17 the trustee shall make any payment 

18 referred to in subparagraph (C)(v) in 

19 accordance with such requirements as 

20 the Indian tribe shall prescribe in the 

21 trust agreement entered into under 

22 subparagraph (C). 

23 (II) INSPECTION.—Before mak24 ing a payment for a project to a con25 tractor under subparagraph (C)(v), to 
127 

•S 2761 IS 

1 ensure completion of the project, the 

2 trustee shall require an inspection of 

3 the project by— 

4 (aa) a local financial institu5 tion; or 

6 (bb) an independent inspect7 ing architect or engineer. 

8 (ii) CONTRACTS.—Each contract re9 ferred to in paragraph (3) shall specify, or 

10 be renegotiated to specify, that payments 

11 under the contract shall be made in ac12 cordance with this paragraph. 

13 (5) PAYMENTS OF PRINCIPAL AND INTEREST.— 

14 (A) PRINCIPAL.— 

15 (i) IN GENERAL.—No principal pay16 ment on any qualified tribal school mod17 ernization bond shall be required under 

18 this subsection until the final, stated date 

19 on which the bond reaches maturity. 

20 (ii) MATURITY; OUTSTANDING PRIN21 CIPAL.—With respect to a qualified tribal 

22 school modernization bond issued under 

23 this subsection— 
128 

•S 2761 IS 

1 (I) the bond shall reach maturity 

2 not later than 15 years after the date 

3 of issuance of the bond; and 

4 (II) on the date on which the 

5 bond reaches maturity, the entire out6 standing principal under the bond 

7 shall become due and payable. 

8 (B) INTEREST.—There shall be awarded a 

9 tax credit under section 1400M of the Internal 

10 Revenue Code of 1986 in lieu of interest on a 

11 qualified tribal school modernization bond 

12 issued under this subsection. 

13 (6) BOND GUARANTEES.— 

14 (A) IN GENERAL.—Payment of the prin15 cipal portion of a qualified tribal school mod16 ernization bond issued under this subsection 

17 shall be guaranteed solely by amounts deposited 

18 with each respective bond trustee as described 

19 in paragraph (4)(C)(iii). 

20 (B) ESTABLISHMENT OF ACCOUNT.— 

21 (i) IN GENERAL.—Notwithstanding 

22 any other provision of law, the Secretary 

23 may— 

24 (I) establish a tribal school mod25 ernization escrow account; and 
129 

•S 2761 IS 

1 (II) beginning in fiscal year 

2 2005, from amounts made available 

3 for school replacement under the con4 struction account of the Bureau, de5 posit not more than $30,000,000 for 

6 each fiscal year into the escrow ac7 count. 

8 (ii) TRANSFERS OF EXCESS PRO9 CEEDS.—Excess proceeds held under any 

10 trust agreement that are not needed for 

11 any of the purposes described in clauses 

12 (iii) and (v) of paragraph (4)(C) shall be 

13 transferred, from time to time, by the 

14 trustee for deposit into the escrow account. 

15 (iii) PAYMENTS.—The Secretary shall 

16 use any amounts deposited in the escrow 

17 account under clauses (i) and (ii)— 

18 (I) to make payments to trustees 

19 appointed and acting in accordance 

20 with paragraph (4); or 

21 (II) to make payments described 

22 in paragraph (2)(D). 

23 (7) LIMITATIONS.— 

24 (A) OBLIGATION TO REPAY.— 
130 

•S 2761 IS 

1 (i) IN GENERAL.—Notwithstanding 

2 any other provision of law, the principal 

3 amount on any qualified tribal school mod4 ernization bond issued under this sub5 section shall be repaid only to the extent of 

6 any escrowed funds provided under para7 graph (4)(C)(iii). 

8 (ii) NO GUARANTEE.—No qualified 

9 tribal school modernization bond issued by 

10 an Indian tribe under this subsection shall 

11 be an obligation of, and no payment of the 

12 principal of such a bond shall be guaran13 teed by— 

14 (I) the United States; 

15 (II) the Indian tribe; or 

16 (III) the tribal school for which 

17 the bond was issued. 

18 (B) LAND AND FACILITIES.—No land or 

19 facility purchased or improved with amounts 

20 derived from a qualified tribal school mod21 ernization bond issued under this subsection 

22 shall be mortgaged or used as collateral for the 

23 bond. 

24 (8) SALE OF BONDS.—A qualified tribal school 

25 modernization bond may be sold at a purchase price 
131 

•S 2761 IS 

1 equal to, in excess of, or at a discount from, the par 

2 amount of the bond. 

3 (9) TREATMENT OF TRUST AGREEMENT EARN4 INGS.—No amount earned through the investment of 

5 funds under the control of a trustee under any trust 

6 agreement described in paragraph (4) shall be sub7 ject to Federal income taxation. 

8 (10) INVESTMENT OF SINKING FUNDS.—A 

9 sinking fund established for the purpose of the pay10 ment of principal on a qualified tribal school mod11 ernization bond issued under this subsection shall be 

12 invested in— 

13 (A) obligations issued by or guaranteed by 

14 the United States; or 

15 (B) such other assets as the Secretary of 

16 the Treasury may by regulation allow. 

17 (c) EXPANSION OF INCENTIVES FOR TRIBAL

18 SCHOOLS.—Chapter 1 is amended by adding at the end 

19 the following new subchapter: 

20 ‘‘Subchapter Z—Tribal School Modernization 

21 Provisions 

‘‘Sec. 1400M. Credit to holders of qualified tribal school modernization bonds. 
132 

•S 2761 IS 

1 ‘‘SEC. 1400M. CREDIT TO HOLDERS OF QUALIFIED TRIBAL 

2 SCHOOL MODERNIZATION BONDS. 

3 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of a tax4 payer who holds a qualified tribal school modernization 

5 bond on a credit allowance date of such bond which occurs 

6 during the taxable year, there shall be allowed as a credit 

7 against the tax imposed by this chapter for such taxable 

8 year an amount equal to the sum of the credits determined 

9 under subsection (b) with respect to credit allowance dates 

10 during such year on which the taxpayer holds such bond. 

11 ‘‘(b) AMOUNT OF CREDIT.— 

12 ‘‘(1) IN GENERAL.—The amount of the credit 

13 determined under this subsection with respect to any 

14 credit allowance date for a qualified tribal school 

15 modernization bond is 25 percent of the annual 

16 credit determined with respect to such bond. 

