Offer-in-compromise: An IRS settlement officer's determination to reject a taxpayer's offer-in-compromise and proceed with collection of her unpaid tax liabilities was not an abuse of discretion. The taxpayer had a history of not timely filing returns or paying her federal taxes. The requirement that the taxpayer be in compliance with these requirements before an offer-in-compromise would be accepted was not an abuse of discretion. Section 7122(a) authorizes compromise of a taxpayer's Federal income tax liability. "The decision to entertain, accept or reject an offer in compromise is squarely within the discretion of the appeals officer and the IRS in general." Kindred v. Commissioner, 454 F.3d 688, 696 (7th Cir. 2006).

Jeaneatte M. Gregg v. Commissioner.

Dkt. No. 11005-07L , 11006-07L , 11007-07L , TC Memo. 2009-19, January 29, 2009.

[Appealable, barring stipulation to the contrary, to CA-7. --CCH.]

[ Code Sec. 7122]




Robert E. McKenzie, for petitioner; Karen Lynne Baker, for respondent.


MEMORANDUM OPINION

JACOBS, Judge: In these consolidated cases petitioner seeks review of respondent's determination to proceed with actions taken (the filing of tax liens) and actions proposed to be taken (intent to levy) to collect petitioner's unpaid income taxes for 1998 to 2004. The cases were submitted fully stipulated pursuant to Rule 122. The issues for decision are whether respondent abused his discretion: (1) In rejecting petitioner's offer-in-compromise to satisfy her unpaid tax liabilities, and (2) in sustaining the filing of tax liens and proposed levy on petitioner's assets.

All Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code.


Background

The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time she filed her petitions, petitioner resided in Illinois.

Petitioner has a history of either filing her income tax returns late or failing to file her returns, and either making tax payments late or failing to make any payments.



Year Filing of Return Payment of Tax

1993 Timely Late

1994 Timely Late

1995 Not filed Never paid

1996 Not filed Never paid

1997 Not filed Never paid

Return completed by
1998 IRS Never paid

Return completed by
1999 IRS Never paid

Return completed by
2000 IRS Never paid

Return completed by
2001 IRS Never paid

2002 Late Never paid

2003 Late Never paid

2004 Late Never paid


Petitioner is current on her Federal income tax filing and payment requirements for 2005, 2006, and 2007.

Respondent prepared returns pursuant to section 6020(b) for petitioner for 1998, 1999, 2000, and 2001. On the basis of those returns, respondent issued notices of deficiencies to petitioner. Thereafter, petitioner petitioned this Court challenging respondent's determinations. The parties subsequently resolved their differences, and on March 25, 2005, the Court entered four separate decisions reflecting the parties' agreement. On May 2, 2005, respondent made the following assessments against petitioner, which were based on the Court's decisions:



Year Deficiency

1998 $11,470

1999 14,881

2000 19,367

2001 42,214


On May 12, 2005, petitioner filed her 2002 and 2004 Federal income tax returns. She did not pay the tax reported thereon. On June 6, 2005, on the basis of amounts reported on these returns, respondent made the following assessments against petitioner:



Additions to Tax

Year Tax Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654

2002 $31,616 $5,959.35 $3,443.18 $866.04

2004 46,245 1,396.35 310.30 -0-


Petitioner filed her Federal income tax return for 2003 on May 13, 2005, but did not pay the tax reported thereon. On the basis of the amount reported on this return, respondent made the following assessment against petitioner on June 13, 2005:



Additions to Tax

Year Tax Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654

2003 $24,480 $5,508 $1,713.60 $631.63


On November 10, 2005, respondent sent petitioner a Letter 3172, Notice of Federal Tax Lien Filing and Right to a Hearing under IRC 6320, for her unpaid Federal taxes for 1998, 1999, 2000, and 2001. In response, on December 9, 2005, petitioner requested a collection due process hearing ( section 6330 hearing).

On December 15, 2005, respondent sent petitioner a Letter 3172 for her unpaid Federal taxes for 2002, 2003, and 2004. In response, on January 13, 2006, petitioner requested a section 6330 hearing.

On January 9, 2006, respondent sent petitioner a Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, for her unpaid Federal taxes for 1998, 1999, 2000, 2001, 2002, 2003, and 2004. In response, on February 2, 2006, petitioner requested a section 6330 hearing.

On July 13, 2006, petitioner submitted a Form 656, Offer in Compromise, and a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with attachments, offering to pay $60,000 in satisfaction of unpaid 1998-2004 taxes totaling $205,652 as of February 8, 2006. The offer was made on the bases of: (1) Doubt as to collectibility and (2) effective tax administration. Attached to Form 656 was an explanation of petitioner's circumstances, which stated:

Jeanette Gregg is a 57-year old woman. She is retired, but has secured her real estate license, and has begun to sell real estate to supplement her retirement income. She has one child, a 33-year old daughter who has been diagnosed with kidney failure.

Since the discovery of her child's illness, the taxpayer has become very involved in her care and treatment. The taxpayer's daughter did receive a kidney transplant in February, 2005. The taxpayer has been involved in all follow-up care and treatment in connection with the transplant.

Additionally, the taxpayer has been diagnosed with Spinal Stenosis. She is in physical therapy for this condition. She underwent back surgery on April 4, 2005, which has effected [sic] her mobility. She also suffers from high blood pressure and diabetes, and is on medication for these conditions.

In connection with her work in real estate, consideration must be given to the imminent slow-down in real estate sales. Increased interest rates and a slowing economy are contributing factors, and it remains uncertain as to how long the taxpayer will generate any income in this area, even if healthy.

On Form 433-A, section 9, petitioner reported that her monthly income was $7,324 ($3,000 business income plus $4,324 from pensions) and her monthly living expenses were $7,149.

Petitioner's hearing requests and the review of her offer-in-compromise were assigned to Appeals Settlement Officer Ivan Porrata (the settlement officer). By letter dated December 4, 2006, the settlement officer proposed to have a telephone conference on December 28, 2006, to discuss the reasons petitioner disagreed with respondent's proposed collection activities and/or to discuss alternatives to such actions. The settlement officer informed petitioner that in order for petitioner's offer to be considered, she would have to file her Federal income tax returns for 1995, 1996, and 1997. On December 20, 2006, petitioner's counsel sent the settlement officer a letter together with copies of two sections of the Internal Revenue Manual (IRM), consisting of IRM pt. 5.1.11.6.1 and IRM pt. 5.9.13.19, which counsel maintained was "the IRS policy that pursuit of unfiled returns is generally limited to six years."

During the December 28, 2006, conference, 1 petitioner's counsel posited that pursuant to Internal Revenue Service (IRS) policy, petitioner's offer-in-compromise should be considered notwithstanding petitioner's failure to file tax returns for 1995, 1996, and 1997. The settlement officer and petitioner's counsel discussed the following sections from the IRM:

IRM 5.8.3.4.1 --Determining Processability (9-1-2005)

(1) An offer in compromise will be deemed not processable if one or more of the following criteria are present:

(a.) Taxpayer Not in Compliance --All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Service employee previously decided not to pursue the filing of the return under the provisions of Policy Statement P-5-133, because it was believed to have "little or no tax due" * * *.

Note: Generally speaking, IRM 5.1.11.1.3(2), Delinquent Return Program, only requires employees to conduct a compliance check to confirm and document all IMF tax returns were filed for the preceding 6-year period. The only exception would be if fraud were discovered during the course of the investigation. Even then it should be extremely rare to go beyond 6 years.

IRM 5.1.11.4, Cases Requiring Special Handling, discusses enforcement criteria, which states that if the taxpayer refuses to file, neglects to file, or indicates an inability to file, then the employees should determine to what extent enforcement should be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a 6-year period, which is calculated by starting with the tax year that is currently due and going back 6 years.

IRM 5.1.11.6.1 --Enforcement Determination (05-07-2002)

(1) The determination to pursue or not pursue a return will depend upon the facts of each case. Review Policy Statement P-5-133 (see IRM 1.2.1.5.19) for general guidelines and factors to consider when determining whether to pursue enforcement of filing requirements and secure a return.

(2) The specific factors that must be considered when making an enforcement determination are:

(a.) Degree of flagrancy;

(b.) History of noncompliance;

(c.) Impact on future voluntary compliance;

(d.) Whether the delinquency involves trust fund monies collected;

(e.) Special circumstances peculiar to a specific taxpayer, class, industry or type of tax;

(f.) Existence of income from illegal sources;

(g.) Minimal or no Tax due (See LEM 5.2.4);

(h.) Cost to the service to secure a return with respect to anticipated tax revenue;

(i.) Bankruptcy; (contact Insolvency).

(3) Enforcement of filing requirements will normally be pursued for a six year period. Always request all (non-fraudulent) unfiled returns. The taxpayer may file for all open periods regardless of the age of the delinquency. [Emphasis added.]

They also discussed Policy Statement 5-133, which is included in IRM pt. 1.2.14.1.18.

IRM 1.2.14.1.18 --Policy Statement 5-133 (08-04-2006)

(1) Delinquent returns --enforcement of filing requirements

(2) Taxpayers failing to file tax returns due will be requested to prepare and file all such returns except in instances where there is an indication that the taxpayer's failure to file the required return or returns was willful or if there is any other indication of fraud. * * *

(3) Where it is determined that required returns have not been filed, the extent to which compliance for prior years will be enforced will be determined by reference to factors ensuring compliance and evenhanded administration of staffing and other Service resources.

(4) Factors to be taken into account include, but are not limited to: prior history of noncompliance, existence of income from illegal sources, effect upon voluntary compliance, anticipated revenue, and collectibility, in relation to the time and effort required to determine tax due. Consideration will also be given any special circumstances existing in the case of a particular taxpayer, class of taxpayer, or industry, or which may be peculiar to the class of tax involved. * * *

(5) Normally, the application of the above criteria will result in enforcement of delinquency procedures for not more than six (6) years. Enforcement beyond such period will not be undertaken without prior managerial approval.

The settlement officer disagreed with the position of petitioner's counsel that IRM pt. 5.8.3.4.1 limited the pursuit of a taxpayer's tax filings to those income tax returns for the 6-year period preceding petitioner's current tax year. The settlement officer maintained that: (1) IRM pt. 5.1.11.6.1(1) provides that the determination to pursue or not pursue the filing of a return depends on the facts of each case, and (2) IRM pt. 5.1.11.6.1(2) provides a list of factors that must be considered, including degree of flagrancy of noncompliance, history of noncompliance, and impact on future voluntary compliance, all of which directly apply to petitioner. The settlement officer believed that because petitioner had taxable income in years both before (i.e., 1993 and 1994) and after (i.e., 1998-2004) the years relating to the unfiled tax returns (i.e., 1995-97), it was likely that a tax balance existed for 1995, 1996, and 1997.

Petitioner's counsel disagreed with the settlement officer's conclusions but stated that petitioner would endeavor to file the three delinquent returns. Counsel noted that petitioner was retired and might have difficulty getting the financial information necessary to file her 1995-97 returns.

By letter dated March 1, 2007, the settlement officer requested additional financial documentation from petitioner. By letter dated March 22, 2007, petitioner's counsel provided the requested documents. That letter informed the settlement officer that petitioner had attempted to secure information to prepare the 1995-97 returns, but that the information was not available.

On March 23, 2007, the settlement officer informed petitioner that her offer-in-compromise would be rejected because of her noncompliance with filing requirements. 2 However, the settlement officer offered petitioner a proposed partial payment installment agreement that was based on the financial information petitioner provided. Petitioner would be required to make monthly payments of $788 until January 2008, followed by monthly payments of $1,800 from February 2008 to June 2009 and monthly payments of $2,100 thereafter. By letter dated March 28, 2007, petitioner's counsel informed the settlement officer that petitioner would not accept the proposed partial payment installment agreement.

On April 20, 2007, respondent sent petitioner three separate Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 regarding liens and proposed levies for 1998, 1999, 2000, 2001, 2002, 2003, and 2004. In each of the notices respondent rejected petitioner's offer-in-compromise because of petitioner's noncompliance with filing requirements. Each notice noted that petitioner had rejected respondent's offer of a proposed partial payment installment agreement.

On May 18, 2007, petitioner filed three petitions requesting the Court to review respondent's collection determinations.


Discussion




A. Standard of Review
These cases involve a review of respondent's determination to proceed with collection of petitioner's unpaid tax liabilities for 1998 to 2004. Administrative hearings under section 6320 (dealing with liens) and section 6330 (dealing with levies) are conducted in accordance with section 6330(c). 3 After the Commissioner issues his notice of determination following an administrative hearing, a taxpayer has the right to petition this Court for judicial review of the determination. Secs. 6320(c), 6330(d)(1). Our review of the determination is subject to the provisions of section 6330.

The judicial review that we are required to conduct in section 6320/6330 cases focuses on the determination made by the Commissioner. Unless the underlying tax liability of the taxpayer that is the subject of the proceeding is properly at issue, we review the Commissioner's determination for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176 (2000)

Petitioner's deficiencies for 1998, 1999, 2000, and 2001 were decided by this Court. We therefore review respondent's determinations for these years for abuse of discretion. Petitioner's deficiencies for 2002, 2003, and 2004 were not subject to deficiency proceedings, either administratively before respondent or before this Court. However, petitioner does not dispute the validity of the underlying tax liability for any of those years. Accordingly, we review respondent's determinations for these years for abuse of discretion.

An abuse of discretion is defined as any action that is unreasonable, arbitrary or capricious, clearly unlawful, or lacking sound basis in fact or law. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-533 (1979); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).



B. The Offer-in-Compromise
Section 7122(a) authorizes compromise of a taxpayer's Federal income tax liability. "The decision to entertain, accept or reject an offer in compromise is squarely within the discretion of the appeals officer and the IRS in general." Kindred v. Commissioner, 454 F.3d 688, 696 (7th Cir. 2006). It is in this light that we review respondent's rejection of petitioner's offer-in-compromise. We do not decide whether in our opinion petitioner's offer-in-compromise should have been accepted. See Woodral v. Commissioner, supra at 23; Keller v. Commissioner, T.C. Memo. 2006-166.

Each of respondent's notices of determination, all dated April 20, 2007, states:

The taxpayer submitted an Offer in Compromise on July 12, 2006 under Doubt as to Collectibility and Effective Tax Administration. The taxpayer is not compliant with filing requirements. The taxpayer has not filed returns for years ended December 31, 1997, December 31, 1996 and December 31, 1995. In a letter dated December 4, 2006; Mr. Porrata requested the filing of these returns as part of the compliance requirement for the Offer in Compromise investigation. On December 19, 2006, Ms. Lach [petitioner's counsel] called Mr. Porrata of Appeals and stated there was an IRS policy which limits the filing of delinquent returns to 6 years. During the telephone conference held on December 28, 2006, the issue was addressed; several IRM sections and Policy statements were discussed. Mr. Porrata maintained that the sections cited by Ms. Lach referred to the service's enforcement procedure in securing delinquent returns. Mr. Porrata informed Ms. Lach that per IRM section 5.8.4.1(1) which addresses the Offer in Compromise program states that all returns for which the taxpayer has a filing requirement must be filed. Ms. Lach conceded that the taxpayer had tax liabilities prior to and subsequent to the delinquent periods and would likely have liabilities for the delinquent periods but, she disagreed that the returns must be filed; hence, the Offer in Compromise was rejected.

Petitioner argues that the settlement officer's demand that she file her delinquent income tax returns for 1995, 1996, and 1997 before he would consider her offer-in-compromise violated IRS policy as stated in the IRM and hence was arbitrary. Petitioner maintains that respondent abused his discretion by ignoring her economic and medical status by focusing on her delinquent income tax returns. However, in the Answering Brief for Petitioner, dated August 7, 2008, petitioner's counsel concedes that the IRM does not have the force and effect of law but only provides direction and guidance. 4

We do not believe respondent abused his discretion in rejecting petitioner's offer-in-compromise. Petitioner has a history of not timely filing returns and paying her Federal income taxes. It is well within respondent's discretion to require that petitioner be in full compliance with these requirements before accepting an offer-in-compromise. See Otto's E-Z Clean Enters., Inc. v. Commissioner, T.C. Memo. 2008-54; Corona Pathology Servs., Inc. v. Commissioner; T.C. Memo. 2003-120.

As noted supra, the decision whether to accept petitioner's offer-in-compromise rests squarely within the discretion of respondent. The settlement officer was under no obligation to accept petitioner's offer. We find there was a reasonable basis for the settlement officer's decision.



C. The Installment Agreement
After respondent rejected petitioner's offer-in-compromise, the settlement officer proposed a partial payment installment agreement which required petitioner to make monthly payments of $788 until January 2008, followed by monthly payments of $1,800 from February 2008 to June 2009 and monthly payments of $2,100 thereafter. In general, the proposed partial payment installment agreement was based on the financial information petitioner provided on Form 433-A, which she submitted with her offer-in-compromise. The settlement officer made certain adjustments to petitioner's financial information that were based on the Commissioner's national allowable expense tables (national standards) before adopting the proposed installment agreement.

Petitioner alleges that respondent abused his discretion by failing to consider her age and health concerns and the realities of the market in which she earns her living when determining her monthly excess income over expenses.

Petitioner's argument is not supported by the record. As reflected in his calculations entered onto petitioner's Form 433-A, the settlement officer used petitioner's earnings statement to calculate her monthly income. On Form 433-A, petitioner estimated she would receive $7,324 in total monthly income (annualized to $87,888), including an estimated $3,000 per month in net business income in 2006.

We are mindful that as part of her offer-in-compromise, petitioner provided a physician's report stating that petitioner was being treated for a degenerative back condition beginning in at least 2003. However, petitioner's income statements did not reflect a decline in her income while she was under treatment. The records petitioner provided showed she earned $73,681 in adjusted gross income in 2003, $183,647 in 2004, and $94,545 for 2005. Thus, there is no indication that petitioner's income had declined during the period she was treated for her back condition. Given that petitioner estimated her future monthly net business income to be $3,000 (after 4 years of treatment for her back condition), we reject petitioner's argument that respondent did not take her health into consideration in his calculation.

Petitioner also argues that in determining her income, respondent did not take into account the local real estate market in which petitioner works. Petitioner did not provide any evidence regarding local real estate projections. Instead, petitioner makes a general assertion that she will not be able to maintain her income level. This is mere speculation. Given the information presented to him, it was not arbitrary or capricious for the settlement officer to discount petitioner's speculative future income projections in making his offer of an installment agreement.

Similarly, respondent used petitioner's own transportation, health care, tax, and legal monthly costs in calculating her living expenses. We find that it was not arbitrary or capricious for respondent to use these figures in calculating petitioner's monthly living expenses. 5

The settlement officer did adjust petitioner's "food, clothing and misc." expenses and her "housing and utilities" expenses and eliminated her condominium assessment expenses in accordance with respondent's national standards. Petitioner argues that pursuant to section 301.7122-1(c)(2)(i), Proced & Admin. Regs., respondent was required to include her actual expenses when determining her total monthly living expenses and not use the national standards. Section 7122(c)(2)(B), in effect when petitioner submitted her offer-in-compromise, provides that the Commissioner may depart from the national standards when "such use would result in the taxpayer not having adequate means to provide for basic living expenses."

Petitioner did not provide evidence demonstrating that she would not have adequate means to provide for her basic living expenses if the national standards were used. And where a taxpayer does not present this evidence, we have held that use of the national standards is not an abuse of discretion by the Commissioner. See Diffee v. Commissioner, T.C. Memo. 2007-304; McDonough v. Commissioner, T.C. Memo. 2006-234.

Skrizowski v. Commissioner, T.C. Memo. 2004-229, cited by petitioner, is distinguishable. In Skrizowski, the Commissioner ignored his own financial determination regarding the taxpayer when he rejected a collection alternative. In these cases, however, respondent considered all of the information petitioner provided and did not make any contradictory findings.

Although section 6330(c) requires respondent to consider relevant issues properly raised by petitioner, including a claim that a collection alternative, such as an installment agreement, is more appropriate, respondent is not required to offer petitioner a collection alternative acceptable to petitioner before determining that a lien and a levy are more appropriate collection tools. See sec. 6159(a) (generally granting the Commissioner discretion to enter into installment agreements).



D. Conclusion
Respondent did not abuse his discretion in rejecting petitioner's proposed offer-in-compromise or in proposing his installment agreement. We sustain respondent's lien and levy collection activities.

To reflect the foregoing,

Decisions will be entered for respondent.

1 Petitioner requested an abatement of all late payment penalties for reasonable cause, claiming that both she and her daughter had medical problems. Acceding to petitioner's request, respondent abated the late payment penalties.

2 The settlement officer followed IRM procedure by procuring manager approval before requiring petitioner to file her income tax returns for 1995, 1996, and 1997, as required by Policy Statement 5-133 when requiring the filing of income tax returns beyond the 6-year period.

3 The rules governing section 6330 hearings govern hearings under sec. 6320. Sec. 6320(c). Sec. 6320(b)(4) provides that to the extent practicable, a hearing under sec. 6320 shall be held in conjunction with a hearing under sec. 6330.

4 We have previously held that as a general rule, provisions within the Commissioner's IRM are not binding on the Commissioner and confer no rights on taxpayers. See Thoburn v. Commissioner, 95 T.C. 132, 141-142 (1990).

5 Respondent increased petitioner's monthly life insurance expenses, a change which benefited petitioner.

The general rule is that a debtor who files a chapter 7 bankruptcy petition is discharged from personal liability for all debts incurred before the filing of the petition. 11 U.S.C. sec. 727(b) (2006); United States v. Hatton, 220 F.3d 1057, 1059-1060 (9th Cir. 2000). However, an individual debtor is not to be discharged in a bankruptcy proceeding from certain specified categories of debts. 11 U.S.C. sec. 523(a); Washington v. Commissioner, 120 T.C. 114, A taxpayer's federal income tax debts for a tax year were not discharged in a Chapter 7 bankruptcy proceeding where the proceeding was commenced less than three years from the due date of the tax return for that year. The taxpayer argued that she notified the IRS that she was seeking discharge of her tax debt in bankruptcy, and the IRS did not respond; therefore, she believed that her tax liabilities had been discharged. However, the IRS's failure to take action did not affect the priority afforded to the tax debts under the Bankruptcy Code.



GERBER, Judge: This case was heard pursuant to the provisions of section 7463 1 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Respondent moved for summary judgment, and petitioner was given an opportunity to respond. This case arose under the provisions of section 6330, and the sole question is whether petitioner's 1998 Federal income tax liability was discharged during her bankruptcy proceeding.


Background

Petitioner had a self-assessed outstanding and unpaid 1998 income tax liability which respondent proposed to collect by means of a levy. Respondent notified petitioner of her right to a hearing, and petitioner submitted a timely request for a hearing. In her request petitioner sought a hearing to assert that her 1998 income tax liability had been discharged in bankruptcy and was no longer collectible by respondent. Petitioner did not challenge the underlying tax liability.

Petitioner's 1998 Federal income tax return was due April 15, 1999, and was filed with a balance due. Thereafter, she filed a chapter 7 bankruptcy petition on September 21, 2001. In accord with bankruptcy procedure petitioner notified every creditor, including respondent, in writing that she was seeking a discharge of her obligations to them. In accord with bankruptcy procedure each creditor was to notify the bankruptcy court if they had any objection to the discharge of petitioner's obligations. Respondent did not notify the bankruptcy court of any objection.

On January 2, 2002, the bankruptcy court issued an order discharging all of petitioner's dischargeable debts and closing the bankruptcy proceeding. Respondent did not appeal the bankruptcy court's order, and petitioner believed that her debt to respondent for her 1998 income tax had been discharged.

On October 2, 2006, respondent notified petitioner of his intent to pursue collection of the 1998 tax liability and accrued interest. Petitioner timely requested a hearing and asserted that respondent should not pursue collection because the 1998 tax liability had been discharged in bankruptcy. A hearing was held on June 13, 2007, at which time respondent's settlement officer explained to petitioner that her 1998 tax liability had not been discharged in the bankruptcy because it had priority status under the Bankruptcy Code. Petitioner did not otherwise challenge the merits of the 1998 tax liability or seek alternatives to collection, such as an offer-in-compromise. The settlement officer verified and provided petitioner with all information required under the provisions of section 6330.


Discussion

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. See Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted with respect to all or any part of the legal issues in controversy if there is no genuine issue as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). There is no dispute about the facts in this case, and the question we consider is a legal one --whether, as a matter of law, petitioner's 1998 income tax obligation was discharged in bankruptcy.

There are no procedural questions about whether the settlement officer met the requirements of section 6330(c). The question of discharge is determinative of whether there was an abuse of discretion in deciding to proceed with collection. Because a discharge order was issued in petitioner's bankruptcy proceeding, we have jurisdiction to decide whether petitioner's 1998 tax liability was discharged under the bankruptcy court's order. See Swanson v. Commissioner, 121 T.C. 111, 117-118 (2003).

We review respondent's determination that, under 11 U.S.C. sec. 523(a)(1)(B)(i) (2006), petitioner's unpaid income tax liability was not discharged in bankruptcy. Additionally, we address petitioner's contentions that respondent made no challenge to petitioner's discharge order issued by the bankruptcy court.

Petitioner's discharge order does not specifically state which of her debts have been discharged. Instead, it outlines which debts are not discharged. One of the debts that is listed as generally not dischargeable is "Debts for most taxes".

The general rule is that a debtor who files a chapter 7 bankruptcy petition is discharged from personal liability for all debts incurred before the filing of the petition. 11 U.S.C. sec. 727(b) (2006); United States v. Hatton, 220 F.3d 1057, 1059-1060 (9th Cir. 2000). However, an individual debtor is not to be discharged in a bankruptcy proceeding from certain specified categories of debts. 11 U.S.C. sec. 523(a); Washington v. Commissioner, 120 T.C. 114, 121 (2003).

The first such category that is specifically excepted from the discharge provisions includes taxes described as priority claims in 11 U.S.C. sec. 507(a)(8) (2006). 11 U.S.C. sec. 523(a)(1)(A); Severo v. Commissioner, 129 T.C. 160 (2007). With respect to claims for income tax due for a tax year in which the due date for the return is within 3 years of the filing of the petition in bankruptcy, they are defined as priority claims. See 11 U.S.C. sec. 507(a)(8)(A)(i).

Petitioner's 1998 income tax return was due, without considering any extensions, on April 15, 1999. Petitioner's bankruptcy case was commenced September 21, 2001, a date that is less than 3 years from the due date of petitioner's 1998 income tax return. Accordingly, petitioner's 1998 income tax liability falls within the statutory exception so as ordinarily not to be discharged by a general order of discharge by a bankruptcy court. Severo v. Commissioner, supra at 166.

Petitioner, however, also contends that she notified respondent that she was seeking discharge of the 1998 tax liability and respondent did not object or otherwise take any action with respect to petitioner's notice. Petitioner contends that any priority that respondent may have had would be obviated by the failure to notify petitioner of respondent's priority status or to object.

This issue has been considered by this Court, and we have held that the Commissioner's failure to take action in the bankruptcy proceeding does not, per se, affect the statutory priority afforded to tax debts. Therefore, if a tax liability satisfies the conditions set forth in 11 U.S.C. sec. 523(a)(1), it is not protected by the general discharge received by a taxpayer in his prior bankruptcy case. Swanson v. Commissioner, supra at 126.

Petitioner was under the impression that her discharge in bankruptcy had eliminated all of her debt. She was surprised 4 years later when respondent advised that collection of the 1998 liability was being pursued. Although we can sympathize with petitioner, she remains obligated for the 1998 tax liability.

Accordingly, there was no abuse of discretion when respondent determined to proceed with collection over petitioner's objection.

In view of the foregoing, respondent's motion for summary judgment will be granted.

An appropriate order and decision will be entered.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

American Recovery and Reinvestment Tax Act of 2009, as Reported by the House Ways and Means Committee

January 29, 2009

111th Congress

Union Calendar No. 2



111th CONGRESS



1st Session



H. R. 598



[Report No. 111-8, Part I]

To provide for a portion of the economic recovery package relating to revenue measures, unemployment, and health.



IN THE HOUSE OF REPRESENTATIVES

January 16, 2009

Mr. RANGEL (for himself, Mr. STARK, and Mr. MCDERMOTT) introduced the following bill; which was referred to the Committee on Ways and Means, and in addition to the Committees on Energy and Commerce, Science and Technology, Education and Labor, and Financial Services, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

January 27, 2009

Reported from the Committee on Ways and Means with an amendment

[Strike out all after the enacting clause and insert the part printed in italic]

January 27, 2009

Committees on Energy and Commerce, Science and Technology, Education and Labor, and Financial Services discharged; committed to the Committee of the Whole House on the State of the Union and ordered to be printed

[For text of introduced bill, see copy of bill as introduced on January 16, 2009]



A BILL

To provide for a portion of the economic recovery package relating to revenue measures, unemployment, and health.

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

TITLE I --TAX PROVISIONS

SECTION 1000. SHORT TITLE, ETC.

(a) Short Title- This title may be cited as the `American Recovery and Reinvestment Tax Act of 2009'.

(b) Reference- Except as otherwise expressly provided, whenever in this title an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c) Table of Contents- The table of contents for this title is as follows:

Sec. 1000. Short title, etc.

Subtitle A --Making Work Pay

Sec. 1001. Making work pay credit.

Subtitle B --Additional Tax Relief for Families With Children

Sec. 1101. Increase in earned income tax credit.

Sec. 1102. Increase of refundable portion of child credit.

Subtitle C --American Opportunity Tax Credit

Sec. 1201. American opportunity tax credit.

Subtitle D --Housing Incentives

Sec. 1301. Waiver of requirement to repay first-time homebuyer credit.

Sec. 1302. Coordination of low-income housing credit and low-income housing grants.

Subtitle E --Tax Incentives for Business

Part I --Temporary Investment Incentives

Sec. 1401. Special allowance for certain property acquired during 2009.

Sec. 1402. Temporary increase in limitations on expensing of certain depreciable business assets.

Part II --5-Year Carryback of Operating Losses

Sec. 1411. 5-year carryback of operating losses.

Sec. 1412. Exception for TARP recipients.

Part III --Incentives for New Jobs

Sec. 1421. Incentives to hire unemployed veterans and disconnected youth.

Part IV --Clarification of Regulations Related to Limitations on Certain Built-In Losses Following an Ownership Change

Sec. 1431. Clarification of regulations related to limitations on certain built-in losses following an ownership change.

Subtitle F --Fiscal Relief for State and Local Governments

Part I --Improved Marketability for Tax-Exempt Bonds

Sec. 1501. De minimis safe harbor exception for tax-exempt interest expense of financial institutions.

Sec. 1502. Modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions.

Sec. 1503. Temporary modification of alternative minimum tax limitations on tax-exempt bonds.

Part II --Tax Credit Bonds for Schools

Sec. 1511. Qualified school construction bonds.

Sec. 1512. Extension and expansion of qualified zone academy bonds.

Part III --Taxable Bond Option for Governmental Bonds

Sec. 1521. Taxable bond option for governmental bonds.

Part IV --Recovery Zone Bonds

Sec. 1531. Recovery zone bonds.

Sec. 1532. Tribal economic development bonds.

Part V --Repeal of Withholding Tax on Government Contractors

Sec. 1541. Repeal of withholding tax on government contractors.

Subtitle G --Energy Incentives

Part I --Renewable Energy Incentives

Sec. 1601. Extension of credit for electricity produced from certain renewable resources.

Sec. 1602. Election of investment credit in lieu of production credit.

Sec. 1603. Repeal of certain limitations on credit for renewable energy property.

Sec. 1604. Coordination with renewable energy grants.

Part II --Increased Allocations of New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds

Sec. 1611. Increased limitation on issuance of new clean renewable energy bonds.

Sec. 1612. Increased limitation and expansion of qualified energy conservation bonds.

Part III --Energy Conservation Incentives

Sec. 1621. Extension and modification of credit for nonbusiness energy property.

Sec. 1622. Modification of credit for residential energy efficient property.

Sec. 1623. Temporary increase in credit for alternative fuel vehicle refueling property.

Part IV --Energy Research Incentives

Sec. 1631. Increased research credit for energy research.

Subtitle H --Other Provisions

Part I --Application of Certain Labor Standards to Projects Financed With Certain Tax-Favored Bonds

Sec. 1701. Application of certain labor standards to projects financed with certain tax-favored bonds.

Part II --Grants To Provide Financing for Low-Income Housing

Sec. 1711. Grants to States for low-income housing projects in lieu of low-income housing credit allocations for 2009.

Part III --Grants for Specified Energy Property in Lieu of Tax Credits

Sec. 1721. Grants for specified energy property in lieu of tax credits.

Part IV --Study of Economic, Employment, and Related Effects of This Act

Sec. 1731. Study of economic, employment, and related effects of this Act.

Subtitle A --Making Work Pay

SEC. 1001. MAKING WORK PAY CREDIT.

(a) In General- Subpart C of part IV of subchapter A of chapter 1 is amended by inserting after section 36 the following new section:

`SEC. 36A. MAKING WORK PAY CREDIT.

`(a) Allowance of Credit- In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the lesser of --

`(1) 6.2 percent of earned income of the taxpayer, or

`(2) $500 ($1,000 in the case of a joint return).

`(b) Limitation Based on Modified Adjusted Gross Income-

`(1) IN GENERAL- The amount allowable as a credit under subsection (a) (determined without regard to this paragraph) for the taxable year shall be reduced (but not below zero) by 2 percent of so much of the taxpayer's modified adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).

`(2) MODIFIED ADJUSTED GROSS INCOME- For purposes of subparagraph (A), the term `modified adjusted gross income' means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

`(c) Definitions- For purposes of this section --

`(1) ELIGIBLE INDIVIDUAL- The term `eligible individual' means any individual other than --

`(A) any nonresident alien individual,

`(B) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins, and

`(C) an estate or trust.

Such term shall not include any individual unless the requirements of section 32(c)(1)(E) are met with respect to such individual.

`(2) EARNED INCOME- The term `earned income' has the meaning given such term by section 32(c)(2), except that such term shall not include net earnings from self-employment which are not taken into account in computing taxable income. For purposes of the preceding sentence, any amount excluded from gross income by reason of section 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year.

`(d) Termination- This section shall not apply to taxable years beginning after December 31, 2010.'.

(b) Treatment of Possessions-

(1) PAYMENTS TO POSSESSIONS-

(A) MIRROR CODE POSSESSION- The Secretary of the Treasury shall pay to each possession of the United States with a mirror code tax system amounts equal to the loss to that possession by reason of the amendments made by this section with respect to taxable years beginning in 2009 and 2010. Such amounts shall be determined by the Secretary of the Treasury based on information provided by the government of the respective possession.

(B) OTHER POSSESSIONS- The Secretary of the Treasury shall pay to each possession of the United States which does not have a mirror code tax system amounts estimated by the Secretary of the Treasury as being equal to the aggregate benefits that would have been provided to residents of such possession by reason of the amendments made by this section for taxable years beginning in 2009 and 2010 if a mirror code tax system had been in effect in such possession. The preceding sentence shall not apply with respect to any possession of the United States unless such possession has a plan, which has been approved by the Secretary of the Treasury, under which such possession will promptly distribute such payments to the residents of such possession.

(2) COORDINATION WITH CREDIT ALLOWED AGAINST UNITED STATES INCOME TAXES- No credit shall be allowed against United States income taxes for any taxable year under section 36A of the Internal Revenue Code of 1986 (as added by this section) to any person --

(A) to whom a credit is allowed against taxes imposed by the possession by reason of the amendments made by this section for such taxable year, or

(B) who is eligible for a payment under a plan described in paragraph (1)(B) with respect to such taxable year.

(3) DEFINITIONS AND SPECIAL RULES-

(A) POSSESSION OF THE UNITED STATES- For purposes of this subsection, the term `possession of the United States' includes the Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands.

(B) MIRROR CODE TAX SYSTEM- For purposes of this subsection, the term `mirror code tax system' means, with respect to any possession of the United States, the income tax system of such possession if the income tax liability of the residents of such possession under such system is determined by reference to the income tax laws of the United States as if such possession were the United States.

(C) TREATMENT OF PAYMENTS- For purposes of section 1324(b)(2) of title 31, United States Code, the payments under this subsection shall be treated in the same manner as a refund due from the credit allowed under section 36A of the Internal Revenue Code of 1986 (as added by this section).

(c) Refunds Disregarded in the Administration of Federal Programs and Federally Assisted Programs- Any credit or refund allowed or made to any individual by reason of section 36A of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (b) of this section shall not be taken into account as income and shall not be taken into account as resources for the month of receipt and the following 2 months, for purposes of determining the eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.

(d) Conforming Amendments-

(1) Section 6211(b)(4)(A) is amended by inserting `36A,' after `36,'.

(2) Section 1324(b)(2) of title 31, United States Code, is amended by inserting `36A,' after `36,'.

(3) The table of sections for subpart C of part IV of subchapter A of chapter 1 is amended by inserting after the item relating to section 36 the following new item:

`Sec. 36A. Making work pay credit.'.

(e) Effective Date- This section shall apply to taxable years beginning after December 31, 2008.

Subtitle B --Additional Tax Relief for Families With Children

SEC. 1101. INCREASE IN EARNED INCOME TAX CREDIT.

(a) In General- Subsection (b) of section 32 is amended by adding at the end the following new paragraph:

`(3) SPECIAL RULES FOR 2009 AND 2010- In the case of any taxable year beginning in 2009 or 2010 --

`(A) INCREASED CREDIT PERCENTAGE FOR 3 OR MORE QUALIFYING CHILDREN- In the case of a taxpayer with 3 or more qualifying children, the credit percentage is 45 percent.

`(B) REDUCTION OF MARRIAGE PENALTY-

`(i) IN GENERAL- The dollar amount in effect under paragraph (2)(B) shall be $5,000.

`(ii) INFLATION ADJUSTMENT- In the case of any taxable year beginning in 2010, the $5,000 amount in clause (i) shall be increased by an amount equal to --

`(I) such dollar amount, multiplied by

`(II) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting `calendar year 2008' for `calendar year 1992' in subparagraph (B) thereof.

`(iii) ROUNDING- Subparagraph (A) of subsection (j)(2) shall apply after taking into account any increase under clause (ii).'.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

SEC. 1102. INCREASE OF REFUNDABLE PORTION OF CHILD CREDIT.

(a) In General- Paragraph (4) of section 24(d) is amended to read as follows:

`(4) SPECIAL RULE FOR 2009 AND 2010- Notwithstanding paragraph (3), in the case of any taxable year beginning in 2009 or 2010, the dollar amount in effect for such taxable year under paragraph (1)(B)(i) shall be zero.'.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

Subtitle C --American Opportunity Tax Credit

SEC. 1201. AMERICAN OPPORTUNITY TAX CREDIT.

(a) In General- Section 25A (relating to Hope scholarship credit) is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection:

`(i) American Opportunity Tax Credit- In the case of any taxable year beginning in 2009 or 2010 --

`(1) INCREASE IN CREDIT- The Hope Scholarship Credit shall be an amount equal to the sum of --

`(A) 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $2,000, plus

`(B) 25 percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000.

`(2) CREDIT ALLOWED FOR FIRST 4 YEARS OF POST-SECONDARY EDUCATION- Subparagraphs (A) and (C) of subsection (b)(2) shall be applied by substituting `4' for `2'.

`(3) QUALIFIED TUITION AND RELATED EXPENSES TO INCLUDE REQUIRED COURSE MATERIALS- Subsection (f)(1)(A) shall be applied by substituting `tuition, fees, and course materials' for `tuition and fees'.

`(4) INCREASE IN AGI LIMITS FOR HOPE SCHOLARSHIP CREDIT- In lieu of applying subsection (d) with respect to the Hope Scholarship Credit, such credit (determined without regard to this paragraph) shall be reduced (but not below zero) by the amount which bears the same ratio to such credit (as so determined) as --

`(A) the excess of --

`(i) the taxpayer's modified adjusted gross income (as defined in subsection (d)(3)) for such taxable year, over

`(ii) $80,000 ($160,000 in the case of a joint return), bears to

`(B) $10,000 ($20,000 in the case of a joint return).

`(5) CREDIT ALLOWED AGAINST ALTERNATIVE MINIMUM TAX- In the case of a taxable year to which section 26(a)(2) does not apply, so much of the credit allowed under subsection (a) as is attributable to the Hope Scholarship Credit shall not exceed the excess of --

`(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over

`(B) the sum of the credits allowable under this subpart (other than this subsection and sections 23, 25D, and 30D) and section 27 for the taxable year.

Any reference in this section or section 24, 25, 26, 25B, 904, or 1400C to a credit allowable under this subsection shall be treated as a reference to so much of the credit allowable under subsection (a) as is attributable to the Hope Scholarship Credit.

`(6) PORTION OF CREDIT MADE REFUNDABLE- 40 percent of so much of the credit allowed under subsection (a) as is attributable to the Hope Scholarship Credit (determined after application of paragraph (4) and without regard to this paragraph and section 26(a)(2) or paragraph (5), as the case may be) shall be treated as a credit allowable under subpart C (and not allowed under subsection (a)). The preceding sentence shall not apply to any taxpayer for any taxable year if such taxpayer is a child to whom subsection (g) of section 1 applies for such taxable year.

`(7) COORDINATION WITH MIDWESTERN DISASTER AREA BENEFITS- In the case of a taxpayer with respect to whom section 702(a)(1)(B) of the Heartland Disaster Tax Relief Act of 2008 applies for any taxable year, such taxpayer may elect to waive the application of this subsection to such taxpayer for such taxable year.'.

(b) Conforming Amendments-

(1) Section 24(b)(3)(B) is amended by inserting `25A(i),' after `23,'.

(2) Section 25(e)(1)(C)(ii) is amended by inserting `25A(i),' after `24,'.

(3) Section 26(a)(1) is amended by inserting `25A(i),' after `24,'.

(4) Section 25B(g)(2) is amended by inserting `25A(i),' after `23,'.

(5) Section 904(i) is amended by inserting `25A(i),' after `24,'.

(6) Section 1400C(d)(2) is amended by inserting `25A(i),' after `24,'.

(7) Section 1324(b)(2) of title 31, United States Code, is amended by inserting `25A,' before `35'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

(d) Application of EGTRRA Sunset- The amendment made by subsection (b)(1) shall be subject to title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 in the same manner as the provision of such Act to which such amendment relates.

(e) Treasury Studies Regarding Education Incentives-

(1) STUDY REGARDING COORDINATION WITH NON-TAX EDUCATIONAL INCENTIVES- The Secretary of the Treasury, or the Secretary's delegate, shall study how to coordinate the credit allowed under section 25A of the Internal Revenue Code of 1986 with the Federal Pell Grant program under section 401 of the Higher Education Act of 1965.

(2) STUDY REGARDING IMPOSITION OF COMMUNITY SERVICE REQUIREMENTS- The Secretary of the Treasury, or the Secretary's delegate, shall study the feasibility of requiring students to perform community service as a condition of taking their tuition and related expenses into account under section 25A of the Internal Revenue Code of 1986.

(3) REPORT- Not later than 1 year after the date of the enactment of this Act, the Secretary of the Treasury, or the Secretary's delegate, shall report to Congress on the results of the studies conducted under this paragraph.

Subtitle D --Housing Incentives

SEC. 1301. WAIVER OF REQUIREMENT TO REPAY FIRST-TIME HOMEBUYER CREDIT.

(a) In General- Paragraph (4) of section 36(f) is amended by adding at the end the following new subparagraph:

`(D) WAIVER OF RECAPTURE FOR PURCHASES IN 2009- In the case of any credit allowed with respect to the purchase of a principal residence after December 31, 2008, and before July 1, 2009 --

`(i) paragraph (1) shall not apply, and

`(ii) paragraph (2) shall apply only if the disposition or cessation described in paragraph (2) with respect to such residence occurs during the 36-month period beginning on the date of the purchase of such residence by the taxpayer.'.

(b) Conforming Amendment- Subsection (g) of section 36 is amended by striking `subsection (c)' and inserting `subsections (c) and (f)(4)(D)'.

(c) Effective Date- The amendments made by this section shall apply to residences purchased after December 31, 2008.

SEC. 1302. COORDINATION OF LOW-INCOME HOUSING CREDIT AND LOW-INCOME HOUSING GRANTS.