17 ‘‘(2) ANNUAL CREDIT.—The annual credit de18 termined with respect to any qualified tribal school 

19 modernization bond is the product of— 

20 ‘‘(A) the applicable credit rate, multiplied 

21 by 

22 ‘‘(B) the outstanding face amount of the 

23 bond. 

24 ‘‘(3) APPLICABLE CREDIT RATE.—For purposes 

25 of paragraph (1), the applicable credit rate with re26 spect to an issue is the rate equal to an average 
133 

•S 2761 IS 

1 market yield (as of the date of sale of the issue) on 

2 outstanding long-term corporate obligations (as de3 termined by the Secretary). 

4 ‘‘(4) SPECIAL RULE FOR ISSUANCE AND RE5 DEMPTION.—In the case of a bond which is issued 

6 during the 3-month period ending on a credit allow7 ance date, the amount of the credit determined 

8 under this subsection with respect to such credit al9 lowance date shall be a ratable portion of the credit 

10 otherwise determined based on the portion of the 3- 

11 month period during which the bond is outstanding. 

12 A similar rule shall apply when the bond is re13 deemed. 

14 ‘‘(c) LIMITATION BASED ON AMOUNT OF TAX.— 

15 ‘‘(1) IN GENERAL.—The credit allowed under 

16 subsection (a) for any taxable year shall not exceed 

17 the excess of— 

18 ‘‘(A) the sum of the regular tax liability 

19 (as defined in section 26(b)) plus the tax im20 posed by section 55, over 

21 ‘‘(B) the sum of the credits allowable 

22 under part IV of subchapter A (other than sub23 part C thereof, relating to refundable credits). 

24 ‘‘(2) CARRYOVER OF UNUSED CREDIT.—If the 

25 credit allowable under subsection (a) exceeds the 
134 

•S 2761 IS 

1 limitation imposed by paragraph (1) for such taxable 

2 year, such excess shall be carried to the succeeding 

3 taxable year and added to the credit allowable under 

4 subsection (a) for such taxable year. 

5 ‘‘(d) QUALIFIED TRIBAL SCHOOL MODERNIZATION

6 BOND; OTHER DEFINITIONS.—For purposes of this sec7 tion— 

8 ‘‘(1) QUALIFIED TRIBAL SCHOOL MODERNIZA9 TION BOND.— 

10 ‘‘(A) IN GENERAL.—The term ‘qualified 

11 tribal school modernization bond’ means, sub12 ject to subparagraph (B), any bond issued as 

13 part of an issue under section 309(b) of the 

14 Heartland Investment and Rural Employment 

15 (HIRE) Act, as in effect on the date of the en16 actment of this section, if— 

17 ‘‘(i) 95 percent or more of the pro18 ceeds of such issue are to be used for the 

19 construction, rehabilitation, or repair of a 

20 school facility funded by the Bureau of In21 dian Affairs of the Department of the Inte22 rior or for the acquisition of land on which 

23 such a facility is to be constructed with 

24 part of the proceeds of such issue, 
135 

•S 2761 IS 

1 ‘‘(ii) the bond is issued by an Indian 

2 tribe, 

3 ‘‘(iii) the issuer designates such bond 

4 for purposes of this section, and 

5 ‘‘(iv) the term of each bond which is 

6 part of such issue does not exceed 15 

7 years. 

8 ‘‘(B) NATIONAL LIMITATION ON AMOUNT

9 OF BONDS DESIGNATED.— 

10 ‘‘(i) NATIONAL LIMITATION.—There is 

11 a national qualified tribal school mod12 ernization bond limitation for each cal13 endar year. Such limitation is— 

14 ‘‘(I) $200,000,000 for 2005, 

15 ‘‘(II) $200,000,000 for 2006, 

16 and 

17 ‘‘(III) zero after 2006. 

18 ‘‘(ii) ALLOCATION OF LIMITATION.— 

19 The national qualified tribal school mod20 ernization bond limitation shall be allo21 cated to Indian tribes by the Secretary of 

22 the Interior subject to the provisions of 

23 section 309 of the Heartland Investment 

24 and Rural Employment (HIRE) Act, as in 
136 

•S 2761 IS 

1 effect on the date of the enactment of this 

2 section. 

3 ‘‘(iii) DESIGNATION SUBJECT TO LIMI4 TATION AMOUNT.—The maximum aggre5 gate face amount of bonds issued during 

6 any calendar year which may be designated 

7 under subsection (d)(1) with respect to any 

8 Indian tribe shall not exceed the limitation 

9 amount allocated to such government 

10 under clause (ii) for such calendar year. 

11 ‘‘(iv) CARRYOVER OF UNUSED LIMITA12 TION.—If for any calendar year— 

13 ‘‘(I) the limitation amount under 

14 this subparagraph, exceeds 

15 ‘‘(II) the amount of qualified 

16 tribal school modernization bonds 

17 issued during such year, 

18 the limitation amount under this subpara19 graph for the following calendar year shall 

20 be increased by the amount of such excess. 

21 The preceding sentence shall not apply if 

22 such following calendar year is after 2012. 

23 ‘‘(2) CREDIT ALLOWANCE DATE.—The term 

24 ‘credit allowance date’ means— 

25 ‘‘(A) March 15, 
137 

•S 2761 IS 

1 ‘‘(B) June 15, 

2 ‘‘(C) September 15, and 

3 ‘‘(D) December 15. 

4 Such term includes the last day on which the bond 

5 is outstanding. 

6 ‘‘(3) BOND.—The term ‘bond’ includes any ob7 ligation. 

8 ‘‘(4) TRIBE.—The term ‘tribe’ has the meaning 

9 given the term ‘Indian tribal government’ by section 

10 7701(a)(40), including the application of section 

11 7871(d). Such term includes any consortium of 

12 tribes approved by the Secretary of the Interior. 

13 ‘‘(e) CREDIT INCLUDED IN GROSS INCOME.—Gross 

14 income includes the amount of the credit allowed to the 

15 taxpayer under this section (determined without regard to 

16 subsection (c)) and the amount so included shall be treat17 ed as interest income. 

18 ‘‘(f) BONDS HELD BY REGULATED INVESTMENT

19 COMPANIES.—If any qualified tribal school modernization 

20 bond is held by a regulated investment company, the credit 

21 determined under subsection (a) shall be allowed to share22 holders of such company under procedures prescribed by 

23 the Secretary. 

24 ‘‘(g) TREATMENT FOR ESTIMATED TAX PUR25 POSES.—Solely for purposes of sections 6654 and 6655, 
138 

•S 2761 IS 

1 the credit allowed by this section to a taxpayer by reason 

2 of holding a qualified tribal school modernization bonds 

3 on a credit allowance date shall be treated as if it were 

4 a payment of estimated tax made by the taxpayer on such 

5 date. 

6 ‘‘(h) CREDIT TREATED AS ALLOWED UNDER PART

7 IV OF SUBCHAPTER A.—For purposes of subtitle F, the 

8 credit allowed by this section shall be treated as a credit 

9 allowable under part IV of subchapter A of this chapter. 

10 ‘‘(i) REPORTING.—Issuers of qualified tribal school 

11 modernization bonds shall submit reports similar to the 

12 reports required under section 149(e).’’. 

13 (d) CONFORMING AMENDMENT.—The table of sub14 chapters for chapter 1 is amended by adding at the end 

15 the following new item: 

‘‘SUBCHAPTER Z. Tribal school modernization provisions.’’. 

16 (e) ADDITIONAL PROVISIONS.— 

17 (1) SOVEREIGN IMMUNITY.—This section and 

18 the amendments made by this section shall not be 

19 construed to impact, limit, or affect the sovereign 

20 immunity of the Federal Government or any State 

21 or tribal government. 

22 (2) APPLICATION.—This section and the 

23 amendments made by this section shall take effect 

24 on the date of the enactment of this Act with respect 
139 

•S 2761 IS 

1 to bonds issued after December 31, 2004, regardless 

2 of the status of regulations promulgated thereunder. 

3 SEC. 310. COMMUNITY HOMEOWNERSHIP CREDIT. 

4 (a) IN GENERAL.—Subpart D of part IV of sub5 chapter A of chapter 1, as amended by this Act, is amend6 ed by inserting after section 42B the following new sec7 tion: 

8 ‘‘SEC. 42C. COMMUNITY HOMEOWNERSHIP CREDIT. 

9 ‘‘(a) ALLOWANCE OF CREDIT.—For purposes of sec10 tion 38, the amount of the homeownership credit deter11 mined under this section for any taxable year in the credit 

12 period shall be an amount equal to the applicable percent13 age of the eligible basis of each qualified residence. 

14 ‘‘(b) APPLICABLE PERCENTAGE.—For purposes of 

15 this section— 

16 ‘‘(1) IN GENERAL.—The term ‘applicable per17 centage’ means the appropriate percentage pre18 scribed by the Secretary for the month in which the 

19 taxpayer and the homeownership credit agency enter 

20 into an agreement with respect to such residence 

21 (which is binding on such agency, the taxpayer, and 

22 all successors in interest) as to the homeownership 

23 credit dollar amount to be allocated to such resi24 dence. 
140 

•S 2761 IS 

1 ‘‘(2) METHOD OF PRESCRIBING PERCENT2 AGE.—The percentage prescribed by the Secretary 

3 for any month shall be the percentage which will 

4 yield over a 5-year period amounts of credit under 

5 subsection (a) which have a present value equal to 

6 50 percent of the eligible basis of a qualified resi7 dence. 

8 ‘‘(3) METHOD OF DISCOUNTING.—The present 

9 value under paragraph (2) shall be determined— 

10 ‘‘(A) as of the last day of the 1st year of 

11 the 5-year period referred to in paragraph (2), 

12 ‘‘(B) by using a discount rate equal to 72 

13 percent of the annual Federal mid-term rate 

14 applicable under section 1274(d)(1) to the 

15 month applicable under paragraph (1) and com16 pounded annually, and 

17 ‘‘(C) by assuming that the credit allowable 

18 under this section for any year is received on 

19 the last day of such year. 

20 ‘‘(c) QUALIFIED RESIDENCE.—For purposes of this 

21 section— 

22 ‘‘(1) IN GENERAL.—The term ‘qualified resi23 dence’ means any residence— 

24 ‘‘(A) which is located— 
141 

•S 2761 IS 

1 ‘‘(i) in a census tract which has a me2 dian gross income which does not exceed 

3 80 percent of the greater of national or 

4 state-wide median gross income, 

5 ‘‘(ii) in a rural area (as defined under 

6 section 520 of the Housing Act of 1949), 

7 ‘‘(iii) on a reservation for a federally 

8 recognized Indian tribe, or 

9 ‘‘(iv) in an area of chronic economic 

10 distress, and 

11 ‘‘(B) which is purchased by a qualified 

12 buyer. 

13 For purposes of subparagraph (A)(iv), an area is an 

14 area of chronic economic distress if it is approved 

15 for designation as such under section 143(j)(3); ex16 cept that such designation shall not require the ap17 proval of the Secretary, shall be deemed to be ap18 proved by the Secretary of Housing and Urban De19 velopment if not approved or disapproved by the 

20 Secretary of Housing and Urban Development with21 in 90 days after submission for approval for pur22 poses of section 143(j)(3)(A)(ii), and shall cease to 

23 apply after the end of the 5th calendar year after 

24 the calendar year in which the designation is made. 

25 ‘‘(2) RESIDENCE.— 
142 

•S 2761 IS 

1 ‘‘(A) IN GENERAL.—For purposes of para2 graph (1), the term ‘residence’ means— 

3 ‘‘(i) a single-family home containing 1 

4 to 4 housing units, 

5 ‘‘(ii) a condominium unit, or 

6 ‘‘(iii) stock in a cooperative housing 

7 corporation (as defined in section 216(b)). 

8 ‘‘(B) FACTORY-BUILT HOMES IN9 CLUDED.—For purposes of clause (i), (ii), or 

10 (iii) of subparagraph (A), such term shall in11 clude any factory-built home. 

12 ‘‘(3) TIMING OF DETERMINATION.—For pur13 poses of paragraph (1), the determination of wheth14 er a residence is a qualified residence shall be made 

15 at the time a binding commitment for an allocation 

16 of credit is awarded by the homeownership credit 

17 agency; except that the determination of whether a 

18 purchaser is a qualified buyer shall be made at the 

19 time the residence is sold. 