Subsection (i) of section 42 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

`(9) COORDINATION WITH LOW-INCOME HOUSING GRANTS-

`(A) REDUCTION IN STATE HOUSING CREDIT CEILING FOR LOW-INCOME HOUSING GRANTS RECEIVED IN 2009- For purposes of this section, the amounts described in clauses (i) through (iv) of subsection (h)(3)(C) with respect to any State for 2009 shall each be reduced by so much of such amount as is taken into account in determining the amount of any grant to such State under section 1711 of the American Recovery and Reinvestment Tax Act of 2009.

`(B) SPECIAL RULE FOR BASIS- Basis of a qualified low-income building shall not be reduced by the amount of any grant described in subparagraph (A).'.

Subtitle E --Tax Incentives for Business

PART I --TEMPORARY INVESTMENT INCENTIVES

SEC. 1401. SPECIAL ALLOWANCE FOR CERTAIN PROPERTY ACQUIRED DURING 2009.

(a) In General- Paragraph (2) of section 168(k) is amended --

(1) by striking `January 1, 2010' and inserting `January 1, 2011', and

(2) by striking `January 1, 2009' each place it appears and inserting `January 1, 2010'.

(b) Conforming Amendments-

(1) The heading for subsection (k) of section 168 is amended by striking `January 1, 2009' and inserting `January 1, 2010'.

(2) The heading for clause (ii) of section 168(k)(2)(B) is amended by striking `PRE-JANUARY 1, 2009' and inserting `PRE-JANUARY 1, 2010'.

(3) Subparagraph (D) of section 168(k)(4) is amended --

(A) by striking `and' at the end of clause (i),

(B) by redesignating clause (ii) as clause (v), and

(C) by inserting after clause (i) the following new clauses:

`(ii) `April 1, 2008' shall be substituted for `January 1, 2008' in subparagraph (A)(iii)(I) thereof,

`(iii) `January 1, 2009' shall be substituted for `January 1, 2010' each place it appears,

`(iv) `January 1, 2010' shall be substituted for `January 1, 2011' in subparagraph (A)(iv) thereof, and'.

(4) Subparagraph (B) of section 168(l)(5) is amended by striking `January 1, 2009' and inserting `January 1, 2010'.

(5) Clause (ii) of section 168(n)(2)(C) is amended by striking `January 1, 2009' and inserting `January 1, 2010'.

(6) Subparagraph (B) of section 1400N(d)(3) is amended by striking `January 1, 2009' and inserting `January 1, 2010'.

(c) Effective Dates-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to property placed in service after December 31, 2008, in taxable years ending after such date.

(2) TECHNICAL AMENDMENT- Section 168(k)(4)(D)(ii) of the Internal Revenue Code of 1986, as added by subsection (b)(3)(C), shall apply to taxable years ending after March 31, 2008.

SEC. 1402. TEMPORARY INCREASE IN LIMITATIONS ON EXPENSING OF CERTAIN DEPRECIABLE BUSINESS ASSETS.

(a) In General- Paragraph (7) of section 179(b) is amended --

(1) by striking `2008' and inserting `2008, or 2009', and

(2) by striking `2008' in the heading thereof and inserting `2008, AND 2009'.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

PART II --5-YEAR CARRYBACK OF OPERATING LOSSES

SEC. 1411. 5-YEAR CARRYBACK OF OPERATING LOSSES.

(a) In General- Subparagraph (H) of section 172(b)(1) is amended to read as follows:

`(H) CARRYBACK FOR 2008 AND 2009 NET OPERATING LOSSES-

`(i) IN GENERAL- In the case of an applicable 2008 or 2009 net operating loss with respect to which the taxpayer has elected the application of this subparagraph --

`(I) such net operating loss shall be reduced by 10 percent of such loss (determined without regard to this subparagraph),

`(II) subparagraph (A)(i) shall be applied by substituting any whole number elected by the taxpayer which is more than 2 and less than 6 for `2',

`(III) subparagraph (E)(ii) shall be applied by substituting the whole number which is one less than the whole number substituted under subclause (II) for `2', and

`(IV) subparagraph (F) shall not apply.

`(ii) APPLICABLE 2008 OR 2009 NET OPERATING LOSS- For purposes of this subparagraph, the term `applicable 2008 or 2009 net operating loss' means --

`(I) the taxpayer's net operating loss for any taxable year ending in 2008 or 2009, or

`(II) if the taxpayer elects to have this subclause apply in lieu of subclause (I), the taxpayer's net operating loss for any taxable year beginning in 2008 or 2009.

`(iii) ELECTION- Any election under this subparagraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the net operating loss. Any such election, once made, shall be irrevocable.

`(iv) COORDINATION WITH ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION- In the case of a taxpayer who elects to have clause (ii)(II) apply, section 56(d)(1)(A)(ii) shall be applied by substituting `ending during 2001 or 2002 or beginning during 2008 or 2009' for `ending during 2001, 2002, 2008, or 2009'.'.

(b) Alternative Tax Net Operating Loss Deduction- Subclause (I) of section 56(d)(1)(A)(ii) is amended to read as follows:

`(I) the amount of such deduction attributable to the sum of carrybacks of net operating losses from taxable years ending during 2001, 2002, 2008, or 2009 and carryovers of net operating losses to such taxable years, or'.

(c) Loss From Operations of Life Insurance Companies- Subsection (b) of section 810 is amended by adding at the end the following new paragraph:

`(4) CARRYBACK FOR 2008 AND 2009 LOSSES-

`(A) IN GENERAL- In the case of an applicable 2008 or 2009 loss from operations with respect to which the taxpayer has elected the application of this paragraph --

`(i) such loss from operations shall be reduced by 10 percent of such loss (determined without regard to this paragraph), and

`(ii) paragraph (1)(A) shall be applied, at the election of the taxpayer, by substituting `5' or `4' for `3'.

`(B) APPLICABLE 2008 OR 2009 LOSS FROM OPERATIONS- For purposes of this paragraph, the term `applicable 2008 or 2009 loss from operations' means --

`(i) the taxpayer's loss from operations for any taxable year ending in 2008 or 2009, or

`(ii) if the taxpayer elects to have this clause apply in lieu of clause (i), the taxpayer's loss from operations for any taxable year beginning in 2008 or 2009.

`(C) ELECTION- Any election under this paragraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the loss from operations. Any such election, once made, shall be irrevocable.

`(D) COORDINATION WITH ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION- In the case of a taxpayer who elects to have subparagraph (B)(ii) apply, section 56(d)(1)(A)(ii) shall be applied by substituting `ending during 2001 or 2002 or beginning during 2008 or 2009' for `ending during 2001, 2002, 2008, or 2009'.'.

(d) Conforming Amendment- Section 172 is amended by striking subsection (k).

(e) Effective Date-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to net operating losses arising in taxable years ending after December 31, 2007.

(2) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION- The amendment made by subsection (b) shall apply to taxable years ending after 1997.

(3) LOSS FROM OPERATIONS OF LIFE INSURANCE COMPANIES- The amendment made by subsection (d) shall apply to losses from operations arising in taxable years ending after December 31, 2007.

(4) TRANSITIONAL RULE- In the case of a net operating loss (or, in the case of a life insurance company, a loss from operations) for a taxable year ending before the date of the enactment of this Act --

(A) any election made under section 172(b)(3) or 810(b)(3) of the Internal Revenue Code of 1986 with respect to such loss may (notwithstanding such section) be revoked before the applicable date,

(B) any election made under section 172(b)(1)(H) or 810(b)(4) of such Code with respect to such loss shall (notwithstanding such section) be treated as timely made if made before the applicable date, and

(C) any application under section 6411(a) of such Code with respect to such loss shall be treated as timely filed if filed before the applicable date.

For purposes of this paragraph, the term `applicable date' means the date which is 60 days after the date of the enactment of this Act.

SEC. 1412. EXCEPTION FOR TARP RECIPIENTS.

The amendments made by this part shall not apply to --

(1) any taxpayer if --

(A) the Federal Government acquires, at any time, an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008, or

(B) the Federal Government acquires, at any time, any warrant (or other right) to acquire any equity interest with respect to the taxpayer pursuant to such Act,

(2) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and

(3) any taxpayer which at any time in 2008 or 2009 is a member of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, determined without regard to subsection (b) thereof) as a taxpayer described in paragraph (1) or (2).

PART III --INCENTIVES FOR NEW JOBS

SEC. 1421. INCENTIVES TO HIRE UNEMPLOYED VETERANS AND DISCONNECTED YOUTH.

(a) In General- Subsection (d) of section 51 is amended by adding at the end the following new paragraph:

`(14) CREDIT ALLOWED FOR UNEMPLOYED VETERANS AND DISCONNECTED YOUTH HIRED IN 2009 OR 2010-

`(A) IN GENERAL- Any unemployed veteran or disconnected youth who begins work for the employer during 2009 or 2010 shall be treated as a member of a targeted group for purposes of this subpart.

`(B) DEFINITIONS- For purposes of this paragraph --

`(i) UNEMPLOYED VETERAN- The term `unemployed veteran' means any veteran (as defined in paragraph (3)(B), determined without regard to clause (ii) thereof) who is certified by the designated local agency as --

`(I) having been discharged or released from active duty in the Armed Forces during 2008, 2009, or 2010, and

`(II) being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks during the 1-year period ending on the hiring date.

`(ii) DISCONNECTED YOUTH- The term `disconnected youth' means any individual who is certified by the designated local agency --

`(I) as having attained age 16 but not age 25 on the hiring date,

`(II) as not regularly attending any secondary, technical, or post-secondary school during the 6-month period preceding the hiring date,

`(III) as not regularly employed during such 6-month period, and

`(IV) as not readily employable by reason of lacking a sufficient number of basic skills.'.

(b) Effective Date- The amendments made by this section shall apply to individuals who begin work for the employer after December 31, 2008.

PART IV --CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE

SEC. 1431. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE.

(a) Findings- Congress finds as follows:

(1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.

(2) Internal Revenue Service Notice 2008-83 is inconsistent with the congressional intent in enacting such section 382(m).

(3) The legal authority to prescribe Internal Revenue Service Notice 2008-83 is doubtful.

(4) However, as taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury legislation is necessary to clarify the force and effect of Internal Revenue Service Notice 2008-83 and restore the proper application under the Internal Revenue Code of 1986 of the limitation on built-in losses following an ownership change of a bank.

(b) Determination of Force and Effect of Internal Revenue Service Notice 2008-83 Exempting Banks From Limitation on Certain Built-In Losses Following Ownership Change-

(1) IN GENERAL- Internal Revenue Service Notice 2008-83 --

(A) shall be deemed to have the force and effect of law with respect to any ownership change (as defined in section 382(g) of the Internal Revenue Code of 1986) occurring on or before January 16, 2009, and

(B) shall have no force or effect with respect to any ownership change after such date.

(2) BINDING CONTRACTS- Notwithstanding paragraph (1), Internal Revenue Service Notice 2008-83 shall have the force and effect of law with respect to any ownership change (as so defined) which occurs after January 16, 2009 if such change --

(A) is pursuant to a written binding contract entered into on or before such date, or

(B) is pursuant to a written agreement entered into on or before such date and such agreement was described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change.

Subtitle F --Fiscal Relief for State and Local Governments

PART I --IMPROVED MARKETABILITY FOR TAX-EXEMPT BONDS

SEC. 1501. DE MINIMIS SAFE HARBOR EXCEPTION FOR TAX-EXEMPT INTEREST EXPENSE OF FINANCIAL INSTITUTIONS.

(a) In General- Subsection (b) of section 265 is amended by adding at the end the following new paragraph:

`(7) DE MINIMIS EXCEPTION FOR BONDS ISSUED DURING 2009 OR 2010-

`(A) IN GENERAL- In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010.

`(B) LIMITATION- The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B).

`(C) REFUNDINGS- For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).'.

(b) Treatment as Financial Institution Preference Item- Clause (iv) of section 291(e)(1)(B) is amended by adding at the end the following: `That portion of any obligation not taken into account under paragraph (2)(A) of section 265(b) by reason of paragraph (7) of such section shall be treated for purposes of this section as having been acquired on August 7, 1986.'.

(c) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.

SEC. 1502. MODIFICATION OF SMALL ISSUER EXCEPTION TO TAX-EXEMPT INTEREST EXPENSE ALLOCATION RULES FOR FINANCIAL INSTITUTIONS.

(a) In General- Paragraph (3) of section 265(b) (relating to exception for certain tax-exempt obligations) is amended by adding at the end the following new subparagraph:

`(G) SPECIAL RULES FOR OBLIGATIONS ISSUED DURING 2009 AND 2010-

`(i) INCREASE IN LIMITATION- In the case of obligations issued during 2009 or 2010, subparagraphs (C)(i), (D)(i), and (D)(iii)(II) shall each be applied by substituting `$30,000,000' for `$10,000,000'.

`(ii) QUALIFIED 501(C)(3) BONDS TREATED AS ISSUED BY EXEMPT ORGANIZATION- In the case of a qualified 501(c)(3) bond (as defined in section 145) issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer.

`(iii) SPECIAL RULE FOR QUALIFIED FINANCINGS- In the case of a qualified financing issue issued during 2009 or 2010 --

`(I) subparagraph (F) shall not apply, and

`(II) any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue issued by the qualified borrower with respect to which such portion relates).

`(iv) QUALIFIED FINANCING ISSUE- For purposes of this subparagraph, the term `qualified financing issue' means any composite, pooled, or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to one or more ultimate borrowers each of whom is a qualified borrower.

`(v) QUALIFIED PORTION- For purposes of this subparagraph, the term `qualified portion' means that portion of the proceeds which are used with respect to each qualified borrower under the issue.

`(vi) QUALIFIED BORROWER- For purposes of this subparagraph, the term `qualified borrower' means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a).'.

(b) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.

SEC. 1503. TEMPORARY MODIFICATION OF ALTERNATIVE MINIMUM TAX LIMITATIONS ON TAX-EXEMPT BONDS.

(a) Interest on Private Activity Bonds Issued During 2009 and 2010 Not Treated as Tax Preference Item- Subparagraph (C) of section 57(a)(5) is amended by adding at the end a new clause:

`(vi) EXCEPTION FOR BONDS ISSUED IN 2009 AND 2010- For purposes of clause (i), the term `private activity bond' shall not include any bond issued after December 31, 2008, and before January 1, 2011. For purposes of the preceding sentence, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).'.

(b) No Adjustment to Adjusted Current Earnings for Interest on Tax-Exempt Bonds Issued After 2008- Subparagraph (B) of section 56(g)(4) is amended by adding at the end the following new clause:

`(iv) TAX EXEMPT INTEREST ON BONDS ISSUED IN 2009 AND 2010- Clause (i) shall not apply in the case of any interest on a bond issued after December 31, 2008, and before January 1, 2011. For purposes of the preceding sentence, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).'.

(c) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.

PART II --TAX CREDIT BONDS FOR SCHOOLS

SEC. 1511. QUALIFIED SCHOOL CONSTRUCTION BONDS.

(a) In General- Subpart I of part IV of subchapter A of chapter 1 is amended by adding at the end the following new section:

`SEC. 54F. QUALIFIED SCHOOL CONSTRUCTION BONDS.

`(a) Qualified School Construction Bond- For purposes of this subchapter, the term `qualified school construction bond' means any bond issued as part of an issue if --

`(1) 100 percent of the available project proceeds of such issue are to be used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a facility is to be constructed with part of the proceeds of such issue,

`(2) the bond is issued by a State or local government within the jurisdiction of which such school is located, and

`(3) the issuer designates such bond for purposes of this section.

`(b) Limitation on Amount of Bonds Designated- The maximum aggregate face amount of bonds issued during any calendar year which may be designated under subsection (a) by any issuer shall not exceed the sum of --

`(1) the limitation amount allocated under subsection (d) for such calendar year to such issuer, and

`(2) if such issuer is a large local educational agency (as defined in subsection (e)(4)) or is issuing on behalf of such an agency, the limitation amount allocated under subsection (e) for such calendar year to such agency.

`(c) National Limitation on Amount of Bonds Designated- There is a national qualified school construction bond limitation for each calendar year. Such limitation is --

`(1) $11,000,000,000 for 2009,

`(2) $11,000,000,000 for 2010, and

`(3) except as provided in subsection (f), zero after 2010.

`(d) 60 Percent of Limitation Allocated Among States-

`(1) IN GENERAL- 60 percent of the limitation applicable under subsection (c) for any calendar year shall be allocated by the Secretary among the States in proportion to the respective numbers of children in each State who have attained age 5 but not age 18 for the most recent fiscal year ending before such calendar year. The limitation amount allocated to a State under the preceding sentence shall be allocated by the State to issuers within such State.

`(2) MINIMUM ALLOCATIONS TO STATES-

`(A) IN GENERAL- The Secretary shall adjust the allocations under this subsection for any calendar year for each State to the extent necessary to ensure that the sum of --

`(i) the amount allocated to such State under this subsection for such year, and

`(ii) the aggregate amounts allocated under subsection (e) to large local educational agencies in such State for such year,

is not less than an amount equal to such State's adjusted minimum percentage of the amount to be allocated under paragraph (1) for the calendar year.

`(B) ADJUSTED MINIMUM PERCENTAGE- A State's adjusted minimum percentage for any calendar year is the product of --

`(i) the minimum percentage described in section 1124(d) of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6334(d)) for such State for the most recent fiscal year ending before such calendar year, multiplied by

`(ii) 1.68.

`(3) ALLOCATIONS TO CERTAIN POSSESSIONS- The amount to be allocated under paragraph (1) to any possession of the United States other than Puerto Rico shall be the amount which would have been allocated if all allocations under paragraph (1) were made on the basis of respective populations of individuals below the poverty line (as defined by the Office of Management and Budget). In making other allocations, the amount to be allocated under paragraph (1) shall be reduced by the aggregate amount allocated under this paragraph to possessions of the United States.

`(4) ALLOCATIONS FOR INDIAN SCHOOLS- In addition to the amounts otherwise allocated under this subsection, $200,000,000 for calendar year 2009, and $200,000,000 for calendar year 2010, shall be allocated by the Secretary of the Interior for purposes of the construction, rehabilitation, and repair of schools funded by the Bureau of Indian Affairs. In the case of amounts allocated under the preceding sentence, Indian tribal governments (as defined in section 7701(a)(40)) shall be treated as qualified issuers for purposes of this subchapter.

`(e) 40 Percent of Limitation Allocated Among Largest School Districts-

`(1) IN GENERAL- 40 percent of the limitation applicable under subsection (c) for any calendar year shall be allocated under paragraph (2) by the Secretary among local educational agencies which are large local educational agencies for such year.

`(2) ALLOCATION FORMULA- The amount to be allocated under paragraph (1) for any calendar year shall be allocated among large local educational agencies in proportion to the respective amounts each such agency received for Basic Grants under subpart 2 of part A of title I of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6331 et seq.) for the most recent fiscal year ending before such calendar year.

`(3) ALLOCATION OF UNUSED LIMITATION TO STATE- The amount allocated under this subsection to a large local educational agency for any calendar year may be reallocated by such agency to the State in which such agency is located for such calendar year. Any amount reallocated to a State under the preceding sentence may be allocated as provided in subsection (d)(1).

`(4) LARGE LOCAL EDUCATIONAL AGENCY- For purposes of this section, the term `large local educational agency' means, with respect to a calendar year, any local educational agency if such agency is --

`(A) among the 100 local educational agencies with the largest numbers of children aged 5 through 17 from families living below the poverty level, as determined by the Secretary using the most recent data available from the Department of Commerce that are satisfactory to the Secretary, or

`(B) 1 of not more than 25 local educational agencies (other than those described in subparagraph (A)) that the Secretary of Education determines (based on the most recent data available satisfactory to the Secretary) are in particular need of assistance, based on a low level of resources for school construction, a high level of enrollment growth, or such other factors as the Secretary deems appropriate.

`(f) Carryover of Unused Limitation- If for any calendar year --

`(1) the amount allocated under subsection (d) to any State, exceeds

`(2) the amount of bonds issued during such year which are designated under subsection (a) pursuant to such allocation,

the limitation amount under such subsection for such State for the following calendar year shall be increased by the amount of such excess. A similar rule shall apply to the amounts allocated under subsection (d)(4) or (e).'.

(b) Conforming Amendments-

(1) Paragraph (1) of section 54A(d) is amended by striking `or' at the end of subparagraph (C), by inserting `or' at the end of subparagraph (D), and by inserting after subparagraph (D) the following new subparagraph:

`(E) a qualified school construction bond,'.

(2) Subparagraph (C) of section 54A(d)(2) is amended by striking `and' at the end of clause (iii), by striking the period at the end of clause (iv) and inserting `, and', and by adding at the end the following new clause:

`(v) in the case of a qualified school construction bond, a purpose specified in section 54F(a)(1).'.

(3) The table of sections for subpart I of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:

`Sec. 54F. Qualified school construction bonds.'.

(c) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.

SEC. 1512. EXTENSION AND EXPANSION OF QUALIFIED ZONE ACADEMY BONDS.

(a) In General- Section 54E(c)(1) is amended by striking `and 2009' and inserting `and $1,400,000,000 for 2009 and 2010'.

(b) Effective Date- The amendment made by this section shall apply to obligations issued after December 31, 2008.

PART III --TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS

SEC. 1521. TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS.

(a) In General- Part IV of subchapter A of chapter 1 is amended by adding at the end the following new subpart:

`Subpart J --Taxable Bond Option for Governmental Bonds

`Sec. 54AA. Taxable bond option for governmental bonds.

`SEC. 54AA. TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS.

`(a) In General- If a taxpayer holds a taxable governmental bond on one or more interest payment dates of the bond during any taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credits determined under subsection (b) with respect to such dates.

`(b) Amount of Credit- The amount of the credit determined under this subsection with respect to any interest payment date for a taxable governmental bond is 35 percent of the amount of interest payable by the issuer with respect to such date.

`(c) Limitation Based on Amount of Tax-

`(1) IN GENERAL- The credit allowed under subsection (a) for any taxable year shall not exceed the excess of --

`(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over

`(B) the sum of the credits allowable under this part (other than subpart C and this subpart).

`(2) CARRYOVER OF UNUSED CREDIT- If the credit allowable under subsection (a) exceeds the limitation imposed by paragraph (1) for such taxable year, such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year (determined before the application of paragraph (1) for such succeeding taxable year).

`(d) Taxable Governmental Bond-

`(1) IN GENERAL- For purposes of this section, the term `taxable governmental bond' means any obligation (other than a private activity bond) if --

`(A) the interest on such obligation would (but for this section) be excludable from gross income under section 103, and

`(B) the issuer makes an irrevocable election to have this section apply.

`(2) APPLICABLE RULES- For purposes of applying paragraph (1) --

`(A) a taxable governmental bond shall not be treated as federally guaranteed by reason of the credit allowed under subsection (a) or section 6432,

`(B) the yield on a taxable governmental bond shall be determined without regard to the credit allowed under subsection (a), and

`(C) a bond shall not be treated as a taxable governmental bond if the issue price has more than a de minimis amount (determined under rules similar to the rules of section 1273(a)(3)) of premium over the stated principal amount of the bond.

`(e) Interest Payment Date- For purposes of this section, the term `interest payment date' means any date on which the holder of record of the taxable governmental bond is entitled to a payment of interest under such bond.

`(f) Special Rules-

`(1) INTEREST ON TAXABLE GOVERNMENTAL BONDS INCLUDIBLE IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES- For purposes of this title, interest on any taxable governmental bond shall be includible in gross income.

`(2) APPLICATION OF CERTAIN RULES- Rules similar to the rules of subsections (f), (g), (h), and (i) of section 54A shall apply for purposes of the credit allowed under subsection (a).

`(g) Special Rule for Qualified Bonds Issued Before 2011- In the case of a qualified bond issued before January 1, 2011 --

`(1) ISSUER ALLOWED REFUNDABLE CREDIT- In lieu of any credit allowed under this section with respect to such bond, the issuer of such bond shall be allowed a credit as provided in section 6432.

`(2) QUALIFIED BOND- For purposes of this subsection, the term `qualified bond' means any taxable governmental bond issued as part of an issue if --

`(A) 100 percent of the available project proceeds (as defined in section 54A) of such issue are to be used for capital expenditures, and

`(B) the issuer makes an irrevocable election to have this subsection apply.

`(h) Regulations- The Secretary may prescribe such regulations and other guidance as may be necessary or appropriate to carry out this section and section 6432.'.

(b) Credit for Qualified Bonds Issued Before 2011- Subchapter B of chapter 65, as amended by this Act, is amended by adding at the end the following new section:

`SEC. 6432. CREDIT FOR QUALIFIED BONDS ALLOWED TO ISSUER.

`(a) In General- In the case of a qualified bond issued before January 1, 2011, the issuer of such bond shall be allowed a credit with respect to each interest payment under such bond which shall be payable by the Secretary as provided in subsection (b).

`(b) Payment of Credit- The Secretary shall pay (contemporaneously with each interest payment date under such bond) to the issuer of such bond (or to any person who makes such interest payments on behalf of the issuer) 35 percent of the interest payable under such bond on such date.

`(c) Application of Arbitrage Rules- For purposes of section 148, the yield on a qualified bond shall be reduced by the credit allowed under this section.

`(d) Interest Payment Date- For purposes of this subsection, the term `interest payment date' means each date on which interest is payable by the issuer under the terms of the bond.

`(e) Qualified Bond- For purposes of this subsection, the term `qualified bond' has the meaning given such term in section 54AA(g).'.

(c) Conforming Amendments-

(1) Section 1324(b)(2) of title 31, United States Code, is amended by striking `or 6428' and inserting `6428, or 6432,'.

(2) Section 54A(c)(1)(B) is amended by striking `subpart C' and inserting `subparts C and J'.

(3) Sections 54(c)(2), 1397E(c)(2), and 1400N(l)(3)(B) are each amended by striking `and I' and inserting `, I, and J'.

(4) Section 6401(b)(1) is amended by striking `and I' and inserting `I, and J'.

(5) The table of subparts for part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:

`Subpart J. Taxable bond option for governmental bonds.'.

(6) The table of sections for subchapter B of chapter 65, as amended by this Act, is amended by adding at the end the following new item:

`Sec. 6432. Credit for qualified bonds allowed to issuer.'.

(d) Transitional Coordination With State Law- Except as otherwise provided by a State after the date of the enactment of this Act, the interest on any taxable governmental bond (as defined in section 54AA of the Internal Revenue Code of 1986, as added by this section) and the amount of any credit determined under such section with respect to such bond shall be treated for purposes of the income tax laws of such State as being exempt from Federal income tax.

(e) Effective Date- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.

PART IV --RECOVERY ZONE BONDS

SEC. 1531. RECOVERY ZONE BONDS.

(a) In General- Subchapter Y of chapter 1 is amended by adding at the end the following new part:

`PART III --RECOVERY ZONE BONDS

`Sec. 1400U-1. Allocation of recovery zone bonds.

`Sec. 1400U-2. Recovery zone economic development bonds.

`Sec. 1400U-3. Recovery zone facility bonds.

`SEC. 1400U-1. ALLOCATION OF RECOVERY ZONE BONDS.

`(a) Allocations-

`(1) IN GENERAL- The Secretary shall allocate the national recovery zone economic development bond limitation and the national recovery zone facility bond limitation among the States in the proportion that each such State's 2008 State employment decline bears to the aggregate of the 2008 State employment declines for all of the States.

`(2) 2008 STATE EMPLOYMENT DECLINE- For purposes of this subsection, the term `2008 State employment decline' means, with respect to any State, the excess (if any) of --

`(A) the number of individuals employed in such State determined for December 2007, over

`(B) the number of individuals employed in such State determined for December 2008.

`(3) ALLOCATIONS BY STATES-

`(A) IN GENERAL- Each State with respect to which an allocation is made under paragraph (1) shall reallocate such allocation among the counties and large municipalities in such State in the proportion the each such county's or municipality's 2008 employment decline bears to the aggregate of the 2008 employment declines for all the counties and municipalities in such State.

`(B) LARGE MUNICIPALITIES- For purposes of subparagraph (A), the term `large municipality' means a municipality with a population of more than 100,000.

`(C) DETERMINATION OF LOCAL EMPLOYMENT DECLINES- For purposes of this paragraph, the employment decline of any municipality or county shall be determined in the same manner as determining the State employment decline under paragraph (2), except that in the case of a municipality any portion of which is in a county, such portion shall be treated as part of such municipality and not part of such county.

`(4) NATIONAL LIMITATIONS-

`(A) RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS- There is a national recovery zone economic development bond limitation of $10,000,000,000.

`(B) RECOVERY ZONE FACILITY BONDS- There is a national recovery zone facility bond limitation of $15,000,000,000.

`(b) Recovery Zone- For purposes of this part, the term `recovery zone' means --

`(1) any area designated by the issuer as having significant poverty, unemployment, home foreclosures, or general distress, and

`(2) any area for which a designation as an empowerment zone or renewal community is in effect.

`SEC. 1400U-2. RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS.

`(a) In General- In the case of a recovery zone economic development bond --

`(1) such bond shall be treated as a qualified bond for purposes of section 6432, and

`(2) subsection (b) of such section shall be applied by substituting `55 percent' for `35 percent'.

`(b) Recovery Zone Economic Development Bond-

`(1) IN GENERAL- For purposes of this section, the term `recovery zone economic development bond' means any taxable governmental bond (as defined in section 54AA(d)) issued before January 1, 2011, as part of issue if --

`(A) 100 percent of the available project proceeds (as defined in section 54A) of such issue are to be used for one or more qualified economic development purposes, and

`(B) the issuer designates such bond for purposes of this section.

`(2) LIMITATION ON AMOUNT OF BONDS DESIGNATED- The maximum aggregate face amount of bonds which may be designated by any issuer under paragraph (1) shall not exceed the amount of the recovery zone economic development bond limitation allocated to such issuer under section 1400U-1.

`(c) Qualified Economic Development Purpose- For purposes of this section, the term `qualified economic development purpose' means expenditures for purposes of promoting development or other economic activity in a recovery zone, including --

`(1) capital expenditures paid or incurred with respect to property located in such zone,

`(2) expenditures for public infrastructure and construction of public facilities, and

`(3) expenditures for job training and educational programs.

`SEC. 1400U-3. RECOVERY ZONE FACILITY BONDS.

`(a) In General- For purposes of part IV of subchapter B (relating to tax exemption requirements for State and local bonds), the term `exempt facility bond' includes any recovery zone facility bond.

`(b) Recovery Zone Facility Bond-

`(1) IN GENERAL- For purposes of this section, the term `recovery zone facility bond' means any bond issued as part of an issue if --

`(A) 95 percent or more of the net proceeds (as defined in section 150(a)(3)) of such issue are to be used for recovery zone property,

`(B) such bond is issued before January 1, 2011, and

`(C) the issuer designates such bond for purposes of this section.

`(2) LIMITATION ON AMOUNT OF BONDS DESIGNATED- The maximum aggregate face amount of bonds which may be designated by any issuer under paragraph (1) shall not exceed the amount of recovery zone facility bond limitation allocated to such issuer under section 1400U-1.

`(c) Recovery Zone Property- For purposes of this section --

`(1) IN GENERAL- The term `recovery zone property' means any property to which section 168 applies (or would apply but for section 179) if --

`(A) such property was acquired by the taxpayer by purchase (as defined in section 179(d)(2)) after the date on which the designation of the recovery zone took effect,

`(B) the original use of which in the recovery zone commences with the taxpayer, and

`(C) substantially all of the use of which is in the recovery zone and is in the active conduct of a qualified business by the taxpayer in such zone.

`(2) QUALIFIED BUSINESS- The term `qualified business' means any trade or business except that --

`(A) the rental to others of real property located in a recovery zone shall be treated as a qualified business only if the property is not residential rental property (as defined in section 168(e)(2)), and

`(B) such term shall not include any trade or business consisting of the operation of any facility described in section 144(c)(6)(B).

`(3) SPECIAL RULES FOR SUBSTANTIAL RENOVATIONS AND SALE-LEASEBACK- Rules similar to the rules of subsections (a)(2) and (b) of section 1397D shall apply for purposes of this subsection.

`(d) Nonapplication of Certain Rules- Sections 146 (relating to volume cap) and 147(d) (relating to acquisition of existing property not permitted) shall not apply to any recovery zone facility bond.'.

(b) Clerical Amendment- The table of parts for subchapter Y of chapter 1 of such Code is amended by adding at the end the following new item:

`Part III. Recovery Zone Bonds.'.

(c) Effective Date- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.

SEC. 1532. TRIBAL ECONOMIC DEVELOPMENT BONDS.

(a) In General- Section 7871 is amended by adding at the end the following new subsection:

`(f) Tribal Economic Development Bonds-

`(1) ALLOCATION OF LIMITATION-

`(A) IN GENERAL- The Secretary shall allocate the national tribal economic development bond limitation among the Indian tribal governments in such manner as the Secretary, in consultation with the Secretary of the Interior, determines appropriate.

`(B) NATIONAL LIMITATION- There is a national tribal economic development bond limitation of $2,000,000,000.

`(2) BONDS TREATED AS EXEMPT FROM TAX- In the case of a tribal economic development bond --

`(A) notwithstanding subsection (c), such bond shall be treated for purposes of this title in the same manner as if such bond were issued by a State, and

`(B) section 146 shall not apply.

`(3) TRIBAL ECONOMIC DEVELOPMENT BOND-

`(A) IN GENERAL- For purposes of this section, the term `tribal economic development bond' means any bond issued by an Indian tribal government --

`(i) the interest on which is not exempt from tax under section 103 by reason of subsection (c) (determined without regard to this subsection) but would be so exempt if issued by a State or local government, and

`(ii) which is designated by the Indian tribal government as a tribal economic development bond for purposes of this subsection.

`(B) EXCEPTIONS- The term tribal economic development bond shall not include any bond issued as part of an issue if any portion of the proceeds of such issue are used to finance --

`(i) any portion of a building in which class II or class III gaming (as defined in section 4 of the Indian Gaming Regulatory Act) is conducted or housed or any other property actually used in the conduct of such gaming, or

`(ii) any facility located outside the Indian reservation (as defined in section 168(j)(6)).

`(C) LIMITATION ON AMOUNT OF BONDS DESIGNATED- The maximum aggregate face amount of bonds which may be designated by any Indian tribal government under subparagraph (A) shall not exceed the amount of national tribal economic development bond limitation allocated to such government under paragraph (1).'.

(b) Study- The Secretary of the Treasury, or the Secretary's delegate, shall conduct a study of the effects of the amendment made by subsection (a). Not later than 1 year after the date of the enactment of this Act, the Secretary of the Treasury, or the Secretary's delegate, shall report to Congress on the results of the studies conducted under this paragraph, including the Secretary's recommendations regarding such amendment.

(c) Effective Date- The amendment made by subsection (a) shall apply to obligations issued after the date of the enactment of this Act.

PART V --REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS

SEC. 1541. REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS.

Section 3402 is amended by striking subsection (t).

Subtitle G --Energy Incentives

PART I --RENEWABLE ENERGY INCENTIVES

SEC. 1601. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES.

(a) In General- Subsection (d) of section 45 is amended --

(1) by striking `2010' in paragraph (1) and inserting `2013',

(2) by striking `2011' each place it appears in paragraphs (2), (3), (4), (6), (7), and (9) and inserting `2014', and

(3) by striking `2012' in paragraph (11)(B) and inserting `2014'.

(b) Technical Amendment- Paragraph (5) of section 45(d) is amended by striking `and before' and all that follows and inserting `and before October 3, 2008.'.

(c) Effective Date-

(1) IN GENERAL- The amendments made by subsection (a) shall apply to property placed in service after the date of the enactment of this Act.

(2) TECHNICAL AMENDMENT- The amendment made by subsection (b) shall take effect as if included in section 102 of the Energy Improvement and Extension Act of 2008.

SEC. 1602. ELECTION OF INVESTMENT CREDIT IN LIEU OF PRODUCTION CREDIT.

(a) In General- Subsection (a) of section 48 is amended by adding at the end the following new paragraph:

`(5) ELECTION TO TREAT QUALIFIED FACILITIES AS ENERGY PROPERTY-

`(A) IN GENERAL- In the case of any qualified investment credit facility placed in service in 2009 or 2010 --

`(i) such facility shall be treated as energy property for purposes of this section, and

`(ii) the energy percentage with respect to such property shall be 30 percent.

`(B) DENIAL OF PRODUCTION CREDIT- No credit shall be allowed under section 45 for any taxable year with respect to any qualified investment credit facility.

`(C) QUALIFIED INVESTMENT CREDIT FACILITY- For purposes of this paragraph, the term `qualified investment credit facility' means any facility described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) if no credit has been allowed under section 45 with respect to such facility and the taxpayer makes an irrevocable election to have this paragraph apply to such facility.'.

(b) Effective Date- The amendments made by this section shall apply to facilities placed in service after December 31, 2008.

SEC. 1603. REPEAL OF CERTAIN LIMITATIONS ON CREDIT FOR RENEWABLE ENERGY PROPERTY.

(a) Repeal of Limitation on Credit for Qualified Small Wind Energy Property- Paragraph (4) of section 48(c) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C).

(b) Repeal of Limitation on Property Financed by Subsidized Energy Financing-

(1) IN GENERAL- Subsection (a) of section 48, as amended by section 1602, is amended by striking paragraph (4) and by redesignating paragraph (5) as paragraph (4).

(2) CONFORMING AMENDMENTS-

(A) Section 25C(e)(1) is amended by striking `(8), and (9)' and inserting `and (8)'.

(B) Section 25D(e) is amended by striking paragraph (9).

(c) Effective Date-

(1) IN GENERAL- Except as provided in paragraph (2),the amendment made by this section shall apply to periods after December 31, 2008, under rules similar to the rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990).

(2) CONFORMING AMENDMENTS- The amendments made by subsection (b)(2) shall apply to taxable years beginning after December 31, 2008.

SEC. 1604. COORDINATION WITH RENEWABLE ENERGY GRANTS.

Section 48 is amended by adding at the end the following new subsection:

`(d) Coordination With Department of Energy Grants- In the case of any property with respect to which the Secretary of Energy makes a grant under section 1721 of the American Recovery and Reinvestment Tax Act of 2009 --

`(1) DENIAL OF PRODUCTION AND INVESTMENT CREDITS- No credit shall be determined under this section or section 45 with respect to such property for the taxable year in which such grant is made or any subsequent taxable year.

`(2) RECAPTURE OF CREDITS FOR PROGRESS EXPENDITURES MADE BEFORE GRANT- If a credit was determined under this section with respect to such property for any taxable year ending before such grant is made --

`(A) the tax imposed under subtitle A on the taxpayer for the taxable year in which such grant is made shall be increased by so much of such credit as was allowed under section 38,

`(B) the general business carryforwards under section 39 shall be adjusted so as to recapture the portion of such credit which was not so allowed, and

`(C) the amount of such grant shall be determined without regard to any reduction in the basis of such property by reason of such credit.

`(3) TREATMENT OF GRANTS- Any such grant shall --

`(A) not be includible in the gross income of the taxpayer, but

`(B) shall be taken into account in determining the basis of the property to which such grant relates, except that the basis of such property shall be reduced under section 50(c) in the same manner as a credit allowed under subsection (a).'.

PART II --INCREASED ALLOCATIONS OF NEW CLEAN RENEWABLE ENERGY BONDS AND QUALIFIED ENERGY CONSERVATION BONDS

SEC. 1611. INCREASED LIMITATION ON ISSUANCE OF NEW CLEAN RENEWABLE ENERGY BONDS.

Subsection (c) of section 54C is amended by adding at the end the following new paragraph:

`(4) ADDITIONAL LIMITATION- The national new clean renewable energy bond limitation shall be increased by $1,600,000,000. Such increase shall be allocated by the Secretary consistent with the rules of paragraphs (2) and (3).'.

SEC. 1612. INCREASED LIMITATION AND EXPANSION OF QUALIFIED ENERGY CONSERVATION BONDS.

(a) Increased Limitation- Subsection (e) of section 54D is amended by adding at the end the following new paragraph:

`(4) ADDITIONAL LIMITATION- The national qualified energy conservation bond limitation shall be increased by $2,400,000,000. Such increase shall be allocated by the Secretary consistent with the rules of paragraphs (1), (2), and (3).'.

(b) Loans and Grants To Implement Green Community Programs-

(1) IN GENERAL- Subparagraph (A) of section 54D(f)(1) is amended by inserting `(or loans or grants for capital expenditures to implement any green community program)' after `Capital expenditures'.

(2) BONDS TO IMPLEMENT GREEN COMMUNITY PROGRAMS NOT TREATED AS PRIVATE ACTIVITY BONDS FOR PURPOSES OF LIMITATIONS ON QUALIFIED ENERGY CONSERVATION BONDS- Subsection (e) of section 54D, as amended by subsection (a), is amended by adding at the end the following new paragraph:

`(5) BONDS TO IMPLEMENT GREEN COMMUNITY PROGRAMS NOT TREATED AS PRIVATE ACTIVITY BONDS- For purposes of paragraph (3) and subsection (f)(2), a bond shall not be treated as a private activity bond solely because proceeds of the issue of which such bond is a part are to be used for loans or grants for capital expenditures to implement any green community program.'.

(c) Effective Date- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.

PART III --ENERGY CONSERVATION INCENTIVES

SEC. 1621. EXTENSION AND MODIFICATION OF CREDIT FOR NONBUSINESS ENERGY PROPERTY.

(a) In General- Section 25C is amended by striking subsections (a) and (b) and inserting the following new subsections:

`(a) Allowance of Credit- In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 30 percent of the sum of --

`(1) the amount paid or incurred by the taxpayer during such taxable year for qualified energy efficiency improvements, and

`(2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year.

`(b) Limitation- The aggregate amount of the credits allowed under this section for taxable years beginning in 2009 and 2010 with respect to any taxpayer shall not exceed $1,500.'.

(b) Extension- Section 25C(g)(2) is amended by striking `December 31, 2009' and inserting `December 31, 2010'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

SEC. 1622. MODIFICATION OF CREDIT FOR RESIDENTIAL ENERGY EFFICIENT PROPERTY.

(a) Removal of Credit Limitation for Property Placed in Service-

(1) IN GENERAL- Paragraph (1) of section 25D(b) is amended to read as follows:

`(1) MAXIMUM CREDIT FOR FUEL CELLS- In the case of any qualified fuel cell property expenditure, the credit allowed under subsection (a) (determined without regard to subsection (c)) for any taxable year shall not exceed $500 with respect to each half kilowatt of capacity of the qualified fuel cell property (as defined in section 48(c)(1)) to which such expenditure relates.'.

(2) CONFORMING AMENDMENT- Paragraph (4) of section 25D(e) is amended --

(A) by striking all that precedes subparagraph (B) and inserting the following:

`(4) FUEL CELL EXPENDITURE LIMITATIONS IN CASE OF JOINT OCCUPANCY- In the case of any dwelling unit with respect to which qualified fuel cell property expenditures are made and which is jointly occupied and used during any calendar year as a residence by two or more individuals the following rules shall apply:

`(A) MAXIMUM EXPENDITURES FOR FUEL CELLS- The maximum amount of such expenditures which may be taken into account under subsection (a) by all such individuals with respect to such dwelling unit during such calendar year shall be $1,667 in the case of each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) with respect to which such expenditures relate.', and

(B) by striking subparagraph (C).

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

SEC. 1623. TEMPORARY INCREASE IN CREDIT FOR ALTERNATIVE FUEL VEHICLE REFUELING PROPERTY.

(a) In General- Section 30C(e) is amended by adding at the end the following new paragraph:

`(6) SPECIAL RULE FOR PROPERTY PLACED IN SERVICE DURING 2009 AND 2010- In the case of property placed in service in taxable years beginning after December 31, 2008, and before January 1, 2011 --

`(A) in the case of any such property which does not relate to hydrogen --

`(i) subsection (a) shall be applied by substituting `50 percent' for `30 percent',

`(ii) subsection (b)(1) shall be applied by substituting `$50,000' for `$30,000', and

`(iii) subsection (b)(2) shall be applied by substituting `$2,000' for `$1,000', and

`(B) in the case of any such property which relates to hydrogen, subsection (b) shall be applied by substituting `$200,000' for `$30,000'.'.

(b) Effective Date- The amendment made by this section shall apply to taxable years beginning after December 31, 2008.

PART IV --ENERGY RESEARCH INCENTIVES

SEC. 1631. INCREASED RESEARCH CREDIT FOR ENERGY RESEARCH.

(a) In General- Section 41 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection:

`(h) Energy Research Credit- In the case of any taxable year beginning in 2009 or 2010 --

`(1) IN GENERAL- The credit determined under subsection (a)(1) shall be increased by 20 percent of the qualified energy research expenses for the taxable year.