20 ‘‘(4) MEDIAN GROSS INCOME.—For purposes of 

21 this section, median gross income shall be deter22 mined consistent with section 143(f)(2). 

23 ‘‘(d) ELIGIBLE BASIS.—For purposes of this sec24 tion— 

25 ‘‘(1) NEW QUALIFIED RESIDENCES.— 
143 

•S 2761 IS 

1 ‘‘(A) IN GENERAL.—The eligible basis of a 

2 new qualified residence is— 

3 ‘‘(i) in the case of a qualified resi4 dence which is sold in a transaction which 

5 meets the requirements of subparagraph 

6 (B), its adjusted basis (excluding land) im7 mediately before such sale, and 

8 ‘‘(ii) zero in any other case. 

9 ‘‘(B) REQUIREMENTS.—A sale of a quali10 fied residence meets the requirements of this 

11 subparagraph if— 

12 ‘‘(i) the buyer acquires the qualified 

13 residence by purchase (as defined in sec14 tion 179(d)(2)), 

15 ‘‘(ii) the buyer of the qualified resi16 dence is not a related person with respect 

17 to the seller, and 

18 ‘‘(iii) in the case of a seller who mate19 rially participates in the development of 

20 the residence, the buyer’s debt financing is 

21 originated by a third party who is not a re22 lated person with respect to the seller. 

23 ‘‘(2) EXISTING QUALIFIED RESIDENCES.— 

24 ‘‘(A) IN GENERAL.—The eligible basis of 

25 an existing qualified residence is— 
144 

•S 2761 IS 

1 ‘‘(i) in the case of a qualified resi2 dence which is sold in a transaction which 

3 meets the requirements of subparagraph 

4 (B), its adjusted basis (excluding land) im5 mediately before such sale, and 

6 ‘‘(ii) zero in any other case. 

7 ‘‘(B) REQUIREMENTS.—A sale of a quali8 fied residence meets the requirements of this 

9 subparagraph if— 

10 ‘‘(i) the buyer acquires the qualified 

11 residence by purchase (as defined in sec12 tion 179(d)(2)), 

13 ‘‘(ii) the qualified residence has un14 dergone substantial rehabilitation in con15 nection with the sale described in clause 

16 (i), 

17 ‘‘(iii) the buyer of the qualified resi18 dence is not a related person with respect 

19 to the seller, and 

20 ‘‘(iv) in the case of a seller who mate21 rially participates in the development of 

22 the residence, the buyer’s debt financing is 

23 originated by a third party who is not a re24 lated person with respect to the seller. 
145 

•S 2761 IS 

1 ‘‘(C) SUBSTANTIAL REHABILITATION.— 

2 For purposes of subparagraph (B), substantial 

3 rehabilitation means rehabilitation expenditures 

4 paid or incurred with respect to a qualified resi5 dence that are at least $25,000. 

6 ‘‘(D) LIMITATION OF ACQUISITION

7 BASIS.—The eligible basis of an existing quali8 fied residence may not exceed 150 percent of 

9 the qualified rehabilitation expenditures. 

10 ‘‘(3) EFFECT OF SUBSEQUENT SALE, ETC.—A 

11 subsequent sale, assignment, rental, or refinancing 

12 of the qualified residence by the buyer or the subse13 quent sale, assignment, or pooling of the buyer’s fi14 nancing by the originator shall not be considered in 

15 determining whether or not the prior sales trans16 action satisfied the requirements of subparagraph 

17 (B) of paragraph (1) or (2). 

18 ‘‘(4) SPECIAL RULES RELATING TO DETER19 MINATION OF ADJUSTED BASIS.—For purposes of 

20 this subsection— 

21 ‘‘(A) IN GENERAL.—Except as provided in 

22 subparagraph (B), the adjusted basis of any 

23 qualified residence— 

24 ‘‘(i) shall not include so much of the 

25 basis of such qualified residence as is de-
146 

•S 2761 IS 

1 termined by reference to the basis of other 

2 property held at any time by the person 

3 acquiring the residence, and 

4 ‘‘(ii) shall be determined without re5 gard to the adjusted basis of any property 

6 which is not part of such qualified resi7 dence. 

8 ‘‘(B) BASIS OF PROPERTY IN COMMON

9 AREAS, ETC., INCLUDED.—The adjusted basis 

10 of any qualified residence shall be determined 

11 by taking into account (on a pro rata basis) the 

12 adjusted basis of property (other than land) 

13 used in common areas or provided as com14 parable amenities to all residences within a 

15 project. 

16 ‘‘(5) SPECIAL RULES FOR DETERMINING ELIGI17 BLE BASIS.— 

18 ‘‘(A) RELATED PERSON, ETC.—For pur19 poses of this section, a person (in this clause re20 ferred to as the ‘related person’) is related to 

21 any person if the related person bears a rela22 tionship to such person specified in section 

23 267(b) or 707(b)(1), or the related person and 

24 such person are engaged in trades or businesses 

25 under common control (within the meaning of 
147 

•S 2761 IS 

1 subsections (a) and (b) of section 52). For pur2 poses of the preceding sentence, in applying 

3 section 267(b) or 707(b)(1), ‘10 percent’ shall 

4 be substituted for ‘50 percent’. 

5 ‘‘(B) NONRESIDENTIAL SPACE EX6 CLUDED.—No portion of the eligible basis of a 

7 qualified residence shall include costs attrib8 utable to nonresidential space. 

9 ‘‘(C) LIMITATION.—The eligible basis of 

10 any residence may not exceed the mortgage 

11 limit for Federal Housing Administration in12 sured mortgages for single family homes in the 

13 area in which such residence is located. 

14 ‘‘(e) DEFINITION AND SPECIAL RULES RELATING TO

15 CREDIT PERIOD.— 

16 ‘‘(1) CREDIT PERIOD DEFINED.—For purposes 

17 of this section, the term ‘credit period’ means, with 

18 respect to any qualified residence, the period of 5 

19 taxable years beginning with the taxable year in 

20 which the sale of the qualified residence occurs satis21 fying the requirements of subsection (d)(1)(B) or 

22 (d)(2)(B). 

23 ‘‘(2) SPECIAL RULE FOR 1ST YEAR OF CREDIT

24 PERIOD.— 
148 

•S 2761 IS 

1 ‘‘(A) IN GENERAL.—The credit allowable 

2 under subsection (a) with respect to any quali3 fied residence for the 1st taxable year of the 

4 credit period shall be determined by multiplying 

5 the eligible basis under subsection (d) by the 

6 fraction— 

7 ‘‘(i) the numerator of which is the 

8 sum of the number of remaining whole 

9 months in such 1st taxable year after the 

10 sale of the qualified residence, and 

11 ‘‘(ii) the denominator of which is 12. 

12 ‘‘(B) DISALLOWED 1ST YEAR CREDIT AL13 LOWED IN 6TH YEAR.—Any reduction by reason 

14 of subparagraph (A) in the credit allowable 

15 (without regard to subparagraph (A)) for the 

16 1st taxable year of the credit period shall be al17 lowable under subsection (a) for the 1st taxable 

18 year following the credit period. 

19 ‘‘(f) LIMITATION ON AGGREGATE CREDIT ALLOW20 ABLE WITH RESPECT TO QUALIFIED RESIDENCES LO21 CATED IN A STATE.— 

22 ‘‘(1) CREDIT MAY NOT EXCEED CREDIT DOLLAR

23 AMOUNT ALLOCATED TO QUALIFIED RESIDENCE.— 

24 ‘‘(A) IN GENERAL.—The amount of the 

25 credit determined under this section for any 
149 

•S 2761 IS 

1 taxable year with respect to any qualified resi2 dence shall not exceed the homeownership cred3 it dollar amount allocated to such qualified resi4 dence under this subsection. 

5 ‘‘(B) TIME FOR MAKING ALLOCATION.— 

6 ‘‘(i) An allocation shall be taken into 

7 account under subparagraph (A) only if it 

8 is made not later than the close of the cal9 endar year in which the qualified residence 

10 is sold. 

11 ‘‘(ii) A homeownership credit agency 

12 may allocate available homeownership cred13 it dollar amounts to a qualified residence 

14 prior to the year of sale of such qualified 

15 residence if— 

16 ‘‘(I) the taxpayer owns fee title 

17 or a leasehold interest of not less than 

18 50 years in the site of the qualified 

19 residence as of the later of the date 

20 which is 6 months after the date that 

21 the allocation was made or the close 

22 of the calendar year in which the allo23 cation is made, and 

24 ‘‘(II) such qualified residence is 

25 completed not later than the close of 
150 

•S 2761 IS 

1 the second calendar year following the 

2 calendar year in which the allocation 

3 was made. 

4 ‘‘(C) VESTED RIGHT TO CREDIT DOLLAR

5 AMOUNT.—Once a homeownership credit alloca6 tion is received by a taxpayer, the right to such 

7 credit is vested in such taxpayer and is not sub8 ject to recapture, except as provided in para9 graph (5)(B). 

10 ‘‘(2) HOMEOWNERSHIP CREDIT DOLLAR

11 AMOUNT FOR AGENCIES.— 

12 ‘‘(A) IN GENERAL.—The aggregate home13 ownership credit dollar amount which a home14 ownership credit agency may allocate for any 

15 calendar year is the portion of the State home16 ownership credit ceiling allocated under this 

17 paragraph for such calendar year to such agen18 cy. 

19 ‘‘(B) STATE CEILING INITIALLY ALLO20 CATED TO STATE HOMEOWNERSHIP CREDIT

21 AGENCIES.—Except as provided in subpara22 graphs (D) and (E), the State homeownership 

23 credit ceiling for each calendar year shall be al24 located to the homeownership credit agency of 

25 such State. If there is more than 1 homeowner-
151 

•S 2761 IS 

1 ship credit agency of a State, all such agencies 

2 shall be treated as a single agency. 

3 ‘‘(C) STATE HOMEOWNERSHIP CREDIT

4 CEILING.—The State homeownership credit ceil5 ing applicable to any State for any calendar 

6 year shall be an amount equal to the sum of— 

7 ‘‘(i) the unused State homeownership 

8 credit ceiling (if any) of such State for the 

9 preceding calendar year, 

10 ‘‘(ii) the greater of— 

11 ‘‘(I) $.50 multiplied by the State 

12 population, or 

13 ‘‘(II) $2,000,000, 

14 ‘‘(iii) the amount of State homeowner15 ship credit ceiling returned in the calendar 

16 year, plus 

17 ‘‘(iv) the amount (if any) allocated 

18 under subparagraph (D) to such State by 

19 the Secretary. 

20 For purposes of clause (i), the unused State 

21 homeownership credit ceiling for any calendar 

22 year is the excess (if any) of the sum of the 

23 amounts described in clauses (ii) through (iv) 

24 over the aggregate homeownership credit dollar 

25 amount allocated for such year. For purposes of 
152 

•S 2761 IS 

1 clause (iii), the amount of State homeownership 

2 credit ceiling returned in the calendar year 

3 equals the homeownership credit dollar amount 

4 previously allocated within the State to any 

5 qualified residence with respect to which an al6 location is canceled by mutual consent of the 

7 homeownership credit agency and the allocation 

8 recipient. 

9 ‘‘(D) UNUSED HOMEOWNERSHIP CREDIT

10 CARRYOVERS ALLOCATED AMONG CERTAIN

11 STATES.— 

12 ‘‘(i) IN GENERAL.—The unused home13 ownership credit carryover of a State for 

14 any calendar year shall be assigned to the 

15 Secretary for allocation among qualified 

16 States for the succeeding calendar year. 

17 ‘‘(ii) UNUSED HOMEOWNERSHIP

18 CREDIT CARRYOVER.—For purposes of this 

19 subparagraph, the unused homeownership 

20 credit carryover of a State for any calendar 

21 year is the excess (if any) of— 

22 ‘‘(I) the unused State home23 ownership credit ceiling for the year 

24 preceding such year, over 
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•S 2761 IS 

1 ‘‘(II) the aggregate homeowner2 ship credit dollar amount allocated for 

3 such year. 