`(2) QUALIFIED ENERGY RESEARCH EXPENSES- For purposes of this subsection, the term `qualified energy research expenses' means so much of the taxpayer's qualified research expenses as are related to the fields of fuel cells and battery technology, renewable energy, energy conservation technology, efficient transmission and distribution of electricity, and carbon capture and sequestration.

`(3) COORDINATION WITH OTHER RESEARCH CREDITS-

`(A) INCREMENTAL CREDIT- The amount of qualified energy research expenses taken into account under subsection (a)(1)(A) shall not exceed the base amount.

`(B) ALTERNATIVE SIMPLIFIED CREDIT- For purposes of subsection (c)(5), the amount of qualified energy research expenses taken into account for the taxable year for which the credit is being determined shall not exceed --

`(i) in the case of subsection (c)(5)(A), 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined, and

`(ii) in the case of subsection (c)(5)(B)(ii), zero.

`(C) BASIC RESEARCH AND ENERGY RESEARCH CONSORTIUM PAYMENTS- Any amount taken into account under paragraph (1) shall not be taken into account under paragraph (2) or (3) of subsection (a).'.

(b) Conforming Amendment- Subparagraph (B) of section 41(i)(1), as redesignated by subsection (a), is amended by inserting `(in the case of the increase in the credit determined under subsection (h), December 31, 2010)' after `December 31, 2009'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

Subtitle H --Other Provisions

PART I --APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN TAX-FAVORED BONDS

SEC. 1701. APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN TAX-FAVORED BONDS.

Subchapter IV of chapter 31 of the title 40, United States Code, shall apply to projects financed with the proceeds of --

(1) any qualified clean renewable energy bond (as defined in section 54C of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,

(2) any qualified energy conservation bond (as defined in section 54D of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,

(3) any qualified zone academy bond (as defined in section 54E of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,

(4) any qualified school construction bond (as defined in section 54F of the Internal Revenue Code of 1986), and

(5) any recovery zone economic development bond (as defined in section 1400U-2 of the Internal Revenue Code of 1986).

PART II --GRANTS TO PROVIDE FINANCING FOR LOW-INCOME HOUSING

SEC. 1711. GRANTS TO STATES FOR LOW-INCOME HOUSING PROJECTS IN LIEU OF LOW-INCOME HOUSING CREDIT ALLOCATIONS FOR 2009.

(a) In General- The Secretary of the Treasury shall make a grant to the housing credit agency of each State in an amount equal to such State's low-income housing grant election amount.

(b) Low-Income Housing Grant Election Amount- For purposes of this section, the term `low-income housing grant election amount' means, with respect to any State, such amount as the State may elect which does not exceed 85 percent of the product of --

(1) the sum of --

(A) 100 percent of the State housing credit ceiling for 2009 which is attributable to amounts described in clauses (i) and (iii) of section 42(h)(3)(C) of the Internal Revenue Code of 1986, and

(B) 40 percent of the State housing credit ceiling for 2009 which is attributable to amounts described in clauses (ii) and (iv) of such section, multiplied by

(2) 10.

(c) Subawards for Low-Income Buildings-

(1) IN GENERAL- A State housing credit agency receiving a grant under this section shall use such grant to make subawards to finance the construction or acquisition and rehabilitation of qualified low-income buildings. A subaward under this section may be made to finance a qualified low-income building with or without an allocation under section 42 of the Internal Revenue Code of 1986, except that a State housing credit agency may make subawards to finance qualified low-income buildings without an allocation only if it makes a determination that such use will increase the total funds available to the State to build and rehabilitate affordable housing. In complying with such determination requirement, a State housing credit agency shall establish a process in which applicants that are allocated credits are required to demonstrate good faith efforts to obtain investment commitments for such credits before the agency makes such subawards.

(2) SUBAWARDS SUBJECT TO SAME REQUIREMENTS AS LOW-INCOME HOUSING CREDIT ALLOCATIONS- Any such subaward with respect to any qualified low-income building shall be made in the same manner and shall be subject to the same limitations (including rent, income, and use restrictions on such building) as an allocation of housing credit dollar amount allocated by such State housing credit agency under section 42 of the Internal Revenue Code of 1986, except that such subawards shall not be limited by, or otherwise affect (except as provided in subsection (h)(3)(J) of such section), the State housing credit ceiling applicable to such agency.

(3) COMPLIANCE AND ASSET MANAGEMENT- The State housing credit agency shall perform asset management functions to ensure compliance with section 42 of the Internal Revenue Code of 1986 and the long-term viability of buildings funded by any subaward under this section. The State housing credit agency may collect reasonable fees from a subaward recipient to cover expenses associated with the performance of its duties under this paragraph. The State housing credit agency may retain an agent or other private contractor to satisfy the requirements of this paragraph.

(4) RECAPTURE- The State housing credit agency shall impose conditions or restrictions, including a requirement providing for recapture, on any subaward under this section so as to assure that the building with respect to which such subaward is made remains a qualified low-income building during the compliance period. Any such recapture shall be payable to the Secretary of the Treasury for deposit in the general fund of the Treasury and may be enforced by means of liens or such other methods as the Secretary of the Treasury determines appropriate.

(d) Return of Unused Grant Funds- Any grant funds not used to make subawards under this section before January 1, 2011, shall be returned to the Secretary of the Treasury on such date. Any subawards returned to the State housing credit agency on or after such date shall be promptly returned to the Secretary of the Treasury. Any amounts returned to the Secretary of the Treasury under this subsection shall be deposited in the general fund of the Treasury.

(e) Definitions- Any term used in this section which is also used in section 42 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 42. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary's delegate.

(f) Appropriations- There is hereby appropriated to the Secretary of the Treasury such sums as may be necessary to carry out this section.

PART III --GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS

SEC. 1721. GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS.

(a) In General- Upon application, the Secretary of Energy shall, within 60 days of the application and subject to the requirements of this section, provide a grant to each person who places in service specified energy property during 2009 or 2010 to reimburse such person for a portion of the expense of such facility as provided in subsection (b).

(b) Grant Amount-

(1) IN GENERAL- The amount of the grant under subsection (a) with respect to any specified energy property shall be the applicable percentage of the basis of such facility.

(2) APPLICABLE PERCENTAGE- For purposes of paragraph (1), the term `applicable percentage' means --

(A) 30 percent in the case of any property described in paragraphs (1) through (4) of subsection (c), and

(B) 10 percent in the case of any other property.

(3) DOLLAR LIMITATIONS- In the case of property described in paragraph (2), (6), or (7) of subsection (c), the amount of any grant under this section with respect to such property shall not exceed the limitation described in section 48(c)(1)(B), 48(c)(2)(B), or 48(c)(3)(B) of the Internal Revenue Code of 1986, respectively, with respect to such property.

(c) Specified Energy Property- For purposes of this section, the term `specified energy property' means any of the following:

(1) QUALIFIED FACILITIES- Any facility described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) of the Internal Revenue Code of 1986.

(2) QUALIFIED FUEL CELL PROPERTY- Any qualified fuel cell property (as defined in section 48(c)(1) of such Code).

(3) SOLAR PROPERTY- Any property described in clause (i) or (ii) of section 48(a)(3)(A) of such Code.

(4) QUALIFIED SMALL WIND ENERGY PROPERTY- Any qualified small wind energy property (as defined in section 48(c)(4) of such Code).

(5) GEOTHERMAL PROPERTY- Any property described in clause (iii) of section 48(a)(3)(A) of such Code.

(6) QUALIFIED MICROTURBINE PROPERTY- Any qualified microturbine property (as defined in section 48(c)(2) of such Code).

(7) COMBINED HEAT AND POWER SYSTEM PROPERTY- Any combined heat and power system property (as defined in section 48(c)(3) of such Code).

(8) GEOTHERMAL HEATPUMP PROPERTY- Any property described in clause (vii) of section 48(a)(3)(A) of such Code.

(d) Application of Certain Rules- In making grants under this section, the Secretary of Energy shall apply rules similar to the rules of section 50 of the Internal Revenue Code of 1986. In applying such rules, if the facility is disposed of, or otherwise ceases to be a qualified renewable energy facility, the Secretary of Energy shall provide for the recapture of the appropriate percentage of the grant amount in such manner as the Secretary of Energy determines appropriate.

(e) Exception for Certain Non-Taxpayers- The Secretary of Energy shall not make any grant under this section to any Federal, State, or local government (or any political subdivision, agency, or instrumentality thereof) or any organization described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code.

(f) Definitions- Terms used in this section which are also used in section 45 or 48 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 45 or 48. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary's delegate.

(g) Coordination Between Departments of Treasury and Energy- The Secretary of the Treasury shall provide the Secretary of Energy with such technical assistance as the Secretary of Energy may require in carrying out this section. The Secretary of Energy shall provide the Secretary of the Treasury with such information as the Secretary of the Treasury may require in carrying out the amendment made by section 1604.

(h) Appropriations- There is hereby appropriated to the Secretary of Energy such sums as may be necessary to carry out this section.

(i) Termination- The Secretary of Energy shall not make any grant to any person under this section unless the application of such person for such grant is received before October 1, 2011.

PART IV --STUDY OF ECONOMIC, EMPLOYMENT, AND RELATED EFFECTS OF THIS ACT

SEC. 1731. STUDY OF ECONOMIC, EMPLOYMENT, AND RELATED EFFECTS OF THIS ACT.

On February 1, 2010, and every 3 months thereafter in calendar year 2010, the Comptroller General of the United States shall submit to the Committee on Ways and Means a written report on the most recent national (and, where available, State-by-State) information on --

(1) the economic effects of this Act;

(2) the employment effects of this Act, including --

(A) a comparison of the number of jobs preserved and the number of jobs created as a result of this Act; and

(B) a comparison of the numbers of jobs preserved and the number of jobs created in each of the public and private sectors;

(3) the share of tax and non-tax expenditures provided under this Act that were spent or saved, by group and income class;

(4) how the funds provided to States under this Act have been spent, including a breakdown of --

(A) funds used for services provided to citizens; and

(B) wages and other compensation for public employees; and

(5) a description of any funds made available under this Act that remain unspent, and the reasons why.

TITLE II --ASSISTANCE FOR UNEMPLOYED WORKERS AND STRUGGLING FAMILIES

SEC. 2000. SHORT TITLE, ETC.

(a) Short Title- This title may be cited as the `Assistance for Unemployed Workers and Struggling Families Act'.

(b) Table of Contents- The table of contents for this title is as follows:

Sec. 2000. Short title, etc.

Subtitle A --Unemployment Insurance

Sec. 2001. Extension of emergency unemployment compensation program.

Sec. 2002. Increase in unemployment compensation benefits.

Sec. 2003. Special transfers for unemployment compensation modernization.

Subtitle B --Assistance for Vulnerable Individuals

Sec. 2101. Emergency fund for TANF program.

Sec. 2102. One-time emergency payment to SSI recipients.

Sec. 2103. Temporary resumption of prior child support law.

Subtitle A --Unemployment Insurance

SEC. 2001. EXTENSION OF EMERGENCY UNEMPLOYMENT COMPENSATION PROGRAM.

(a) In General- Section 4007 of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 26 U.S.C. 3304 note), as amended by section 4 of the Unemployment Compensation Extension Act of 2008 (Public Law 110-449; 122 Stat. 5015), is amended --

(1) by striking `March 31, 2009' each place it appears and inserting `December 31, 2009';

(2) in the heading for subsection (b)(2), by striking `MARCH 31, 2009' and inserting `DECEMBER 31, 2009'; and

(3) in subsection (b)(3), by striking `August 27, 2009' and inserting `May 31, 2010'.

(b) Financing Provisions- Section 4004 of such Act is amended by adding at the end the following:

`(e) Transfer of Funds- Notwithstanding any other provision of law, the Secretary of the Treasury shall transfer from the general fund of the Treasury (from funds not otherwise appropriated) --

`(1) to the extended unemployment compensation account (as established by section 905 of the Social Security Act) such sums as the Secretary of Labor estimates to be necessary to make payments to States under this title by reason of the amendments made by section 2001(a) of the Assistance for Unemployed Workers and Struggling Families Act; and

`(2) to the employment security administration account (as established by section 901 of the Social Security Act) such sums as the Secretary of Labor estimates to be necessary for purposes of assisting States in meeting administrative costs by reason of the amendments referred to in paragraph (1).

There are appropriated from the general fund of the Treasury, without fiscal year limitation, the sums referred to in the preceding sentence and such sums shall not be required to be repaid.'.

SEC. 2002. INCREASE IN UNEMPLOYMENT COMPENSATION BENEFITS.

(a) Federal-State Agreements- Any State which desires to do so may enter into and participate in an agreement under this section with the Secretary of Labor (hereinafter in this section referred to as the `Secretary'). Any State which is a party to an agreement under this section may, upon providing 30 days' written notice to the Secretary, terminate such agreement.

(b) Provisions of Agreement-

(1) ADDITIONAL COMPENSATION- Any agreement under this section shall provide that the State agency of the State will make payments of regular compensation to individuals in amounts and to the extent that they would be determined if the State law of the State were applied, with respect to any week for which the individual is (disregarding this section) otherwise entitled under the State law to receive regular compensation, as if such State law had been modified in a manner such that the amount of regular compensation (including dependents' allowances) payable for any week shall be equal to the amount determined under the State law (before the application of this paragraph) plus an additional $25.

(2) ALLOWABLE METHODS OF PAYMENT- Any additional compensation provided for in accordance with paragraph (1) shall be payable either --

(A) as an amount which is paid at the same time and in the same manner as any regular compensation otherwise payable for the week involved; or

(B) at the option of the State, by payments which are made separately from, but on the same weekly basis as, any regular compensation otherwise payable.

(c) Nonreduction Rule- An agreement under this section shall not apply (or shall cease to apply) with respect to a State upon a determination by the Secretary that the method governing the computation of regular compensation under the State law of that State has been modified in a manner such that --

(1) the average weekly benefit amount of regular compensation which will be payable during the period of the agreement (determined disregarding any additional amounts attributable to the modification described in subsection (b)(1)) will be less than

(2) the average weekly benefit amount of regular compensation which would otherwise have been payable during such period under the State law, as in effect on December 31, 2008.

(d) Payments to States-

(1) IN GENERAL-

(A) FULL REIMBURSEMENT- There shall be paid to each State which has entered into an agreement under this section an amount equal to 100 percent of --

(i) the total amount of additional compensation (as described in subsection (b)(1)) paid to individuals by the State pursuant to such agreement; and

(ii) any additional administrative expenses incurred by the State by reason of such agreement (as determined by the Secretary).

(B) TERMS OF PAYMENTS- Sums payable to any State by reason of such State's having an agreement under this section shall be payable, either in advance or by way of reimbursement (as determined by the Secretary), in such amounts as the Secretary estimates the State will be entitled to receive under this section for each calendar month, reduced or increased, as the case may be, by any amount by which the Secretary finds that his estimates for any prior calendar month were greater or less than the amounts which should have been paid to the State. Such estimates may be made on the basis of such statistical, sampling, or other method as may be agreed upon by the Secretary and the State agency of the State involved.

(2) CERTIFICATIONS- The Secretary shall from time to time certify to the Secretary of the Treasury for payment to each State the sums payable to such State under this section.

(3) APPROPRIATION- There are appropriated from the general fund of the Treasury, without fiscal year limitation, such sums as may be necessary for purposes of this subsection.

(e) Applicability-

(1) IN GENERAL- An agreement entered into under this section shall apply to weeks of unemployment --

(A) beginning after the date on which such agreement is entered into; and

(B) ending before January 1, 2010.

(2) TRANSITION RULE FOR INDIVIDUALS REMAINING ENTITLED TO REGULAR COMPENSATION AS OF JANUARY 1, 2010- In the case of any individual who, as of the date specified in paragraph (1)(B), has not yet exhausted all rights to regular compensation under the State law of a State with respect to a benefit year that began before such date, additional compensation (as described in subsection (b)(1)) shall continue to be payable to such individual for any week beginning on or after such date for which the individual is otherwise eligible for regular compensation with respect to such benefit year.

(3) TERMINATION- Notwithstanding any other provision of this subsection, no additional compensation (as described in subsection (b)(1)) shall be payable for any week beginning after June 30, 2010.

(f) Fraud and Overpayments- The provisions of section 4005 of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 122 Stat. 2356) shall apply with respect to additional compensation (as described in subsection (b)(1)) to the same extent and in the same manner as in the case of emergency unemployment compensation.

(g) Application to Other Unemployment Benefits-

(1) IN GENERAL- Each agreement under this section shall include provisions to provide that the purposes of the preceding provisions of this section shall be applied with respect to unemployment benefits described in subsection (h)(3) to the same extent and in the same manner as if those benefits were regular compensation.

(2) ELIGIBILITY AND TERMINATION RULES- Additional compensation (as described in subsection (b)(1)) --

(A) shall not be payable, pursuant to this subsection, with respect to any unemployment benefits described in subsection (h)(3) for any week beginning on or after the date specified in subsection (e)(1)(B), except in the case of an individual who was eligible to receive additional compensation (as so described) in connection with any regular compensation or any unemployment benefits described in subsection (h)(3) for any period of unemployment ending before such date; and

(B) shall in no event be payable for any week beginning after the date specified in subsection (e)(3).

(h) Definitions- For purposes of this section --

(1) the terms `compensation', `regular compensation', `benefit year', `State', `State agency', `State law', and `week' have the respective meanings given such terms under section 205 of the Federal-State Extended Unemployment Compensation Act of 1970 (26 U.S.C. 3304 note);

(2) the term `emergency unemployment compensation' means emergency unemployment compensation under title IV of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 122 Stat. 2353); and

(3) any reference to unemployment benefits described in this paragraph shall be considered to refer to --

(A) extended compensation (as defined by section 205 of the Federal-State Extended Unemployment Compensation Act of 1970); and

(B) unemployment compensation (as defined by section 85(b) of the Internal Revenue Code of 1986) provided under any program administered by a State under an agreement with the Secretary.

SEC. 2003. SPECIAL TRANSFERS FOR UNEMPLOYMENT COMPENSATION MODERNIZATION.

(a) In General- Section 903 of the Social Security Act (42 U.S.C. 1103) is amended by adding at the end the following:

`Special Transfers in Fiscal Years 2009, 2010, and 2011 for Modernization

`(f)(1)(A) In addition to any other amounts, the Secretary of Labor shall provide for the making of unemployment compensation modernization incentive payments (hereinafter `incentive payments') to the accounts of the States in the Unemployment Trust Fund, by transfer from amounts reserved for that purpose in the Federal unemployment account, in accordance with succeeding provisions of this subsection.

`(B) The maximum incentive payment allowable under this subsection with respect to any State shall, as determined by the Secretary of Labor, be equal to the amount obtained by multiplying $7,000,000,000 by the same ratio as would apply under subsection (a)(2)(B) for purposes of determining such State's share of any excess amount (as described in subsection (a)(1)) that would have been subject to transfer to State accounts, as of October 1, 2008, under the provisions of subsection (a).

`(C) Of the maximum incentive payment determined under subparagraph (B) with respect to a State --

`(i) one-third shall be transferred to the account of such State upon a certification under paragraph (4)(B) that the State law of such State meets the requirements of paragraph (2); and

`(ii) the remainder shall be transferred to the account of such State upon a certification under paragraph (4)(B) that the State law of such State meets the requirements of paragraph (3).

`(2) The State law of a State meets the requirements of this paragraph if such State law --

`(A) uses a base period that includes the most recently completed calendar quarter before the start of the benefit year for purposes of determining eligibility for unemployment compensation; or

`(B) provides that, in the case of an individual who would not otherwise be eligible for unemployment compensation under the State law because of the use of a base period that does not include the most recently completed calendar quarter before the start of the benefit year, eligibility shall be determined using a base period that includes such calendar quarter.

`(3) The State law of a State meets the requirements of this paragraph if such State law includes provisions to carry out at least 2 of the following subparagraphs:

`(A) An individual shall not be denied regular unemployment compensation under any State law provisions relating to availability for work, active search for work, or refusal to accept work, solely because such individual is seeking only part-time work (as defined by the Secretary of Labor), except that the State law provisions carrying out this subparagraph may exclude an individual if a majority of the weeks of work in such individual's base period do not include part-time work (as so defined).

`(B) An individual shall not be disqualified from regular unemployment compensation for separating from employment if that separation is for any compelling family reason. For purposes of this subparagraph, the term `compelling family reason' means the following:

`(i) Domestic violence, verified by such reasonable and confidential documentation as the State law may require, which causes the individual reasonably to believe that such individual's continued employment would jeopardize the safety of the individual or of any member of the individual's immediate family (as defined by the Secretary of Labor).

`(ii) The illness or disability of a member of the individual's immediate family (as those terms are defined by the Secretary of Labor).

`(iii) The need for the individual to accompany such individual's spouse --

`(I) to a place from which it is impractical for such individual to commute; and

`(II) due to a change in location of the spouse's employment.

`(C) Weekly unemployment compensation is payable under this subparagraph to any individual who is unemployed (as determined under the State unemployment compensation law), has exhausted all rights to regular unemployment compensation under the State law, and is enrolled and making satisfactory progress in a State-approved training program or in a job training program authorized under the Workforce Investment Act of 1998. Such programs shall prepare individuals who have been separated from a declining occupation, or who have been involuntarily and indefinitely separated from employment as a result of a permanent reduction of operations at the individual's place of employment, for entry into a high-demand occupation. The amount of unemployment compensation payable under this subparagraph to an individual for a week of unemployment shall be equal to the individual's average weekly benefit amount (including dependents' allowances) for the most recent benefit year, and the total amount of unemployment compensation payable under this subparagraph to any individual shall be equal to at least 26 times the individual's average weekly benefit amount (including dependents' allowances) for the most recent benefit year.

`(D) Dependents' allowances are provided, in the case of any individual who is entitled to receive regular unemployment compensation and who has any dependents (as defined by State law), in an amount equal to at least $15 per dependent per week, subject to any aggregate limitation on such allowances which the State law may establish (but which aggregate limitation on the total allowance for dependents paid to an individual may not be less than $50 for each week of unemployment or 50 percent of the individual's weekly benefit amount for the benefit year, whichever is less).

`(4)(A) Any State seeking an incentive payment under this subsection shall submit an application therefor at such time, in such manner, and complete with such information as the Secretary of Labor may within 60 days after the date of the enactment of this subsection prescribe (whether by regulation or otherwise), including information relating to compliance with the requirements of paragraph (2) or (3), as well as how the State intends to use the incentive payment to improve or strengthen the State's unemployment compensation program. The Secretary of Labor shall, within 30 days after receiving a complete application, notify the State agency of the State of the Secretary's findings with respect to the requirements of paragraph (2) or (3) (or both).

`(B)(i) If the Secretary of Labor finds that the State law provisions (disregarding any State law provisions which are not then currently in effect as permanent law or which are subject to discontinuation) meet the requirements of paragraph (2) or (3), as the case may be, the Secretary of Labor shall thereupon make a certification to that effect to the Secretary of the Treasury, together with a certification as to the amount of the incentive payment to be transferred to the State account pursuant to that finding. The Secretary of the Treasury shall make the appropriate transfer within 7 days after receiving such certification.

`(ii) For purposes of clause (i), State law provisions which are to take effect within 12 months after the date of their certification under this subparagraph shall be considered to be in effect as of the date of such certification.

`(C)(i) No certification of compliance with the requirements of paragraph (2) or (3) may be made with respect to any State whose State law is not otherwise eligible for certification under section 303 or approvable under section 3304 of the Federal Unemployment Tax Act.

`(ii) No certification of compliance with the requirements of paragraph (3) may be made with respect to any State whose State law is not in compliance with the requirements of paragraph (2).

`(iii) No application under subparagraph (A) may be considered if submitted before the date of the enactment of this subsection or after the latest date necessary (as specified by the Secretary of Labor) to ensure that all incentive payments under this subsection are made before October 1, 2011.

`(5)(A) Except as provided in subparagraph (B), any amount transferred to the account of a State under this subsection may be used by such State only in the payment of cash benefits to individuals with respect to their unemployment (including for dependents' allowances and for unemployment compensation under paragraph (3)(C)), exclusive of expenses of administration.

`(B) A State may, subject to the same conditions as set forth in subsection (c)(2) (excluding subparagraph (B) thereof, and deeming the reference to `subsections (a) and (b)' in subparagraph (D) thereof to include this subsection), use any amount transferred to the account of such State under this subsection for the administration of its unemployment compensation law and public employment offices.

`(6) Out of any money in the Federal unemployment account not otherwise appropriated, the Secretary of the Treasury shall reserve $7,000,000,000 for incentive payments under this subsection. Any amount so reserved shall not be taken into account for purposes of any determination under section 902, 910, or 1203 of the amount in the Federal unemployment account as of any given time. Any amount so reserved for which the Secretary of the Treasury has not received a certification under paragraph (4)(B) by the deadline described in paragraph (4)(C)(iii) shall, upon the close of fiscal year 2011, become unrestricted as to use as part of the Federal unemployment account.

`(7) For purposes of this subsection, the terms `benefit year', `base period', and `week' have the respective meanings given such terms under section 205 of the Federal-State Extended Unemployment Compensation Act of 1970 (26 U.S.C. 3304 note).

`Special Transfer in Fiscal Year 2009 for Administration

`(g)(1) In addition to any other amounts, the Secretary of the Treasury shall transfer from the employment security administration account to the account of each State in the Unemployment Trust Fund, within 30 days after the date of the enactment of this subsection, the amount determined with respect to such State under paragraph (2).

`(2) The amount to be transferred under this subsection to a State account shall (as determined by the Secretary of Labor and certified by such Secretary to the Secretary of the Treasury) be equal to the amount obtained by multiplying $500,000,000 by the same ratio as determined under subsection (f)(1)(B) with respect to such State.

`(3) Any amount transferred to the account of a State as a result of the enactment of this subsection may be used by the State agency of such State only in the payment of expenses incurred by it for --

`(A) the administration of the provisions of its State law carrying out the purposes of subsection (f)(2) or any subparagraph of subsection (f)(3);

`(B) improved outreach to individuals who might be eligible for regular unemployment compensation by virtue of any provisions of the State law which are described in subparagraph (A);

`(C) the improvement of unemployment benefit and unemployment tax operations, including responding to increased demand for unemployment compensation; and

`(D) staff-assisted reemployment services for unemployment compensation claimants.'.

(b) Regulations- The Secretary of Labor may prescribe any regulations, operating instructions, or other guidance necessary to carry out the amendment made by subsection (a).

Subtitle B --Assistance for Vulnerable Individuals

SEC. 2101. EMERGENCY FUND FOR TANF PROGRAM.

(a) In General- Section 403 of the Social Security Act (42 U.S.C. 603) is amended by adding at the end the following:

`(c) Emergency Fund-

`(1) ESTABLISHMENT- There is established in the Treasury of the United States a fund which shall be known as the `Emergency Contingency Fund for State Temporary Assistance for Needy Families Programs' (in this subsection referred to as the `Emergency Fund').

`(2) DEPOSITS INTO FUND- Out of any money in the Treasury of the United States not otherwise appropriated, there are appropriated such sums as are necessary for payment to the Emergency Fund.

`(3) GRANTS-

`(A) GRANT RELATED TO CASELOAD INCREASES-

`(i) IN GENERAL- For each calendar quarter in fiscal year 2009 or 2010, the Secretary shall make a grant from the Emergency Fund to each State that --

`(I) requests a grant under this subparagraph for the quarter; and

`(II) meets the requirement of clause (ii) for the quarter.

`(ii) CASELOAD INCREASE REQUIREMENT- A State meets the requirement of this clause for a quarter if the average monthly assistance caseload of the State for the quarter exceeds the average monthly assistance caseload of the State for the corresponding quarter in the emergency fund base year of the State.

`(iii) AMOUNT OF GRANT- Subject to paragraph (5), the amount of the grant to be made to a State under this subparagraph for a quarter shall be 80 percent of the amount (if any) by which the total expenditures of the State for basic assistance (as defined by the Secretary) in the quarter, whether under the State program funded under this part or as qualified State expenditures, exceeds the total expenditures of the State for such assistance for the corresponding quarter in the emergency fund base year of the State.

`(B) GRANT RELATED TO INCREASED EXPENDITURES FOR NON-RECURRENT SHORT-TERM BENEFITS-

`(i) IN GENERAL- For each calendar quarter in fiscal year 2009 or 2010, the Secretary shall make a grant from the Emergency Fund to each State that --

`(I) requests a grant under this subparagraph for the quarter; and

`(II) meets the requirement of clause (ii) for the quarter.

`(ii) NON-RECURRENT SHORT-TERM EXPENDITURE REQUIREMENT- A State meets the requirement of this clause for a quarter if the total expenditures of the State for non-recurrent short-term benefits in the quarter, whether under the State program funded under this part or as qualified State expenditures, exceeds the total such expenditures of the State for non-recurrent short-term benefits in the corresponding quarter in the emergency fund base year of the State.

`(iii) AMOUNT OF GRANT- Subject to paragraph (5), the amount of the grant to be made to a State under this subparagraph for a quarter shall be an amount equal to 80 percent of the excess described in clause (ii).

`(C) GRANT RELATED TO INCREASED EXPENDITURES FOR SUBSIDIZED EMPLOYMENT-

`(i) IN GENERAL- For each calendar quarter in fiscal year 2009 or 2010, the Secretary shall make a grant from the Emergency Fund to each State that --

`(I) requests a grant under this subparagraph for the quarter; and

`(II) meets the requirement of clause (ii) for the quarter.

`(ii) SUBSIDIZED EMPLOYMENT EXPENDITURE REQUIREMENT- A State meets the requirement of this clause for a quarter if the total expenditures of the State for subsidized employment in the quarter, whether under the State program funded under this part or as qualified State expenditures, exceeds the total of such expenditures of the State in the corresponding quarter in the emergency fund base year of the State.

`(iii) AMOUNT OF GRANT- Subject to paragraph (5), the amount of the grant to be made to a State under this subparagraph for a quarter shall be an amount equal to 80 percent of the excess described in clause (ii).

`(4) AUTHORITY TO MAKE NECESSARY ADJUSTMENTS TO DATA AND COLLECT NEEDED DATA- In determining the size of the caseload of a State and the expenditures of a State for basic assistance, non-recurrent short-term benefits, and subsidized employment, during any period for which the State requests funds under this subsection, and during the emergency fund base year of the State, the Secretary may make appropriate adjustments to the data to ensure that the data reflect expenditures under the State program funded under this part and qualified State expenditures. The Secretary may develop a mechanism for collecting expenditure data, including procedures which allow States to make reasonable estimates, and may set deadlines for making revisions to the data.

`(5) LIMITATION- The total amount payable to a single State under subsection (b) and this subsection for a fiscal year shall not exceed 25 percent of the State family assistance grant.

`(6) LIMITATIONS ON USE OF FUNDS- A State to which an amount is paid under this subsection may use the amount only as authorized by section 404.

`(7) TIMING OF IMPLEMENTATION- The Secretary shall implement this subsection as quickly as reasonably possible, pursuant to appropriate guidance to States.

`(8) DEFINITIONS- In this subsection:

`(A) AVERAGE MONTHLY ASSISTANCE CASELOAD- The term `average monthly assistance caseload' means, with respect to a State and a quarter, the number of families receiving assistance during the quarter under the State program funded under this part or as qualified State expenditures, subject to adjustment under paragraph (4).

`(B) EMERGENCY FUND BASE YEAR-

`(i) IN GENERAL- The term `emergency fund base year' means, with respect to a State and a category described in clause (ii), whichever of fiscal year 2007 or 2008 is the fiscal year in which the amount described by the category with respect to the State is the lesser.

`(ii) CATEGORIES DESCRIBED- The categories described in this clause are the following:

`(I) The average monthly assistance caseload of the State.

`(II) The total expenditures of the State for non-recurrent short-term benefits, whether under the State program funded under this part or as qualified State expenditures.

`(III) The total expenditures of the State for subsidized employment, whether under the State program funded under this part or as qualified State expenditures.

`(C) QUALIFIED STATE EXPENDITURES- The term `qualified State expenditures' has the meaning given the term in section 409(a)(7).'.

(b) Temporary Modification of Caseload Reduction Credit- Section 407(b)(3)(A)(i) of such Act (42 U.S.C. 607(b)(3)(A)(i)) is amended by inserting `(or if the immediately preceding fiscal year is fiscal year 2009 or 2010, then, at State option, during the emergency fund base year of the State with respect to the average monthly assistance caseload of the State (within the meaning of section 403(c)(8)(B)))' before `under the State'.

(c) Effective Date- The amendments made by this section shall take effect on the date of the enactment of this Act.

SEC. 2102. ONE-TIME EMERGENCY PAYMENT TO SSI RECIPIENTS.

(a) Payment Authority-

(1) IN GENERAL- At the earliest practicable date in calendar year 2009 but not later than 120 days after the date of the enactment of this section, the Commissioner of Social Security shall make a one-time payment to each individual who is determined by the Commissioner in calendar year 2009 to be an individual who --

(A) is entitled to a cash benefit under the supplemental security income program under title XVI of the Social Security Act (other than pursuant to section 1611(e)(1)(B) of such Act) for at least 1 day in the calendar month in which the first payment under this section is to be made; or

(B)(i) was entitled to such a cash benefit (other than pursuant to section 1611(e)(1)(B) of such Act) for at least 1 day in the 2-month period preceding that calendar month; and

(ii) whose entitlement to that benefit ceased in that 2-month period solely because the income of the individual (and the income of the spouse, if any, of the individual) exceeded the applicable income limit described in paragraph (1)(A) or (2)(A) of section 1611(a) of such Act.

(2) AMOUNT OF PAYMENT- Subject to subsection (b)(1) of this section, the amount of the payment shall be --

(A) in the case of an individual eligible for a payment under this section who does not have a spouse eligible for such a payment, an amount equal to the average of the cash benefits payable in the aggregate under section 1611 or 1619(a) of the Social Security Act to eligible individuals who do not have an eligible spouse, for the most recent month for which data on payment of the benefits are available, as determined by the Commissioner of Social Security; or

(B) in the case of an individual eligible for a payment under this section who has a spouse eligible for such a payment, an amount equal to the average of the cash benefits payable in the aggregate under section 1611 or 1619(a) of the Social Security Act to eligible individuals who have an eligible spouse, for the most recent month for which data on payment of the benefits are available, as so determined.

(b) Administrative Provisions-

(1) AUTHORITY TO WITHHOLD PAYMENT TO RECOVER PRIOR OVERPAYMENT OF SSI BENEFITS- The Commissioner of Social Security may withhold part or all of a payment otherwise required to be made under subsection (a) of this section to an individual, in order to recover a prior overpayment of benefits to the individual under the supplemental security income program under title XVI of the Social Security Act, subject to the limitations of section 1631(b) of such Act.

(2) PAYMENT TO BE DISREGARDED IN DETERMINING UNDERPAYMENTS UNDER THE SSI PROGRAM- A payment under subsection (a) shall be disregarded in determining whether there has been an underpayment of benefits under the supplemental security income program under title XVI of the Social Security Act.

(3) NONASSIGNMENT- The provisions of section 1631(d) of the Social Security Act shall apply with respect to payments under this section to the same extent as they apply in the case of title XVI of such Act.

(c) Payments To Be Disregarded for Purposes of All Federal and Federally Assisted Programs- A payment under subsection (a) shall not be regarded as income to the recipient, and shall not be regarded as a resource of the recipient for the month of receipt and the following 6 months, for purposes of determining the eligibility of any individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.

(d) Appropriation- Out of any sums in the Treasury of the United States not otherwise appropriated, there are appropriated such sums as may be necessary to carry out this section.

SEC. 2103. TEMPORARY RESUMPTION OF PRIOR CHILD SUPPORT LAW.

During the period that begins with October 1, 2008, and ends with September 30, 2010, section 455(a)(1) of the Social Security Act shall be applied and administered as if the phrase `from amounts paid to the State under section 458 or' did not appear in such section.

TITLE III --HEALTH INSURANCE ASSISTANCE FOR THE UNEMPLOYED

SEC. 3001. SHORT TITLE AND TABLE OF CONTENTS OF TITLE.

(a) Short Title of Title- This title may be cited as the `Health Insurance Assistance for the Unemployed Act of 2009'.

(b) Table of Contents of Title- The table of contents of this title is as follows:

Sec. 3001. Short title and table of contents of title.

Sec. 3002. Premium assistance for COBRA benefits and extension of COBRA benefits for older or long-term employees.

Sec. 3003. Temporary optional Medicaid coverage for the unemployed.

SEC. 3002. PREMIUM ASSISTANCE FOR COBRA BENEFITS AND EXTENSION OF COBRA BENEFITS FOR OLDER OR LONG-TERM EMPLOYEES.

(a) Premium Assistance for COBRA Continuation Coverage for Individuals and Their Families-

(1) PROVISION OF PREMIUM ASSISTANCE-

(A) REDUCTION OF PREMIUMS PAYABLE- In the case of any premium for a period of coverage beginning on or after the date of the enactment of this Act for COBRA continuation coverage with respect to any assistance eligible individual, such individual shall be treated for purposes of any COBRA continuation provision as having paid the amount of such premium if such individual pays 35 percent of the amount of such premium (as determined without regard to this subsection).

(B) PREMIUM REIMBURSEMENT- For provisions providing the balance of such premium, see section 6431 of the Internal Revenue Code of 1986, as added by paragraph (12).

(2) LIMITATION OF PERIOD OF PREMIUM ASSISTANCE-

(A) IN GENERAL- Paragraph (1)(A) shall not apply with respect to any assistance eligible individual for months of coverage beginning on or after the earlier of --

(i) the first date that such individual is eligible for coverage under any other group health plan (other than coverage consisting of only dental, vision, counseling, or referral services (or a combination thereof), coverage under a health reimbursement arrangement or a health flexible spending arrangement, or coverage of treatment that is furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination thereof)) or is eligible for benefits under title XVIII of the Social Security Act, or

(ii) the earliest of --

(I) the date which is 12 months after the first day of the first month that paragraph (1)(A) applies with respect to such individual,

(II) the date following the expiration of the maximum period of continuation coverage required under the applicable COBRA continuation coverage provision, or

(III) the date following the expiration of the period of continuation coverage allowed under paragraph (4)(B)(ii).

(B) TIMING OF ELIGIBILITY FOR ADDITIONAL COVERAGE- For purposes of subparagraph (A)(i), an individual shall not be treated as eligible for coverage under a group health plan before the first date on which such individual could be covered under such plan.

(C) NOTIFICATION REQUIREMENT- An assistance eligible individual shall notify in writing the group health plan with respect to which paragraph (1)(A) applies if such paragraph ceases to apply by reason of subparagraph (A)(i). Such notice shall be provided to the group health plan in such time and manner as may be specified by the Secretary of Labor.

(3) ASSISTANCE ELIGIBLE INDIVIDUAL- For purposes of this section, the term `assistance eligible individual' means any qualified beneficiary if --

(A) at any time during the period that begins with September 1, 2008, and ends with December 31, 2009, such qualified beneficiary is eligible for COBRA continuation coverage,

(B) such qualified beneficiary elects such coverage, and

(C) the qualifying event with respect to the COBRA continuation coverage consists of the involuntary termination of the covered employee's employment and occurred during such period.

(4) EXTENSION OF ELECTION PERIOD AND EFFECT ON COVERAGE-

(A) IN GENERAL- Notwithstanding section 605(a) of the Employee Retirement Income Security Act of 1974, section 4980B(f)(5)(A) of the Internal Revenue Code of 1986, section 2205(a) of the Public Health Service Act, and section 8905a(c)(2) of title 5, United States Code, in the case of an individual who is a qualified beneficiary described in paragraph (3)(A) as of the date of the enactment of this Act and has not made the election referred to in paragraph (3)(B) as of such date, such individual may elect the COBRA continuation coverage under the COBRA continuation coverage provisions containing such sections during the 60-day period commencing with the date on which the notification required under paragraph (7)(C) is provided to such individual.

(B) COMMENCEMENT OF COVERAGE; NO REACH-BACK- Any COBRA continuation coverage elected by a qualified beneficiary during an extended election period under subparagraph (A) --

(i) shall commence on the date of the enactment of this Act, and

(ii) shall not extend beyond the period of COBRA continuation coverage that would have been required under the applicable COBRA continuation coverage provision if the coverage had been elected as required under such provision.

(C) PREEXISTING CONDITIONS- With respect to a qualified beneficiary who elects COBRA continuation coverage pursuant to subparagraph (A), the period --

(i) beginning on the date of the qualifying event, and

(ii) ending with the day before the date of the enactment of this Act,

shall be disregarded for purposes of determining the 63-day periods referred to in section 701)(2) of the Employee Retirement Income Security Act of 1974, section 9801(c)(2) of the Internal Revenue Code of 1986, and section 2701(c)(2) of the Public Health Service Act.

(5) EXPEDITED REVIEW OF DENIALS OF PREMIUM ASSISTANCE- In any case in which an individual requests treatment as an assistance eligible individual and is denied such treatment by the group health plan by reason of such individual's ineligibility for COBRA continuation coverage, the Secretary of Labor (or the Secretary of Health and Human services in connection with COBRA continuation coverage which is provided other than pursuant to part 6 of subtitle B of title I of the Employee Retirement Income Security Act of 1974), in consultation with the Secretary of the Treasury, shall provide for expedited review of such denial. An individual shall be entitled to such review upon application to such Secretary in such form and manner as shall be provided by such Secretary. Such Secretary shall make a determination regarding such individual's eligibility within 10 business days after receipt of such individual's application for review under this paragraph.

(6) DISREGARD OF SUBSIDIES FOR PURPOSES OF FEDERAL AND STATE PROGRAMS- Notwithstanding any other provision of law, any premium reduction with respect to an assistance eligible individual under this subsection shall not be considered income or resources in determining eligibility for, or the amount of assistance or benefits provided under, any other public benefit provided under Federal law or the law of any State or political subdivision thereof.

(7) NOTICES TO INDIVIDUALS-

(A) GENERAL NOTICE-

(i) IN GENERAL- In the case of notices provided under section 606(4) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1166(4)), section 4980B(f)(6)(D) of the Internal Revenue Code of 1986, section 2206(4) of the Public Health Service Act (42 U.S.C. 300bb-6(4)), or section 8905a(f)(2)(A) of title 5, United States Code, with respect to individuals who, during the period described in paragraph (3)(A), become entitled to elect COBRA continuation coverage, such notices shall include an additional notification to the recipient of the availability of premium reduction with respect to such coverage under this subsection.

(ii) ALTERNATIVE NOTICE- In the case of COBRA continuation coverage to which the notice provision under such sections does not apply, the Secretary of Labor, in consultation with the Secretary of the Treasury and the Secretary of Health and Human Services, shall, in coordination with administrators of the group health plans (or other entities) that provide or administer the COBRA continuation coverage involved, provide rules requiring the provision of such notice.

(iii) FORM- The requirement of the additional notification under this subparagraph may be met by amendment of existing notice forms or by inclusion of a separate document with the notice otherwise required.

(B) SPECIFIC REQUIREMENTS- Each additional notification under subparagraph (A) shall include --

(i) the forms necessary for establishing eligibility for premium reduction under this subsection,

(ii) the name, address, and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with such premium reduction,

(iii) a description of the extended election period provided for in paragraph (4)(A),

(iv) a description of the obligation of the qualified beneficiary under paragraph (2)(C) to notify the plan providing continuation coverage of eligibility for subsequent coverage under another group health plan or eligibility for benefits under title XVIII of the Social Security Act and the penalty provided for failure to so notify the plan, and

(v) a description, displayed in a prominent manner, of the qualified beneficiary's right to a reduced premium and any conditions on entitlement to the reduced premium.

(C) NOTICE RELATING TO RETROACTIVE COVERAGE- In the case of an individual described in paragraph (3)(A) who has elected COBRA continuation coverage as of the date of enactment of this Act or an individual described in paragraph (4)(A), the administrator of the group health plan (or other entity) involved shall provide (within 60 days after the date of enactment of this Act) for the additional notification required to be provided under subparagraph (A).

(D) MODEL NOTICES- Not later than 30 days after the date of enactment of this Act, the Secretary of the Labor, in consultation with the Secretary of the Treasury and the Secretary of Health and Human Services, shall prescribe models for the additional notification required under this paragraph.