4 ‘‘(iii) FORMULA FOR ALLOCATION OF

5 UNUSED HOMEOWNERSHIP CREDIT

6 CARRYOVERS AMONG QUALIFIED

7 STATES.—The amount allocated under this 

8 subparagraph to a qualified State for any 

9 calendar year shall be the amount deter10 mined by the Secretary to bear the same 

11 ratio to the aggregate unused homeowner12 ship credit carryovers of all States for the 

13 preceding calendar year as such State’s 

14 population for the calendar year bears to 

15 the population of all qualified States for 

16 the calendar year. 

17 ‘‘(iv) QUALIFIED STATE.—For pur18 poses of this subparagraph, the term 

19 ‘qualified State’ means, with respect to a 

20 calendar year, any State— 

21 ‘‘(I) which allocated its entire 

22 State homeownership credit ceiling for 

23 the preceding calendar year, and 

24 ‘‘(II) for which a request is made 

25 (not later than May 1 of the calendar 
154 

•S 2761 IS 

1 year) to receive an allocation under 

2 clause (iii). 

3 ‘‘(E) STATE MAY PROVIDE FOR DIF4 FERENT ALLOCATION.—Rules similar to the 

5 rules of section 146(e) (other than paragraph 

6 (2)(B) thereof) shall apply for purposes of this 

7 paragraph. 

8 ‘‘(F) POPULATION.—For purposes of this 

9 paragraph, population shall be determined in 

10 accordance with section 146(j). 

11 ‘‘(3) PORTION OF STATE CEILING SET-ASIDE

12 FOR CERTAIN PROJECTS INVOLVING QUALIFIED

13 NONPROFIT ORGANIZATIONS.— 

14 ‘‘(A) IN GENERAL.—Not more than 92.5 

15 percent of the State homeownership credit ceil16 ing for any State for any calendar year shall be 

17 allocated to projects other than qualified non18 profit housing projects described in subpara19 graph (B). 

20 ‘‘(B) PROJECTS INVOLVING QUALIFIED

21 NONPROFIT ORGANIZATIONS.—For purposes of 

22 subparagraph (A), a qualified nonprofit housing 

23 project is described in this subparagraph if a 

24 qualified nonprofit organization is to own an in25 terest in the project (directly or through a part-
155 

•S 2761 IS 

1 nership) and materially participate (within the 

2 meaning of section 469(h)) in the development 

3 and operation of the project throughout the 

4 credit period. 

5 ‘‘(C) QUALIFIED NONPROFIT ORGANIZA6 TION.—For purposes of this paragraph, the 

7 term ‘qualified nonprofit organization’ means 

8 any organization if— 

9 ‘‘(i) such organization is described in 

10 paragraph (3) or (4) of section 501(c) and 

11 is exempt from tax under section 501(a), 

12 ‘‘(ii) such organization is determined 

13 by the State homeownership credit agency 

14 not to be affiliated with or controlled by a 

15 for-profit organization, and 

16 ‘‘(iii) 1 of the exempt purposes of 

17 such organization includes the fostering of 

18 low-income housing. 

19 ‘‘(D) TREATMENT OF CERTAIN SUBSIDI20 ARIES.— 

21 ‘‘(i) IN GENERAL.—For purposes of 

22 this paragraph, a qualified nonprofit orga23 nization shall be treated as satisfying the 

24 ownership and material participation test 

25 of subparagraph (B) if any qualified cor-
156 

•S 2761 IS 

1 poration in which such organization holds 

2 stock satisfies such test. 

3 ‘‘(ii) QUALIFIED CORPORATION.—For 

4 purposes of clause (i), the term ‘qualified 

5 corporation’ means any corporation if 100 

6 percent of the stock of such corporation is 

7 held by 1 or more qualified nonprofit orga8 nizations at all times during the period 

9 such corporation is in existence. 

10 ‘‘(E) STATE MAY NOT OVERRIDE SET11 ASIDE.—Nothing in subparagraph (E) of para12 graph (2) shall be construed to permit a State 

13 not to comply with subparagraph (A) of this 

14 paragraph. 

15 ‘‘(4) LIMITATION ON ALLOCATIONS TO AREAS

16 OF CHRONIC ECONOMIC DISTRESS.—No more than 

17 50 percent of a homeownership credit agency’s por18 tion of the State homeownership credit ceiling for a 

19 calendar year may be allocated to residences located 

20 in areas that— 

21 ‘‘(A) are designated as areas of chronic 

22 economic distress in accordance with paragraph 

23 (1) of subsection (c), and 

24 ‘‘(B) do not meet the requirements of 

25 clause (i), (ii), or (iii) of subsection (c)(1)(A). 
157 

•S 2761 IS 

1 ‘‘(5) SPECIAL RULES.— 

2 ‘‘(A) RESIDENCE MUST BE LOCATED

3 WITHIN JURISDICTION OF CREDIT AGENCY.—A 

4 homeownership credit agency may allocate its 

5 aggregate homeownership credit dollar amount 

6 only to qualified residences located in the juris7 diction of the governmental unit of which such 

8 agency is a part. 

9 ‘‘(B) AGENCY ALLOCATIONS IN EXCESS OF

10 LIMIT.—If the aggregate homeownership credit 

11 dollar amounts allocated by a homeownership 

12 credit agency for any calendar year exceed the 

13 portion of the State homeownership credit ceil14 ing allocated to such agency for such calendar 

15 year, the homeownership credit dollar amounts 

16 so allocated shall be reduced (to the extent of 

17 such excess) for residences in the reverse of the 

18 order in which the allocations of such amounts 

19 were made. 

20 ‘‘(g) DEFINITIONS AND SPECIAL RULES.—For pur21 poses of this section— 

22 ‘‘(1) COMPLETED.—The term ‘completed’ 

23 means the point in time where a qualified residence 

24 is first placed in a condition or state of readiness 

25 and availability for occupancy. 
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•S 2761 IS 

1 ‘‘(2) PROJECT.—The term ‘project’ means 1 or 

2 more residences together with functionally related 

3 and subordinate facilities developed and made avail4 able to inhabitants of such residences, including rec5 reational facilities and parking areas. To constitute 

6 a project, each residence must— 

7 ‘‘(A) be developed by the same taxpayer 

8 pursuant to common planning and feasibility 

9 studies, 

10 ‘‘(B) be financed through a common plan 

11 of construction financing, and 

12 ‘‘(C) have common ownership prior to sale. 