(8) SAFEGUARDS- The Secretary of the Treasury shall provide such rules, procedures, regulations, and other guidance as may be necessary and appropriate to prevent fraud and abuse under this subsection.

(9) OUTREACH- The Secretary of Labor, in consultation with the Secretary of the Treasury and the Secretary of Health and Human Services, shall provide outreach consisting of public education and enrollment assistance relating to premium reduction provided under this subsection. Such outreach shall target employers, group health plan administrators, public assistance programs, States, insurers, and other entities as determined appropriate by such Secretaries. Such outreach shall include an initial focus on those individuals electing continuation coverage who are referred to in paragraph (7)(C). Information on such premium reduction, including enrollment, shall also be made available on website of the Departments of Labor, Treasury, and Health and Human Services.

(10) DEFINITIONS- For purposes of this subsection --

(A) ADMINISTRATOR- The term `administrator' has the meaning given such term in section 3(16) of the Employee Retirement Income Security Act of 1974.

(B) COBRA CONTINUATION COVERAGE- The term `COBRA continuation coverage' means continuation coverage provided pursuant to part 6 of subtitle B of title I of the Employee Retirement Income Security Act of 1974 (other than under section 609), title XXII of the Public Health Service Act, section 4980B of the Internal Revenue Code of 1986 (other than subsection (f)(1) of such section insofar as it relates to pediatric vaccines), or section 8905a of title 5, United States Code, or under a State program that provides continuation coverage comparable to such continuation coverage. Such term does not include coverage under a health flexible spending arrangement.

(C) COBRA CONTINUATION PROVISION- The term `COBRA continuation provision' means the provisions of law described in subparagraph (B).

(D) COVERED EMPLOYEE- The term `covered employee' has the meaning given such term in section 607(2) of the Employee Retirement Income Security Act of 1974.

(E) QUALIFIED BENEFICIARY- The term `qualified beneficiary' has the meaning given such term in section 607(3) of the Employee Retirement Income Security Act of 1974.

(F) GROUP HEALTH PLAN- The term `group health plan' has the meaning given such term in section 607(1) of the Employee Retirement Income Security Act of 1974.

(G) STATE- The term `State' includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.

(11) REPORTS-

(A) INTERIM REPORT- The Secretary of the Treasury shall submit an interim report to the Committee on Education and Labor, the Committee on Ways and Means, and the Committee on Energy and Commerce of the House of Representatives and the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate regarding the premium reduction provided under this subsection that includes --

(i) the number of individuals provided such assistance as of the date of the report; and

(ii) the total amount of expenditures incurred (with administrative expenditures noted separately) in connection with such assistance as of the date of the report.

(B) FINAL REPORT- As soon as practicable after the last period of COBRA continuation coverage for which premium reduction is provided under this section, the Secretary of the Treasury shall submit a final report to each Committee referred to in subparagraph (A) that includes --

(i) the number of individuals provided premium reduction under this section;

(ii) the average dollar amount (monthly and annually) of premium reductions provided to such individuals; and

(iii) the total amount of expenditures incurred (with administrative expenditures noted separately) in connection with premium reduction under this section.

(12) COBRA PREMIUM ASSISTANCE-

(A) IN GENERAL- Subchapter B of chapter 65 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

`SEC. 6431. COBRA PREMIUM ASSISTANCE.

`(a) In General- The entity to whom premiums are payable under COBRA continuation coverage shall be reimbursed for the amount of premiums not paid by plan beneficiaries by reason of section 3002(a) of the Health Insurance Assistance for the Unemployed Act of 2009. Such amount shall be treated as a credit against the requirement of such entity to make deposits of payroll taxes and the liability of such entity for payroll taxes. To the extent that such amount exceeds the amount of such taxes, the Secretary shall pay to such entity the amount of such excess. No payment may be made under this subsection to an entity with respect to any assistance eligible individual until after such entity has received the reduced premium from such individual required under section 3002(a)(1)(A) of such Act.

`(b) Payroll Taxes- For purposes of this section, the term `payroll taxes' means --

`(1) amounts required to be deducted and withheld for the payroll period under section 3401 (relating to wage withholding),

`(2) amounts required to be deducted for the payroll period under section 3102 (relating to FICA employee taxes), and

`(3) amounts of the taxes imposed for the payroll period under section 3111 (relating to FICA employer taxes).

`(c) Treatment of Credit- Except as otherwise provided by the Secretary, the credit described in subsection (a) shall be applied as though the employer had paid to the Secretary, on the day that the qualified beneficiary's premium payment is received, an amount equal to such credit.

`(d) Treatment of Payment- For purposes of section 1324(b)(2) of title 31, United States Code, any payment under this section shall be treated in the same manner as a refund of the credit under section 35.

`(e) Reporting-

`(1) IN GENERAL- Each entity entitled to reimbursement under subsection (a) for any period shall submit such reports as the Secretary may require, including --

`(A) an attestation of involuntary termination of employment for each covered employee on the basis of whose termination entitlement to reimbursement is claimed under subsection (a), and

`(B) a report of the amount of payroll taxes offset under subsection (a) for the reporting period and the estimated offsets of such taxes for the subsequent reporting period in connection with reimbursements under subsection (a).

`(2) TIMING OF REPORTS RELATING TO AMOUNT OF PAYROLL TAXES- Reports required under paragraph (1)(B) shall be submitted at the same time as deposits of taxes imposed by chapters 21, 22, and 24 or at such time as is specified by the Secretary.

`(f) Regulations- The Secretary may issue such regulations or other guidance as may be necessary or appropriate to carry out this section, including the requirement to report information or the establishment of other methods for verifying the correct amounts of payments and credits under this section. The Secretary shall issue such regulations or guidance with respect to the application of this section to group health plans that are multiemployer plans.'.

(B) SOCIAL SECURITY TRUST FUNDS HELD HARMLESS- In determining any amount transferred or appropriated to any fund under the Social Security Act, section 6431 of the Internal Revenue Code of 1986 shall not be taken into account.

(C) CLERICAL AMENDMENT- The table of sections for subchapter B of chapter 65 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

`Sec. 6431. COBRA premium assistance.'.

(D) EFFECTIVE DATE- The amendments made by this paragraph shall apply to premiums to which subsection (a)(1)(A) applies.

(13) PENALTY FOR FAILURE TO NOTIFY HEALTH PLAN OF CESSATION OF ELIGIBILITY FOR PREMIUM ASSISTANCE-

(A) IN GENERAL- Part I of subchapter B of chapter 68 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

`SEC. 6720C. PENALTY FOR FAILURE TO NOTIFY HEALTH PLAN OF CESSATION OF ELIGIBILITY FOR COBRA PREMIUM ASSISTANCE.

`(a) In General- Any person required to notify a group health plan under section 3002(a)(2)(C)) of the Health Insurance Assistance for the Unemployed Act of 2009 who fails to make such a notification at such time and in such manner as the Secretary of Labor may require shall pay a penalty of 110 percent of the premium reduction provided under such section after termination of eligibility under such subsection.

`(b) Reasonable Cause Exception- No penalty shall be imposed under subsection (a) with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect.'.

(B) CLERICAL AMENDMENT- The table of sections of part I of subchapter B of chapter 68 of such Code is amended by adding at the end the following new item:

`Sec. 6720C. Penalty for failure to notify health plan of cessation of eligibility for COBRA premium assistance.'.

(C) EFFECTIVE DATE- The amendments made by this paragraph shall apply to failures occurring after the date of the enactment of this Act.

(14) COORDINATION WITH HCTC-

(A) IN GENERAL- Subsection (g) of section 35 of the Internal Revenue Code of 1986 is amended by redesignating paragraph (9) as paragraph (10) and inserting after paragraph (8) the following new paragraph:

`(9) COBRA PREMIUM ASSISTANCE- In the case of an assistance eligible individual who receives premium reduction for COBRA continuation coverage under section 3002(a) of the Health Insurance Assistance for the Unemployed Act of 2009 for any month during the taxable year, such individual shall not be treated as an eligible individual, a certified individual, or a qualifying family member for purposes of this section or section 7527 with respect to such month.'.

(B) EFFECTIVE DATE- The amendment made by subparagraph (A) shall apply to taxable years ending after the date of the enactment of this Act.

(15) EXCLUSION OF COBRA PREMIUM ASSISTANCE FROM GROSS INCOME-

(A) IN GENERAL- Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 139B the following new section:

`SEC. 139C. COBRA PREMIUM ASSISTANCE.

`In the case of an assistance eligible individual (as defined in section 3002 of the Health Insurance Assistance for the Unemployed Act of 2009), gross income does not include any premium reduction provided under subsection (a) of such section.'.

(B) CLERICAL AMENDMENT- The table of sections for part III of subchapter B of chapter 1 of such Code is amended by inserting after the item relating to section 139B the following new item:

`Sec. 139C. COBRA premium assistance.'.

(C) EFFECTIVE DATE- The amendments made by this paragraph shall apply to taxable years ending after the date of the enactment of this Act.

(b) Extension of COBRA Benefits for Older or Long-Term Employees-

(1) ERISA AMENDMENT- Section 602(2)(A) of the Employee Retirement Income Security Act of 1974 is amended by adding at the end the following new clauses:

`(x) SPECIAL RULE FOR OLDER OR LONG-TERM EMPLOYEES GENERALLY- In the case of a qualifying event described in section 603(2) with respect to a covered employee who (as of such qualifying event) has attained age 55 or has completed 10 or more years of service with the entity that is the employer at the time of the qualifying event, clauses (i) and (ii) shall not apply.

`(xi) YEAR OF SERVICE- For purposes of this subparagraph, the term `year of service' shall have the meaning provided in section 202(a)(3).'.

(2) IRC AMENDMENT- Clause (i) of section 4980B(f)(2)(B) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subclauses:

`(X) SPECIAL RULE FOR OLDER OR LONG-TERM EMPLOYEES GENERALLY- In the case of a qualifying event described in paragraph (3)(B) with respect to a covered employee who (as of such qualifying event) has attained age 55 or has completed 10 or more years of service with the entity that is the employer at the time of the qualifying event, subclauses (I) and (II) shall not apply.

`(XI) YEAR OF SERVICE- For purposes of this clause, the term `year of service' shall have the meaning provided in section 202(a)(3) of the Employee Retirement Income Security Act of 1974.'.

(3) PHSA AMENDMENT- Section 2202(2)(A) of the Public Health Service Act is amended by adding at the end the following new clauses:

`(viii) SPECIAL RULE FOR OLDER OR LONG-TERM EMPLOYEES GENERALLY- In the case of a qualifying event described in section 2203(2) with respect to a covered employee who (as of such qualifying event) has attained age 55 or has completed 10 or more years of service with the entity that is the employer at the time of the qualifying event, clauses (i) and (ii) shall not apply.

`(ix) YEAR OF SERVICE- For purposes of this subparagraph, the term `year of service' shall have the meaning provided in section 202(a)(3) of the Employee Retirement Income Security Act of 1974.'.

(4) EFFECTIVE DATE OF AMENDMENTS- The amendments made by this subsection shall apply to periods of coverage which would (without regard to the amendments made by this section) end on or after the date of the enactment of this Act.

SEC. 3003. TEMPORARY OPTIONAL MEDICAID COVERAGE FOR THE UNEMPLOYED.

(a) In General- Section 1902 of the Social Security Act (42 U.S.C. 1396b) is amended --

(1) in subsection (a)(10)(A)(ii) --

(A) by striking `or' at the end of subclause (XVIII);

(B) by adding `or' at the end of subclause (XIX); and

(C) by adding at the end the following new subclause

`(XX) who are described in subsection (dd)(1) (relating to certain unemployed individuals and their families);'; and

(2) by adding at the end the following new subsection:

`(dd)(1) Individuals described in this paragraph are --

`(A) individuals who --

`(i) are within one or more of the categories described in paragraph (2), as elected under the State plan; and

`(ii) meet the applicable requirements of paragraph (3); and

`(B) individuals who --

`(i) are the spouse, or dependent child under 19 years of age, of an individual described in subparagraph (A); and

`(ii) meet the requirement of paragraph (3)(B).

`(2) The categories of individuals described in this paragraph are each of the following:

`(A) Individuals who are receiving unemployment compensation benefits.

`(B) Individuals who were receiving, but have exhausted, unemployment compensation benefits on or after July 1, 2008.

`(C) Individuals who are involuntarily unemployed and were involuntarily separated from employment on or after September 1, 2008, and before January 1, 2011, whose family gross income does not exceed a percentage specified by the State (not to exceed 200 percent) of the income official poverty line (as defined by the Office of Management and Budget, and revised annually in accordance with section 673(2) of the Omnibus Budget Reconciliation Act of 1981) applicable to a family of the size involved, and who, but for subsection (a)(10)(A)(ii)(XX), are not eligible for medical assistance under this title or health assistance under title XXI.

`(D) Individuals who are involuntarily unemployed and were involuntarily separated from employment on or after September 1, 2008, and before January 1, 2011, who are members of households participating in the supplemental nutrition assistance program established under the Food and Nutrition Act of 2008 (7 U.S.C. 2011 et seq), and who, but for subsection (a)(10)(A)(ii)(XX), are not eligible for medical assistance under this title or health assistance under title XXI.

A State plan may elect one or more of the categories described in this paragraph but may not elect the category described in subparagraph (B) unless the State plan also elects the category described in subparagraph (A).

`(3) The requirements of this paragraph with respect to an individual are the following:

`(A) In the case of individuals within a category described in subparagraph (A) or (B) of paragraph (2), the individual was involuntarily separated from employment on or after September 1, 2008, and before January 1, 2011, or meets such comparable requirement as the Secretary specifies through rule, guidance, or otherwise in the case of an individual who was an independent contractor.

`(B) The individual is not otherwise covered under creditable coverage, as defined in section 2701(c) of the Public Health Service Act (42 U.S.C. 300gg(c)), but applied without regard to paragraph (1)(F) of such section and without regard to coverage provided by reason of the application of subsection (a)(10)(A)(ii)(XX).

`(4)(A) No income or resources test shall be applied with respect to any category of individuals described in subparagraph (A), (B), or (D) of paragraph (2) who are eligible for medical assistance only by reason of the application of subsection (a)(10)(A)(ii)(XX).

`(B) Nothing in this subsection shall be construed to prevent a State from imposing a resource test for the category of individuals described in paragraph (2)(C)).

`(C) In the case of individuals provided medical assistance by reason of the application of subsection (a)(10)(A)(ii)(XX), the requirements of subsections (i)(22) and (x) shall not apply.'.

(b) 100 Percent Federal Matching Rate-

(1) FMAP FOR TIME-LIMITED PERIOD- The third sentence of section 1905(b) of such Act (42 U.S.C. 1396d(b)) is amended by inserting before the period at the end the following: `and for items and services furnished on or after the date of enactment of this Act and before January 1, 2011, to individuals who are eligible for medical assistance only by reason of the application of section 1902(a)(10)(A)(ii)(XX)'.

(2) CERTAIN ENROLLMENT-RELATED ADMINISTRATIVE COSTS- Notwithstanding any other provision of law, for purposes of applying section 1903(a) of the Social Security Act (42 U.S.C. 1396b(a)), with respect to expenditures incurred on or after the date of the enactment of this Act and before January 1, 2011, for costs of administration (including outreach and the modification and operation of eligibility information systems) attributable to eligibility determination and enrollment of individuals who are eligible for medical assistance only by reason of the application of section 1902(a)(10)(A)(ii)(XX) of such Act, as added by subsection (a)(1), the Federal matching percentage shall be 100 percent instead of the matching percentage otherwise applicable.

(c) Conforming Amendments- (1) Section 1903(f)(4) of such Act (42 U.S.C. 1396c(f)(4)) is amended by inserting `1902(a)(10)(A)(ii)(XX), or' after `1902(a)(10)(A)(ii)(XIX),'.

(2) Section 1905(a) of such Act (42 U.S.C. 1396d(a)) is amended, in the matter preceding paragraph (1) --

(A) by striking `or' at the end of clause (xii);

(B) by adding `or' at the end of clause (xiii); and

(C) by inserting after clause (xiii) the following new clause:

`(xiv) individuals described in section 1902(dd)(1),'.

TITLE IV --HEALTH INFORMATION TECHNOLOGY

SEC. 4001. SHORT TITLE; TABLE OF CONTENTS OF TITLE.

(a) Short Title- This title may be cited as the `Health Information Technology for Economic and Clinical Health Act' or the `HITECH Act'.

(b) Table of Contents of Title- The table of contents of this title is as follows:

Sec. 4001. Short title; table of contents of title.

Subtitle A --Promotion of Health Information Technology

Part I --Improving Health Care Quality, Safety, and Efficiency

Sec. 4101. ONCHIT; standards development and adoption.

`TITLE XXX --HEALTH INFORMATION TECHNOLOGY AND QUALITY



`Sec. 3000. Definitions.

`Subtitle A --Promotion of Health Information Technology



`Sec. 3001. Office of the National Coordinator for Health Information Technology.



`Sec. 3002. HIT Policy Committee.



`Sec. 3003. HIT Standards Committee.



`Sec. 3004. Process for adoption of endorsed recommendations; adoption of initial set of standards, implementation specifications, and certification criteria.



`Sec. 3005. Application and use of adopted standards and implementation specifications by Federal agencies.



`Sec. 3006. Voluntary application and use of adopted standards and implementation specifications by private entities.



`Sec. 3007. Federal health information technology.



`Sec. 3008. Transitions.



`Sec. 3009. Relation to HIPAA privacy and security law.



`Sec. 3010. Authorization for appropriations.

Sec. 4102. Technical amendment.

Part II --Application and Use of Adopted Health Information Technology Standards; Reports

Sec. 4111. Coordination of Federal activities with adopted standards and implementation specifications.

Sec. 4112. Application to private entities.

Sec. 4113. Study and reports.

Subtitle B --Testing of Health Information Technology

Sec. 4201. National Institute for Standards and Technology testing.

Sec. 4202. Research and development programs.

Subtitle C --Incentives for the Use of Health Information Technology

Part I --Grants and Loans Funding

Sec. 4301. Grant, loan, and demonstration programs.

`Subtitle B --Incentives for the Use of Health Information Technology



`Sec. 3011. Immediate funding to strengthen the health information technology infrastructure.



`Sec. 3012. Health information technology implementation assistance.



`Sec. 3013. State grants to promote health information technology.



`Sec. 3014. Competitive grants to States and Indian tribes for the development of loan programs to facilitate the widespread adoption of certified EHR technology.



`Sec. 3015. Demonstration program to integrate information technology into clinical education.



`Sec. 3016. Information technology professionals on health care.



`Sec. 3017. General grant and loan provisions.



`Sec. 3018. Authorization for appropriations.

Part II --Medicare Program

Sec. 4311. Incentives for eligible professionals.

Sec. 4312. Incentives for hospitals.

Sec. 4313. Treatment of payments and savings; implementation funding.

Sec. 4314. Study on application of EHR payment incentives for providers not receiving other incentive payments.

Part III --Medicaid Funding

Sec. 4321. Medicaid provider HIT adoption and operation payments; implementation funding.

Subtitle D --Privacy

Sec. 4400. Definitions.

Part I --Improved Privacy Provisions and Security Provisions

Sec. 4401. Application of security provisions and penalties to business associates of covered entities; annual guidance on security provisions.

Sec. 4402. Notification in the case of breach.

Sec. 4403. Education on Health Information Privacy.

Sec. 4404. Application of privacy provisions and penalties to business associates of covered entities.

Sec. 4405. Restrictions on certain disclosures and sales of health information; accounting of certain protected health information disclosures; access to certain information in electronic format.

Sec. 4406. Conditions on certain contacts as part of health care operations.

Sec. 4407. Temporary breach notification requirement for vendors of personal health records and other non-HIPAA covered entities.

Sec. 4408. Business associate contracts required for certain entities.

Sec. 4409. Clarification of application of wrongful disclosures criminal penalties.

Sec. 4410. Improved enforcement.

Sec. 4411. Audits.

Part II --Relationship to Other Laws; Regulatory References; Effective Date; Reports

Sec. 4421. Relationship to other laws.

Sec. 4422. Regulatory references.

Sec. 4423. Effective date.

Sec. 4424. Studies, reports, guidance.

Subtitle E --Miscellaneous Medicare Provisions

Sec. 4501. Moratoria on certain Medicare regulations.

Sec. 4502. Long-term care hospital technical corrections.

Subtitle A --Promotion of Health Information Technology

PART I --IMPROVING HEALTH CARE QUALITY, SAFETY, AND EFFICIENCY

SEC. 4101. ONCHIT; STANDARDS DEVELOPMENT AND ADOPTION.

The Public Health Service Act (42 U.S.C. 201 et seq.) is amended by adding at the end the following:

`TITLE XXX --HEALTH INFORMATION TECHNOLOGY AND QUALITY

`SEC. 3000. DEFINITIONS.

`In this title:

`(1) CERTIFIED EHR TECHNOLOGY- The term `certified EHR technology' means a qualified electronic health record that is certified pursuant to section 3001(c)(5) as meeting standards adopted under section 3004 that are applicable to the type of record involved (as determined by the Secretary, such as an ambulatory electronic health record for office-based physicians or an inpatient hospital electronic health record for hospitals).

`(2) ENTERPRISE INTEGRATION- The term `enterprise integration' means the electronic linkage of health care providers, health plans, the government, and other interested parties, to enable the electronic exchange and use of health information among all the components in the health care infrastructure in accordance with applicable law, and such term includes related application protocols and other related standards.

`(3) HEALTH CARE PROVIDER- The term `health care provider' means a hospital, skilled nursing facility, nursing facility, home health entity or other long-term care facility, health care clinic, Federally qualified health center, group practice (as defined in section 1877(h)(4) of the Social Security Act), a pharmacist, a pharmacy, a laboratory, a physician (as defined in section 1861(r) of the Social Security Act), a practitioner (as described in section 1842(b)(18)(C) of the Social Security Act), a provider operated by, or under contract with, the Indian Health Service or by an Indian tribe (as defined in the Indian Self-Determination and Education Assistance Act), tribal organization, or urban Indian organization (as defined in section 4 of the Indian Health Care Improvement Act), a rural health clinic, a covered entity under section 340B, and any other category of facility or clinician determined appropriate by the Secretary.

`(4) HEALTH INFORMATION- The term `health information' has the meaning given such term in section 1171(4) of the Social Security Act.

`(5) HEALTH INFORMATION TECHNOLOGY- The term `health information technology' means hardware, software, integrated technologies and related licenses, intellectual property, upgrades, and packaged solutions sold as services that are specifically designed for use by health care entities for the electronic creation, maintenance, or exchange of health information.

`(6) HEALTH PLAN- The term `health plan' has the meaning given such term in section 1171(5) of the Social Security Act.

`(7) HIT POLICY COMMITTEE- The term `HIT Policy Committee' means such Committee established under section 3002(a).

`(8) HIT STANDARDS COMMITTEE- The term `HIT Standards Committee' means such Committee established under section 3003(a).

`(9) INDIVIDUALLY IDENTIFIABLE HEALTH INFORMATION- The term `individually identifiable health information' has the meaning given such term in section 1171(6) of the Social Security Act.

`(10) LABORATORY- The term `laboratory' has the meaning given such term in section 353(a).

`(11) NATIONAL COORDINATOR- The term `National Coordinator' means the head of the Office of the National Coordinator for Health Information Technology established under section 3001(a).

`(12) PHARMACIST- The term `pharmacist' has the meaning given such term in section 804(2) of the Federal Food, Drug, and Cosmetic Act.

`(13) QUALIFIED ELECTRONIC HEALTH RECORD- The term `qualified electronic health record' means an electronic record of health-related information on an individual that --

`(A) includes patient demographic and clinical health information, such as medical history and problem lists; and

`(B) has the capacity --

`(i) to provide clinical decision support;

`(ii) to support physician order entry;

`(iii) to capture and query information relevant to health care quality; and

`(iv) to exchange electronic health information with, and integrate such information from other sources.

`(14) STATE- The term `State' means each of the several States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands.

`Subtitle A --Promotion of Health Information Technology

`SEC. 3001. OFFICE OF THE NATIONAL COORDINATOR FOR HEALTH INFORMATION TECHNOLOGY.

`(a) Establishment- There is established within the Department of Health and Human Services an Office of the National Coordinator for Health Information Technology (referred to in this section as the `Office'). The Office shall be headed by a National Coordinator who shall be appointed by the Secretary and shall report directly to the Secretary.

`(b) Purpose- The National Coordinator shall perform the duties under subsection (c) in a manner consistent with the development of a nationwide health information technology infrastructure that allows for the electronic use and exchange of information and that --

`(1) ensures that each patient's health information is secure and protected, in accordance with applicable law;

`(2) improves health care quality, reduces medical errors, and advances the delivery of patient-centered medical care;

`(3) reduces health care costs resulting from inefficiency, medical errors, inappropriate care, duplicative care, and incomplete information;

`(4) provides appropriate information to help guide medical decisions at the time and place of care;

`(5) ensures the inclusion of meaningful public input in such development of such infrastructure;

`(6) improves the coordination of care and information among hospitals, laboratories, physician offices, and other entities through an effective infrastructure for the secure and authorized exchange of health care information;

`(7) improves public health activities and facilitates the early identification and rapid response to public health threats and emergencies, including bioterror events and infectious disease outbreaks;

`(8) facilitates health and clinical research and health care quality;

`(9) promotes prevention of chronic diseases;

`(10) promotes a more effective marketplace, greater competition, greater systems analysis, increased consumer choice, and improved outcomes in health care services; and

`(11) improves efforts to reduce health disparities.

`(c) Duties of the National Coordinator-

`(1) STANDARDS- The National Coordinator shall review and determine whether to endorse each standard, implementation specification, and certification criterion for the electronic exchange and use of health information that is recommended by the HIT Standards Committee under section 3003 for purposes of adoption under section 3004. The Coordinator shall make such determination, and report to the Secretary such determination, not later than 45 days after the date the recommendation is received by the Coordinator.

`(2) HIT POLICY COORDINATION-

`(A) IN GENERAL- The National Coordinator shall coordinate health information technology policy and programs of the Department with those of other relevant executive branch agencies with a goal of avoiding duplication of efforts and of helping to ensure that each agency undertakes health information technology activities primarily within the areas of its greatest expertise and technical capability and in a manner towards a coordinated national goal.

`(B) HIT POLICY AND STANDARDS COMMITTEES- The National Coordinator shall be a leading member in the establishment and operations of the HIT Policy Committee and the HIT Standards Committee and shall serve as a liaison among those two Committees and the Federal Government.

`(3) STRATEGIC PLAN-

`(A) IN GENERAL- The National Coordinator shall, in consultation with other appropriate Federal agencies (including the National Institute of Standards and Technology), update the Federal Health IT Strategic Plan (developed as of June 3, 2008) to include specific objectives, milestones, and metrics with respect to the following:

`(i) The electronic exchange and use of health information and the enterprise integration of such information.

`(ii) The utilization of an electronic health record for each person in the United States by 2014.

`(iii) The incorporation of privacy and security protections for the electronic exchange of an individual's individually identifiable health information.

`(iv) Ensuring security methods to ensure appropriate authorization and electronic authentication of health information and specifying technologies or methodologies for rendering health information unusable, unreadable, or indecipherable.

`(v) Specifying a framework for coordination and flow of recommendations and policies under this subtitle among the Secretary, the National Coordinator, the HIT Policy Committee, the HIT Standards Committee, and other health information exchanges and other relevant entities.

`(vi) Methods to foster the public understanding of health information technology.

`(vii) Strategies to enhance the use of health information technology in improving the quality of health care, reducing medical errors, reducing health disparities, improving public health, and improving the continuity of care among health care settings.

`(B) COLLABORATION- The strategic plan shall be updated through collaboration of public and private entities.

`(C) MEASURABLE OUTCOME GOALS- The strategic plan update shall include measurable outcome goals.

`(D) PUBLICATION- The National Coordinator shall republish the strategic plan, including all updates.

`(4) WEBSITE- The National Coordinator shall maintain and frequently update an Internet website on which there is posted information on the work, schedules, reports, recommendations, and other information to ensure transparency in promotion of a nationwide health information technology infrastructure.

`(5) CERTIFICATION-

`(A) IN GENERAL- The National Coordinator, in consultation with the Director of the National Institute of Standards and Technology, shall develop a program (either directly or by contract) for the voluntary certification of health information technology as being in compliance with applicable certification criteria adopted under this subtitle. Such program shall include testing of the technology in accordance with section 4201(b) of the HITECH Act.

`(B) CERTIFICATION CRITERIA DESCRIBED- In this title, the term `certification criteria' means, with respect to standards and implementation specifications for health information technology, criteria to establish that the technology meets such standards and implementation specifications.

`(6) REPORTS AND PUBLICATIONS-

`(A) REPORT ON ADDITIONAL FUNDING OR AUTHORITY NEEDED- Not later than 12 months after the date of the enactment of this title, the National Coordinator shall submit to the appropriate committees of jurisdiction of the House of Representatives and the Senate a report on any additional funding or authority the Coordinator or the HIT Policy Committee or HIT Standards Committee requires to evaluate and develop standards, implementation specifications, and certification criteria, or to achieve full participation of stakeholders in the adoption of a nationwide health information technology infrastructure that allows for the electronic use and exchange of health information.

`(B) IMPLEMENTATION REPORT- The National Coordinator shall prepare a report that identifies lessons learned from major public and private health care systems in their implementation of health information technology, including information on whether the technologies and practices developed by such systems may be applicable to and usable in whole or in part by other health care providers.

`(C) ASSESSMENT OF IMPACT OF HIT ON COMMUNITIES WITH HEALTH DISPARITIES AND UNINSURED, UNDERINSURED, AND MEDICALLY UNDERSERVED AREAS- The National Coordinator shall assess and publish the impact of health information technology in communities with health disparities and in areas with a high proportion of individuals who are uninsured, underinsured, and medically underserved individuals (including urban and rural areas) and identify practices to increase the adoption of such technology by health care providers in such communities.

`(D) EVALUATION OF BENEFITS AND COSTS OF THE ELECTRONIC USE AND EXCHANGE OF HEALTH INFORMATION- The National Coordinator shall evaluate and publish evidence on the benefits and costs of the electronic use and exchange of health information and assess to whom these benefits and costs accrue.

`(E) RESOURCE REQUIREMENTS- The National Coordinator shall estimate and publish resources required annually to reach the goal of utilization of an electronic health record for each person in the United States by 2014, including the required level of Federal funding, expectations for regional, State, and private investment, and the expected contributions by volunteers to activities for the utilization of such records.

`(7) ASSISTANCE- The National Coordinator may provide financial assistance to consumer advocacy groups and not-for-profit entities that work in the public interest for purposes of defraying the cost to such groups and entities to participate under, whether in whole or in part, the National Technology Transfer Act of 1995 (15 U.S.C. 272 note).

`(8) GOVERNANCE FOR NATIONWIDE HEALTH INFORMATION NETWORK- The National Coordinator shall establish a governance mechanism for the nationwide health information network.

`(d) Detail of Federal Employees-

`(1) IN GENERAL- Upon the request of the National Coordinator, the head of any Federal agency is authorized to detail, with or without reimbursement from the Office, any of the personnel of such agency to the Office to assist it in carrying out its duties under this section.

`(2) EFFECT OF DETAIL- Any detail of personnel under paragraph (1) shall --

`(A) not interrupt or otherwise affect the civil service status or privileges of the Federal employee; and

`(B) be in addition to any other staff of the Department employed by the National Coordinator.

`(3) ACCEPTANCE OF DETAILEES- Notwithstanding any other provision of law, the Office may accept detailed personnel from other Federal agencies without regard to whether the agency described under paragraph (1) is reimbursed.

`(e) Chief Privacy Officer of the Office of the National Coordinator- Not later than 12 months after the date of the enactment of this title, the Secretary shall appoint a Chief Privacy Officer of the Office of the National Coordinator, whose duty it shall be to advise the National Coordinator on privacy, security, and data stewardship of electronic health information and to coordinate with other Federal agencies (and similar privacy officers in such agencies), with State and regional efforts, and with foreign countries with regard to the privacy, security, and data stewardship of electronic individually identifiable health information.

`SEC. 3002. HIT POLICY COMMITTEE.

`(a) Establishment- There is established a HIT Policy Committee to make policy recommendations to the National Coordinator relating to the implementation of a nationwide health information technology infrastructure, including implementation of the strategic plan described in section 3001(c)(3).

`(b) Duties-

`(1) RECOMMENDATIONS ON HEALTH INFORMATION TECHNOLOGY INFRASTRUCTURE- The HIT Policy Committee shall recommend a policy framework for the development and adoption of a nationwide health information technology infrastructure that permits the electronic exchange and use of health information as is consistent with the strategic plan under section 3001(c)(3) and that includes the recommendations under paragraph (2). The Committee shall update such recommendations and make new recommendations as appropriate.

`(2) SPECIFIC AREAS OF STANDARD DEVELOPMENT-

`(A) IN GENERAL- The HIT Policy Committee shall recommend the areas in which standards, implementation specifications, and certification criteria are needed for the electronic exchange and use of health information for purposes of adoption under section 3004 and shall recommend an order of priority for the development, harmonization, and recognition of such standards, specifications, and certification criteria among the areas so recommended. Such standards and implementation specifications shall include named standards, architectures, and software schemes for the authentication and security of individually identifiable health information and other information as needed to ensure the reproducible development of common solutions across disparate entities.

`(B) AREAS REQUIRED FOR CONSIDERATION- For purposes of subparagraph (A), the HIT Policy Committee shall make recommendations for at least the following areas:

`(i) Technologies that protect the privacy of health information and promote security in a qualified electronic health record, including for the segmentation and protection from disclosure of specific and sensitive individually identifiable health information with the goal of minimizing the reluctance of patients to seek care (or disclose information about a condition) because of privacy concerns, in accordance with applicable law, and for the use and disclosure of limited data sets of such information.

`(ii) A nationwide health information technology infrastructure that allows for the electronic use and accurate exchange of health information.

`(iii) The utilization of a certified electronic health record for each person in the United States by 2014.

`(iv) Technologies that as a part of a qualified electronic health record allow for an accounting of disclosures made by a covered entity (as defined for purposes of regulations promulgated under section 264(c) of the Health Insurance Portability and Accountability Act of 1996) for purposes of treatment, payment, and health care operations (as such terms are defined for purposes of such regulations).

`(v) The use of certified electronic health records to improve the quality of health care, such as by promoting the coordination of health care and improving continuity of health care among health care providers, by reducing medical errors, by improving population health, and by advancing research and education.

`(C) OTHER AREAS FOR CONSIDERATION- In making recommendations under subparagraph (A), the HIT Policy Committee may consider the following additional areas:

`(i) The appropriate uses of a nationwide health information infrastructure, including for purposes of --

`(I) the collection of quality data and public reporting;

`(II) biosurveillance and public health;

`(III) medical and clinical research; and

`(IV) drug safety.

`(ii) Self-service technologies that facilitate the use and exchange of patient information and reduce wait times.

`(iii) Telemedicine technologies, in order to reduce travel requirements for patients in remote areas.

`(iv) Technologies that facilitate home health care and the monitoring of patients recuperating at home.

`(v) Technologies that help reduce medical errors.

`(vi) Technologies that facilitate the continuity of care among health settings.

`(vii) Technologies that meet the needs of diverse populations.

`(viii) Any other technology that the HIT Policy Committee finds to be among the technologies with the greatest potential to improve the quality and efficiency of health care.

`(3) FORUM- The HIT Policy Committee shall serve as a forum for broad stakeholder input with specific expertise in policies relating to the matters described in paragraphs (1) and (2).

`(c) Membership and Operations-

`(1) IN GENERAL- The National Coordinator shall provide leadership in the establishment and operations of the HIT Policy Committee.

`(2) MEMBERSHIP- The membership of the HIT Policy Committee shall at least reflect providers, ancillary healthcare workers, consumers, purchasers, health plans, technology vendors, researchers, relevant Federal agencies, and individuals with technical expertise on health care quality, privacy and security, and on the electronic exchange and use of health information.

`(3) CONSIDERATION- The National Coordinator shall ensure that the relevant recommendations and comments from the National Committee on Vital and Health Statistics are considered in the development of policies.

`(d) Application of FACA- The Federal Advisory Committee Act (5 U.S.C. App.), other than section 14 of such Act, shall apply to the HIT Policy Committee.

`(e) Publication- The Secretary shall provide for publication in the Federal Register and the posting on the Internet website of the Office of the National Coordinator for Health Information Technology of all policy recommendations made by the HIT Policy Committee under this section.

`SEC. 3003. HIT STANDARDS COMMITTEE.

`(a) Establishment- There is established a committee to be known as the HIT Standards Committee to recommend to the National Coordinator standards, implementation specifications, and certification criteria for the electronic exchange and use of health information for purposes of adoption under section 3004, consistent with the implementation of the strategic plan described in section 3001(c)(3) and beginning with the areas listed in section 3002(b)(2)(B) in accordance with policies developed by the HIT Policy Committee.

`(b) Duties-

`(1) STANDARD DEVELOPMENT-

`(A) IN GENERAL- The HIT Standards Committee shall recommend to the National Coordinator standards, implementation specifications, and certification criteria described in subsection (a) that have been developed, harmonized, or recognized by the HIT Standards Committee. The HIT Standards Committee shall update such recommendations and make new recommendations as appropriate, including in response to a notification sent under section 3004(b)(2). Such recommendations shall be consistent with the latest recommendations made by the HIT Policy Committee.

`(B) PILOT TESTING OF STANDARDS AND IMPLEMENTATION SPECIFICATIONS- In the development, harmonization, or recognition of standards and implementation specifications, the HIT Standards Committee shall, as appropriate, provide for the testing of such standards and specifications by the National Institute for Standards and Technology under section 4201 of the HITECH Act.

`(C) CONSISTENCY- The standards, implementation specifications, and certification criteria recommended under this subsection shall be consistent with the standards for information transactions and data elements adopted pursuant to section 1173 of the Social Security Act.

`(2) FORUM- The HIT Standards Committee shall serve as a forum for the participation of a broad range of stakeholders to provide input on the development, harmonization, and recognition of standards, implementation specifications, and certification criteria necessary for the development and adoption of a nationwide health information technology infrastructure that allows for the electronic use and exchange of health information.

`(3) SCHEDULE- Not later than 90 days after the date of the enactment of this title, the HIT Standards Committee shall develop a schedule for the assessment of policy recommendations developed by the HIT Policy Committee under section 3002. The HIT Standards Committee shall update such schedule annually. The Secretary shall publish such schedule in the Federal Register.

`(4) PUBLIC INPUT- The HIT Standards Committee shall conduct open public meetings and develop a process to allow for public comment on the schedule described in paragraph (3) and recommendations described in this subsection. Under such process comments shall be submitted in a timely manner after the date of publication of a recommendation under this subsection.

`(c) Membership and Operations-

`(1) IN GENERAL- The National Coordinator shall provide leadership in the establishment and operations of the HIT Standards Committee.

`(2) MEMBERSHIP- The membership of the HIT Standards Committee shall at least reflect providers, ancillary healthcare workers, consumers, purchasers, health plans, technology vendors, researchers, relevant Federal agencies, and individuals with technical expertise on health care quality, privacy and security, and on the electronic exchange and use of health information.

`(3) CONSIDERATION- The National Coordinator shall ensure that the relevant recommendations and comments from the National Committee on Vital and Health Statistics are considered in the development of standards.

`(4) ASSISTANCE- For the purposes of carrying out this section, the Secretary may provide or ensure that financial assistance is provided by the HIT Standards Committee to defray in whole or in part any membership fees or dues charged by such Committee to those consumer advocacy groups and not for profit entities that work in the public interest as a part of their mission.

`(d) Application of FACA- The Federal Advisory Committee Act (5 U.S.C. App.), other than section 14, shall apply to the HIT Standards Committee.

`(e) Publication- The Secretary shall provide for publication in the Federal Register and the posting on the Internet website of the Office of the National Coordinator for Health Information Technology of all recommendations made by the HIT Standards Committee under this section.

`SEC. 3004. PROCESS FOR ADOPTION OF ENDORSED RECOMMENDATIONS; ADOPTION OF INITIAL SET OF STANDARDS, IMPLEMENTATION SPECIFICATIONS, AND CERTIFICATION CRITERIA.

`(a) Process for Adoption of Endorsed Recommendations-

`(1) REVIEW OF ENDORSED STANDARDS, IMPLEMENTATION SPECIFICATIONS, AND CERTIFICATION CRITERIA- Not later than 90 days after the date of receipt of standards, implementation specifications, or certification criteria endorsed under section 3001(c), the Secretary, in consultation with representatives of other relevant Federal agencies, shall jointly review such standards, implementation specifications, or certification criteria and shall determine whether or not to propose adoption of such standards, implementation specifications, or certification criteria.

`(2) DETERMINATION TO ADOPT STANDARDS, IMPLEMENTATION SPECIFICATIONS, AND CERTIFICATION CRITERIA- If the Secretary determines --

`(A) to propose adoption of any grouping of such standards, implementation specifications, or certification criteria, the Secretary shall, by regulation, determine whether or not to adopt such grouping of standards, implementation specifications, or certification criteria; or

`(B) not to propose adoption of any grouping of standards, implementation specifications, or certification criteria, the Secretary shall notify the National Coordinator and the HIT Standards Committee in writing of such determination and the reasons for not proposing the adoption of such recommendation.

`(3) PUBLICATION- The Secretary shall provide for publication in the Federal Register of all determinations made by the Secretary under paragraph (1).

`(b) Adoption of Initial Set of Standards, Implementation Specifications, and Certification Criteria-

`(1) IN GENERAL- Not later than December 31, 2009, the Secretary shall, through the rulemaking process described in section 3003, adopt an initial set of standards, implementation specifications, and certification criteria for the areas required for consideration under section 3002(b)(2)(B).

`(2) APPLICATION OF CURRENT STANDARDS, IMPLEMENTATION SPECIFICATIONS, AND CERTIFICATION CRITERIA- The standards, implementation specifications, and certification criteria adopted before the date of the enactment of this title through the process existing through the Office of the National Coordinator for Health Information Technology may be applied towards meeting the requirement of paragraph (1).

`SEC. 3005. APPLICATION AND USE OF ADOPTED STANDARDS AND IMPLEMENTATION SPECIFICATIONS BY FEDERAL AGENCIES.

`For requirements relating to the application and use by Federal agencies of the standards and implementation specifications adopted under section 3004, see section 4111 of the HITECH Act.

`SEC. 3006. VOLUNTARY APPLICATION AND USE OF ADOPTED STANDARDS AND IMPLEMENTATION SPECIFICATIONS BY PRIVATE ENTITIES.

`(a) In General- Except as provided under section 4112 of the HITECH Act, any standard or implementation specification adopted under section 3004 shall be voluntary with respect to private entities.

`(b) Rule of Construction- Nothing in this subtitle shall be construed to require that a private entity that enters into a contract with the Federal Government apply or use the standards and implementation specifications adopted under section 3004 with respect to activities not related to the contract.

`SEC. 3007. FEDERAL HEALTH INFORMATION TECHNOLOGY.

`(a) In General- The National Coordinator shall support the development, routine updating and provision of qualified EHR technology (as defined in section 3000) consistent with subsections (b) and (c) unless the Secretary determines that the needs and demands of providers are being substantially and adequately met through the marketplace.

`(b) Certification- In making such EHR technology publicly available, the National Coordinator shall ensure that the qualified EHR technology described in subsection (a) is certified under the program developed under section 3001(c)(3) to be in compliance with applicable standards adopted under section 3003(a).

`(c) Authorization to Charge a Nominal Fee- The National Coordinator may impose a nominal fee for the adoption by a health care provider of the health information technology system developed or approved under subsection (a) and (b). Such fee shall take into account the financial circumstances of smaller providers, low income providers, and providers located in rural or other medically underserved areas.

`(d) Rule of Construction- Nothing in this section shall be construed to require that a private or government entity adopt or use the technology provided under this section.

`SEC. 3008. TRANSITIONS.

`(a) ONCHIT- To the extent consistent with section 3001, all functions, personnel, assets, liabilities, and administrative actions applicable to the National Coordinator for Health Information Technology appointed under Executive Order 13335 or the Office of such National Coordinator on the date before the date of the enactment of this title shall be transferred to the National Coordinator appointed under section 3001(a) and the Office of such National Coordinator as of the date of the enactment of this title.

`(b) AHIC-

`(1) To the extent consistent with sections 3002 and 3003, all functions, personnel, assets, and liabilities applicable to the AHIC Successor, Inc. doing business as the National eHealth Collaborative as of the day before the date of the enactment of this title shall be transferred to the HIT Policy Committee or the HIT Standards Committee, established under section 3002(a) or 3003(a), as appropriate, as of the date of the enactment of this title.

`(2) In carrying out section 3003(b)(1)(A), until recommendations are made by the HIT Policy Committee, recommendations of the HIT Standards Committee shall be consistent with the most recent recommendations made by such AHIC Successor, Inc.

`(c) Rules of Construction-

`(1) ONCHIT- Nothing in section 3001 or subsection (a) shall be construed as requiring the creation of a new entity to the extent that the Office of the National Coordinator for Health Information Technology established pursuant to Executive Order 13335 is consistent with the provisions of section 3001.

`(2) AHIC- Nothing in sections 3002 or 3003 or subsection (b) shall be construed as prohibiting the AHIC Successor, Inc. doing business as the National eHealth Collaborative from modifying its charter, duties, membership, and any other structure or function required to be consistent with section 3002 and 3003 in a manner that would permit the Secretary to choose to recognize such Community as the HIT Policy Committee or the HIT Standards Committee.

`SEC. 3009. RELATION TO HIPAA PRIVACY AND SECURITY LAW.

`(a) In General- With respect to the relation of this title to HIPAA privacy and security law:

`(1) This title may not be construed as having any effect on the authorities of the Secretary under HIPAA privacy and security law.

`(2) The purposes of this title include ensuring that the health information technology standards and implementation specifications adopted under section 3004 take into account the requirements of HIPAA privacy and security law.

`(b) Definition- For purposes of this section, the term `HIPAA privacy and security law' means --

`(1) the provisions of part C of title XI of the Social Security Act, section 264 of the Health Insurance Portability and Accountability Act of 1996, and subtitle D of title IV of the HITECH Act; and

`(2) regulations under such provisions.

`SEC. 3010. AUTHORIZATION FOR APPROPRIATIONS.

`There is authorized to be appropriated to the Office of the National Coordinator for Health Information Technology to carry out this subtitle $250,000,000 for fiscal year 2009.'.

SEC. 4102. TECHNICAL AMENDMENT.

Section 1171(5) of the Social Security Act (42 U.S.C. 1320d) is amended by striking `or C' and inserting `C, or D'.

PART II --APPLICATION AND USE OF ADOPTED HEALTH INFORMATION TECHNOLOGY STANDARDS; REPORTS

SEC. 4111. COORDINATION OF FEDERAL ACTIVITIES WITH ADOPTED STANDARDS AND IMPLEMENTATION SPECIFICATIONS.

(a) Spending on Health Information Technology Systems- As each agency (as defined in the Executive Order issued on August 22, 2006, relating to promoting quality and efficient health care in Federal Government administered or sponsored health care programs) implements, acquires, or upgrades health information technology systems used for the direct exchange of individually identifiable health information between agencies and with non-Federal entities, it shall utilize, where available, health information technology systems and products that meet standards and implementation specifications adopted under section 3004(b) of the Public Health Service Act, as added by section 4101.

(b) Federal Information Collection Activities- With respect to a standard or implementation specification adopted under section 3004(b) of the Public Health Service Act, as added by section 4101, the President shall take measures to ensure that Federal activities involving the broad collection and submission of health information are consistent with such standard or implementation specification, respectively, within three years after the date of such adoption.

(c) Application of Definitions- The definitions contained in section 3000 of the Public Health Service Act, as added by section 4101, shall apply for purposes of this part.

SEC. 4112. APPLICATION TO PRIVATE ENTITIES.

Each agency (as defined in such Executive Order issued on August 22, 2006, relating to promoting quality and efficient health care in Federal Government administered or sponsored health care programs) shall require in contracts or agreements with health care providers, health plans, or health insurance issuers that as each provider, plan, or issuer implements, acquires, or upgrades health information technology systems, it shall utilize, where available, health information technology systems and products that meet standards and implementation specifications adopted under section 3004(b) of the Public Health Service Act, as added by section 4101.

SEC. 4113. STUDY AND REPORTS.

(a) Report on Adoption of Nationwide System- Not later than 2 years after the date of the enactment of this Act and annually thereafter, the Secretary of Health and Human Services shall submit to the appropriate committees of jurisdiction of the House of Representatives and the Senate a report that --

(1) describes the specific actions that have been taken by the Federal Government and private entities to facilitate the adoption of a nationwide system for the electronic use and exchange of health information;

(2) describes barriers to the adoption of such a nationwide system; and

(3) contains recommendations to achieve full implementation of such a nationwide system.

(b) Reimbursement Incentive Study and Report-

(1) STUDY- The Secretary of Health and Human Services shall carry out, or contract with a private entity to carry out, a study that examines methods to create efficient reimbursement incentives for improving health care quality in federally qualified health centers, rural health clinics, and free clinics.

(2) REPORT- Not later than 2 years after the date of the enactment of this Act, the Secretary of Health and Human Services shall submit to the appropriate committees of jurisdiction of the House of Representatives and the Senate a report on the study carried out under paragraph (1).

(c) Aging Services Technology Study and Report-

(1) IN GENERAL- The Secretary of Health and Human Services shall carry out, or contract with a private entity to carry out, a study of matters relating to the potential use of new aging services technology to assist seniors, individuals with disabilities, and their caregivers throughout the aging process.

(2) MATTERS TO BE STUDIED- The study under paragraph (1) shall include --

(A) an evaluation of --

(i) methods for identifying current, emerging, and future health technology that can be used to meet the needs of seniors and individuals with disabilities and their caregivers across all aging services settings, as specified by the Secretary;

(ii) methods for fostering scientific innovation with respect to aging services technology within the business and academic communities; and

(iii) developments in aging services technology in other countries that may be applied in the United States; and

(B) identification of --

(i) barriers to innovation in aging services technology and devising strategies for removing such barriers; and

(ii) barriers to the adoption of aging services technology by health care providers and consumers and devising strategies to removing such barriers.

(3) REPORT- Not later than 24 months after the date of the enactment of this Act, the Secretary shall submit to the appropriate committees of jurisdiction of the House of Representatives and of the Senate a report on the study carried out under paragraph (1).

(4) DEFINITIONS- For purposes of this subsection:

(A) AGING SERVICES TECHNOLOGY- The term `aging services technology' means health technology that meets the health care needs of seniors, individuals with disabilities, and the caregivers of such seniors and individuals.

(B) SENIOR- The term `senior' has such meaning as specified by the Secretary.

Subtitle B --Testing of Health Information Technology

SEC. 4201. NATIONAL INSTITUTE FOR STANDARDS AND TECHNOLOGY TESTING.

(a) Pilot Testing of Standards and Implementation Specifications- In coordination with the HIT Standards Committee established under section 3003 of the Public Health Service Act, as added by section 4101, with respect to the development of standards and implementation specifications under such section, the Director of the National Institute for Standards and Technology shall test such standards and implementation specifications, as appropriate, in order to assure the efficient implementation and use of such standards and implementation specifications.



(b) Voluntary Testing Program- In coordination with the HIT Standards Committee established under section 3003 of the Public Health Service Act, as added by section 4101, with respect to the development of standards and implementation specifications under such section, the Director of the National Institute of Standards and Technology shall support the establishment of a conformance testing infrastructure, including the development of technical test beds. The development of this conformance testing infrastructure may include a program to accredit independent, non-Federal laboratories to perform testing.

SEC. 4202. RESEARCH AND DEVELOPMENT PROGRAMS.

(a) Health Care Information Enterprise Integration Research Centers-

(1) IN GENERAL- The Director of the National Institute of Standards and Technology, in consultation with the Director of the National Science Foundation and other appropriate Federal agencies, shall establish a program of assistance to institutions of higher education (or consortia thereof which may include nonprofit entities and Federal Government laboratories) to establish multidisciplinary Centers for Health Care Information Enterprise Integration.

(2) REVIEW; COMPETITION- Grants shall be awarded under this subsection on a merit-reviewed, competitive basis.

(3) PURPOSE- The purposes of the Centers described in paragraph (1) shall be --

(A) to generate innovative approaches to health care information enterprise integration by conducting cutting-edge, multidisciplinary research on the systems challenges to health care delivery; and

(B) the development and use of health information technologies and other complementary fields.

(4) RESEARCH AREAS- Research areas may include --

(A) interfaces between human information and communications technology systems;

(B) voice-recognition systems;

(C) software that improves interoperability and connectivity among health information systems;

(D) software dependability in systems critical to health care delivery;

(E) measurement of the impact of information technologies on the quality and productivity of health care;

(F) health information enterprise management;

(G) health information technology security and integrity; and

(H) relevant health information technology to reduce medical errors.

(5) APPLICATIONS- An institution of higher education (or a consortium thereof) seeking funding under this subsection shall submit an application to the Director of the National Institute of Standards and Technology at such time, in such manner, and containing such information as the Director may require. The application shall include, at a minimum, a description of --

(A) the research projects that will be undertaken by the Center established pursuant to assistance under paragraph (1) and the respective contributions of the participating entities;

(B) how the Center will promote active collaboration among scientists and engineers from different disciplines, such as information technology, biologic sciences, management, social sciences, and other appropriate disciplines;

(C) technology transfer activities to demonstrate and diffuse the research results, technologies, and knowledge; and

(D) how the Center will contribute to the education and training of researchers and other professionals in fields relevant to health information enterprise integration.

(b) National Information Technology Research and Development Program- The National High-Performance Computing Program established by section 101 of the High-Performance Computing Act of 1991 (15 U.S.C. 5511) shall coordinate Federal research and development programs related to the development and deployment of health information technology, including activities related to --

(1) computer infrastructure;

(2) data security;

(3) development of large-scale, distributed, reliable computing systems;

(4) wired, wireless, and hybrid high-speed networking;

(5) development of software and software-intensive systems;

(6) human-computer interaction and information management technologies; and

(7) the social and economic implications of information technology.

Subtitle C --Incentives for the Use of Health Information Technology

PART I --GRANTS AND LOANS FUNDING

SEC. 4301. GRANT, LOAN, AND DEMONSTRATION PROGRAMS.

Title XXX of the Public Health Service Act, as added by section 4101, is amended by adding at the end the following new subtitle:

`Subtitle B --Incentives for the Use of Health Information Technology

`SEC. 3011. IMMEDIATE FUNDING TO STRENGTHEN THE HEALTH INFORMATION TECHNOLOGY INFRASTRUCTURE.

`(a) In General- The Secretary of Health and Human Services shall, using amounts appropriated under section 3018, invest in the infrastructure necessary to allow for and promote the electronic exchange and use of health information for each individual in the United States consistent with the goals outlined in the strategic plan developed by the National Coordinator (and as available) under section 3001. To the greatest extent practicable, the Secretary shall ensure that any funds so appropriated shall be used for the acquisition of health information technology that meets standards and certification criteria adopted before the date of the enactment of this title until such date as the standards are adopted under section 3004. The Secretary shall invest funds through the different agencies with expertise in such goals, such as the Office of the National Coordinator for Health Information Technology, the Health Resources and Services Administration, the Agency for Healthcare Research and Quality, the Centers of Medicare & Medicaid Services, the Centers for Disease Control and Prevention, and the Indian Health Service to support the following:

`(1) Health information technology architecture that will support the nationwide electronic exchange and use of health information in a secure, private, and accurate manner, including connecting health information exchanges, and which may include updating and implementing the infrastructure necessary within different agencies of the Department of Health and Human Services to support the electronic use and exchange of health information.

`(2) Development and adoption of appropriate certified electronic health records for categories of providers not eligible for support under title XVIII or XIX of the Social Security Act for the adoption of such records.

`(3) Training on and dissemination of information on best practices to integrate health information technology, including electronic health records, into a provider's delivery of care, consistent with best practices learned from the Health Information Technology Research Center developed under section 302, including community health centers receiving assistance under section 330 of the Public Health Service Act, covered entities under section 340B of such Act, and providers participating in one or more of the programs under titles XVIII, XIX, and XXI of the Social Security Act (relating to Medicare, Medicaid, and the State Children's Health Insurance Program).

`(4) Infrastructure and tools for the promotion of telemedicine, including coordination among Federal agencies in the promotion of telemedicine.

`(5) Promotion of the interoperability of clinical data repositories or registries.

`(6) Promotion of technologies and best practices that enhance the protection of health information by all holders of individually identifiable health information.

`(7) Improve and expand the use of health information technology by public health departments.

`(8) Provide $300 million to support regional or sub-national efforts towards health information exchange.

`(b) Coordination- The Secretary shall ensure funds under this section are used in a coordinated manner with other health information promotion activities.

`(c) Additional Use of Funds- In addition to using funds as provided in subsection (a), the Secretary may use amounts appropriated under section 3018 to carry out activities that are provided for under laws in effect on the date of the enactment of this title.

`SEC. 3012. HEALTH INFORMATION TECHNOLOGY IMPLEMENTATION ASSISTANCE.

`(a) Health Information Technology Extension Program- To assist health care providers to adopt, implement, and effectively use certified EHR technology that allows for the electronic exchange and use of health information, the Secretary, acting through the Office of the National Coordinator, shall establish a health information technology extension program to provide health information technology assistance services to be carried out through the Department of Health and Human Services. The National Coordinator shall consult with other Federal agencies with demonstrated experience and expertise in information technology services, such as the National Institute of Standards and Technology, in developing and implementing this program.

`(b) Health Information Technology Research Center-

`(1) IN GENERAL- The Secretary shall create a Health Information Technology Research Center (in this section referred to as the `Center') to provide technical assistance and develop or recognize best practices to support and accelerate efforts to adopt, implement, and effectively utilize health information technology that allows for the electronic exchange and use of information in compliance with standards, implementation specifications, and certification criteria adopted under section 3004(b).

`(2) INPUT- The Center shall incorporate input from --

`(A) other Federal agencies with demonstrated experience and expertise in information technology services such as the National Institute of Standards and Technology;

`(B) users of health information technology, such as providers and their support and clerical staff and others involved in the care and care coordination of patients, from the health care and health information technology industry; and

`(C) others as appropriate.

`(3) PURPOSES- The purposes of the Center are to --

`(A) provide a forum for the exchange of knowledge and experience;

`(B) accelerate the transfer of lessons learned from existing public and private sector initiatives, including those currently receiving Federal financial support;

`(C) assemble, analyze, and widely disseminate evidence and experience related to the adoption, implementation, and effective use of health information technology that allows for the electronic exchange and use of information including through the regional centers described in subsection (c);

`(D) provide technical assistance for the establishment and evaluation of regional and local health information networks to facilitate the electronic exchange of information across health care settings and improve the quality of health care;

`(E) provide technical assistance for the development and dissemination of solutions to barriers to the exchange of electronic health information; and

`(F) learn about effective strategies to adopt and utilize health information technology in medically underserved communities.

`(c) Health Information Technology Regional Extension Centers-

`(1) IN GENERAL- The Secretary shall provide assistance for the creation and support of regional centers (in this subsection referred to as `regional centers') to provide technical assistance and disseminate best practices and other information learned from the Center to support and accelerate efforts to adopt, implement, and effectively utilize health information technology that allows for the electronic exchange and use of information in compliance with standards, implementation specifications, and certification criteria adopted under section 3004. Activities conducted under this subsection shall be consistent with the strategic plan developed by the National Coordinator, (and, as available) under section 3001.

`(2) AFFILIATION- Regional centers shall be affiliated with any U.S.-based nonprofit institution or organization, or group thereof, that applies and is awarded financial assistance under this section. Individual awards shall be decided on the basis of merit.

`(3) OBJECTIVE- The objective of the regional centers is to enhance and promote the adoption of health information technology through --

`(A) assistance with the implementation, effective use, upgrading, and ongoing maintenance of health information technology, including electronic health records, to healthcare providers nationwide;

`(B) broad participation of individuals from industry, universities, and State governments;

`(C) active dissemination of best practices and research on the implementation, effective use, upgrading, and ongoing maintenance of health information technology, including electronic health records, to health care providers in order to improve the quality of healthcare and protect the privacy and security of health information;

`(D) participation, to the extent practicable, in health information exchanges; and

`(E) utilization, when appropriate, of the expertise and capability that exists in Federal agencies other than the Department; and

`(F) integration of health information technology, including electronic health records, into the initial and ongoing training of health professionals and others in the healthcare industry that would be instrumental to improving the quality of healthcare through the smooth and accurate electronic use and exchange of health information.

`(4) REGIONAL ASSISTANCE- Each regional center shall aim to provide assistance and education to all providers in a region, but shall prioritize any direct assistance first to the following:

`(A) Public or not-for-profit hospitals or critical access hospitals.

`(B) Federally qualified health centers (as defined in section 1861(aa)(4) of the Social Security Act).

`(C) Entities that are located in rural and other areas that serve uninsured, underinsured, and medically underserved individuals (regardless of whether such area is urban or rural).

`(D) Individual or small group practices (or a consortium thereof) that are primarily focused on primary care.

`(5) FINANCIAL SUPPORT- The Secretary may provide financial support to any regional center created under this subsection for a period not to exceed four years. The Secretary may not provide more than 50 percent of the capital and annual operating and maintenance funds required to create and maintain such a center, except in an instance of national economic conditions which would render this cost-share requirement detrimental to the program and upon notification to Congress as to the justification to waive the cost-share requirement.

`(6) NOTICE OF PROGRAM DESCRIPTION AND AVAILABILITY OF FUNDS- The Secretary shall publish in the Federal Register, not later than 90 days after the date of the enactment of this Act, a draft description of the program for establishing regional centers under this subsection. Such description shall include the following:

`(A) A detailed explanation of the program and the programs goals.

`(B) Procedures to be followed by the applicants.

`(C) Criteria for determining qualified applicants.

`(D) Maximum support levels expected to be available to centers under the program.

`(7) APPLICATION REVIEW- The Secretary shall subject each application under this subsection to merit review. In making a decision whether to approve such application and provide financial support, the Secretary shall consider at a minimum the merits of the application, including those portions of the application regarding --

`(A) the ability of the applicant to provide assistance under this subsection and utilization of health information technology appropriate to the needs of particular categories of health care providers;

`(B) the types of service to be provided to health care providers;

`(C) geographical diversity and extent of service area; and

`(D) the percentage of funding and amount of in-kind commitment from other sources.

`(8) BIENNIAL EVALUATION- Each regional center which receives financial assistance under this subsection shall be evaluated biennially by an evaluation panel appointed by the Secretary. Each evaluation panel shall be composed of private experts, none of whom shall be connected with the center involved, and of Federal officials. Each evaluation panel shall measure the involved center's performance against the objective specified in paragraph (3). The Secretary shall not continue to provide funding to a regional center unless its evaluation is overall positive.

`(9) CONTINUING SUPPORT- After the second year of assistance under this subsection a regional center may receive additional support under this subsection if it has received positive evaluations and a finding by the Secretary that continuation of Federal funding to the center was in the best interest of provision of health information technology extension services.

`SEC. 3013. STATE GRANTS TO PROMOTE HEALTH INFORMATION TECHNOLOGY.

`(a) In General- The Secretary, acting through the National Coordinator, shall establish a program in accordance with this section to facilitate and expand the electronic movement and use of health information among organizations according to nationally recognized standards.

`(b) Planning Grants- The Secretary may award a grant to a State or qualified State-designated entity (as described in subsection (d)) that submits an application to the Secretary at such time, in such manner, and containing such information as the Secretary may specify, for the purpose of planning activities described in subsection (b).

`(c) Implementation Grants- The Secretary may award a grant to a State or qualified State-designated entity that --

`(1) has submitted, and the Secretary has approved, a plan described in subsection (c) (regardless of whether such plan was prepared using amounts awarded under paragraph (1)); and

`(2) submits an application at such time, in such manner, and containing such information as the Secretary may specify.

`(d) Use of Funds- Amounts received under a grant under subsection (a)(3) shall be used to conduct activities to facilitate and expand the electronic movement and use of health information among organizations according to nationally recognized standards through activities that include --

`(1) enhancing broad and varied participation in the authorized and secure nationwide electronic use and exchange of health information;

`(2) identifying State or local resources available towards a nationwide effort to promote health information technology;

`(3) complementing other Federal grants, programs, and efforts towards the promotion of health information technology;

`(4) providing technical assistance for the development and dissemination of solutions to barriers to the exchange of electronic health information;

`(5) promoting effective strategies to adopt and utilize health information technology in medically underserved communities;

`(6) assisting patients in utilizing health information technology;

`(7) encouraging clinicians to work with Health Information Technology Regional Extension Centers as described in section 3012, to the extent they are available and valuable;

`(8) supporting public health agencies' authorized use of and access to electronic health information;

`(9) promoting the use of electronic health records for quality improvement including through quality measures reporting; and

`(10) such other activities as the Secretary may specify.

`(e) Plan-

`(1) IN GENERAL- A plan described in this subsection is a plan that describes the activities to be carried out by a State or by the qualified State-designated entity within such State to facilitate and expand the electronic movement and use of health information among organizations according to nationally recognized standards and implementation specifications.

`(2) REQUIRED ELEMENTS- A plan described in paragraph (1) shall --

`(A) be pursued in the public interest;

`(B) be consistent with the strategic plan developed by the National Coordinator, (and, as available) under section 3001;

`(C) include a description of the ways the State or qualified State-designated entity will carry out the activities described in subsection (b); and

`(D) contain such elements as the Secretary may require.

`(f) Qualified State-Designated Entity- For purposes of this section, to be a qualified State-designated entity, with respect to a State, an entity shall --

`(1) be designated by the State as eligible to receive awards under this section;

`(2) be a not-for-profit entity with broad stakeholder representation on its governing board;

`(3) demonstrate that one of its principal goals is to use information technology to improve health care quality and efficiency through the authorized and secure electronic exchange and use of health information;

`(4) adopt nondiscrimination and conflict of interest policies that demonstrate a commitment to open, fair, and nondiscriminatory participation by stakeholders; and

`(5) conform to such other requirements as the Secretary may establish.

`(g) Required Consultation- In carrying out activities described in subsections (a)(2) and (a)(3), a State or qualified State-designated entity shall consult with and consider the recommendations of --

`(1) health care providers (including providers that provide services to low income and underserved populations);

`(2) health plans;

`(3) patient or consumer organizations that represent the population to be served;

`(4) health information technology vendors;

`(5) health care purchasers and employers;

`(6) public health agencies;

`(7) health professions schools, universities and colleges;

`(8) clinical researchers;

`(9) other users of health information technology such as the support and clerical staff of providers and others involved in the care and care coordination of patients; and

`(10) such other entities, as may be determined appropriate by the Secretary.

`(h) Continuous Improvement- The Secretary shall annually evaluate the activities conducted under this section and shall, in awarding grants under this section, implement the lessons learned from such evaluation in a manner so that awards made subsequent to each such evaluation are made in a manner that, in the determination of the Secretary, will lead towards the greatest improvement in quality of care, decrease in costs, and the most effective authorized and secure electronic exchange of health information.

`(i) Required Match-

`(1) IN GENERAL- For a fiscal year (beginning with fiscal year 2011), the Secretary may not make a grant under subsection (a) to a State unless the State agrees to make available non-Federal contributions (which may include in-kind contributions) toward the costs of a grant awarded under subsection (a)(3) in an amount equal to --

`(A) for fiscal year 2011, not less than $1 for each $10 of Federal funds provided under the grant;

`(B) for fiscal year 2012, not less than $1 for each $7 of Federal funds provided under the grant; and

`(C) for fiscal year 2013 and each subsequent fiscal year, not less than $1 for each $3 of Federal funds provided under the grant.

`(2) AUTHORITY TO REQUIRE STATE MATCH FOR FISCAL YEARS BEFORE FISCAL YEAR 2011- For any fiscal year during the grant program under this section before fiscal year 2011, the Secretary may determine the extent to which there shall be required a non-Federal contribution from a State receiving a grant under this section.

`SEC. 3014. COMPETITIVE GRANTS TO STATES AND INDIAN TRIBES FOR THE DEVELOPMENT OF LOAN PROGRAMS TO FACILITATE THE WIDESPREAD ADOPTION OF CERTIFIED EHR TECHNOLOGY.

`(a) In General- The National Coordinator may award competitive grants to eligible entities for the establishment of programs for loans to health care providers to conduct the activities described in subsection (e).

`(b) Eligible Entity Defined- For purposes of this subsection, the term `eligible entity' means a State or Indian tribe (as defined in the Indian Self-Determination and Education Assistance Act) that --

`(1) submits to the National Coordinator an application at such time, in such manner, and containing such information as the National Coordinator may require;

`(2) submits to the National Coordinator a strategic plan in accordance with subsection (d) and provides to the National Coordinator assurances that the entity will update such plan annually in accordance with such subsection;

`(3) provides assurances to the National Coordinator that the entity will establish a Loan Fund in accordance with subsection (c);

`(4) provides assurances to the National Coordinator that the entity will not provide a loan from the Loan Fund to a health care provider unless the provider agrees to --

`(A) submit reports on quality measures adopted by the Federal Government (by not later than 90 days after the date on which such measures are adopted), to --

`(i) the Director of the Centers for Medicare & Medicaid Services (or his or her designee), in the case of an entity participating in the Medicare program under title XVIII of the Social Security Act or the Medicaid program under title XIX of such Act; or

`(ii) the Secretary in the case of other entities;

`(B) demonstrate to the satisfaction of the Secretary (through criteria established by the Secretary) that any certified EHR technology purchased, improved, or otherwise financially supported under a loan under this section is used to exchange health information in a manner that, in accordance with law and standards (as adopted under section 3005) applicable to the exchange of information, improves the quality of health care, such as promoting care coordination; and

`(C) comply with such other requirements as the entity or the Secretary may require;

`(D) include a plan on how health care providers involved intend to maintain and support the certified EHR technology over time;

`(E) include a plan on how the health care providers involved intend to maintain and support the certified EHR technology that would be purchased with such loan, including the type of resources expected to be involved and any such other information as the State or Indian tribe, respectively, may require; and

`(5) agrees to provide matching funds in accordance with subsection (i).

`(c) Establishment of Fund- For purposes of subsection (b)(3), an eligible entity shall establish a certified EHR technology loan fund (referred to in this subsection as a `Loan Fund') and comply with the other requirements contained in this section. A grant to an eligible entity under this section shall be deposited in the Loan Fund established by the eligible entity. No funds authorized by other provisions of this title to be used for other purposes specified in this title shall be deposited in any Loan Fund.

`(d) Strategic Plan-

`(1) IN GENERAL- For purposes of subsection (b)(2), a strategic plan of an eligible entity under this subsection shall identify the intended uses of amounts available to the Loan Fund of such entity.

`(2) CONTENTS- A strategic plan under paragraph (1), with respect to a Loan Fund of an eligible entity, shall include for a year the following:

`(A) A list of the projects to be assisted through the Loan Fund during such year.

`(B) A description of the criteria and methods established for the distribution of funds from the Loan Fund during the year.

`(C) A description of the financial status of the Loan Fund as of the date of submission of the plan.

`(D) The short-term and long-term goals of the Loan Fund.

`(e) Use of Funds- Amounts deposited in a Loan Fund, including loan repayments and interest earned on such amounts, shall be used only for awarding loans or loan guarantees, making reimbursements described in subsection (g)(4)(A), or as a source of reserve and security for leveraged loans, the proceeds of which are deposited in the Loan Fund established under subsection (a). Loans under this section may be used by a health care provider to --

`(1) facilitate the purchase of certified EHR technology;

`(2) enhance the utilization of certified EHR technology;

`(3) train personnel in the use of such technology; or

`(4) improve the secure electronic exchange of health information.

`(f) Types of Assistance- Except as otherwise limited by applicable State law, amounts deposited into a Loan Fund under this subsection may only be used for the following:

`(1) To award loans that comply with the following:

`(A) The interest rate for each loan shall not exceed the market interest rate.

`(B) The principal and interest payments on each loan shall commence not later than 1 year after the date the loan was awarded, and each loan shall be fully amortized not later than 10 years after the date of the loan.

`(C) The Loan Fund shall be credited with all payments of principal and interest on each loan awarded from the Loan Fund.

`(2) To guarantee, or purchase insurance for, a local obligation (all of the proceeds of which finance a project eligible for assistance under this subsection) if the guarantee or purchase would improve credit market access or reduce the interest rate applicable to the obligation involved.

`(3) As a source of revenue or security for the payment of principal and interest on revenue or general obligation bonds issued by the eligible entity if the proceeds of the sale of the bonds will be deposited into the Loan Fund.

`(4) To earn interest on the amounts deposited into the Loan Fund.

`(5) To make reimbursements described in subsection (g)(4)(A).

`(g) Administration of Loan Funds-

`(1) COMBINED FINANCIAL ADMINISTRATION- An eligible entity may (as a convenience and to avoid unnecessary administrative costs) combine, in accordance with applicable State law, the financial administration of a Loan Fund established under this subsection with the financial administration of any other revolving fund established by the entity if otherwise not prohibited by the law under which the Loan Fund was established.

`(2) COST OF ADMINISTERING FUND- Each eligible entity may annually use not to exceed 4 percent of the funds provided to the entity under a grant under this subsection to pay the reasonable costs of the administration of the programs under this section, including the recovery of reasonable costs expended to establish a Loan Fund which are incurred after the date of the enactment of this title.

`(3) GUIDANCE AND REGULATIONS- The National Coordinator shall publish guidance and promulgate regulations as may be necessary to carry out the provisions of this section, including --

`(A) provisions to ensure that each eligible entity commits and expends funds allotted to the entity under this subsection as efficiently as possible in accordance with this title and applicable State laws; and

`(B) guidance to prevent waste, fraud, and abuse.

`(4) PRIVATE SECTOR CONTRIBUTIONS-

`(A) IN GENERAL- A Loan Fund established under this subsection may accept contributions from private sector entities, except that such entities may not specify the recipient or recipients of any loan issued under this subsection. An eligible entity may agree to reimburse a private sector entity for any contribution made under this subparagraph, except that the amount of such reimbursement may not be greater than the principal amount of the contribution made.

`(B) AVAILABILITY OF INFORMATION- An eligible entity shall make publicly available the identity of, and amount contributed by, any private sector entity under subparagraph (A) and may issue letters of commendation or make other awards (that have no financial value) to any such entity.

`(h) Matching Requirements-

`(1) IN GENERAL- The National Coordinator may not make a grant under subsection (a) to an eligible entity unless the entity agrees to make available (directly or through donations from public or private entities) non-Federal contributions in cash to the costs of carrying out the activities for which the grant is awarded in an amount equal to not less than $1 for each $5 of Federal funds provided under the grant.

`(2) DETERMINATION OF AMOUNT OF NON-FEDERAL CONTRIBUTION- In determining the amount of non-Federal contributions that an eligible entity has provided pursuant to subparagraph (A), the National Coordinator may not include any amounts provided to the entity by the Federal Government.

`(i) Effective Date- The Secretary may not make an award under this section prior to January 1, 2010.

`SEC. 3015. DEMONSTRATION PROGRAM TO INTEGRATE INFORMATION TECHNOLOGY INTO CLINICAL EDUCATION.

`(a) In General- The Secretary may award grants under this section to carry out demonstration projects to develop academic curricula integrating certified EHR technology in the clinical education of health professionals. Such awards shall be made on a competitive basis and pursuant to peer review.

`(b) Eligibility- To be eligible to receive a grant under subsection (a), an entity shall --

`(1) submit to the Secretary an application at such time, in such manner, and containing such information as the Secretary may require;

`(2) submit to the Secretary a strategic plan for integrating certified EHR technology in the clinical education of health professionals to reduce medical errors and enhance health care quality;

`(3) be --

`(A) a school of medicine, osteopathic medicine, dentistry, or pharmacy, a graduate program in behavioral or mental health, or any other graduate health professions school;

`(B) a graduate school of nursing or physician assistant studies;

`(C) a consortium of two or more schools described in subparagraph (A) or (B); or

`(D) an institution with a graduate medical education program in medicine, osteopathic medicine, dentistry, pharmacy, nursing, or physician assistance studies.

`(4) provide for the collection of data regarding the effectiveness of the demonstration project to be funded under the grant in improving the safety of patients, the efficiency of health care delivery, and in increasing the likelihood that graduates of the grantee will adopt and incorporate certified EHR technology, in the delivery of health care services; and

`(5) provide matching funds in accordance with subsection (d).

`(c) Use of Funds-

`(1) IN GENERAL- With respect to a grant under subsection (a), an eligible entity shall --

`(A) use grant funds in collaboration with 2 or more disciplines; and

`(B) use grant funds to integrate certified EHR technology into community-based clinical education.

`(2) LIMITATION- An eligible entity shall not use amounts received under a grant under subsection (a) to purchase hardware, software, or services.

`(d) Financial Support- The Secretary may not provide more than 50 percent of the costs of any activity for which assistance is provided under subsection (a), except in an instance of national economic conditions which would render the cost-share requirement under this subsection detrimental to the program and upon notification to Congress as to the justification to waive the cost-share requirement.

`(e) Evaluation- The Secretary shall take such action as may be necessary to evaluate the projects funded under this section and publish, make available, and disseminate the results of such evaluations on as wide a basis as is practicable.

`(f) Reports- Not later than 1 year after the date of enactment of this title, and annually thereafter, the Secretary shall submit to the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate, and the Committee on Energy and Commerce of the House of Representatives a report that --

`(1) describes the specific projects established under this section; and

`(2) contains recommendations for Congress based on the evaluation conducted under subsection (e).

`SEC. 3016. INFORMATION TECHNOLOGY PROFESSIONALS ON HEALTH CARE.

`(a) In General- The Secretary, in consultation with the Director of the National Science Foundation, shall provide assistance to institutions of higher education (or consortia thereof) to establish or expand medical health informatics education programs, including certification, undergraduate, and masters degree programs, for both health care and information technology students to ensure the rapid and effective utilization and development of health information technologies (in the United States health care infrastructure).

`(b) Activities- Activities for which assistance may be provided under subsection (a) may include the following:

`(1) Developing and revising curricula in medical health informatics and related disciplines.

`(2) Recruiting and retaining students to the program involved.

`(3) Acquiring equipment necessary for student instruction in these programs, including the installation of testbed networks for student use.

`(4) Establishing or enhancing bridge programs in the health informatics fields between community colleges and universities.

`(c) Priority- In providing assistance under subsection (a), the Secretary shall give preference to the following:

`(1) Existing education and training programs.

`(2) Programs designed to be completed in less than six months.

`(d) Financial Support- The Secretary may not provide more than 50 percent of the costs of any activity for which assistance is provided under subsection (a), except in an instance of national economic conditions which would render the cost-share requirement under this subsection detrimental to the program and upon notification to Congress as to the justification to waive the cost-share requirement.

`SEC. 3017. GENERAL GRANT AND LOAN PROVISIONS.

`(a) Reports- The Secretary may require that an entity receiving assistance under this title shall submit to the Secretary, not later than the date that is 1 year after the date of receipt of such assistance, a report that includes --

`(1) an analysis of the effectiveness of the activities for which the entity receives such assistance, as compared to the goals for such activities; and

`(2) an analysis of the impact of the project on health care quality and safety.

`(b) Requirement To Improve Quality of Care and Decrease in Costs- The National Coordinator shall annually evaluate the activities conducted under this title and shall, in awarding grants, implement the lessons learned from such evaluation in a manner so that awards made subsequent to each such evaluation are made in a manner that, in the determination of the National Coordinator, will result in the greatest improvement in the quality and efficiency of health care.

`SEC. 3018. AUTHORIZATION FOR APPROPRIATIONS.

`For the purposes of carrying out this subtitle, there is authorized to be appropriated such sums as may be necessary for each of the fiscal years 2009 through 2013. Amounts so appropriated shall remain available until expended.'.

PART II --MEDICARE PROGRAM

SEC. 4311. INCENTIVES FOR ELIGIBLE PROFESSIONALS.

(a) Incentive Payments- Section 1848 of the Social Security Act (42 U.S.C. 1395w-4) is amended by adding at the end the following new subsection:

`(o) Incentives for Adoption and Meaningful Use of Certified EHR Technology-

`(1) INCENTIVE PAYMENTS-

`(A) IN GENERAL- Subject to the succeeding subparagraphs of this paragraph, with respect to covered professional services furnished by an eligible professional during a payment year (as defined in subparagraph (E)), if the eligible professional is a meaningful EHR user (as determined under paragraph (2)) for the reporting period with respect to such year, in addition to the amount otherwise paid under this part, there also shall be paid to the eligible professional (or to an employer or facility in the cases described in clause (A) of section 1842(b)(6)), from the Federal Supplementary Medical Insurance Trust Fund established under section 1841 an amount equal to 75 percent of the Secretary's estimate (based on claims submitted not later than 2 months after the end of the payment year) of the allowed charges under this part for all such covered professional services furnished by the eligible professional during such year.

`(B) LIMITATIONS ON AMOUNTS OF INCENTIVE PAYMENTS-

`(i) IN GENERAL- In no case shall the amount of the incentive payment provided under this paragraph for an eligible professional for a payment year exceed the applicable amount specified under this subparagraph with respect to such eligible professional and such year.

`(ii) AMOUNT- Subject to clause (iii), the applicable amount specified in this subparagraph for an eligible professional is as follows:

`(I) For the first payment year for such professional, $15,000.

`(II) For the second payment year for such professional, $12,000.

`(III) For the third payment year for such professional, $8,000.

`(IV) For the fourth payment year for such professional, $4,000.

`(V) For the fifth payment year for such professional, $2,000.

`(VI) For any succeeding payment year for such professional, $0.

`(iii) PHASE DOWN FOR ELIGIBLE PROFESSIONALS FIRST ADOPTING EHR AFTER 2013- If the first payment year for an eligible professional is after 2013, then the amount specified in this subparagraph for a payment year for such professional is the same as the amount specified in clause (ii) for such payment year for an eligible professional whose first payment year is 2013. If the first payment year for an eligible professional is after 2015 then the applicable amount specified in this subparagraph for such professional for such year and any subsequent year shall be $0.

`(C) NON-APPLICATION TO HOSPITAL-BASED ELIGIBLE PROFESSIONALS-

`(i) IN GENERAL- No incentive payment may be made under this paragraph in the case of a hospital-based eligible professional.

`(ii) HOSPITAL-BASED ELIGIBLE PROFESSIONAL- For purposes of clause (i), the term `hospital-based eligible professional' means, with respect to covered professional services furnished by an eligible professional during the reporting period for a payment year, an eligible professional, such as a pathologist, anesthesiologist, or emergency physician, who furnishes substantially all of such services in a hospital setting (whether inpatient or outpatient) and through the use of the facilities and equipment, including computer equipment, of the hospital.

`(D) PAYMENT-

`(i) FORM OF PAYMENT- The payment under this paragraph may be in the form of a single consolidated payment or in the form of such periodic installments as the Secretary may specify.

`(ii) COORDINATION OF APPLICATION OF LIMITATION FOR PROFESSIONALS IN DIFFERENT PRACTICES- In the case of an eligible professional furnishing covered professional services in more than one practice (as specified by the Secretary), the Secretary shall establish rules to coordinate the incentive payments, including the application of the limitation on amounts of such incentive payments under this paragraph, among such practices.

`(iii) COORDINATION WITH MEDICAID- The Secretary shall seek, to the maximum extent practicable, to avoid duplicative requirements from Federal and State Governments to demonstrate meaningful use of certified EHR technology under this title and title XIX. In doing so, the Secretary may deem satisfaction of State requirements for such meaningful use for a payment year under title XIX to be sufficient to qualify as meaningful use under this subsection and subsection (a)(7) and vice versa. The Secretary may also adjust the reporting periods under such title and such subsections in order to carry out this clause.

`(E) PAYMENT YEAR DEFINED-

`(i) IN GENERAL- For purposes of this subsection, the term `payment year' means a year beginning with 2011.

`(ii) FIRST, SECOND, ETC. PAYMENT YEAR- The term `first payment year' means, with respect to covered professional services furnished by an eligible professional, the first year for which an incentive payment is made for such services under this subsection. The terms `second payment year', `third payment year', `fourth payment year', and `fifth payment year' mean, with respect to covered professional services furnished by such eligible professional, each successive year immediately following the first payment year for such professional.

`(2) MEANINGFUL EHR USER-

`(A) IN GENERAL- For purposes of paragraph (1), an eligible professional shall be treated as a meaningful EHR user for a reporting period for a payment year (or, for purposes of subsection (a)(7), for a reporting period under such subsection for a year) if each of the following requirements is met:

`(i) MEANINGFUL USE OF CERTIFIED EHR TECHNOLOGY- The eligible professional demonstrates to the satisfaction of the Secretary, in accordance with subparagraph (C)(i), that during such period the professional is using certified EHR technology in a meaningful manner, which shall include the use of electronic prescribing as determined to be appropriate by the Secretary.

`(ii) INFORMATION EXCHANGE- The eligible professional demonstrates to the satisfaction of the Secretary, in accordance with subparagraph (C)(i), that during such period such certified EHR technology is connected in a manner that provides, in accordance with law and standards applicable to the exchange of information, for the electronic exchange of health information to improve the quality of health care, such as promoting care coordination.

`(iii) REPORTING ON MEASURES USING EHR- Subject to subparagraph (B)(ii) and using such certified EHR technology, the eligible professional submits information for such period, in a form and manner specified by the Secretary, on such clinical quality measures and such other measures as selected by the Secretary under subparagraph (B)(i).

The Secretary may provide for the use of alternative means for meeting the requirements of clauses (i), (ii), and (iii) in the case of an eligible professional furnishing covered professional services in a group practice (as defined by the Secretary). The Secretary shall seek to improve the use of electronic health records and health care quality over time by requiring more stringent measures of meaningful use selected under this paragraph.

`(B) REPORTING ON MEASURES-

`(i) SELECTION- The Secretary shall select measures for purposes of subparagraph (A)(iii) but only consistent with the following:

`(I) The Secretary shall provide preference to clinical quality measures that have been endorsed by the entity with a contract with the Secretary under section 1890(a).

`(II) Prior to any measure being selected under this subparagraph, the Secretary shall publish in the Federal Register such measure and provide for a period of public comment on such measure.

`(ii) LIMITATION- The Secretary may not require the electronic reporting of information on clinical quality measures under subparagraph (A)(iii) unless the Secretary has the capacity to accept the information electronically, which may be on a pilot basis.

`(iii) COORDINATION OF REPORTING OF INFORMATION- In selecting such measures, and in establishing the form and manner for reporting measures under subparagraph (A)(iii), the Secretary shall seek to avoid redundant or duplicative reporting otherwise required, including reporting under subsection (k)(2)(C).

`(C) DEMONSTRATION OF MEANINGFUL USE OF CERTIFIED EHR TECHNOLOGY AND INFORMATION EXCHANGE-

`(i) IN GENERAL- A professional may satisfy the demonstration requirement of clauses (i) and (ii) of subparagraph (A) through means specified by the Secretary, which may include --

`(I) an attestation;

`(II) the submission of claims with appropriate coding (such as a code indicating that a patient encounter was documented using certified EHR technology);

`(III) a survey response;

`(IV) reporting under subparagraph (A)(iii); and

`(V) other means specified by the Secretary.

`(ii) USE OF PART D DATA- Notwithstanding sections 1860D-15(d)(2)(B) and 1860D-15(f)(2), the Secretary may use data regarding drug claims submitted for purposes of section 1860D-15 that are necessary for purposes of subparagraph (A).

`(3) APPLICATION-

`(A) PHYSICIAN REPORTING SYSTEM RULES- Paragraphs (5), (6), and (8) of subsection (k) shall apply for purposes of this subsection in the same manner as they apply for purposes of such subsection.

`(B) COORDINATION WITH OTHER PAYMENTS- The provisions of this subsection shall not be taken into account in applying the provisions of subsection (m) of this section and of section 1833(m) and any payment under such provisions shall not be taken into account in computing allowable charges under this subsection.

`(C) LIMITATIONS ON REVIEW- There shall be no administrative or judicial review under section 1869, section 1878, or otherwise of the determination of any incentive payment under this subsection and the payment adjustment under subsection (a)(7), including the determination of a meaningful EHR user under paragraph (2), a limitation under paragraph (1)(B), and the exception under subsection (a)(7)(B).

`(D) POSTING ON WEBSITE- The Secretary shall post on the Internet website of the Centers for Medicare & Medicaid Services, in an easily understandable format, a list of the names, business addresses, and business phone numbers of the eligible professionals who are meaningful EHR users and, as determined appropriate by the Secretary, of group practices receiving incentive payments under paragraph (1).