13 For purposes of this paragraph, it is not necessary 

14 that all residences within a project be contiguous or 

15 that all residences consist only of either new resi16 dences or existing residences and it is not necessary 

17 that each residence within a project be a qualified 

18 residence. 

19 ‘‘(3) QUALIFIED BUYER.— 

20 ‘‘(A) IN GENERAL.—The term ‘qualified 

21 buyer’ means a buyer if at the time of the ac22 quisition of the qualified residence, the buyer— 

23 ‘‘(i) is 1 or more individuals whose in24 come does not exceed 80 percent of the 
159 

•S 2761 IS 

1 area median gross income (70 percent for 

2 families of less than 3 members), and 

3 ‘‘(ii) intends to occupy the residence 

4 as the buyer’s principal residence (within 

5 the meaning of section 121). 

6 ‘‘(B) SPECIAL RULES IN QUALIFIED CEN7 SUS TRACTS.—With respect to residences lo8 cated in qualified census tracts (as defined in 

9 section 42), subparagraph (A) shall be applied 

10 by substituting ‘100 percent’ for ‘80 percent’ 

11 and ‘90 percent’ for ‘70 percent’. 

12 ‘‘(C) DETERMINATION OF INCOME.—For 

13 purposes of this paragraph, a buyer’s income 

14 shall be determined in accordance with section 

15 143(f)(4), except that subparagraph (B) of 

16 such section shall be applied substituting ‘the 

17 national median gross income’ for ‘the state18 wide median gross income for the State in 

19 which such residence is located’. 

20 ‘‘(4) NEW QUALIFIED RESIDENCE.—The term 

21 ‘new qualified residence’ means a qualified residence 

22 the original ownership of which begins with the tax23 payer. 
160 

•S 2761 IS 

1 ‘‘(5) EXISTING QUALIFIED RESIDENCE.—The 

2 term ‘existing qualified residence’ means any quali3 fied residence which is not a new qualified residence. 

4 ‘‘(6) HOMEOWNERSHIP CREDIT AGENCY.—The 

5 term ‘homeownership credit agency’ means any 

6 agency authorized to carry out this section. 

7 ‘‘(7) POSSESSIONS TREATED AS STATES.—The 

8 term ‘State’ includes the District of Columbia and a 

9 possession of the United States. 

10 ‘‘(8) APPLICATION TO ESTATES AND TRUSTS.— 

11 In the case of an estate or trust, the amount of the 

12 credit determined under subsection (a) shall be ap13 portioned between the estate or trust and the bene14 ficiaries on the basis of the income of the estate or 

15 trust allocable to each. 

16 ‘‘(h) REDUCTION IN TAX BENEFITS.— 

17 ‘‘(1) RECAPTURE OF CREDIT.—If within the 5- 

18 year period beginning on the date of the original 

19 purchase of a qualified residence, the residence is 

20 sold, the qualified buyer— 

21 ‘‘(A) shall deduct and withhold an amount 

22 equal to the recapture amount from the amount 

23 realized on such sale, and 

24 ‘‘(B) shall transfer such amount to the 

25 homeownership credit agency which allocated 
161 

•S 2761 IS 

1 the homeownership credit dollar amount to such 

2 residence. 

3 ‘‘(2) RECAPTURE AMOUNT.—For purposes of 

4 paragraph (1), the recapture amount is the amount 

5 equal to— 

6 ‘‘(A) 100 percent of the gain from the sale 

7 referred to in paragraph (1) in the 1st or 2nd 

8 year, 

9 ‘‘(B) 80 percent of the gain from such sale 

10 in the 3rd year, 

11 ‘‘(C) 70 percent of the gain from such sale 

12 in the 4th year, or 

13 ‘‘(D) 60 percent of the gain from such sale 

14 in the 5th year. 

15 ‘‘(3) DENIAL OF DEDUCTIONS IF CONVERTED

16 TO RENTAL HOUSING.—If a qualified residence is 

17 converted to rental housing within the 5-year period 

18 beginning on the date of the original purchase of a 

19 qualified residence, no deduction for amortization or 

20 depreciation under this chapter shall be permitted 

21 with respect to such residence during such period. 

22 ‘‘(i) APPLICATION OF AT-RISK RULES.—For pur23 poses of this section, rules of section 465 shall not apply 

24 in determining the eligible basis of any qualified residence. 

25 ‘‘(j) REPORTS TO THE SECRETARY.— 
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•S 2761 IS 

1 ‘‘(1) FROM THE TAXPAYER.—The Secretary 

2 may require taxpayers to submit an information re3 turn (at such time and in such form and manner as 

4 the Secretary prescribes) for each taxable year set5 ting forth— 

6 ‘‘(A) the eligible basis for the taxable year 

7 of each qualified residence with respect to which 

8 the taxpayer is claiming a credit under this sec9 tion, 

10 ‘‘(B) the amount of all homeownership 

11 credit allocations received by the taxpayer from 

12 any and all State homeownership credit agen13 cies, and 

14 ‘‘(C) such other information as the Sec15 retary may require. 

16 The penalty under section 6652(j) shall apply to any 

17 failure to submit the return required by the Sec18 retary under the preceding sentence on the date pre19 scribed therefor. 

20 ‘‘(2) FROM HOMEOWNERSHIP CREDIT AGEN21 CIES.—Each agency which allocates any homeowner22 ship credit dollar amount to any residence for any 

23 calendar year shall submit to the Secretary (at such 

24 time and in such form and manner as the Secretary 

25 shall prescribe) an annual report specifying— 
163 

•S 2761 IS 

1 ‘‘(A) the amount of the homeownership 

2 credit dollar amount allocated to each residence 

3 for such year, 

4 ‘‘(B) sufficient information to identify each 

5 such residence and the taxpayer initially enti6 tled to claim the credit under this section with 

7 respect thereto, and 

8 ‘‘(C) such other information as the Sec9 retary may require. 