`(4) CERTIFIED EHR TECHNOLOGY DEFINED- For purposes of this section, the term `certified EHR technology' means a qualified electronic health record (as defined in 3000(13) of the Public Health Service Act) that is certified pursuant to section 3001(c)(5) of such Act as meeting standards adopted under section 3004 of such Act that are applicable to the type of record involved (as determined by the Secretary, such as an ambulatory electronic health record for office-based physicians or an inpatient hospital electronic health record for hospitals).

`(5) DEFINITIONS- For purposes of this subsection:

`(A) COVERED PROFESSIONAL SERVICES- The term `covered professional services' has the meaning given such term in subsection (k)(3).

`(B) ELIGIBLE PROFESSIONAL- The term `eligible professional' means a physician, as defined in section 1861(r).

`(C) REPORTING PERIOD- The term `reporting period' means any period (or periods), with respect to a payment year, as specified by the Secretary.'.

(b) Incentive Payment Adjustment- Section 1848(a) of the Social Security Act (42 U.S.C. 1395w-4(a)) is amended by adding at the end the following new paragraph:

`(7) INCENTIVES FOR MEANINGFUL USE OF CERTIFIED EHR TECHNOLOGY-

`(A) ADJUSTMENT-

`(i) IN GENERAL- Subject to subparagraphs (B) and (D), with respect to covered professional services furnished by an eligible professional during 2016 or any subsequent payment year, if the eligible professional is not a meaningful EHR user (as determined under subsection (o)(2)) for a reporting period for the year, the fee schedule amount for such services furnished by such professional during the year (including the fee schedule amount for purposes of determining a payment based on such amount) shall be equal to the applicable percent of the fee schedule amount that would otherwise apply to such services under this subsection (determined after application of paragraph (3) but without regard to this paragraph).

`(ii) APPLICABLE PERCENT- Subject to clause (iii), for purposes of clause (i), the term `applicable percent' means --

`(I) for 2016, 99 percent;

`(II) for 2017, 98 percent; and

`(III) for 2018 and each subsequent year, 97 percent.

`(iii) AUTHORITY TO DECREASE APPLICABLE PERCENTAGE FOR 2019 AND SUBSEQUENT YEARS- For 2019 and each subsequent year, if the Secretary finds that the proportion of eligible professionals who are meaningful EHR users (as determined under subsection (o)(2)) is less than 75 percent, the applicable percent shall be decreased by 1 percentage point from the applicable percent in the preceding year, but in no case shall the applicable percent be less than 95 percent.

`(B) SIGNIFICANT HARDSHIP EXCEPTION- The Secretary may, on a case-by-case basis, exempt an eligible professional from the application of the payment adjustment under subparagraph (A) if the Secretary determines, subject to annual renewal, that compliance with the requirement for being a meaningful EHR user would result in a significant hardship, such as in the case of an eligible professional who practices in a rural area without sufficient Internet access. In no case may an eligible professional be granted an exemption under this subparagraph for more than 5 years.

`(C) APPLICATION OF PHYSICIAN REPORTING SYSTEM RULES- Paragraphs (5), (6), and (8) of subsection (k) shall apply for purposes of this paragraph in the same manner as they apply for purposes of such subsection.

`(D) NON-APPLICATION TO HOSPITAL-BASED ELIGIBLE PROFESSIONALS- No payment adjustment may be made under subparagraph (A) in the case of hospital-based eligible professionals (as defined in subsection (o)(1)(C)(ii)).

`(E) DEFINITIONS- For purposes of this paragraph:

`(i) COVERED PROFESSIONAL SERVICES- The term `covered professional services' has the meaning given such term in subsection (k)(3).

`(ii) ELIGIBLE PROFESSIONAL- The term `eligible professional' means a physician, as defined in section 1861(r).

`(iii) REPORTING PERIOD- The term `reporting period' means, with respect to a year, a period specified by the Secretary.'.

(c) Application to Certain HMO-Affiliated Eligible Professionals- Section 1853 of the Social Security Act (42 U.S.C. 1395w-23) is amended by adding at the end the following new subsection:

`(l) Application of Eligible Professional Incentives for Certain MA Organizations for Adoption and Meaningful Use of Certified EHR Technology-

`(1) IN GENERAL- Subject to paragraphs (3) and (4), in the case of a qualifying MA organization, the provisions of sections 1848(o) and 1848(a)(7) shall apply with respect to eligible professionals described in paragraph (2) of the organization who the organization attests under paragraph (6) to be meaningful EHR users in a similar manner as they apply to eligible professionals under such sections. Incentive payments under paragraph (3) shall be made to and payment adjustments under paragraph (4) shall apply to such qualifying organizations.

`(2) ELIGIBLE PROFESSIONAL DESCRIBED- With respect to a qualifying MA organization, an eligible professional described in this paragraph is an eligible professional (as defined for purposes of section 1848(o)) who --

`(A)(i) is employed by the organization; or

`(ii)(I) is employed by, or is a partner of, an entity that through contract with the organization furnishes at least 80 percent of the entity's patient care services to enrollees of such organization; and

`(II) furnishes at least 75 percent of the professional services of the eligible professional to enrollees of the organization; and

`(B) furnishes, on average, at least 20 hours per week of patient care services.

`(3) ELIGIBLE PROFESSIONAL INCENTIVE PAYMENTS-

`(A) IN GENERAL- In applying section 1848(o) under paragraph (1), instead of the additional payment amount under section 1848(o)(1)(A) and subject to subparagraph (B), the Secretary may substitute an amount determined by the Secretary to the extent feasible and practical to be similar to the estimated amount in the aggregate that would be payable if payment for services furnished by such professionals was payable under part B instead of this part.

`(B) AVOIDING DUPLICATION OF PAYMENTS-

`(i) IN GENERAL- If an eligible professional described in paragraph (2) is eligible for the maximum incentive payment under section 1848(o)(1)(A) for the same payment period, the payment incentive shall be made only under such section and not under this subsection.

`(ii) METHODS- In the case of an eligible professional described in paragraph (2) who is eligible for an incentive payment under section 1848(o)(1)(A) but is not described in clause (i) for the same payment period, the Secretary shall develop a process --

`(I) to ensure that duplicate payments are not made with respect to an eligible professional both under this subsection and under section 1848(o)(1)(A); and

`(II) to collect data from Medicare Advantage organizations to ensure against such duplicate payments.

`(C) FIXED SCHEDULE FOR APPLICATION OF LIMITATION ON INCENTIVE PAYMENTS FOR ALL ELIGIBLE PROFESSIONALS- In applying section 1848(o)(1)(B)(ii) under subparagraph (A), in accordance with rules specified by the Secretary, a qualifying MA organization shall specify a year (not earlier than 2011) that shall be treated as the first payment year for all eligible professionals with respect to such organization.

`(4) PAYMENT ADJUSTMENT-

`(A) IN GENERAL- In applying section 1848(a)(7) under paragraph (1), instead of the payment adjustment being an applicable percent of the fee schedule amount for a year under such section, subject to subparagraph (D), the payment adjustment under paragraph (1) shall be equal to the percent specified in subparagraph (B) for such year of the payment amount otherwise provided under this section for such year.

`(B) SPECIFIED PERCENT- The percent specified under this subparagraph for a year is 100 percent minus a number of percentage points equal to the product of --

`(i) the number of percentage points by which the applicable percent (under section 1848(a)(7)(A)(ii)) for the year is less than 100 percent; and

`(ii) the Medicare physician expenditure proportion specified in subparagraph (C) for the year.

`(C) MEDICARE PHYSICIAN EXPENDITURE PROPORTION- The Medicare physician expenditure proportion under this subparagraph for a year is the Secretary's estimate of the proportion, of the expenditures under parts A and B that are not attributable to this part, that are attributable to expenditures for physicians' services.

`(D) APPLICATION OF PAYMENT ADJUSTMENT- In the case that a qualifying MA organization attests that not all eligible professionals are meaningful EHR users with respect to a year, the Secretary shall apply the payment adjustment under this paragraph based on the proportion of such eligible professionals that are not meaningful EHR users for such year.

`(5) QUALIFYING MA ORGANIZATION DEFINED- In this subsection and subsection (m), the term `qualifying MA organization' means a Medicare Advantage organization that is organized as a health maintenance organization (as defined in section 2791(b)(3) of the Public Health Service Act).

`(6) MEANINGFUL EHR USER ATTESTATION- For purposes of this subsection and subsection (m), a qualifying MA organization shall submit an attestation, in a form and manner specified by the Secretary which may include the submission of such attestation as part of submission of the initial bid under section 1854(a)(1)(A)(iv), identifying --

`(A) whether each eligible professional described in paragraph (2), with respect to such organization is a meaningful EHR user (as defined in section 1848(o)(2)) for a year specified by the Secretary; and

`(B) whether each eligible hospital described in subsection (m)(1), with respect to such organization, is a meaningful EHR user (as defined in section 1886(n)(3)) for an applicable period specified by the Secretary.'.

(d) Conforming Amendments- Section 1853 of the Social Security Act (42 U.S.C. 1395w-23) is amended --

(1) in subsection (a)(1)(A), by striking `and (i)' and inserting `(i), and (l)';

(2) in subsection (c) --

(A) in paragraph (1)(D)(i), by striking `section 1886(h)' and inserting `sections 1848(o) and 1886(h)'; and

(B) in paragraph (6)(A), by inserting after `under part B,' the following: `excluding expenditures attributable to subsections (a)(7) and (o) of section 1848,'; and

(3) in subsection (f), by inserting `and for payments under subsection (l)' after `with the organization'.

(e) Conforming Amendments to e-Prescribing-

(1) Section 1848(a)(5)(A) of the Social Security Act (42 U.S.C. 1395w-4(a)(5)(A)) is amended --

(A) in clause (i), by striking `or any subsequent year' and inserting `, 2013, 2014, or 2015'; and

(B) in clause (ii), by striking `and each subsequent year' and inserting `and 2015'.

(2) Section 1848(m)(2) of such Act (42 U.S.C. 1395w-4(m)(2)) is amended --

(A) in subparagraph (A), by striking `For 2009' and inserting `Subject to subparagraph (D), for 2009'; and

(B) by adding at the end the following new subparagraph:

`(D) LIMITATION WITH RESPECT TO EHR INCENTIVE PAYMENTS- The provisions of this paragraph shall not apply to an eligible professional (or, in the case of a group practice under paragraph (3)(C), to the group practice) if, for the reporting period the eligible professional (or group practice) receives an incentive payment under subsection (o)(1)(A) with respect to a certified EHR technology (as defined in subsection (o)(4)) that has the capability of electronic prescribing.'.

SEC. 4312. INCENTIVES FOR HOSPITALS.

(a) Incentive Payment- Section 1886 of the Social Security Act (42 U.S.C. 1395ww) is amended by adding at the end the following new subsection:

`(n) Incentives for Adoption and Meaningful Use of Certified EHR Technology-

`(1) IN GENERAL- Subject to the succeeding provisions of this subsection, with respect to inpatient hospital services furnished by an eligible hospital during a payment year (as defined in paragraph (2)(G)), if the eligible hospital is a meaningful EHR user (as determined under paragraph (3)) for the reporting period with respect to such year, in addition to the amount otherwise paid under this section, there also shall be paid to the eligible hospital, from the Federal Hospital Insurance Trust Fund established under section 1817, an amount equal to the applicable amount specified in paragraph (2)(A) for the hospital for such payment year.

`(2) PAYMENT AMOUNT-

`(A) IN GENERAL- Subject to the succeeding subparagraphs of this paragraph, the applicable amount specified in this subparagraph for an eligible hospital for a payment year is equal to the product of the following:

`(i) INITIAL AMOUNT- The sum of --

`(I) the base amount specified in subparagraph (B); plus

`(II) the discharge related amount specified in subparagraph (C) for a 12-month period selected by the Secretary with respect to such payment year.

`(ii) MEDICARE SHARE- The Medicare share as specified in subparagraph (D) for the hospital for a period selected by the Secretary with respect to such payment year.

`(iii) TRANSITION FACTOR- The transition factor specified in subparagraph (E) for the hospital for the payment year.

`(B) BASE AMOUNT- The base amount specified in this subparagraph is $2,000,000.

`(C) DISCHARGE RELATED AMOUNT- The discharge related amount specified in this subparagraph for a 12-month period selected by the Secretary shall be determined as the sum of the amount, based upon total discharges (regardless of any source of payment) for the period, for each discharge up to the 23,000th discharge as follows:

`(i) For the 1,150th through the 9,200th discharge, $200.

`(ii) For the 9,201st through the 13,800th discharge, 50 percent of the amount specified in clause (i).

`(iii) For the 13,801st through the 23,000th discharge, 30 percent of the amount specified in clause (i).

`(D) MEDICARE SHARE- The Medicare share specified under this subparagraph for a hospital for a period selected by the Secretary for a payment year is equal to the fraction --

`(i) the numerator of which is the sum (for such period and with respect to the hospital) of --

`(I) the number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals with respect to whom payment may be made under part A; and

`(II) the number of inpatient-bed-days (as so established) which are attributable to individuals who are enrolled with a Medicare Advantage organization under part C; and

`(ii) the denominator of which is the product of --

`(I) the total number of inpatient-bed-days with respect to the hospital during such period; and

`(II) the total amount of the hospital's charges during such period, not including any charges that are attributable to charity care (as such term is used for purposes of hospital cost reporting under this title), divided by the total amount of the hospital's charges during such period.

Insofar as the Secretary determines that data are not available on charity care necessary to calculate the portion of the formula specified in clause (ii)(II), the Secretary shall use data on uncompensated care and may adjust such data so as to be an appropriate proxy for charity care including a downward adjustment to eliminate bad debt data from uncompensated care data. In the absence of the data necessary, with respect to a hospital, for the Secretary to compute the amount described in clause (ii)(II), the amount under such clause shall be deemed to be 1. In the absence of data, with respect to a hospital, necessary to compute the amount described in clause (i)(II), the amount under such clause shall be deemed to be 0.

`(E) TRANSITION FACTOR SPECIFIED-

`(i) IN GENERAL- Subject to clause (ii), the transition factor specified in this subparagraph for an eligible hospital for a payment year is as follows:

`(I) For the first payment year for such hospital, 1.

`(II) For the second payment year for such hospital, 3/4 .

`(III) For the third payment year for such hospital, 1/2 .

`(IV) For the fourth payment year for such hospital, 1/4 .

`(V) For any succeeding payment year for such hospital, 0.

`(ii) PHASE DOWN FOR ELIGIBLE HOSPITALS FIRST ADOPTING EHR AFTER 2013- If the first payment year for an eligible hospital is after 2013, then the transition factor specified in this subparagraph for a payment year for such hospital is the same as the amount specified in clause (i) for such payment year for an eligible hospital for which the first payment year is 2013. If the first payment year for an eligible hospital is after 2015 then the transition factor specified in this subparagraph for such hospital and for such year and any subsequent year shall be 0.

`(F) FORM OF PAYMENT- The payment under this subsection for a payment year may be in the form of a single consolidated payment or in the form of such periodic installments as the Secretary may specify.

`(G) PAYMENT YEAR DEFINED-

`(i) IN GENERAL- For purposes of this subsection, the term `payment year' means a fiscal year beginning with fiscal year 2011.

`(ii) FIRST, SECOND, ETC. PAYMENT YEAR- The term `first payment year' means, with respect to inpatient hospital services furnished by an eligible hospital, the first fiscal year for which an incentive payment is made for such services under this subsection. The terms `second payment year', `third payment year', and `fourth payment year' mean, with respect to an eligible hospital, each successive year immediately following the first payment year for that hospital.

`(3) MEANINGFUL EHR USER-

`(A) IN GENERAL- For purposes of paragraph (1), an eligible hospital shall be treated as a meaningful EHR user for a reporting period for a payment year (or, for purposes of subsection (b)(3)(B)(ix), for a reporting period under such subsection for a fiscal year) if each of the following requirements are met:

`(i) MEANINGFUL USE OF CERTIFIED EHR TECHNOLOGY- The eligible hospital demonstrates to the satisfaction of the Secretary, in accordance with subparagraph (C)(i), that during such period the hospital is using certified EHR technology in a meaningful manner.

`(ii) INFORMATION EXCHANGE- The eligible hospital demonstrates to the satisfaction of the Secretary, in accordance with subparagraph (C)(i), that during such period such certified EHR technology is connected in a manner that provides, in accordance with law and standards applicable to the exchange of information, for the electronic exchange of health information to improve the quality of health care, such as promoting care coordination.

`(iii) REPORTING ON MEASURES USING EHR- Subject to subparagraph (B)(ii) and using such certified EHR technology, the eligible hospital submits information for such period, in a form and manner specified by the Secretary, on such clinical quality measures and such other measures as selected by the Secretary under subparagraph (B)(i).

The Secretary shall seek to improve the use of electronic health records and health care quality over time by requiring more stringent measures of meaningful use selected under this paragraph.

`(B) REPORTING ON MEASURES-

`(i) SELECTION- The Secretary shall select measures for purposes of subparagraph (A)(iii) but only consistent with the following:

`(I) The Secretary shall provide preference to clinical quality measures that have been selected for purposes of applying subsection (b)(3)(B)(viii) or that have been endorsed by the entity with a contract with the Secretary under section 1890(a).

`(II) Prior to any measure (other than a clinical quality measure that has been selected for purposes of applying subsection (b)(3)(B)(viii)) being selected under this subparagraph, the Secretary shall publish in the Federal Register such measure and provide for a period of public comment on such measure.

`(ii) LIMITATIONS- The Secretary may not require the electronic reporting of information on clinical quality measures under subparagraph (A)(iii) unless the Secretary has the capacity to accept the information electronically, which may be on a pilot basis.

`(iii) COORDINATION OF REPORTING OF INFORMATION- In selecting such measures, and in establishing the form and manner for reporting measures under subparagraph (A)(iii), the Secretary shall seek to avoid redundant or duplicative reporting with reporting otherwise required, including reporting under subsection (b)(3)(B)(viii).

`(C) DEMONSTRATION OF MEANINGFUL USE OF CERTIFIED EHR TECHNOLOGY AND INFORMATION EXCHANGE-

`(i) IN GENERAL- A hospital may satisfy the demonstration requirement of clauses (i) and (ii) of subparagraph (A) through means specified by the Secretary, which may include --

`(I) an attestation;

`(II) the submission of claims with appropriate coding (such as a code indicating that inpatient care was documented using certified EHR technology);

`(III) a survey response;

`(IV) reporting under subparagraph (A)(iii); and

`(V) other means specified by the Secretary.

`(ii) USE OF PART D DATA- Notwithstanding sections 1860D-15(d)(2)(B) and 1860D-15(f)(2), the Secretary may use data regarding drug claims submitted for purposes of section 1860D-15 that are necessary for purposes of subparagraph (A).

`(4) APPLICATION-

`(A) LIMITATIONS ON REVIEW- There shall be no administrative or judicial review under section 1869, section 1878, or otherwise of the determination of any incentive payment under this subsection and the payment adjustment under subsection (b)(3)(B)(ix), including the determination of a meaningful EHR user under paragraph (3), determination of measures applicable to services furnished by eligible hospitals under this subsection, and the exception under subsection (b)(3)(B)(ix)(II).

`(B) POSTING ON WEBSITE- The Secretary shall post on the Internet website of the Centers for Medicare & Medicaid Services, in an easily understandable format, a list of the names of the eligible hospitals that are meaningful EHR users under this subsection or subsection (b)(3)(B)(ix) and other relevant data as determined appropriate by the Secretary. The Secretary shall ensure that a hospital has the opportunity to review the other relevant data that are to be made public with respect to the hospital prior to such data being made public.

`(5) CERTIFIED EHR TECHNOLOGY DEFINED- The term `certified EHR technology' has the meaning given such term in section 1848(o)(4).

`(6) DEFINITIONS- For purposes of this subsection:

`(A) ELIGIBLE HOSPITAL- The term `eligible hospital' means a subsection (d) hospital.

`(B) REPORTING PERIOD- The term `reporting period' means any period (or periods), with respect to a payment year, as specified by the Secretary.'.

(b) Incentive Market Basket Adjustment- Section 1886(b)(3)(B) of the Social Security Act (42 U.S.C. 1395ww(b)(3)(B)) is amended --

(1) in clause (viii)(I), by inserting `(or, beginning with fiscal year 2016, by one-quarter)' after `2.0 percentage points'; and

(2) by adding at the end the following new clause:

`(ix)(I) For purposes of clause (i) for fiscal year 2016 and each subsequent fiscal year, in the case of an eligible hospital (as defined in subsection (n)(6)(A)) that is not a meaningful EHR user (as defined in subsection (n)(3)) for the reporting period for such fiscal year, three-quarters of the applicable percentage increase otherwise applicable under clause (i) for such fiscal year shall be reduced by 33 1/3 percent for fiscal year 2016, 66 2/3 percent for fiscal year 2017, and 100 percent for fiscal year 2018 and each subsequent fiscal year. Such reduction shall apply only with respect to the fiscal year involved and the Secretary shall not take into account such reduction in computing the applicable percentage increase under clause (i) for a subsequent fiscal year.

`(II) The Secretary may, on a case-by-case basis, exempt a subsection (d) hospital from the application of subclause (I) with respect to a fiscal year if the Secretary determines, subject to annual renewal, that requiring such hospital to be a meaningful EHR user during such fiscal year would result in a significant hardship, such as in the case of a hospital in a rural area without sufficient Internet access. In no case may a hospital be granted an exemption under this subclause for more than 5 years.

`(III) For fiscal year 2016 and each subsequent fiscal year, a State in which hospitals are paid for services under section 1814(b)(3) shall adjust the payments to each subsection (d) hospital in the State that is not a meaningful EHR user (as defined in subsection (n)(3)) in a manner that is designed to result in an aggregate reduction in payments to hospitals in the State that is equivalent to the aggregate reduction that would have occurred if payments had been reduced to each subsection (d) hospital in the State in a manner comparable to the reduction under the previous provisions of this clause. The State shall report to the Secretary the methodology it will use to make the payment adjustment under the previous sentence.

`(IV) For purposes of this clause, the term `reporting period' means, with respect to a fiscal year, any period (or periods), with respect to the fiscal year, as specified by the Secretary.'.

(c) Application to Certain HMO-Affiliated Eligible Hospitals- Section 1853 of the Social Security Act (42 U.S.C. 1395w-23), as amended by section 4311(c), is further amended by adding at the end the following new subsection:

`(m) Application of Eligible Hospital Incentives for Certain MA Organizations for Adoption and Meaningful Use of Certified EHR Technology-

`(1) APPLICATION- Subject to paragraphs (3) and (4), in the case of a qualifying MA organization, the provisions of sections 1886(n) and 1886(b)(3)(B)(ix) shall apply with respect to eligible hospitals described in paragraph (2) of the organization which the organization attests under subsection (l)(6) to be meaningful EHR users in a similar manner as they apply to eligible hospitals under such sections. Incentive payments under paragraph (3) shall be made to and payment adjustments under paragraph (4) shall apply to such qualifying organizations.

`(2) ELIGIBLE HOSPITAL DESCRIBED- With respect to a qualifying MA organization, an eligible hospital described in this paragraph is an eligible hospital that is under common corporate governance with such organization and serves individuals enrolled under an MA plan offered by such organization.

`(3) ELIGIBLE HOSPITAL INCENTIVE PAYMENTS-

`(A) IN GENERAL- In applying section 1886(n)(2) under paragraph (1), instead of the additional payment amount under section 1886(n)(2), there shall be substituted an amount determined by the Secretary to be similar to the estimated amount in the aggregate that would be payable if payment for services furnished by such hospitals was payable under part A instead of this part. In implementing the previous sentence, the Secretary --

`(i) shall, insofar as data to determine the discharge related amount under section 1886(n)(2)(C) for an eligible hospital are not available to the Secretary, use such alternative data and methodology to estimate such discharge related amount as the Secretary determines appropriate; and

`(ii) shall, insofar as data to determine the medicare share described in section 1886(n)(2)(D) for an eligible hospital are not available to the Secretary, use such alternative data and methodology to estimate such share, which data and methodology may include use of the inpatient bed days (or discharges) with respect to an eligible hospital during the appropriate period which are attributable to both individuals for whom payment may be made under part A or individuals enrolled in an MA plan under a Medicare Advantage organization under this part as a proportion of the total number of patient-bed-days (or discharges) with respect to such hospital during such period.

`(B) AVOIDING DUPLICATION OF PAYMENTS-

`(i) IN GENERAL- In the case of a hospital that for a payment year is an eligible hospital described in paragraph (2), is an eligible hospital under section 1886(n), and for which at least one-third of their discharges (or bed-days) of Medicare patients for the year are covered under part A, payment for the payment year shall be made only under section 1886(n) and not under this subsection.

`(ii) METHODS- In the case of a hospital that is an eligible hospital described in paragraph (2) and also is eligible for an incentive payment under section 1886(n) but is not described in clause (i) for the same payment period, the Secretary shall develop a process --

`(I) to ensure that duplicate payments are not made with respect to an eligible hospital both under this subsection and under section 1886(n); and

`(II) to collect data from Medicare Advantage organizations to ensure against such duplicate payments.

`(4) PAYMENT ADJUSTMENT-

`(A) Subject to paragraph (3), in the case of a qualifying MA organization (as defined in section 1853(l)(5)), if, according to the attestation of the organization submitted under subsection (l)(6) for an applicable period, one or more eligible hospitals (as defined in section 1886(n)(6)(A)) that are under common corporate governance with such organization and that serve individuals enrolled under a plan offered by such organization are not meaningful EHR users (as defined in section 1886(n)(3)) with respect to a period, the payment amount payable under this section for such organization for such period shall be the percent specified in subparagraph (B) for such period of the payment amount otherwise provided under this section for such period.

`(B) SPECIFIED PERCENT- The percent specified under this subparagraph for a year is 100 percent minus a number of percentage points equal to the product of --

`(i) the number of the percentage point reduction effected under section 1886(b)(3)(B)(ix)(I) for the period; and

`(ii) the Medicare hospital expenditure proportion specified in subparagraph (C) for the year.

`(C) MEDICARE HOSPITAL EXPENDITURE PROPORTION- The Medicare hospital expenditure proportion under this subparagraph for a year is the Secretary's estimate of the proportion, of the expenditures under parts A and B that are not attributable to this part, that are attributable to expenditures for inpatient hospital services.

`(D) APPLICATION OF PAYMENT ADJUSTMENT- In the case that a qualifying MA organization attests that not all eligible hospitals are meaningful EHR users with respect to an applicable period, the Secretary shall apply the payment adjustment under this paragraph based on a methodology specified by the Secretary, taking into account the proportion of such eligible hospitals, or discharges from such hospitals, that are not meaningful EHR users for such period.'.

(d) Conforming Amendments-

(1) Section 1814(b) of the Social Security Act (42 U.S.C. 1395f(b)) is amended --

(A) in paragraph (3), in the matter preceding subparagraph (A), by inserting `, subject to section 1886(d)(3)(B)(ix)(III),' after `then'; and

(B) by adding at the end the following: `For purposes of applying paragraph (3), there shall be taken into account incentive payments, and payment adjustments under subsection (b)(3)(B)(ix) or (n) of section 1886.'.

(2) Section 1851(i)(1) of the Social Security Act (42 U.S.C. 1395w-21(i)(1)) is amended by striking `and 1886(h)(3)(D)' and inserting `1886(h)(3)(D), and 1853(m)'.

(3) Section 1853 of the Social Security Act (42 U.S.C. 1395w-23), as amended by section 4311(d)(1), is amended --

(A) in subsection (c) --

(i) in paragraph (1)(D)(i), by striking `1848(o)' and inserting `, 1848(o), and 1886(n)'; and

(ii) in paragraph (6)(A), by inserting `and subsections (b)(3)(B)(ix) and (n) of section 1886' after `section 1848'; and

(B) in subsection (f), by inserting `and subsection (m)' after `under subsection (l)'.

SEC. 4313. TREATMENT OF PAYMENTS AND SAVINGS; IMPLEMENTATION FUNDING.

(a) Premium Hold Harmless-

(1) IN GENERAL- Section 1839(a)(1) of the Social Security Act (42 U.S.C. 1395r(a)(1)) is amended by adding at the end the following: `In applying this paragraph there shall not be taken into account additional payments under section 1848(o) and section 1853(l)(3) and the Government contribution under section 1844(a)(3).'.

(2) PAYMENT- Section 1844(a) of such Act (42 U.S.C. 1395w(a)) is amended --

(A) in paragraph (2), by striking the period at the end and inserting `; plus'; and

(B) by adding at the end the following new paragraph:

`(3) a Government contribution equal to the amount of payment incentives payable under sections 1848(o) and 1853(l)(3).'.

(b) Medicare Improvement Fund- Section 1898 of the Social Security Act (42 U.S.C. 1395iii), as added by section 7002(a) of the Supplemental Appropriations Act, 2008 (Public Law 110-252) and as amended by section 188(a)(2) of the Medicare Improvements for Patients and Providers Act of 2008 (Public Law 110-275; 122 Stat. 2589) and by section 6 of the QI Program Supplemental Funding Act of 2008, is amended --

(1) in subsection (a) --

(A) by inserting `medicare' before `fee-for-service'; and

(B) by inserting before the period at the end the following: `including, but not limited to, an increase in the conversion factor under section 1848(d) to address, in whole or in part, any projected shortfall in the conversion factor for 2014 relative to the conversion factor for 2008 and adjustments to payments for items and services furnished by providers of services and suppliers under such original medicare fee-for-service program'; and

(2) in subsection (b) --

(A) in paragraph (1), by striking `during fiscal year 2014,' and all that follows and inserting the following: `during --

`(A) fiscal year 2014, $22,290,000,000; and

`(B) fiscal year 2020 and each subsequent fiscal year, the Secretary's estimate, as of July 1 of the fiscal year, of the aggregate reduction in expenditures under this title during the preceding fiscal year directly resulting from the reduction in payment amounts under sections 1848(a)(7), 1853(l)(4), 1853(m)(4), and 1886(b)(3)(B)(ix).'; and

(B) by adding at the end the following new paragraph:

`(4) NO EFFECT ON PAYMENTS IN SUBSEQUENT YEARS- In the case that expenditures from the Fund are applied to, or otherwise affect, a payment rate for an item or service under this title for a year, the payment rate for such item or service shall be computed for a subsequent year as if such application or effect had never occurred.'.

(c) Implementation Funding- In addition to funds otherwise available, out of any funds in the Treasury not otherwise appropriated, there are appropriated to the Secretary of Health and Human Services for the Center for Medicare & Medicaid Services Program Management Account, $60,000,000 for each of fiscal years 2009 through 2015 and $30,000,000 for each succeeding fiscal year through fiscal year 2019, which shall be available for purposes of carrying out the provisions of (and amendments made by) this part. Amounts appropriated under this subsection for a fiscal year shall be available until expended.

SEC. 4314. STUDY ON APPLICATION OF EHR PAYMENT INCENTIVES FOR PROVIDERS NOT RECEIVING OTHER INCENTIVE PAYMENTS.

(a) Study-

(1) IN GENERAL- The Secretary of Health and Human Services shall conduct a study to determine the extent to which and manner in which payment incentives (such as under title XVIII or XIX of the Social Security Act) and other funding for purposes of implementing and using certified EHR technology (as defined in section 3000 of the Public Health Service Act) should be made available to health care providers who are receiving minimal or no payment incentives or other funding under this Act, under title XVIII or XIX of the Social Security Act, or otherwise, for such purposes.

(2) DETAILS OF STUDY- Such study shall include an examination of --

(A) the adoption rates of certified EHR technology by such health care providers;

(B) the clinical utility of such technology by such health care providers;

(C) whether the services furnished by such health care providers are appropriate for or would benefit from the use of such technology;

(D) the extent to which such health care providers work in settings that might otherwise receive an incentive payment or other funding under this Act, title XVIII or XIX of the Social Security Act, or otherwise;

(E) the potential costs and the potential benefits of making payment incentives and other funding available to such health care providers; and

(F) any other issues the Secretary deems to be appropriate.

(b) Report- Not later than June 30, 2010, the Secretary shall submit to Congress a report on the findings and conclusions of the study conducted under subsection (a).

PART III --MEDICAID FUNDING

SEC. 4321. MEDICAID PROVIDER HIT ADOPTION AND OPERATION PAYMENTS; IMPLEMENTATION FUNDING.

(a) In General- Section 1903 of the Social Security Act (42 U.S.C. 1396b) is amended --

(1) in subsection (a)(3) --

(A) by striking `and' at the end of subparagraph (D);

(B) by striking `plus' at the end of subparagraph (E) and inserting `and'; and

(C) by adding at the end the following new subparagraph:

`(F)(i) 100 percent of so much of the sums expended during such quarter as are attributable to payments for certified EHR technology (and support services including maintenance and training that is for, or is necessary for the adoption and operation of, such technology) by Medicaid providers described in subsection (t)(1); and

`(ii) 90 percent of so much of the sums expended during such quarter as are attributable to payments for reasonable administrative expenses related to the administration of payments described in clause (i) if the State meets the condition described in subsection (t)(9); plus'; and

(2) by inserting after subsection (s) the following new subsection:

`(t)(1) For purposes of subsection (a)(3)(F), the payments for certified EHR technology (and support services including maintenance that is for, or is necessary for the operation of, such technology) by Medicaid providers described in this paragraph are payments made by the State in accordance with this subsection of 85 percent of the net allowable costs of Medicaid providers (as defined in paragraph (2)) for such technology (and support services).

`(2) In this subsection and subsection (a)(3)(F), the term `Medicaid provider' means --

`(A) an eligible professional (as defined in paragraph (3)(B)) who is not hospital-based and has at least 30 percent of the professional's patient volume (as estimated in accordance with standards established by the Secretary) attributable to individuals who are receiving medical assistance under this title; and

`(B)(i) a children's hospital,

`(ii) an acute-care hospital that is not described in clause (i) and that has at least 10 percent of the hospital's patient volume (as estimated in accordance with standards established by the Secretary) attributable to individuals who are receiving medical assistance under this title, or

`(iii) a Federally-qualified health center or rural health clinic that has at least 30 percent of the center's or clinic's patient volume (as estimated in accordance with standards established by the Secretary) attributable to individuals who are receiving medical assistance under this title.

A professional shall not qualify as a Medicaid provider under this subsection unless the professional has waived, in a manner specified by the Secretary, any right to payment under section 1848(o) with respect to the adoption or support of certified EHR technology by the professional. In applying clauses (ii) and (iii) of subparagraph (B), the standards established by the Secretary for patient volume shall include individuals enrolled in a Medicaid managed care plan (under section 1903(m) or section 1932).

`(3) In this subsection and subsection (a)(3)(F):

`(A) The term `certified EHR technology' means a qualified electronic health record (as defined in 3000(13) of the Public Health Service Act) that is certified pursuant to section 3001(c)(5) of such Act as meeting standards adopted under section 3004 of such Act that are applicable to the type of record involved (as determined by the Secretary, such as an ambulatory electronic health record for office-based physicians or an inpatient hospital electronic health record for hospitals).

`(B) The term `eligible professional' means a physician as defined in paragraphs (1) and (2) of section 1861(r), and includes a nurse mid-wife and a nurse practitioner.

`(C) The term `hospital-based' means, with respect to an eligible professional, a professional (such as a pathologist, anesthesiologist, or emergency physician) who furnishes substantially all of the individual's professional services in a hospital setting (whether inpatient or outpatient) and through the use of the facilities and equipment, including computer equipment, of the hospital.

`(4)(A) The term `allowable costs' means, with respect to certified EHR technology of a Medicaid provider, costs of such technology (and support services including maintenance and training that is for, or is necessary for the adoption and operation of, such technology) as determined by the Secretary to be reasonable.

`(B) The term `net allowable costs' means allowable costs reduced by any payment that is made to the provider involved from any other source that is directly attributable to payment for certified EHR technology or services described in subparagraph (A).

`(C) In no case shall --

`(i) the aggregate allowable costs under this subsection (covering one or more years) with respect to a Medicaid provider described in paragraph (2)(A) for purchase and initial implementation of certified EHR technology (and services described in subparagraph (A)) exceed $25,000 or include costs over a period of longer than 5 years;

`(ii) for costs not described in clause (i) relating to the operation, maintenance, or use of certified EHR technology, the annual allowable costs under this subsection with respect to such a Medicaid provider for costs not described in clause (i) for any year exceed $10,000;

`(iii) payment described in paragraph (1) for costs described in clause (ii) be made with respect to such a Medicaid provider over a period of more than 5 years;

`(iv) the aggregate allowable costs under this subsection with respect to such a Medicaid provider for all costs exceed $75,000; or

`(v) the allowable costs, whether for purchase and initial implementation, maintenance, or otherwise, for a Medicaid provider described in paragraph (2)(B) exceed such aggregate or annual limitation as the Secretary shall establish, based on an amount determined by the Secretary as being adequate to adopt and maintain certified EHR technology, consistent with paragraph (6).

`(5) Payments described in paragraph (1) are not in accordance with this subsection unless the following requirements are met:

`(A) The State provides assurances satisfactory to the Secretary that amounts received under subsection (a)(3)(F) with respect to costs of a Medicaid provider are paid directly to such provider without any deduction or rebate.

`(B) Such Medicaid provider is responsible for payment of the costs described in such paragraph that are not provided under this title.

`(C) With respect to payments to such Medicaid provider for costs other than costs related to the initial adoption of certified EHR technology, the Medicaid provider demonstrates meaningful use of certified EHR technology through a means that is approved by the State and acceptable to the Secretary, and that may be based upon the methodologies applied under section 1848(o) or 1886(n).

`(D) To the extent specified by the Secretary, the certified EHR technology is compatible with State or Federal administrative management systems.

`(6)(A) In no case shall the payments described in paragraph (1), with respect to a hospital, exceed in the aggregate the product of --

`(i) the overall hospital HIT amount for the hospital computed under subparagraph (B); and

`(ii) the Medicaid share for such hospital computed under subparagraph (C).

`(B) For purposes of this paragraph, the overall hospital HIT amount, with respect to a hospital, is the sum of the applicable amounts specified in section 1886(n)(2)(A) for such hospital for the first 4 payment years (as estimated by the Secretary) determined as if the Medicare share specified in clause (ii) of such section were 1. The Secretary shall publish in the Federal Register the overall hospital HIT amount for each hospital eligible for payments under this subsection. In computing amounts under clause (ii) for payment years after the first payment year, the Secretary shall assume that in subsequent payment years discharges increase at an annual rate of 2 percent per year.

`(C) The Medicaid share computed under this subparagraph, for a hospital for a period specified by the Secretary, shall be calculated in the same manner as the Medicare share under section 1886(n)(2)(D) for such a hospital and period, except that there shall be substituted for the numerator under clause (i) of such section the amount that is equal to the number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals who are receiving medical assistance under this title and who are not described in section 1886(n)(2)(D)(i). In computing inpatient-bed-days under the previous sentence, the Secretary shall take into account inpatient-bed-days attributable to inpatient-bed-days that are paid for individuals enrolled in a Medicaid managed care plan (under section 1903(m) or section 1932).

`(7) With respect to health care providers other than hospitals, the Secretary shall ensure coordination of the different programs for payment of such health care providers for adoption or use of health information technology (including certified EHR technology), as well as payments for such health care providers provided under this title or title XVIII, to assure no duplication of funding.

`(8) In carrying out paragraph (5)(C), the State and Secretary shall seek, to the maximum extent practicable, to avoid duplicative requirements from Federal and State Governments to demonstrate meaningful use of certified EHR technology under this title and title XVIII. In doing so, the Secretary may deem satisfaction of requirements for such meaningful use for a payment year under title XVIII to be sufficient to qualify as meaningful use under this subsection. The Secretary may also specify the reporting periods under this subsection in order to carry out this paragraph.

`(9) In order to be provided Federal financial participation under subsection (a)(3)(F)(ii), a State must demonstrate to the satisfaction of the Secretary, that the State --

`(A) is using the funds provided for the purposes of administering payments under this subsection, including tracking of meaningful use by Medicaid providers;

`(B) conducting adequate oversight of the program under this subsection, including routine tracking of meaningful use attestations and reporting mechanisms; and

`(C) be pursuing initiatives to encourage the adoption of certified EHR technology to promote health care quality and the exchange of health care information under this title, subject to applicable laws and regulations governing such exchange.

`(10) The Secretary shall periodically submit reports to the Committee on Energy and Commerce of the House of Representatives and the Committee on Finance of the Senate on status, progress, and oversight of payments under paragraph (1).'.

(b) Implementation Funding- In addition to funds otherwise available, out of any funds in the Treasury not otherwise appropriated, there are appropriated to the Secretary of Health and Human Services for the Center for Medicare & Medicaid Services Program Management Account, $40,000,000 for each of fiscal years 2009 through 2015 and $20,000,000 for each succeeding fiscal year through fiscal year 2019, which shall be available for purposes of carrying out the provisions of (and the amendments made by) this part. Amounts appropriated under this subsection for a fiscal year shall be available until expended.

Subtitle D --Privacy

SEC. 4400. DEFINITIONS.

In this subtitle, except as specified otherwise:

(1) BREACH- The term `breach' means the unauthorized acquisition, access, use, or disclosure of protected health information which compromises the security, privacy, or integrity of protected health information maintained by or on behalf of a person. Such term does not include any unintentional acquisition, access, use, or disclosure of such information by an employee or agent of the covered entity or business associate involved if such acquisition, access, use, or disclosure, respectively, was made in good faith and within the course and scope of the employment or other contractual relationship of such employee or agent, respectively, with the covered entity or business associate and if such information is not further acquired, accessed, used, or disclosed by such employee or agent.

(2) BUSINESS ASSOCIATE- The term `business associate' has the meaning given such term in section 160.103 of title 45, Code of Federal Regulations.

(3) COVERED ENTITY- The term `covered entity' has the meaning given such term in section 160.103 of title 45, Code of Federal Regulations.

(4) DISCLOSE- The terms `disclose' and `disclosure' have the meaning given the term `disclosure' in section 160.103 of title 45, Code of Federal Regulations.

(5) ELECTRONIC HEALTH RECORD- The term `electronic health record' means an electronic record of health-related information on an individual that is created, gathered, managed, and consulted by authorized health care clinicians and staff.

(6) HEALTH CARE OPERATIONS- The term `health care operation' has the meaning given such term in section 164.501 of title 45, Code of Federal Regulations.

(7) HEALTH CARE PROVIDER- The term `health care provider' has the meaning given such term in section 160.103 of title 45, Code of Federal Regulations.

(8) HEALTH PLAN- The term `health plan' has the meaning given such term in section 1171(5) of the Social Security Act.

(9) NATIONAL COORDINATOR- The term `National Coordinator' means the head of the Office of the National Coordinator for Health Information Technology established under section 3001(a) of the Public Health Service Act, as added by section 4101.

(10) PAYMENT- The term `payment' has the meaning given such term in section 164.501 of title 45, Code of Federal Regulations.

(11) PERSONAL HEALTH RECORD- The term `personal health record' means an electronic record of individually identifiable health information on an individual that can be drawn from multiple sources and that is managed, shared, and controlled by or for the individual.

(12) PROTECTED HEALTH INFORMATION- The term `protected health information' has the meaning given such term in section 160.103 of title 45, Code of Federal Regulations.

(13) SECRETARY- The term `Secretary' means the Secretary of Health and Human Services.

(14) SECURITY- The term `security' has the meaning given such term in section 164.304 of title 45, Code of Federal Regulations.

(15) STATE- The term `State' means each of the several States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands.

(16) TREATMENT- The term `treatment' has the meaning given such term in section 164.501 of title 45, Code of Federal Regulations.

(17) USE- The term `use' has the meaning given such term in section 160.103 of title 45, Code of Federal Regulations.

(18) VENDOR OF PERSONAL HEALTH RECORDS- The term `vendor of personal health records' means an entity, other than a covered entity (as defined in paragraph (3)), that offers or maintains a personal health record.

PART I --IMPROVED PRIVACY PROVISIONS AND SECURITY PROVISIONS

SEC. 4401. APPLICATION OF SECURITY PROVISIONS AND PENALTIES TO BUSINESS ASSOCIATES OF COVERED ENTITIES; ANNUAL GUIDANCE ON SECURITY PROVISIONS.

(a) Application of Security Provisions- Sections 164.308, 164.310, 164.312, and 164.316 of title 45, Code of Federal Regulations, shall apply to a business associate of a covered entity in the same manner that such sections apply to the covered entity. The additional requirements of this title that relate to security and that are made applicable with respect to covered entities shall also be applicable to such a business associate and shall be incorporated into the business associate agreement between the business associate and the covered entity.

(b) Application of Civil and Criminal Penalties- In the case of a business associate that violates any security provision specified in subsection (a), sections 1176 and 1177 of the Social Security Act (42 U.S.C. 1320d-5, 1320d-6) shall apply to the business associate with respect to such violation in the same manner such sections apply to a covered entity that violates such security provision.

(c) Annual Guidance- For the first year beginning after the date of the enactment of this Act and annually thereafter, the Secretary of Health and Human Services shall, in consultation with industry stakeholders, annually issue guidance on the most effective and appropriate technical safeguards for use in carrying out the sections referred to in subsection (a) and the security standards in subpart C of part 164 of title 45, Code of Federal Regulations, as such provisions are in effect as of the date before the enactment of this Act.

SEC. 4402. NOTIFICATION IN THE CASE OF BREACH.

(a) In General- A covered entity that accesses, maintains, retains, modifies, records, stores, destroys, or otherwise holds, uses, or discloses unsecured protected health information (as defined in subsection (h)(1)) shall, in the case of a breach of such information that is discovered by the covered entity, notify each individual whose unsecured protected health information has been, or is reasonably believed by the covered entity to have been, accessed, acquired, or disclosed as a result of such breach.

(b) Notification of Covered Entity by Business Associate- A business associate of a covered entity that accesses, maintains, retains, modifies, records, stores, destroys, or otherwise holds, uses, or discloses unsecured protected health information shall, following the discovery of a breach of such information, notify the covered entity of such breach. Such notice shall include the identification of each individual whose unsecured protected health information has been, or is reasonably believed by the business associate to have been, accessed, acquired, or disclosed during such breach.

(c) Breaches Treated as Discovered- For purposes of this section, a breach shall be treated as discovered by a covered entity or by a business associate as of the first day on which such breach is known to such entity or associate, respectively, (including any person, other than the individual committing the breach, that is an employee, officer, or other agent of such entity or associate, respectively) or should reasonably have been known to such entity or associate (or person) to have occurred.

(d) Timeliness of Notification-

(1) IN GENERAL- Subject to subsection (g), all notifications required under this section shall be made without unreasonable delay and in no case later than 60 calendar days after the discovery of a breach by the covered entity involved (or business associate involved in the case of a notification required under subsection (b)).

(2) BURDEN OF PROOF- The covered entity involved (or business associate involved in the case of a notification required under subsection (b)), shall have the burden of demonstrating that all notifications were made as required under this part, including evidence demonstrating the necessity of any delay.

(e) Methods of Notice-

(1) INDIVIDUAL NOTICE- Notice required under this section to be provided to an individual, with respect to a breach, shall be provided promptly and in the following form:

(A) Written notification by first-class mail to the individual (or the next of kin of the individual if the individual is deceased) at the last known address of the individual or the next of kin, respectively, or, if specified as a preference by the individual, by electronic mail. The notification may be provided in one or more mailings as information is available.

(B) In the case in which there is insufficient, or out-of-date contact information (including a phone number, e-mail address, or any other form of appropriate communication) that precludes direct written (or, if specified by the individual under subparagraph (A), electronic) notification to the individual, a substitute form of notice shall be provided, including, in the case that there are 10 or more individuals for which there is insufficient or out-of-date contact information, a conspicuous posting for a period determined by the Secretary on the home page of the website of the covered entity involved or notice in major print or broadcast media, including major media in geographic areas where the individuals affected by the breach likely reside. Such a notice in media or web posting will include a toll-free phone number where an individual can learn whether or not the individual's unsecured protected health information is possibly included in the breach.

(C) In any case deemed by the covered entity involved to require urgency because of possible imminent misuse of unsecured protected health information, the covered entity, in addition to notice provided under subparagraph (A), may provide information to individuals by telephone or other means, as appropriate.

(2) MEDIA NOTICE- Notice shall be provided to prominent media outlets serving a State or jurisdiction, following the discovery of a breach described in subsection (a), if the unsecured protected health information of more than 500 residents of such State or jurisdiction is, or is reasonably believed to have been, accessed, acquired, or disclosed during such breach.

(3) NOTICE TO SECRETARY- Notice shall be provided to the Secretary by covered entities of unsecured protected health information that has been acquired or disclosed in a breach. If the breach was with respect to 500 or more individuals than such notice must be provided immediately. If the breach was with respect to less than 500 individuals, the covered entity involved may maintain a log of any such breach occurring and annually submit such a log to the Secretary documenting such breaches occuring during the year involved.

(4) POSTING ON HHS PUBLIC WEBSITE- The Secretary shall make available to the public on the Internet website of the Department of Health and Human Services a list that identifies each covered entity involved in a breach described in subsection (a) in which the unsecured protected health information of more than 500 individuals is acquired or disclosed.

(f) Content of Notification- Regardless of the method by which notice is provided to individuals under this section, notice of a breach shall include, to the extent possible, the following:

(1) A brief description of what happened, including the date of the breach and the date of the discovery of the breach, if known.

(2) A description of the types of unsecured protected health information that were involved in the breach (such as full name, Social Security number, date of birth, home address, account number, or disability code).

(3) The steps individuals should take to protect themselves from potential harm resulting from the breach.

(4) A brief description of what the covered entity involved is doing to investigate the breach, to mitigate losses, and to protect against any further breaches.

(5) Contact procedures for individuals to ask questions or learn additional information, which shall include a toll-free telephone number, an e-mail address, website, or postal address.

(g) Delay of Notification Authorized for Law Enforcement Purposes- If a law enforcement official determines that a notification, notice, or posting required under this section would impede a criminal investigation or cause damage to national security, such notification, notice, or posting shall be delayed in the same manner as provided under section 164.528(a)(2) of title 45, Code of Federal Regulations, in the case of a disclosure covered under such section.

(h) Unsecured Protected Health Information-

(1) DEFINITION-

(A) IN GENERAL- Subject to subparagraph (B), for purposes of this section, the term `unsecured protected health information' means protected health information that is not secured through the use of a technology or methodology specified by the Secretary in the guidance issued under paragraph (2).

(B) EXCEPTION IN CASE TIMELY GUIDANCE NOT ISSUED- In the case that the Secretary does not issue guidance under paragraph (2) by the date specified in such paragraph, for purposes of this section, the term `unsecured protected health information' shall mean protected health information that is not secured by a technology standard that renders protected health information unusable, unreadable, or indecipherable to unauthorized individuals and is developed or endorsed by a standards developing organization that is accredited by the American National Standards Institute.

(2) GUIDANCE- For purposes of paragraph (1) and section 407(f)(3), not later than the date that is 60 days after the date of the enactment of this Act, the Secretary shall, after consultation with stakeholders, issue (and annually update) guidance specifying the technologies and methodologies that render protected health information unusable, unreadable, or indecipherable to unauthorized individuals.

(i) Report to Congress on Breaches-

(1) IN GENERAL- Not later than 12 months after the date of the enactment of this Act and annually thereafter, the Secretary shall prepare and submit to the Committee on Finance and the Committee on Health, Education, Labor, and Pensions of the Senate and the Committee on Ways and Means and the Committee on Energy and Commerce of the House of Representatives a report containing the information described in paragraph (2) regarding breaches for which notice was provided to the Secretary under subsection (e)(3).

(2) INFORMATION- The information described in this paragraph regarding breaches specified in paragraph (1) shall include --

(A) the number and nature of such breaches; and

(B) actions taken in response to such breaches.

(j) Regulations; Effective Date- To carry out this section, the Secretary of Health and Human Services shall promulgate interim final regulations by not later than the date that is 180 days after the date of the enactment of this title. The provisions of this section shall apply to breaches that are discovered on or after the date that is 30 days after the date of publication of such interim final regulations.

SEC. 4403. EDUCATION ON HEALTH INFORMATION PRIVACY.

(a) Regional Office Privacy Advisors- Not later than 6 months after the date of the enactment of this Act, the Secretary shall designate an individual in each regional office of the Department of Health and Human Services to offer guidance and education to covered entities, business associates, and individuals on their rights and responsibilities related to Federal privacy and security requirements for protected health information.

(b) Education Initiative on Uses of Health Information- Not later than 12 months after the date of the enactment of this Act, the Office for Civil Rights within the Department of Health and Human Services shall develop and maintain a multi-faceted national education initiative to enhance public transparency regarding the uses of protected health information, including programs to educate individuals about the potential uses of their protected health information, the effects of such uses, and the rights of individuals with respect to such uses. Such programs shall be conducted in a variety of languages and present information in a clear and understandable manner.

SEC. 4404. APPLICATION OF PRIVACY PROVISIONS AND PENALTIES TO BUSINESS ASSOCIATES OF COVERED ENTITIES.

(a) Application of Contract Requirements- In the case of a business associate of a covered entity that obtains or creates protected health information pursuant to a written contract (or other written arrangement) described in section 164.502(e)(2) of title 45, Code of Federal Regulations, with such covered entity, the business associate may use and disclose such protected health information only if such use or disclosure, respectively, is in compliance with each applicable requirement of section 164.504(e) of such title. The additional requirements of this subtitle that relate to privacy and that are made applicable with respect to covered entities shall also be applicable to such a business associate and shall be incorporated into the business associate agreement between the business associate and the covered entity.

(b) Application of Knowledge Elements Associated With Contracts- Section 164.504(e)(1)(ii) of title 45, Code of Federal Regulations, shall apply to a business associate described in subsection (a), with respect to compliance with such subsection, in the same manner that such section applies to a covered entity, with respect to compliance with the standards in sections 164.502(e) and 164.504(e) of such title, except that in applying such section 164.504(e)(1)(ii) each reference to the business associate, with respect to a contract, shall be treated as a reference to the covered entity involved in such contract.

(c) Application of Civil and Criminal Penalties- In the case of a business associate that violates any provision of subsection (a) or (b), the provisions of sections 1176 and 1177 of the Social Security Act (42 U.S.C. 1320d-5, 1320d-6) shall apply to the business associate with respect to such violation in the same manner as such provisions apply to a person who violates a provision of part C of title XI of such Act.

SEC. 4405. RESTRICTIONS ON CERTAIN DISCLOSURES AND SALES OF HEALTH INFORMATION; ACCOUNTING OF CERTAIN PROTECTED HEALTH INFORMATION DISCLOSURES; ACCESS TO CERTAIN INFORMATION IN ELECTRONIC FORMAT.

(a) Requested Restrictions on Certain Disclosures of Health Information- In the case that an individual requests under paragraph (a)(1)(i)(A) of section 164.522 of title 45, Code of Federal Regulations, that a covered entity restrict the disclosure of the protected health information of the individual, notwithstanding paragraph (a)(1)(ii) of such section, the covered entity must comply with the requested restriction if --

(1) except as otherwise required by law, the disclosure is to a health plan for purposes of carrying out payment or health care operations (and is not for purposes of carrying out treatment); and

(2) the protected health information pertains solely to a health care item or service for which the health care provider involved has been paid out of pocket in full.

(b) Disclosures Required To Be Limited to the Limited Data Set or the Minimum Necessary-

(1) IN GENERAL-

(A) IN GENERAL- Subject to subparagraph (B), a covered entity shall be treated as being in compliance with section 164.502(b)(1) of title 45, Code of Federal Regulations, with respect to the use, disclosure, or request of protected health information described in such section, only if the covered entity limits such protected health information, to the extent practicable, to the limited data set (as defined in section 164.514(e)(2) of such title) or, if needed by such entity, to the minimum necessary to accomplish the intended purpose of such use, disclosure, or request, respectively.

(B) GUIDANCE- Not later than 18 months after the date of the enactment of this section, the Secretary shall issue guidance on what constitutes `minimum necessary' for purposes of subpart E of part 164 of title 45, Code of Federal Regulation. In issuing such guidance the Secretary shall take into consideration the guidance under section 4424(c).

(C) SUNSET- Subparagraph (A) shall not apply on and after the effective date on which the Secretary issues the guidance under subparagraph (B).

(2) DETERMINATION OF MINIMUM NECESSARY- For purposes of paragraph (1), in the case of the disclosure of protected health information, the covered entity or business associate disclosing such information shall determine what constitutes the minimum necessary to accomplish the intended purpose of such disclosure.

(3) APPLICATION OF EXCEPTIONS- The exceptions described in section 164.502(b)(2) of title 45, Code of Federal Regulations, shall apply to the requirement under paragraph (1) as of the effective date described in section 4423 in the same manner that such exceptions apply to section 164.502(b)(1) of such title before such date.

(4) RULE OF CONSTRUCTION- Nothing in this subsection shall be construed as affecting the use, disclosure, or request of protected health information that has been de-identified.

(c) Accounting of Certain Protected Health Information Disclosures Required if Covered Entity Uses Electronic Health Record-

(1) IN GENERAL- In applying section 164.528 of title 45, Code of Federal Regulations, in the case that a covered entity uses or maintains an electronic health record with respect to protected health information --

(A) the exception under paragraph (a)(1)(i) of such section shall not apply to disclosures through an electronic health record made by such entity of such information; and

(B) an individual shall have a right to receive an accounting of disclosures described in such paragraph of such information made by such covered entity during only the three years prior to the date on which the accounting is requested.

(2) REGULATIONS- The Secretary shall promulgate regulations on what information shall be collected about each disclosure referred to in paragraph (1)(A) not later than 18 months after the date on which the Secretary adopts standards on accounting for disclosure described in the section 3002(b)(2)(B)(iv) of the Public Health Service Act, as added by section 4101. Such regulations shall only require such information to be collected through an electronic health record in a manner that takes into account the interests of individuals in learning the circumstances under which their protected health information is being disclosed and takes into account the administrative burden of accounting for such disclosures.

(3) CONSTRUCTION- Nothing in this subsection shall be construed as requiring a covered entity to account for disclosures of protected health information that are not made by such covered entity or by a business associate acting on behalf of the covered entity.

(4) EFFECTIVE DATE-

(A) CURRENT USERS OF ELECTRONIC RECORDS- In the case of a covered entity insofar as it acquired an electronic health record as of January 1, 2009, paragraph (1) shall apply to disclosures, with respect to protected health information, made by the covered entity from such a record on and after January 1, 2014.

(B) OTHERS- In the case of a covered entity insofar as it acquires an electronic health record after January 1, 2009, paragraph (1) shall apply to disclosures, with respect to protected health information, made by the covered entity from such record on and after the later of the following:

(i) January 1, 2011; or

(ii) the date that it acquires an electronic health record.

(d) Review of Health Care Operations- Not later than 18 months after the date of the enactment of this title, the Secretary shall promulgate regulations to eliminate from the definition of health care operations under section 164.501 of title 45, Code of Federal Regulations, those activities that can reasonably and efficiently be conducted through the use of information that is de-identified (in accordance with the requirements of section 164.514(b) of such title) or that should require a valid authorization for use or disclosure. In promulgating such regulations, the Secretary may choose to narrow or clarify activities that the Secretary chooses to retain in the definition of health care operations and the Secretary shall take into account the report under section 424(d). In such regulations the Secretary shall specify the date on which such regulations shall apply to disclosures made by a covered entity, but in no case would such date be sooner than the date that is 24 months after the date of the enactment of this section.

(e) Prohibition on Sale of Electronic Health Records or Protected Health Information Obtained From Electronic Health Records-

(1) IN GENERAL- Except as provided in paragraph (2), a covered entity or business associate shall not directly or indirectly receive remuneration in exchange for any protected health information of an individual unless the covered entity obtained from the individual, in accordance with section 164.508 of title 45, Code of Federal Regulations, a valid authorization that includes, in accordance with such section, a specification of whether the protected health information can be further exchanged for remuneration by the entity receiving protected health information of that individual.

(2) EXCEPTIONS- Paragraph (1) shall not apply in the following cases:

(A) The purpose of the exchange is for research or public health activities (as described in sections 164.501, 164.512(i), and 164.512(b) of title 45, Code of Federal Regulations) and the price charged reflects the costs of preparation and transmittal of the data for such purpose.

(B) The purpose of the exchange is for the treatment of the individual and the price charges reflects not more than the costs of preparation and transmittal of the data for such purpose.

(C) The purpose of the exchange is the health care operation specifically described in subparagraph (iv) of paragraph (6) of the definition of health care operations in section 164.501 of title 45, Code of Federal Regulations.

(D) The purpose of the exchange is for remuneration that is provided by a covered entity to a business associate for activities involving the exchange of protected health information that the business associate undertakes on behalf of and at the specific request of the covered entity pursuant to a business associate agreement.

(E) The purpose of the exchange is to provide an individual with a copy of the individual's protected health information pursuant to section 164.524 of title 45, Code of Federal Regulations.

(F) The purpose of the exchange is otherwise determined by the Secretary in regulations to be similarly necessary and appropriate as the exceptions provided in subparagraphs (A) through (E).

(3) REGULATIONS- The Secretary shall promulgate regulations to carry out paragraph (this subsection, including exceptions described in paragraph (2), not later than 18 months after the date of the enactment of this title.

(4) EFFECTIVE DATE- Paragraph (1) shall apply to exchanges occurring on or after the date that is 6 months after the date of the promulgation of final regulations implementing this subsection.

(f) Access to Certain Information in Electronic Format- In applying section 164.524 of title 45, Code of Federal Regulations, in the case that a covered entity uses or maintains an electronic health record with respect to protected health information of an individual --

(1) the individual shall have a right to obtain from such covered entity a copy of such information in an electronic format; and

(2) notwithstanding paragraph (c)(4) of such section, any fee that the covered entity may impose for providing such individual with a copy of such information (or a summary or explanation of such information) if such copy (or summary or explanation) is in an electronic form shall not be greater than the entity's labor costs in responding to the request for the copy (or summary or explanation).

SEC. 4406. CONDITIONS ON CERTAIN CONTACTS AS PART OF HEALTH CARE OPERATIONS.

(a) Marketing-

(1) IN GENERAL- A communication by a covered entity or business associate that is about a product or service and that encourages recipients of the communication to purchase or use the product or service shall not be considered a health care operation for purposes of subpart E of part 164 of title 45, Code of Federal Regulations, unless the communication is made as described in subparagraph (i), (ii), or (iii) of paragraph (1) of the definition of marketing in section 164.501 of such title.

(2) PAYMENT FOR CERTAIN COMMUNICATIONS- A covered entity or business associate may not receive direct or indirect payment in exchange for making any communication described in subparagraph (i), (ii), or (iii) of paragraph (1) of the definition of marketing in section 164.501 of title 45, Code of Federal Regulations, except --

(A) a business associate of a covered entity may receive payment from the covered entity for making any such communication on behalf of the covered entity that is consistent with the written contract (or other written arrangement) described in section 164.502(e)(2) of such title between such business associate and covered entity; and

(B) a covered entity may receive payment in exchange for making any such communication if the entity obtains from the recipient of the communication, in accordance with section 164.508 of title 45, Code of Federal Regulations, a valid authorization (as described in paragraph (b) of such section) with respect to such communication.

(b) Fundraising- Fundraising for the benefit of a covered entity shall not be considered a health care operation for purposes of section 164.501 of title 45, Code of Federal Regulations.

(c) Effective Date- This section shall apply to contracting occurring on or after the effective date specified under section 4423.

SEC. 4407. TEMPORARY BREACH NOTIFICATION REQUIREMENT FOR VENDORS OF PERSONAL HEALTH RECORDS AND OTHER NON-HIPAA COVERED ENTITIES.

(a) In General- In accordance with subsection (c), each vendor of personal health records, following the discovery of a breach of security of unsecured PHR identifiable health information that is in a personal health record maintained or offered by such vendor, and each entity described in clause (ii) or (iii) of section 4424(b)(1)(A), following the discovery of a breach of security of such information that is obtained through a product or service provided by such entity, shall --

(1) notify each individual who is a citizen or resident of the United States whose unsecured PHR identifiable health information was acquired by an unauthorized person as a result of such a breach of security; and

(2) notify the Federal Trade Commission.

(b) Notification by Third Party Service Providers- A third party service provider that provides services to a vendor of personal health records or to an entity described in clause (ii) or (iii) of section 4424(b)(1)(A) in connection with the offering or maintenance of a personal health record or a related product or service and that accesses, maintains, retains, modifies, records, stores, destroys, or otherwise holds, uses, or discloses unsecured PHR identifiable health information in such a record as a result of such services shall, following the discovery of a breach of security of such information, notify such vendor or entity, respectively, of such breach. Such notice shall include the identification of each individual whose unsecured PHR identifiable health information has been, or is reasonably believed to have been, accessed, acquired, or disclosed during such breach.

(c) Application of Requirements for Timeliness, Method, and Content of Notifications- Subsections (c), (d), (e), and (f) of section 402 shall apply to a notification required under subsection (a) and a vendor of personal health records, an entity described in subsection (a) and a third party service provider described in subsection (b), with respect to a breach of security under subsection (a) of unsecured PHR identifiable health information in such records maintained or offered by such vendor, in a manner specified by the Federal Trade Commission.

(d) Notification of the Secretary- Upon receipt of a notification of a breach of security under subsection (a)(2), the Federal Trade Commission shall notify the Secretary of such breach.

(e) Enforcement- A violation of subsection (a) or (b) shall be treated as an unfair and deceptive act or practice in violation of a regulation under section 18(a)(1)(B) of the Federal Trade Commission Act (15 U.S.C. 57/a/(a)(1)(B)) regarding unfair or deceptive acts or practices.

(f) Definitions- For purposes of this section:

(1) BREACH OF SECURITY- The term `breach of security' means, with respect to unsecured PHR identifiable health information of an individual in a personal health record, acquisition of such information without the authorization of the individual.

(2) PHR IDENTIFIABLE HEALTH INFORMATION- The term `PHR identifiable health information' means individually identifiable health information, as defined in section 1171(6) of the Social Security Act (42 U.S.C. 1320d(6)), and includes, with respect to an individual, information --

(A) that is provided by or on behalf of the individual; and

(B) that identifies the individual or with respect to which there is a reasonable basis to believe that the information can be used to identify the individual.

(3) UNSECURED PHR IDENTIFIABLE HEALTH INFORMATION-

(A) IN GENERAL- Subject to subparagraph (B), the term `unsecured PHR identifiable health information' means PHR identifiable health information that is not protected through the use of a technology or methodology specified by the Secretary in the guidance issued under section 4402(h)(2).

(B) EXCEPTION IN CASE TIMELY GUIDANCE NOT ISSUED- In the case that the Secretary does not issue guidance under section 4402(h)(2) by the date specified in such section, for purposes of this section, the term `unsecured PHR identifiable health information' shall mean PHR identifiable health information that is not secured by a technology standard that renders protected health information unusable, unreadable, or indecipherable to unauthorized individuals and that is developed or endorsed by a standards developing organization that is accredited by the American National Standards Institute.

(g) Regulations; Effective Date; Sunset-

(1) REGULATIONS; EFFECTIVE DATE- To carry out this section, the Secretary of Health and Human Services shall promulgate interim final regulations by not later than the date that is 180 days after the date of the enactment of this section. The provisions of this section shall apply to breaches of security that are discovered on or after the date that is 30 days after the date of publication of such interim final regulations.

(2) SUNSET- The provisions of this section shall not apply to breaches of security occurring on or after the earlier of the following the dates:

(A) The date on which a standard relating to requirements for entities that are not covered entities that includes requirements relating to breach notification has been promulgated by the Secretary.

(B) The date on which a standard relating to requirements for entities that are not covered entities that includes requirements relating to breach notification has been promulgated by the Federal Trade Commission and has taken effect.

SEC. 4408. BUSINESS ASSOCIATE CONTRACTS REQUIRED FOR CERTAIN ENTITIES.

Each organization, with respect to a covered entity, that provides data transmission of protected health information to such entity (or its business associate) and that requires access on a routine basis to such protected health information, such as a Health Information Exchange Organization, Regional Health Information Organization, E-prescribing Gateway, or each vendor that contracts with a covered entity to allow that covered entity to offer a personal health record to patients as part of its electronic health record, is required to enter into a written contract (or other written arrangement) described in section 164.502(e)(2) of title 45, Code of Federal Regulations and a written contract (or other arrangement) described in section 164.308(b) of such title, with such entity and shall be treated as a business associate of the covered entity for purposes of the provisions of this subtitle and subparts C and E of part 164 of title 45, Code of Federal Regulations, as such provisions are in effect as of the date of enactment of this title.

SEC. 4409. CLARIFICATION OF APPLICATION OF WRONGFUL DISCLOSURES CRIMINAL PENALTIES.

Section 1177(a) of the Social Security Act (42 U.S.C. 1320d-6(a)) is amended by adding at the end the following new sentence: `For purposes of the previous sentence, a person (including an employee or other individual) shall be considered to have obtained or disclosed individually identifiable health information in violation of this part if the information is maintained by a covered entity (as defined in the HIPAA privacy regulation described in section 1180(b)(3)) and the individual obtained or disclosed such information without authorization.'.

SEC. 4410. IMPROVED ENFORCEMENT.

(a) In General- Section 1176 of the Social Security Act (42 U.S.C. 1320d-5) is amended --

(1) in subsection (b)(1), by striking `the act constitutes an offense punishable under section 1177' and inserting `a penalty has been imposed under section 1177 with respect to such act'; and

(2) by adding at the end the following new subsection:

`(c) Noncompliance Due to Willful Neglect-

`(1) IN GENERAL- A violation of a provision of this part due to willful neglect is a violation for which the Secretary is required to impose a penalty under subsection (a)(1).

`(2) REQUIRED INVESTIGATION- For purposes of paragraph (1), the Secretary shall formally investigate any complaint of a violation of a provision of this part if a preliminary investigation of the facts of the complaint indicate such a possible violation due to willful neglect.'.

(b) Effective Date; Regulations-

(1) The amendments made by subsection (a) shall apply to penalties imposed on or after the date that is 24 months after the date of the enactment of this title.

(2) Not later than 18 months after the date of the enactment of this title, the Secretary of Health and Human Services shall promulgate regulations to implement such amendments.

(c) Distribution of Certain Civil Monetary Penalties Collected-

(1) IN GENERAL- Subject to the regulation promulgated pursuant to paragraph (3), any civil monetary penalty or monetary settlement collected with respect to an offense punishable under this subtitle or section 1176 of the Social Security Act (42 U.S.C. 1320d-5) insofar as such section relates to privacy or security shall be transferred to the Office of Civil Rights of the Department of Health and Human Services to be used for purposes of enforcing the provisions of this subtitle and subparts C and E of part 164 of title 45, Code of Federal Regulations, as such provisions are in effect as of the date of enactment of this Act.

(2) GAO REPORT- Not later than 18 months after the date of the enactment of this title, the Comptroller General shall submit to the Secretary a report including recommendations for a methodology under which an individual who is harmed by an act that constitutes an offense referred to in paragraph (1) may receive a percentage of any civil monetary penalty or monetary settlement collected with respect to such offense.

(3) ESTABLISHMENT OF METHODOLOGY TO DISTRIBUTE PERCENTAGE OF CMPS COLLECTED TO HARMED INDIVIDUALS- Not later than 3 years after the date of the enactment of this title, the Secretary shall establish by regulation and based on the recommendations submitted under paragraph (2), a methodology under which an individual who is harmed by an act that constitutes an offense referred to in paragraph (1) may receive a percentage of any civil monetary penalty or monetary settlement collected with respect to such offense.

(4) APPLICATION OF METHODOLOGY- The methodology under paragraph (3) shall be applied with respect to civil monetary penalties or monetary settlements imposed on or after the effective date of the regulation.

(d) Tiered Increase in Amount of Civil Monetary Penalties-

(1) IN GENERAL- Section 1176(a)(1) of the Social Security Act (42 U.S.C. 1320d-5(a)(1)) is amended by striking `who violates a provision of this part a penalty of not more than' and all that follows and inserting the following: `who violates a provision of this part --

`(A) in the case of a violation of such provision in which it is established that the person did not know (and by exercising reasonable diligence would not have known) that such person violated such provision, a penalty for each such violation of an amount that is at least the amount described in paragraph (3)(A) but not to exceed the amount described in paragraph (3)(D);

`(B) in the case of a violation of such provision in which it is established that the violation was due to reasonable cause and not to willful neglect, a penalty for each such violation of an amount that is at least the amount described in paragraph (3)(B) but not to exceed the amount described in paragraph (3)(D); and

`(C) in the case of a violation of such provision in which it is established that the violation was due to willful neglect --

`(i) if the violation is corrected as described in subsection (b)(3)(A), a penalty in an amount that is at least the amount described in paragraph (3)(C) but not to exceed the amount described in paragraph (3)(D); and

`(ii) if the violation is not corrected as described in such subsection, a penalty in an amount that is at least the amount described in paragraph (3)(D).

In determining the amount of a penalty under this section for a violation, the Secretary shall base such determination on the nature and extent of the violation and the nature and extent of the harm resulting from such violation.'.

(2) TIERS OF PENALTIES DESCRIBED- Section 1176(a) of such Act (42 U.S.C. 1320d-5(a)) is further amended by adding at the end the following new paragraph:

`(3) TIERS OF PENALTIES DESCRIBED- For purposes of paragraph (1), with respect to a violation by a person of a provision of this part --

`(A) the amount described in this subparagraph is $100 for each such violation, except that the total amount imposed on the person for all such violations of an identical requirement or prohibition during a calendar year may not exceed $25,000;

`(B) the amount described in this subparagraph is $1,000 for each such violation, except that the total amount imposed on the person for all such violations of an identical requirement or prohibition during a calendar year may not exceed $100,000;

`(C) the amount described in this subparagraph is $10,000 for each such violation, except that the total amount imposed on the person for all such violations of an identical requirement or prohibition during a calendar year may not exceed $250,000; and

`(D) the amount described in this subparagraph is $50,000 for each such violation, except that the total amount imposed on the person for all such violations of an identical requirement or prohibition during a calendar year may not exceed $1,500,000.'.

(3) CONFORMING AMENDMENTS- Section 1176(b) of such Act (42 U.S.C. 1320d-5(b)) is amended --

(A) by striking paragraph (2) and redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively; and

(B) in paragraph (2), as so redesignated --

(i) in subparagraph (A), by striking `in subparagraph (B), a penalty may not be imposed under subsection (a) if' and all that follows through `the failure to comply is corrected' and inserting `in subparagraph (B) or subsection (a)(1)(C), a penalty may not be imposed under subsection (a) if the failure to comply is corrected'; and

(ii) in subparagraph (B), by striking `(A)(ii)' and inserting `(A)' each place it appears.

(4) EFFECTIVE DATE- The amendments made by this subsection shall apply to violations occurring after the date of the enactment of this title.

(e) Enforcement Through State Attorneys General-

(1) IN GENERAL- Section 1176 of the Social Security Act (42 U.S.C. 1320d-5) is amended by adding at the end the following new subsection:

`(c) Enforcement by State Attorneys General-

`(1) CIVIL ACTION- Except as provided in subsection (b), in any case in which the attorney general of a State has reason to believe that an interest of one or more of the residents of that State has been or is threatened or adversely affected by any person who violates a provision of this part, the attorney general of the State, as parens patriae, may bring a civil action on behalf of such residents of the State in a district court of the United States of appropriate jurisdiction --

`(A) to enjoin further such violation by the defendant; or

`(B) to obtain damages on behalf of such residents of the State, in an amount equal to the amount determined under paragraph (2).

`(2) STATUTORY DAMAGES-

`(A) IN GENERAL- For purposes of paragraph (1)(B), the amount determined under this paragraph is the amount calculated by multiplying the number of violations by up to $100. For purposes of the preceding sentence, in the case of a continuing violation, the number of violations shall be determined consistent with the HIPAA privacy regulations (as defined in section 1180(b)(3)) for violations of subsection (a).

`(B) LIMITATION- The total amount of damages imposed on the person for all violations of an identical requirement or prohibition during a calendar year may not exceed $25,000.

`(C) REDUCTION OF DAMAGES- In assessing damages under subparagraph (A), the court may consider the factors the Secretary may consider in determining the amount of a civil money penalty under subsection (a) under the HIPAA privacy regulations.

`(3) ATTORNEY FEES- In the case of any successful action under paragraph (1), the court, in its discretion, may award the costs of the action and reasonable attorney fees to the State.

`(4) NOTICE TO SECRETARY- The State shall serve prior written notice of any action under paragraph (1) upon the Secretary and provide the Secretary with a copy of its complaint, except in any case in which such prior notice is not feasible, in which case the State shall serve such notice immediately upon instituting such action. The Secretary shall have the right --

`(A) to intervene in the action;

`(B) upon so intervening, to be heard on all matters arising therein; and

`(C) to file petitions for appeal.

`(5) CONSTRUCTION- For purposes of bringing any civil action under paragraph (1), nothing in this section shall be construed to prevent an attorney general of a State from exercising the powers conferred on the attorney general by the laws of that State.

`(6) VENUE; SERVICE OF PROCESS-

`(A) VENUE- Any action brought under paragraph (1) may be brought in the district court of the United States that meets applicable requirements relating to venue under section 1391 of title 28, United States Code.

`(B) SERVICE OF PROCESS- In an action brought under paragraph (1), process may be served in any district in which the defendant --

`(i) is an inhabitant; or

`(ii) maintains a physical place of business.

`(7) LIMITATION ON STATE ACTION WHILE FEDERAL ACTION IS PENDING- If the Secretary has instituted an action against a person under subsection (a) with respect to a specific violation of this part, no State attorney general may bring an action under this subsection against the person with respect to such violation during the pendency of that action.

`(8) APPLICATION OF CMP STATUTE OF LIMITATION- A civil action may not be instituted with respect to a violation of this part unless an action to impose a civil money penalty may be instituted under subsection (a) with respect to such violation consistent with the second sentence of section 1128A(c)(1).'.

(2) CONFORMING AMENDMENTS- Subsection (b) of such section, as amended by subsection (d)(3), is amended --

(A) in paragraph (1), by striking `A penalty may not be imposed under subsection (a)' and inserting `No penalty may be imposed under subsection (a) and no damages obtained under subsection (c)';

(B) in paragraph (2)(A) --

(i) in the matter before clause (i), by striking `a penalty may not be imposed under subsection (a)' and inserting `no penalty may be imposed under subsection (a) and no damages obtained under subsection (c)'; and

(ii) in clause (ii), by inserting `or damages' after `the penalty';

(C) in paragraph (2)(B)(i), by striking `The period' and inserting `With respect to the imposition of a penalty by the Secretary under subsection (a), the period'; and

(D) in paragraph (3), by inserting `and any damages under subsection (c)' after `any penalty under subsection (a)'.

(3) EFFECTIVE DATE- The amendments made by this subsection shall apply to violations occurring after the date of the enactment of this Act.

(f) Allowing Continued Use of Corrective Action- Such section is further amended by adding at the end the following new subsection:

`(d) Allowing Continued Use of Corrective Action- Nothing in this section shall be construed as preventing the Office of Civil Rights of the Department of Health and Human Services from continuing, in its discretion, to use corrective action without a penalty in cases where the person did not know (and by exercising reasonable diligence would not have known) of the violation involved.'.

SEC. 4411. AUDITS.

The Secretary shall provide for periodic audits to ensure that covered entities and business associates that are subject to the requirements of this subtitle and subparts C and E of part 164 of title 45, Code of Federal Regulations, as such provisions are in effect as of the date of enactment of this Act, comply with such requirements.

PART II --RELATIONSHIP TO OTHER LAWS; REGULATORY REFERENCES; EFFECTIVE DATE; REPORTS

SEC. 4421. RELATIONSHIP TO OTHER LAWS.

(a) Application of HIPAA State Preemption- Section 1178 of the Social Security Act (42 U.S.C. 1320d-7) shall apply to a provision or requirement under this subtitle in the same manner that such section applies to a provision or requirement under part C of title XI of such Act or a standard or implementation specification adopted or established under sections 1172 through 1174 of such Act.

(b) Health Insurance Portability and Accountability Act- The standards governing the privacy and security of individually identifiable health information promulgated by the Secretary under sections 262(a) and 264 of the Health Insurance Portability and Accountability Act of 1996 shall remain in effect to the extent that they are consistent with this subtitle. The Secretary shall by rule amend such Federal regulations as required to make such regulations consistent with this subtitle.

SEC. 4422. REGULATORY REFERENCES.

Each reference in this subtitle to a provision of the Code of Federal Regulations refers to such provision as in effect on the date of the enactment of this title (or to the most recent update of such provision).

SEC. 4423. EFFECTIVE DATE.

Except as otherwise specifically provided, the provisions of part I shall take effect on the date that is 12 months after the date of the enactment of this title.

SEC. 4424. STUDIES, REPORTS, GUIDANCE.

(a) Report on Compliance-

(1) IN GENERAL- For the first year beginning after the date of the enactment of this Act and annually thereafter, the Secretary shall prepare and submit to the Committee on Health, Education, Labor, and Pensions of the Senate and the Committee on Ways and Means and the Committee on Energy and Commerce of the House of Representatives a report concerning complaints of alleged violations of law, including the provisions of this subtitle as well as the provisions of subparts C and E of part 164 of title 45, Code of Federal Regulations, (as such provisions are in effect as of the date of enactment of this Act) relating to privacy and security of health information that are received by the Secretary during the year for which the report is being prepared. Each such report shall include, with respect to such complaints received during the year --

(A) the number of such complaints;

(B) the number of such complaints resolved informally, a summary of the types of such complaints so resolved, and the number of covered entities that received technical assistance from the Secretary during such year in order to achieve compliance with such provisions and the types of such technical assistance provided;

(C) the number of such complaints that have resulted in the imposition of civil monetary penalties or have been resolved through monetary settlements, including the nature of the complaints involved and the amount paid in each penalty or settlement;

(D) the number of compliance reviews conducted and the outcome of each such review;

(E) the number of subpoenas or inquiries issued;

(F) the Secretary's plan for improving compliance with and enforcement of such provisions for the following year; and

(G) the number of audits performed and a summary of audit findings pursuant to section 4411.

(2) AVAILABILITY TO PUBLIC- Each report under paragraph (1) shall be made available to the public on the Internet website of the Department of Health and Human Services.

(b) Study and Report on Application of Privacy and Security Requirements to Non-HIPAA Covered Entities-

(1) STUDY- Not later than one year after the date of the enactment of this title, the Secretary, in consultation with the Federal Trade Commission, shall conduct a study, and submit a report under paragraph (2), on privacy and security requirements for entities that are not covered entities or business associates as of the date of the enactment of this title, including --

(A) requirements relating to security, privacy, and notification in the case of a breach of security or privacy (including the applicability of an exemption to notification in the case of individually identifiable health information that has been rendered unusable, unreadable, or indecipherable through technologies or methodologies recognized by appropriate professional organization or standard setting bodies to provide effective security for the information) that should be applied to --

(i) vendors of personal health records;

(ii) entities that offer products or services through the website of a vendor of personal health records;

(iii) entities that are not covered entities and that offer products or services through the websites of covered entities that offer individuals personal health records;

(iv) entities that are not covered entities and that access information in a personal health record or send information to a personal health record; and

(v) third party service providers used by a vendor or entity described in clause (i), (ii), (iii), or (iv) to assist in providing personal health record products or services;

(B) a determination of which Federal Government agency is best equipped to enforce such requirements recommended to be applied to such vendors, entities, and service providers under subparagraph (A); and

(C) a timeframe for implementing regulations based on such findings.

(2) REPORT- The Secretary shall submit to the Committee on Finance, the Committee on Health, Education, Labor, and Pensions, and the Committee on Commerce of the Senate and the Committee on Ways and Means and the Committee on Energy and Commerce of the House of Representatives a report on the findings of the study under paragraph (1) and shall include in such report recommendations on the privacy and security requirements described in such paragraph.

(c) Guidance on Implementation Specification To De-Identify Protected Health Information- Not later than 12 months after the date of the enactment of this title, the Secretary shall, in consultation with stakeholders, issue guidance on how best to implement the requirements for the de-identification of protected health information under section 164.514(b) of title 45, Code of Federal Regulations.

(d) GAO Report on Treatment Disclosures- Not later than one year after the date of the enactment of this title, the Comptroller General of the United States shall submit to the Committee on Health, Education, Labor, and Pensions of the Senate and the Committee on Ways and Means and the Committee on Energy and Commerce of the House of Representatives a report on the best practices related to the disclosure among health care providers of protected health information of an individual for purposes of treatment of such individual. Such report shall include an examination of the best practices implemented by States and by other entities, such as health information exchanges and regional health information organizations, an examination of the extent to which such best practices are successful with respect to the quality of the resulting health care provided to the individual and with respect to the ability of the health care provider to manage such best practices, and an examination of the use of electronic informed consent for disclosing protected health information for treatment, payment, and health care operations.

Subtitle E --Miscellaneous Medicare Provisions

SEC. 4501. MORATORIA ON CERTAIN MEDICARE REGULATIONS.

(a) Delay in Phase Out of Medicare Hospice Budget Neutrality Adjustment Factor During Fiscal Year 2009- Notwithstanding any other provision of law, including the final rule published on August 8, 2008, 73 Federal Register 46464 et seq., relating to Medicare Program; Hospice Wage Index for Fiscal Year 2009, the Secretary of Health and Human Services shall not phase out or eliminate the budget neutrality adjustment factor in the Medicare hospice wage index before October 1, 2009, and the Secretary shall recompute and apply the final Medicare hospice wage index for fiscal year 2009 as if there had been no reduction in the budget neutrality adjustment factor.

(b) Non-Application of Phased-Out Indirect Medical Education (IME) Adjustment Factor for Fiscal Year 2009-

(1) IN GENERAL- Section 412.322 of title 42, Code of Federal Regulations, shall be applied without regard to paragraph (c) of such section, and the Secretary of Health and Human Services shall recompute payments for discharges occurring on or after October 1, 2008, as if such paragraph had never been in effect.

(2) NO EFFECT ON SUBSEQUENT YEARS- Nothing in paragraph (1) shall be construed as having any effect on the application of paragraph (d) of section 412.322 of title 42, Code of Federal Regulations.

(c) Funding for Implementation- In addition to funds otherwise available, for purposes of implementing the provisions of subsections (a) and (b), including costs incurred in reprocessing claims in carrying out such provisions, the Secretary of Health and Human Services shall provide for the transfer from the Federal Hospital Insurance Trust Fund established under section 1817 of the Social Security Act (42 U.S.C. 1395i) to the Centers for Medicare & Medicaid Services Program Management Account of $2,000,000 for fiscal year 2009.

SEC. 4502. LONG-TERM CARE HOSPITAL TECHNICAL CORRECTIONS.

(a) Payment- Subsection (c) of section 114 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Public Law 110-173) is amended --

(1) in paragraph (1) --

(A) by amending the heading to read as follows: `DELAY IN APPLICATION OF 25 PERCENT PATIENT THRESHOLD PAYMENT ADJUSTMENT';

(B) by striking `the date of the enactment of this Act' and inserting `July 1, 2007,'; and

(C) in subparagraph (A), by inserting `or to a long-term care hospital, or satellite facility, that as of December 29, 2007, was co-located with an entity that is a provider-based, off-campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Social Security Act at the off-campus location' after `freestanding long-term care hospitals'; and

(2) in paragraph (2) --

(A) in subparagraph (B)(ii), by inserting `or that is described in section 412.22(h)(3)(i) of such title' before the period; and

(B) in subparagraph (C), by striking `the date of the enactment of this Act' and inserting `October 1, 2007 (or July 1, 2007, in the case of a satellite facility described in section 412.22(h)(3)(i) of title 42, Code of Federal Regulations)'.

(b) Moratorium- Subsection (d)(3)(A) of such section is amended by striking `if the hospital or facility' and inserting `if the hospital or facility obtained a certificate of need for an increase in beds that is in a State for which such certificate of need is required and that was issued on or after April 1, 2005, and before December 29, 2007, or if the hospital or facility'.

(c) Effective Date- The amendments made by this section shall be effective and apply as if included in the enactment of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Public Law 110-173).



Union Calendar No. 2



111th CONGRESS



1st Session



H. R. 598



[Report No. 111-8, Part I]



A BILL

To provide for a portion of the economic recovery package relating to revenue measures, unemployment, and health.