10 ‘‘(k) RESPONSIBILITIES OF HOMEOWNERSHIP CRED11 IT AGENCIES.— 

12 ‘‘(1) PLANS FOR ALLOCATION OF CREDIT

13 AMONG RESIDENCES.— 

14 ‘‘(A) IN GENERAL.—Notwithstanding any 

15 other provision of this section, the homeowner16 ship credit dollar amount with respect to any 

17 qualified residence shall be zero unless such 

18 amount was allocated pursuant to a qualified 

19 allocation plan of the homeownership credit 

20 agency which is approved by the governmental 

21 unit (in accordance with rules similar to the 

22 rules of section 147(f)(2) (other than subpara23 graph (B)(ii) thereof)) of which such agency is 

24 a part. 
164 

•S 2761 IS 

1 ‘‘(B) QUALIFIED ALLOCATION PLAN.—For 

2 purposes of this paragraph, the term ‘qualified 

3 allocation plan’ means any plan which sets forth 

4 selection criteria to be used to determine the 

5 homeownership development priorities of the 

6 homeownership credit agency which are appro7 priate to local conditions. 

8 ‘‘(C) CERTAIN HOMEOWNERSHIP DEVEL9 OPMENT CRITERIA MUST BE USED.—The devel10 opment criteria set forth in a qualified alloca11 tion plan must include— 

12 ‘‘(i) contribution of the development 

13 to community stability and revitalization, 

14 ‘‘(ii) community and local government 

15 support for the development, 

16 ‘‘(iii) need for homeownership develop17 ment within the area, 

18 ‘‘(iv) sponsor capability, and 

19 ‘‘(v) long-term sustainability of the 

20 project as owner-occupied residences. 

21 ‘‘(2) CREDIT ALLOCATED TO RESIDENCE NOT

22 TO EXCEED AMOUNT NECESSARY TO ASSURE FEASI23 BILITY.— 

24 ‘‘(A) IN GENERAL.—The homeownership 

25 credit dollar amount allocated to a residence 
165 

•S 2761 IS 

1 shall not exceed the amount the homeownership 

2 credit agency determines is necessary for the 

3 feasibility of the residence. 

4 ‘‘(B) AGENCY EVALUATION.—In making 

5 the determination under subparagraph (A), the 

6 homeownership credit agency shall consider— 

7 ‘‘(i) the sources and uses of funds and 

8 the total financing planned for the resi9 dence, 

10 ‘‘(ii) any proceeds or receipts expected 

11 to be generated by reason of tax benefits, 

12 ‘‘(iii) the anticipated appraised value 

13 of the residence, 

14 ‘‘(iv) the reasonableness of the devel15 opmental costs of the residence, 

16 ‘‘(v) the affordability to a reasonable 

17 range of prospective qualified buyers, and 

18 ‘‘(vi) whether the residence addresses 

19 the need for affordable homes for families 

20 with children. 

21 ‘‘(C) DETERMINATION MADE WHEN CRED22 IT DOLLAR AMOUNT APPLIED FOR.—A deter23 mination under subparagraph (A) shall be made 

24 as of each of the following times: 
166 

•S 2761 IS 

1 ‘‘(i) The application for the home2 ownership credit dollar amount. 

3 ‘‘(ii) The allocation of the homeowner4 ship credit dollar amount. 

5 ‘‘(3) LIEN FOR RECAPTURE AMOUNT.—A home6 ownership credit dollar amount may be allocated by 

7 a homeownership credit agency to a residence only 

8 if such agency has a lien on such residence for the 

9 payment of any amount potentially required to be 

10 paid under subsection (h) to such agency. 

11 ‘‘(l) REGULATIONS.—The Secretary shall prescribe 

12 such regulations as may be necessary or appropriate to 

13 carry out the purposes of this section, including regula14 tions— 

15 ‘‘(1) dealing with— 

16 ‘‘(A) projects which include more than 1 

17 residence or only a portion of a residence, and 

18 ‘‘(B) buildings which are completed in por19 tions, 

20 ‘‘(2) providing for the application of this section 

21 to short taxable years, 

22 ‘‘(3) preventing the avoidance of the rules of 

23 this section, and 

24 ‘‘(4) providing the opportunity for homeowner25 ship credit agencies to correct administrative errors 
167 

•S 2761 IS 

1 and omissions with respect to allocations and record 

2 keeping within a reasonable period after their dis3 covery, taking into account the availability of regula4 tions and other administrative guidance from the 

5 Secretary.’’. 

6 (b) CURRENT YEAR BUSINESS CREDIT CALCULA7 TION.—Section 38(b) (relating to current year business 

8 credit), as amended by this Act, is amended by striking 

9 ‘‘plus’’ at the end of paragraph (17), by striking the period 

10 at the end of paragraph (18) and inserting ‘‘, plus’’, and 

11 by adding at the end the following: 

12 ‘‘(19) the homeownership credit determined 

13 under section 42C(a),’’. 

14 (c) LIMITATION ON CARRYBACK.—Subsection (d) of 

15 section 39 (relating to carryback and carryforward of un16 used credits), as amended by this Act, is amended by add17 ing at the end the following: 

18 ‘‘(14) NO CARRYBACK OF HOMEOWNERSHIP

19 CREDIT BEFORE EFFECTIVE DATE.—No amount of 

20 unused business credit available under section 42C 

21 may be carried back to a taxable year beginning on 

22 or before the effective date of such section.’’. 

23 (d) CONFORMING AMENDMENTS.— 
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•S 2761 IS 

1 (1) Section 55(c)(1) is amended by inserting 

2 ‘‘or subsection (h) or (i) of section 42C’’ after ‘‘sec3 tion 42A’’. 

4 (2) Subsections (i)(3)(D), (i)(6)(B)(i), and 

5 (k)(1) of section 469 are each amended by inserting 

6 ‘‘or 42C’’ after ‘‘section 42A’’. 

7 (3) Section 772(a) is amended by striking 

8 ‘‘and’’ at the end of paragraph (11), by redesig9 nating paragraph (12) as paragraph (13), and by in10 serting after paragraph (11) the following: 

11 ‘‘(12) the homeownership credit determined 

12 under section 42C, and’’. 

13 (4) Section 774(b)(4) is amended by inserting 

14 ‘‘, 42C(h),’’ after ‘‘section 42A(i)’’. 

15 (e) CLERICAL AMENDMENT.—The table of sections 

16 for subpart D of part IV of subchapter A of chapter 1, 

17 as amended by this section, is amended by inserting after 

18 the item relating to section 42B the following: 

‘‘Sec. 42C. Community homeownership credit.’’. 

19 (f) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to qualified residences sold in tax21 able years beginning after December 31, 2004, and before 

22 January 1, 2006. 

Æ