January 27, 2009

Reported from the Committee on Ways and Means with an amendment

January 27, 2009

Committees on Energy and Commerce, Science and Technology, Education and Labor, and Financial Services discharged; committed to the Committee of the Whole House on the State of the Union and ordered to be printed

Proposed legislation - JCT-DOC, JCX- 10-09, Joint Committee on Taxation Description of the American Recovery and Reinvestment Tax Act of 2009

January 26, 2009

111th Congress

DESCRIPTION OF THE AMERICAN RECOVERY AND REINVESTMENT TAX ACT OF 2009


Scheduled for Markup by the SENATE COMMITTEE ON FINANCE on January 27, 2009

Prepared by the Staff of the JOINT COMMITTEE ON TAXATION

January 23, 2009

JCX-10-09


CONTENTS


INTRODUCTION
I. TAX RELIEF FOR INDIVIDUALS AND FAMILIES

1. Making work pay credit

2. Temporary increase in the earned income tax credit

3. Temporary increase of refundable portion of the child credit

4. American opportunity tax credit

5. Temporarily allow computer technology and equipment as a qualified higher education expense for qualified tuition programs

6. Waiver of requirement to repay first-time homebuyer credit

7. Exclusion from gross income for unemployment compensation benefits

II. RENEWABLE ENERGY INCENTIVES

1. Extension of the renewable electricity credit

2. Election of investment credit in lieu of production tax credits

3. Modification of energy credit

4. Expand new clean renewable energy bonds

5. Expand qualified energy conservation bonds

6. Extension and modification of credit for nonbusiness energy property

7. Credit for residential energy efficient property

8. Temporary increase in credit for alternative fuel vehicle refueling property

9. Energy research credit

10. Five-year carryback of general business credit

11. Temporary provision allowing general business credits to offset 100 percent of Federal income tax liability

III. TAX INCENTIVES FOR BUSINESS

1. Special allowance for certain property acquired during 2009

2. Temporary increase in limitations on expensing of certain depreciable business assets

3. Five-year carryback of operating losses

4. Modification of work opportunity tax credit

5. Extension of election to accelerate AMT and research credits in lieu of bonus depreciation

6. Deferral of certain income from the discharge of indebtedness

7. Qualified small business stock

IV. MANUFACTURING RECOVERY PROVISIONS

1. Expand industrial development bonds to include creation of intangible property and other modifications

2. Credit for investment in advanced energy property

V. ECONOMIC RECOVERY TOOLS

1. Recovery Zone Bonds

2. Tribal Economic Development Bonds

3. Extend and modify the new markets tax credit

VI. INFRASTRUCTURE FINANCING TOOLS

1. De minimis safe harbor exception for tax-exempt interest expense of financial institutions and modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions

2. Repeal of alternative minimum tax limitations on tax exempt bonds issued in 2009 and 2010

3. One-year delay of withholding on government contractors

4. Qualified school construction bonds

5. Extend and expand qualified zone academy bonds

6. Build America Bonds

VII. DESCRIPTION OF NONTAX ITEMS

1. Prohibition on collection of certain payments

2. Extension of trade adjustment assistance programs

3. Economic recovery payments to recipients of Social Security, supplement security income, railroad retirement, and Veterans disability benefits

4. Increase in the statutory limit on the public debt


INTRODUCTION


The Senate Committee on Finance has scheduled a markup of the American Recovery and Reinvestment Tax Act of 2009. This document, 1 prepared by the staff of the Joint Committee on Taxation, provides a description of the Chairman's Mark.


I. TAX RELIEF FOR INDIVIDUALS AND FAMILIES




1. Making work pay credit


Present Law




Earned income tax credit

Low- and moderate-income workers may be eligible for the refundable earned income tax credit ("EITC"). Eligibility for the EITC is based on earned income, adjusted gross income, investment income, filing status, and immigration and work status in the United States. The amount of the EITC is based on the presence and number of qualifying children in the worker's family, as well as on adjusted gross income and earned income.

The EITC generally equals a specified percentage of earned income 2 up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phaseout range. For taxpayers with earned income (or adjusted gross income (AGI), if greater) in excess of the beginning of the phaseout range, the maximum EITC amount is reduced by the phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of the phaseout range, no credit is allowed.

The EITC is a refundable credit, meaning that if the amount of the credit exceeds the taxpayer's Federal income tax liability, the excess is payable to the taxpayer as a direct transfer payment. Under an advance payment system, eligible taxpayers may elect to receive the credit in their paychecks, rather than waiting to claim a refund on their tax return filed by April 15 of the following year.



Child credit

An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000 through 2010, and $500 thereafter. A child who is not a citizen, national, or resident of the United States cannot be a qualifying child.

The credit is phased out for individuals with income over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. For purposes of this limitation, modified adjusted gross income includes certain otherwise excludable income earned by U.S. citizens or residents living abroad or in certain U.S. territories.

The credit is allowable against the regular tax and the alternative minimum tax. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the "earned income" formula). The threshold dollar amount is $12,550 (for 2009), and is indexed for inflation.

Families with three or more children may determine the additional child tax credit using the "alternative formula," if this results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child tax credit equals the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income tax credit.

Earned income is defined as the sum of wages, salaries, tips, and other taxable employee compensation plus net self-employment earnings. Unlike the EITC, which also includes the preceding items in its definition of earned income, the additional child tax credit is based only on earned income to the extent it is included in computing taxable income. For example, some ministers' parsonage allowances are considered self-employment income, and thus are considered earned income for purposes of computing the EITC, but the allowances are excluded from gross income for individual income tax purposes, and thus are not considered earned income for purposes of the additional child tax credit since the income is not included in taxable income.


Description of Proposal




In general

The proposal provides eligible individuals a refundable income tax credit for two years (taxable years beginning in 2009 and 2010).

The credit is the lesser of (1) 6.2 percent of an individual's earned income or (2) $500 ($1,000 in the case of a joint return). For these purposes, the earned income definition is the same as for the earned income tax credit with two modifications. First, earned income for these purposes does not include net earnings from self-employment which are not taken into account in computing taxable income. Second, earned income for these purposes includes combat pay excluded from gross income under section 112. 3

The credit is phased out at a rate of four percent of the eligible individual's modified adjusted gross income above $75,000 ($150,000 in the case of a joint return). For these purposes an eligible individual's modified adjusted gross income is the eligible individual's adjusted gross income increased by any amount excluded from gross income under sections 911, 931, or 933. An eligible individual means any individual other than: (1) a nonresident alien; (2) an individual with respect to whom another individual may claim a dependency deduction for a taxable year beginning in a calendar year in which the eligible individual's taxable year begins; and (3) an estate or trust.

The otherwise allowable credit allowed under the proposal shall be reduced by the amount of any payment received by the taxpayer pursuant to the proposals of the bill providing special payments under the Department of Veterans' Affairs Administration and the Social Security Administration.



Treatment of the U.S. possessions



Mirror code possessions 4

The U.S. Treasury will make two payments (for 2009 and 2010, respectively) to each mirror code possession in an amount equal to the aggregate amount of the credits allowable by reason of the proposal to that possession's residents against its income tax. This amount will be determined by the Treasury Secretary based on information provided by the government of the respective possession. For purposes of this payment, a possession is a mirror code possession if the income tax liability of residents of the possession under that possession's income tax system is determined by reference to the U.S. income tax laws as if the possession were the United States.



Non-mirror code possessions 5

To each possession that does not have a mirror code tax system, the U.S. Treasury will make two payments (for 2009 and 2010, respectively) in an amount estimated by the Secretary as being equal to the aggregate credits that would have been allowed to residents of that possession if a mirror code tax system had been in effect in that possession. Accordingly, the amount of each payment to a non-mirror Code possession will be an estimate of the aggregate amount of the credits that would be allowed to the possession's residents if the credit provided by the proposal to U.S. residents were provided by the possession to its residents. This payment will not be made to any U.S. possession unless that possession has a plan that has been approved by the Secretary under which the possession will promptly distribute the payment to its residents.



General rules

No credit against U.S. income taxes is permitted under the proposal for any person to whom a credit is allowed against possession income taxes as a result of the proposal (for example, under that possession's mirror income tax). Similarly, no credit against U.S. income taxes is permitted for any person who is eligible for a payment under a non-mirror code possession's plan for distributing to its residents the payment described above from the U.S. Treasury.

For purposes of the payments to the possessions, the Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands are considered possessions of the United States.

For purposes of the rule permitting the Treasury Secretary to disburse appropriated amounts for refunds due from certain credit proposals of the Internal Revenue Code of 1986, the payments required to be made to possessions under the proposal are treated in the same manner as a refund due from the credit allowed under the proposal.



Federal programs or Federally-assisted programs

Any credit or refund allowed or made to an individual under this proposal (including to any resident of a U.S. possession) is not taken into account as income and shall not be taken into account as resources for the month of receipt and the following two months for purposes of determining eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.



Income tax withholding

It is anticipated that taxpayers' reduced tax liability under the proposal shall be expeditiously implemented through revised income tax withholding schedules produced by the Internal Revenue Service. These revised income tax withholding schedules should be designed to reduce taxpayers' income tax withheld for each remaining pay period in the remainder of 2009 so that the full benefit of the proposal is reflected in the income tax withholding schedules during the balance of 2009.


Effective Date


The proposal applies to taxable years beginning after December 31, 2008.



2. Temporary increase in the earned income tax credit


Present Law




Overview

Low- and moderate-income workers may be eligible for the refundable earned income tax credit (EITC). Eligibility for the EITC is based on earned income, adjusted gross income, investment income, filing status, and immigration and work status in the United States. The amount of the EITC is based on the presence and number of qualifying children in the worker's family, as well as on adjusted gross income and earned income.

The EITC generally equals a specified percentage of earned income 6 up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phaseout range. For taxpayers with earned income (or adjusted gross income (AGI), if greater) in excess of the beginning of the phaseout range, the maximum EITC amount is reduced by the phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of the phaseout range, no credit is allowed.

An individual is not eligible for the EITC if the aggregate amount of disqualified income of the taxpayer for the taxable year exceeds $3,100 (for 2009). This threshold is indexed for inflation. Disqualified income is the sum of: (1) interest (taxable and tax exempt); (2) dividends; (3) net rent and royalty income (if greater than zero); (4) capital gains net income; and (5) net passive income (if greater than zero) that is not self-employment income.

The EITC is a refundable credit, meaning that if the amount of the credit exceeds the taxpayer's Federal income tax liability, the excess is payable to the taxpayer as a direct transfer payment. Under an advance payment system, eligible taxpayers may elect to receive the credit in their paychecks, rather than waiting to claim a refund on their tax return filed by April 15 of the following year.



Filing status

An unmarried individual may claim the EITC if he or she files as a single filer or as a head of household. Married individuals generally may not claim the EITC unless they file jointly. An exception to the joint return filing requirement applies to certain spouses who are separated. Under this exception, a married taxpayer who is separated from his or her spouse for the last six months of the taxable year shall not be considered as married (and, accordingly, may file a return as head of household and claim the EITC), provided that the taxpayer maintains a household that constitutes the principal place of abode for a dependent child (including a son, stepson, daughter, stepdaughter, adopted child, or a foster child) for over half the taxable year, 7 and pays over half the cost of maintaining the household in which he or she resides with the child during the year.



Presence of qualifying children and amount of the earned income credit

Three separate credit schedules apply: one schedule for taxpayers with no qualifying children, one schedule for taxpayers with one qualifying child, and one schedule for taxpayers with more than one qualifying child. 8

Taxpayers with no qualifying children may claim a credit if they are over age 24 and below age 65. The credit is 7.65 percent of earnings up to $5,970, resulting in a maximum credit of $457, for 2009. The maximum is available for those with incomes between $5,970 and $7,470 ($10,590 if married filing jointly). The credit begins to phase down at a rate of 7.65 percent of earnings above $7,470 ($10,590 if married filing jointly) resulting in a $0 credit at $13,440 of earnings ($16,560 if married filing jointly).

Taxpayers with one qualifying child may claim a credit in 2009 of 34 percent of their earnings up to $8,950, resulting in a maximum credit of $3,043. The maximum credit is available for those with earnings between $8,950 and $16,420 ($19,540 if married filing jointly). The credit begins to phase down at a rate of 15.98 percent of earnings above $16,420 ($19,540 if married filing jointly). The credit is phased down to $0 at $35,463 of earnings ($38,583 if married filing jointly).

Taxpayers with more than one qualifying child may claim a credit in 2009 of 40 percent of earnings up to $12,570, resulting in a maximum credit of $5,028. The maximum credit is available for those with earnings between $12,570 and $16,420 ($19,540 if married filing jointly). The credit begins to phase down at a rate of 21.06 percent of earnings above $16,420 ($19,540 if married filing jointly). The credit is phased down to $0 at $40,295 of earnings ($43,415 if married filing jointly).

If more than one taxpayer lives with a qualifying child, only one of these taxpayers may claim the child for purposes of the EITC. If multiple eligible taxpayers actually claim the same qualifying child, then a tiebreaker rule determines which taxpayer is entitled to the EITC with respect to the qualifying child. Any eligible taxpayer with at least one qualifying child who does not claim the EITC with respect to qualifying children due to failure to meet certain identification requirements with respect to such children (i.e., providing the name, age and taxpayer identification number of each of such children) may not claim the EITC for taxpayers without qualifying children.


Description of Proposal




Three or more qualifying children

The proposal increases the EITC credit percentage for three or more qualifying children to 45 percent for 2009 and 2010. For example, taxpayers with three or more qualifying children may claim a credit in 2009 of 45 percent of earnings up to $12,570, 9 resulting in a maximum credit of $5,656.50.



Provide additional marriage penalty relief through higher threshold phase-out amounts for married couples filing joint returns

The proposal increases the threshold phase-out amounts for married couples filing joint returns to $5,000 10 above the threshold phase-out amounts for singles, surviving spouses, and heads of households) for 2009 and 2010. For example, in 2009 the maximum credit of $3,043 for one qualifying child is available for those with earnings between $8,950 and $16,420 ($21,420 if married filing jointly). The credit begins to phase down at a rate of 15.98 percent of earnings above $16,420 ($21,420 if married filing jointly). The credit is phased down to $0 at $35,463 of earnings ($40,463 if married filing jointly).


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



3. Temporary increase of refundable portion of the child credit


Present Law


An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000 through 2010, and $500 thereafter. A child who is not a citizen, national, or resident of the United States cannot be a qualifying child.

The credit is phased out for individuals with income over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. For purposes of this limitation, modified adjusted gross income includes certain otherwise excludable income earned by U.S. citizens or residents living abroad or in certain U.S. territories.

The credit is allowable against the regular tax and the alternative minimum tax. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the "earned income" formula). The threshold dollar amount is $12,550 (for 2009), and is indexed for inflation.

Families with three or more children may determine the additional child tax credit using the "alternative formula," if this results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child tax credit equals the amount by which the taxpayer's social security taxes exceed the taxpayer's earned income tax credit ("EITC").

Earned income is defined as the sum of wages, salaries, tips, and other taxable employee compensation plus net self-employment earnings. Unlike the EITC, which also includes the preceding items in its definition of earned income, the additional child tax credit is based only on earned income to the extent it is included in computing taxable income. For example, some ministers' parsonage allowances are considered self-employment income, and thus are considered earned income for purposes of computing the EITC, but the allowances are excluded from gross income for individual income tax purposes, and thus are not considered earned income for purposes of the additional child tax credit since the income is not included in taxable income.

Any credit or refund allowed or made to an individual under this proposal (including to any resident of a U.S. possession) is not taken into account as income and shall not be taken into account as resources for the month of receipt and the following two months for purposes of determining eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.


Description of Proposal


The proposal modifies the earned income formula for the determination of the refundable child credit to apply to 15 percent of earned income in excess of $6,000 for taxable years beginning in 2009 and 2010.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



4. American opportunity tax credit


Present Law


Individual taxpayers are allowed to claim a nonrefundable credit, the Hope credit, against Federal income taxes of up to $1,800 (for 2009) per eligible student per year for qualified tuition and related expenses paid for the first two years of the student's post-secondary education in a degree or certificate program. 11 The Hope credit rate is 100 percent on the first $1,200 of qualified tuition and related expenses, and 50 percent on the next $1,200 of qualified tuition and related expenses; these dollar amounts are indexed for inflation, with the amount rounded down to the next lowest multiple of $100. Thus, for example, a taxpayer who incurs $1,200 of qualified tuition and related expenses for an eligible student is eligible (subject to the adjusted gross income phaseout described below) for a $1,200 Hope credit. If a taxpayer incurs $2,400 of qualified tuition and related expenses for an eligible student, then he or she is eligible for a $1,800 Hope credit.

The Hope credit that a taxpayer may otherwise claim is phased out ratably for taxpayers with modified adjusted gross income between $50,000 and $60,000 ($100,000 and $120,000 for married taxpayers filing a joint return) for 2009. The adjusted gross income phaseout ranges are indexed for inflation, with the amount rounded down to the next lowest multiple of $1,000.

The qualified tuition and related expenses must be incurred on behalf of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer. The Hope credit is available with respect to an individual student for two taxable years, provided that the student has not completed the first two years of post-secondary education before the beginning of the second taxable year.

The Hope credit is available in the taxable year the expenses are paid, subject to the requirement that the education is furnished to the student during that year or during an academic period beginning during the first three months of the next taxable year. Qualified tuition and related expenses paid with the proceeds of a loan generally are eligible for the Hope credit. The repayment of a loan itself is not a qualified tuition or related expense.

A taxpayer may claim the Hope credit with respect to an eligible student who is not the taxpayer or the taxpayer's spouse (e.g., in cases in which the student is the taxpayer's child) only if the taxpayer claims the student as a dependent for the taxable year for which the credit is claimed. If a student is claimed as a dependent, the student is not entitled to claim a Hope credit for that taxable year on the student's own tax return. If a parent (or other taxpayer) claims a student as a dependent, any qualified tuition and related expenses paid by the student are treated as paid by the parent (or other taxpayer) for purposes of determining the amount of qualified tuition and related expenses paid by such parent (or other taxpayer) under the proposal. In addition, for each taxable year, a taxpayer may elect either the Hope credit, the Lifetime Learning credit, or an above-the-line deduction for qualified tuition and related expenses with respect to an eligible student.

The Hope credit is available for "qualified tuition and related expenses," which include tuition and fees (excluding nonacademic fees) required to be paid to an eligible educational institution as a condition of enrollment or attendance of an eligible student at the institution. Charges and fees associated with meals, lodging, insurance, transportation, and similar personal, living, or family expenses are not eligible for the credit. The expenses of education involving sports, games, or hobbies are not qualified tuition and related expenses unless this education is part of the student's degree program.

Qualified tuition and related expenses generally include only out-of-pocket expenses. Qualified tuition and related expenses do not include expenses covered by employer-provided educational assistance and scholarships that are not required to be included in the gross income of either the student or the taxpayer claiming the credit. Thus, total qualified tuition and related expenses are reduced by any scholarship or fellowship grants excludable from gross income under section 117 and any other tax-free educational benefits received by the student (or the taxpayer claiming the credit) during the taxable year. The Hope credit is not allowed with respect to any education expense for which a deduction is claimed under section 162 or any other section of the Code.

An eligible student for purposes of the Hope credit is an individual who is enrolled in a degree, certificate, or other program (including a program of study abroad approved for credit by the institution at which such student is enrolled) leading to a recognized educational credential at an eligible educational institution. The student must pursue a course of study on at least a halftime basis. A student is considered to pursue a course of study on at least a half-time basis if the student carries at least one half the normal full-time work load for the course of study the student is pursuing for at least one academic period that begins during the taxable year. To be eligible for the Hope credit, a student must not have been convicted of a Federal or State felony consisting of the possession or distribution of a controlled substance.

Eligible educational institutions generally are accredited post-secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also are eligible educational institutions. To qualify as an eligible educational institution, an institution must be eligible to participate in Department of Education student aid programs.

Effective for taxable years beginning after December 31, 2010, the changes to the Hope credit made by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") no longer apply. The principal EGTRRA change scheduled to expire is the change that permitted a taxpayer to claim a Hope credit in the same year that he or she claimed an exclusion from a Coverdell education savings account. Thus, after 2010, a taxpayer cannot claim a Hope credit in the same year he or she claims an exclusion from a Coverdell education savings account.


Description of Proposal


The proposal modifies the Hope credit for taxable years beginning in 2009 or 2010. The modified credit is referred to as the American opportunity tax credit. The allowable modified credit is up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100 percent on the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000 of qualified tuition and related expenses. For purposes of the modified credit, the definition of qualified tuition and related expenses is expanded to include course materials.

Under the proposal, the modified credit is available with respect to an individual student for four years, provided that the student has not completed the first four years of post-secondary education before the beginning of the fourth taxable year. Thus, the modified credit, in addition to other modifications, extends the application of the Hope credit to two more years of postsecondary education.

The modified credit that a taxpayer may otherwise claim is phased out ratably for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The modified credit may be claimed against a taxpayer's alternative minimum tax liability.

Thirty percent of a taxpayer's otherwise allowable modified credit is refundable. However, no portion of the modified credit is refundable if the taxpayer claiming the credit is a child to whom section 1(g) applies for such taxable year (generally, any child under age 18 or any child under age 24 who is a student providing less than one-half of his or her own support, who has at least one living parent and does not file a joint return).

In addition, the proposal requires the Secretary of the Treasury to conduct two studies and submit a report to Congress on the results of those studies within one year after the date of enactment. The first study shall examine how to coordinate the Hope and Lifetime Learning credits with the Pell grant program. The second study shall examine requiring students to perform community service as a condition of taking their tuition and related expenses into account for purposes of the Hope and Lifetime Learning credits.


Effective Date


The proposal is effective with respect to taxable years beginning after December 31, 2008.



5. Temporarily allow computer technology and equipment as a qualified higher education expense for qualified tuition programs


Present Law


Section 529 provides specified income tax and transfer tax rules for the treatment of accounts and contracts established under qualified tuition programs. 12 A qualified tuition program is a program established and maintained by a State or agency or instrumentality thereof, or by one or more eligible educational institutions, which satisfies certain requirements and under which a person may purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary (a "prepaid tuition program"). In the case of a program established and maintained by a State or agency or instrumentality thereof, a qualified tuition program also includes a program under which a person may make contributions to an account that is established for the purpose of satisfying the qualified higher education expenses of the designated beneficiary of the account, provided it satisfies certain specified requirements (a "savings account program"). Under both types of qualified tuition programs, a contributor establishes an account for the benefit of a particular designated beneficiary to provide for that beneficiary's higher education expenses.

For this purpose, qualified higher education expenses means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution, and expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with such enrollment or attendance. Qualified higher education expenses generally also include room and board for students who are enrolled at least half-time.

Contributions to a qualified tuition program must be made in cash. Section 529 does not impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition benefits relating to a qualified tuition account; however, the program is required to have adequate safeguards to prevent contributions in excess of amounts necessary to provide for the beneficiary's qualified higher education expenses. Contributions generally are treated as a completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for Federal income tax purposes, although they may be deductible for State income tax purposes. Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is not subject to current income tax).

Distributions from a qualified tuition program are excludable from the distributee's gross income to the extent that the total distribution does not exceed the qualified higher education expenses incurred for the beneficiary. If a distribution from a qualified tuition program exceeds the qualified higher education expenses incurred for the beneficiary, the portion of the excess that is treated as earnings generally is subject to income tax and an additional 10-percent tax. Amounts in a qualified tuition program may be rolled over to another qualified tuition program for the same beneficiary or for a member of the family of that beneficiary.

In general, prepaid tuition contracts and tuition savings accounts established under a qualified tuition program involve prepayments or contributions made by one or more individuals for the benefit of a designated beneficiary, with decisions with respect to the contract or account to be made by an individual who is not the designated beneficiary. Qualified tuition accounts or contracts generally require the designation of a person (generally referred to as an "account owner") whom the program administrator (oftentimes a third party administrator retained by the State or by the educational institution that established the program) may look to for decisions, recordkeeping, and reporting with respect to the account established for a designated beneficiary. The person or persons who make the contributions to the account need not be the same person who is regarded as the account owner for purposes of administering the account. Under many qualified tuition programs, the account owner generally has control over the account or contract, including the ability to change designated beneficiaries and to withdraw funds at any time and for any purpose. Thus, in practice, qualified tuition accounts or contracts generally involve a contributor, a designated beneficiary, an account owner (who oftentimes is not the contributor or the designated beneficiary), and an administrator of the account or contract. 13


Description of Proposal


The proposal expands the definition of qualified higher education expenses for taxable years beginning in 2009 and 2010 to include expenses for computer technology and equipment.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



6. Waiver of requirement to repay first-time homebuyer credit


Present Law


A taxpayer who is a first-time homebuyer is allowed a refundable tax credit equal to the lesser of $7,500 ($3,750 for a married individual filing separately) or 10 percent of the purchase price of a principal residence. The credit is allowed for the tax year in which the taxpayer purchases the home unless the taxpayer makes an election as described below. The credit is allowed for qualifying home purchases on or after April 9, 2008 and before July 1, 2009 (without regard to whether there was a binding contract to purchase prior to April 9, 2008).

The credit phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase.

A taxpayer is considered a first-time homebuyer if such individual had no ownership interest in a principal residence in the United States during the 3-year period prior to the purchase of the home to which the credit applies.

No credit is allowed if the D.C. homebuyer credit is allowable for the taxable year the residence is purchased or a prior taxable year. A taxpayer is not permitted to claim the credit if the taxpayer's financing is from tax-exempt mortgage revenue bonds, if the taxpayer is a nonresident alien, or if the taxpayer disposes of the residence (or it ceases to be a principal residence) before the close of a taxable year for which a credit otherwise would be allowable.

The credit is recaptured ratably over fifteen years with no interest charge beginning in the second taxable year after the taxable year in which the home is purchased. For example, if the taxpayer purchases a home in 2008, the credit is allowed on the 2008 tax return, and repayments commence with the 2010 tax return. If the taxpayer sells the home (or the home ceases to be used as the principal residence of the taxpayer or the taxpayer's spouse) prior to complete repayment of the credit, any remaining credit repayment amount is due on the tax return for the year in which the home is sold (or ceases to be used as the principal residence). However, the credit repayment amount may not exceed the amount of gain from the sale of the residence to an unrelated person. For this purpose, gain is determined by reducing the basis of the residence by the amount of the credit to the extent not previously recaptured. No amount is recaptured after the death of a taxpayer. In the case of an involuntary conversion of the home, recapture is not accelerated if a new principal residence is acquired within a two year period. In the case of a transfer of the residence to a spouse or to a former spouse incident to divorce, the transferee spouse (and not the transferor spouse) will be responsible for any future recapture.

An election is provided to treat a home purchased in the eligible period in 2009 as if purchased on December 31, 2008 for purposes of claiming the credit on the 2008 tax return and for establishing the beginning of the recapture period. Taxpayers may amend their returns for this purpose.


Description of Proposal


The proposal waives the recapture of the credit for qualifying home purchases after December 31, 2008 and before July 1, 2009. This waiver of recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on December 31, 2008. If the taxpayer disposes of the home, or the home otherwise ceases to be the principal residence of the taxpayer, within 36 months from the date of purchase, the present law rules for recapture of the credit will still apply.


Effective Date


The proposal shall apply to residences purchased after December 31, 2008.



7. Exclusion from gross income for unemployment compensation benefits


Present Law


An individual must include in gross income any unemployment compensation benefits received under the laws of the United States or any State.


Description of Proposal


Up to $2,400 of unemployment compensation benefits received in 2009 are excluded from gross income by the recipient.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.


II. RENEWABLE ENERGY INCENTIVES




1. Extension of the renewable electricity credit


Present Law




In general

An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities. 14 Qualified energy resources comprise wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources. To be eligible for the credit, electricity produced from qualified energy resources at qualified facilities must be sold by the taxpayer to an unrelated person.



Credit amounts and credit period



In general

The base amount of the electricity production credit is 1.5 cents per kilowatt-hour (indexed annually for inflation) of electricity produced. The amount of the credit was 2.1 cents per kilowatt-hour for 2008. A taxpayer may generally claim a credit during the 10-year period commencing with the date the qualified facility is placed in service. The credit is reduced for grants, tax-exempt bonds, subsidized energy financing, and other credits.



Credit phaseout

The amount of credit a taxpayer may claim is phased out as the market price of electricity exceeds certain threshold levels. The electricity production credit is reduced over a 3-cent phaseout range to the extent the annual average contract price per kilowatt-hour of electricity sold in the prior year from the same qualified energy resource exceeds 8 cents (adjusted for inflation; 11.8 cents for 2008).



Reduced credit periods and credit amounts

Generally, in the case of open-loop biomass facilities (including agricultural livestock waste nutrient facilities), geothermal energy facilities, solar energy facilities, small irrigation power facilities, landfill gas facilities, and trash combustion facilities placed in service before August 8, 2005, the 10-year credit period is reduced to five years, commencing on the date the facility was originally placed in service. However, for qualified open-loop biomass facilities (other than a facility described in section 45(d)(3)(A)(i) that uses agricultural livestock waste nutrients) placed in service before October 22, 2004, the five-year period commences on January 1, 2005. In the case of a closed-loop biomass facility modified to co-fire with coal, to co-fire with other biomass, or to co-fire with coal and other biomass, the credit period begins no earlier than October 22, 2004.

In the case of open-loop biomass facilities (including agricultural livestock waste nutrient facilities), small irrigation power facilities, landfill gas facilities, trash combustion facilities, and qualified hydropower facilities the otherwise allowable credit amount is 0.75 cent per kilowatt-hour, indexed for inflation measured after 1992 (1 cent per kilowatt-hour for 2008).



Other limitations on credit claimants and credit amounts

In general, in order to claim the credit, a taxpayer must own the qualified facility and sell the electricity produced by the facility to an unrelated party. A lessee or operator may claim the credit in lieu of the owner of the qualifying facility in the case of qualifying open-loop biomass facilities and in the case of closed-loop biomass facilities modified to co-fire with coal, to co-fire with other biomass, or to co-fire with coal and other biomass. In the case of a poultry waste facility, the taxpayer may claim the credit as a lessee or operator of a facility owned by a governmental unit.

For all qualifying facilities, other than closed-loop biomass facilities modified to co-fire with coal, to co-fire with other biomass, or to co-fire with coal and other biomass, the amount of credit a taxpayer may claim is reduced by reason of grants, tax-exempt bonds, subsidized energy financing, and other credits, but the reduction cannot exceed 50 percent of the otherwise allowable credit. In the case of closed-loop biomass facilities modified to co-fire with coal, to co-fire with other biomass, or to co-fire with coal and other biomass, there is no reduction in credit by reason of grants, tax-exempt bonds, subsidized energy financing, and other credits.

The credit for electricity produced from renewable resources is a component of the general business credit. 15 Generally, the general business credit for any taxable year may not exceed the amount by which the taxpayer's net income tax exceeds the greater of the tentative minimum tax or 25 percent of so much of the net regular tax liability as exceeds $25,000. However, this limitation does not apply to section 45 credits for electricity or refined coal produced from a facility (placed in service after October 22, 2004) during the first four years of production beginning on the date the facility is placed in service. 16 Excess credits may be carried back one year and forward up to 20 years.



Qualified facilities



Wind energy facility

A wind energy facility is a facility that uses wind to produce electricity. To be a qualified facility, a wind energy facility must be placed in service after December 31, 1993, and before January 1, 2010.



Closed-loop biomass facility

A closed-loop biomass facility is a facility that uses any organic material from a plant which is planted exclusively for the purpose of being used at a qualifying facility to produce electricity. In addition, a facility can be a closed-loop biomass facility if it is a facility that is modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both coal and other biomass, but only if the modification is approved under the Biomass Power for Rural Development Programs or is part of a pilot project of the Commodity Credit Corporation.

To be a qualified facility, a closed-loop biomass facility must be placed in service after December 31, 1992, and before January 1, 2011. In the case of a facility using closed-loop biomass but also co-firing the closed-loop biomass with coal, other biomass, or coal and other biomass, a qualified facility must be originally placed in service and modified to co-fire the closed-loop biomass at any time before January 1, 2011.

A qualified facility includes a new power generation unit placed in service after October 3, 2008, at an existing closed-loop biomass facility, but only to the extent of the increased amount of electricity produced at the existing facility by reason of such new unit.



Open-loop biomass (including agricultural livestock waste nutrients) facility

An open-loop biomass facility is a facility that uses open-loop biomass to produce electricity. For purposes of the credit, open-loop biomass is defined as (1) any agricultural livestock waste nutrients or (2) any solid, nonhazardous, cellulosic waste material or any lignin material that is segregated from other waste materials and which is derived from:
 forest-related resources, including mill and harvesting residues, precommercial thinnings, slash, and brush;

 solid wood waste materials, including waste pallets, crates, dunnage, manufacturing and construction wood wastes, and landscape or right-of-way tree trimmings; or

 agricultural sources, including orchard tree crops, vineyard, grain, legumes, sugar, and other crop by-products or residues.

Agricultural livestock waste nutrients are defined as agricultural livestock manure and litter, including bedding material for the disposition of manure. Wood waste materials do not qualify as open-loop biomass to the extent they are pressure treated, chemically treated, or painted. In addition, municipal solid waste, gas derived from the biodegradation of solid waste, and paper which is commonly recycled do not qualify as open-loop biomass. Open-loop biomass does not include closed-loop biomass or any biomass burned in conjunction with fossil fuel (co-firing) beyond such fossil fuel required for start up and flame stabilization.

In the case of an open-loop biomass facility that uses agricultural livestock waste nutrients, a qualified facility is one that was originally placed in service after October 22, 2004, and before January 1, 2009, and has a nameplate capacity rating which is not less than 150 kilowatts. In the case of any other open-loop biomass facility, a qualified facility is one that was originally placed in service before January 1, 2011. A qualified facility includes a new power generation unit placed in service after October 3, 2008, at an existing open-loop biomass facility, but only to the extent of the increased amount of electricity produced at the existing facility by reason of such new unit.



Geothermal facility

A geothermal facility is a facility that uses geothermal energy to produce electricity. Geothermal energy is energy derived from a geothermal deposit that is a geothermal reservoir consisting of natural heat that is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). To be a qualified facility, a geothermal facility must be placed in service after October 22, 2004, and before January 1, 2011.



Solar facility

A solar facility is a facility that uses solar energy to produce electricity. To be a qualified facility, a solar facility must be placed in service after October 22, 2004, and before January 1, 2006.



Small irrigation facility

A small irrigation power facility is a facility that generates electric power through an irrigation system canal or ditch without any dam or impoundment of water. The installed capacity of a qualified facility must be at least 150 kilowatts but less than five megawatts. To be a qualified facility, a small irrigation facility must be originally placed in service after October 22, 2004, and before October 3, 2008. Marine and hydrokinetic renewable energy facilities, described below, subsume small irrigation power facilities after October 2, 2008.



Landfill gas facility

A landfill gas facility is a facility that uses landfill gas to produce electricity. Landfill gas is defined as methane gas derived from the biodegradation of municipal solid waste. To be a qualified facility, a landfill gas facility must be placed in service after October 22, 2004, and before January 1, 2011.



Trash combustion facility

Trash combustion facilities are facilities that use municipal solid waste (garbage) to produce steam to drive a turbine for the production of electricity. To be a qualified facility, a trash combustion facility must be placed in service after October 22, 2004, and before January 1, 2011. A qualified trash combustion facility includes a new unit, placed in service after October 22, 2004, that increases electricity production capacity at an existing trash combustion facility. A new unit generally would include a new burner/boiler and turbine. The new unit may share certain common equipment, such as trash handling equipment, with other pre-existing units at the same facility. Electricity produced at a new unit of an existing facility qualifies for the production credit only to the extent of the increased amount of electricity produced at the entire facility.



Hydropower facility

A qualifying hydropower facility is (1) a facility that produced hydroelectric power (a hydroelectric dam) prior to August 8, 2005, at which efficiency improvements or additions to capacity have been made after such date and before January 1, 2011, that enable the taxpayer to produce incremental hydropower or (2) a facility placed in service before August 8, 2005, that did not produce hydroelectric power (a nonhydroelectric dam) on such date, and to which turbines or other electricity generating equipment have been added after such date and before January 1, 2011.

At an existing hydroelectric facility, the taxpayer may claim credit only for the production of incremental hydroelectric power. Incremental hydroelectric power for any taxable year is equal to the percentage of average annual hydroelectric power produced at the facility attributable to the efficiency improvement or additions of capacity determined by using the same water flow information used to determine an historic average annual hydroelectric power production baseline for that facility. The Federal Energy Regulatory Commission will certify the baseline power production of the facility and the percentage increase due to the efficiency and capacity improvements.

Nonhydroelectric dams converted to produce electricity must be licensed by the Federal Energy Regulatory Commission and meet all other applicable environmental, licensing, and regulatory requirements.

For a nonhydroelectric dam converted to produce electric power before January 1, 2009, there must not be any enlargement of the diversion structure, construction or enlargement of a bypass channel, or the impoundment or any withholding of additional water from the natural stream channel.

For a nonhydroelectric dam converted to produce electric power after December 31, 2008, the nonhydroelectric dam (1) must have been placed in service before October 3, 2008, (2) must have been operated for flood control, navigation, or water supply purposes and (3) must not have produced hydroelectric power on October 3, 2008. In addition, the hydroelectric project must be operated so that the water surface elevation at any given location and time that would have occurred in the absence of the hydroelectric project is maintained, subject to any license requirements imposed under applicable law that change the water surface elevation for the purpose of improving environmental quality of the affected waterway. The Secretary, in consultation with the Federal Energy Regulatory Commission, shall certify if a hydroelectric project licensed at a nonhydroelectric dam meets this criteria.



Marine and hydrokinetic renewable energy facility

A qualified marine and hydrokinetic renewable energy facility is any facility that produces electric power from marine and hydrokinetic renewable energy, has a nameplate capacity rating of at least 150 kilowatts, and is placed in service after October 2, 2008, and before January 1, 2012. Marine and hydrokinetic renewable energy is defined as energy derived from (1) waves, tides, and currents in oceans, estuaries, and tidal areas; (2) free flowing water in rivers, lakes, and streams; (3) free flowing water in an irrigation system, canal, or other man-made channel, including projects that utilize nonmechanical structures to accelerate the flow of water for electric power production purposes; or (4) differentials in ocean temperature (ocean thermal energy conversion). The term does not include energy derived from any source that uses a dam, diversionary structure (except for irrigation systems, canals, and other man-made channels), or impoundment for electric power production.



Summary of credit rate and credit period by facility type


Table 1.-Summary of Section 45 Credit for Electricity Produced from Certain Renewable Resources



____________________________________________________________________________________
Eligible electricity Credit amount for Credit period for Credit period for
2008 (cents per facilities placed facilities placed in
production activity kilowatt-hour) in service on or
before August 8, service after
2005 (years from August 8, 2005
placed-in-service (years from
date) placed-in-service
date)

____________________________________________________________________________________
Wind 2.1 10 10

Closed-loop biomass 2.1 10 1 10

Open-loop biomass 1.0 5 2 10

(including
agricultural
livestock waste
nutrient
facilities)

Geothermal 2.1 5 10

Solar (pre-2006
facilities only) 2.1 5 10

Small irrigation
power 1.0 5 10

Municipal solid
waste 1.0 5 10

(including
landfill gas
facilities and
trash combustion
facilities)

Qualified hydropower 1.0 N/A 10

Marine and
hydrokinetic 1.0 N/A 10

____________________________________________________________________________________
1 In the case of certain co-firing closed-loop facilities, the credit period begins
no earlier than October 22, 2004.

2 For certain facilities placed in service before October 22, 2004, the five-year
credit period commences on January 1, 2005.





Taxation of cooperatives and their patrons

For Federal income tax purposes, a cooperative generally computes its income as if it were a taxable corporation, with one exception: the cooperative may exclude from its taxable income distributions of patronage dividends. Generally, a cooperative that is subject to the cooperative tax rules of subchapter T of the Code 17 is permitted a deduction for patronage dividends paid only to the extent of net income that is derived from transactions with patrons who are members of the cooperative. 18 The availability of such deductions from taxable income has the effect of allowing the cooperative to be treated like a conduit with respect to profits derived from transactions with patrons who are members of the cooperative.

Eligible cooperatives may elect to pass any portion of the credit through to their patrons. An eligible cooperative is defined as a cooperative organization that is owned more than 50 percent by agricultural producers or entities owned by agricultural producers. The credit may be apportioned among patrons eligible to share in patronage dividends on the basis of the quantity or value of business done with or for such patrons for the taxable year. The election must be made on a timely filed return for the taxable year and, once made, is irrevocable for such taxable year.


Description of Proposal


The proposal extends for three years (generally, through 2013; through 2012 for wind facilities) the period during which qualified facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, and qualified hydropower may be placed in service for purposes of the electricity production credit. The proposal extends for two years (through 2013) the placed-in-service period for marine and hydrokinetic renewable energy resources.

The proposal also makes a technical amendment to the definition of small irrigation power facility to clarify its integration into the definition marine and hydrokinetic renewable energy facility.


Effective Date


The extension of the electricity production credit is effective for property placed in service after the date of enactment. The technical amendment is effective as if included in section 102 of the Energy Improvement and Extension Act of 2008.



2. Election of investment credit in lieu of production tax credits


Present Law




Renewable Electricity Credit

An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities. 19 Qualified energy resources comprise wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources. To be eligible for the credit, electricity produced from qualified energy resources at qualified facilities must be sold by the taxpayer to an unrelated person. The credit amounts, credit periods, definitions of qualified facilities, and other rules governing this credit are described more fully in section II.1. of this document.



Energy Credit

An income tax credit is also allowed for certain energy property placed in service. Qualifying property includes certain fuel cell property, solar property, geothermal power production property, small wind energy property, combined heat and power system property, microturbine property, and geothermal heat pump property. 20 The amounts of credit, definitions of qualifying property, and other rules governing this credit are described more fully in section II.3. of this document.


Description of Proposal


The proposal allows the taxpayer to make an irrevocable election to have certain qualified facilities placed in service in 2009 and 2010 be treated as energy property eligible for a 30 percent investment credit under section 48. For this purpose, qualified facilities are facilities otherwise eligible for the section 45 production tax credit (other than refined coal, Indian coal, and solar facilities) with respect to which no credit under section 45 has been allowed. A taxpayer electing to treat a facility as energy property may not claim the production credit under section 45.


Effective Date


The proposal applies to facilities placed in service after December 31, 2008.



3. Modification of energy credit 21


Present Law




In general

A nonrefundable, 10-percent business energy credit 22 is allowed for the cost of new property that is equipment that either (1) uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat, or (2) is used to produce, distribute, or use energy derived from a geothermal deposit, but only, in the case of electricity generated by geothermal power, up to the electric transmission stage. Property used to generate energy for the purposes of heating a swimming pool is not eligible solar energy property.

The energy credit is a component of the general business credit. 23 An unused general business credit generally may be carried back one year and carried forward 20 years. 24 The taxpayer's basis in the property is reduced by one-half of the amount of the credit claimed. For projects whose construction time is expected to equal or exceed two years, the credit may be claimed as progress expenditures are made on the project, rather than during the year the property is placed in service. The credit is allowed against the alternative minimum tax for credits determined in taxable years beginning after October 3, 2008.

Property financed by subsidized energy financing or with proceeds from private activity bonds is subject to a reduction in basis for purposes of claiming the credit. The basis reduction is proportional to the share of the basis of the property that is financed by the subsidized financing or proceeds. The term "subsidized energy financing" means financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.



Special rules for solar energy property

The credit for solar energy property is increased to 30 percent in the case of periods prior to January 1, 2017. Additionally, equipment that uses fiber-optic distributed sunlight to illuminate the inside of a structure is solar energy property eligible for the 30-percent credit.



Fuel cells and microturbines

The energy credit applies to qualified fuel cell power plants, but only for periods prior to January 1, 2017. The credit rate is 30 percent.

A qualified fuel cell power plant is an integrated system composed of a fuel cell stack assembly and associated balance of plant components that (1) converts a fuel into electricity using electrochemical means, and (2) has an electricity-only generation efficiency of greater than 30 percent and a capacity of at least one-half kilowatt. The credit may not exceed $1,500 for each 0.5 kilowatt of capacity.

The energy credit applies to qualifying stationary microturbine power plants for periods prior to January 1, 2017. The credit is limited to the lesser of 10 percent of the basis of the property or $200 for each kilowatt of capacity.

A qualified stationary microturbine power plant is an integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and associated balance of plant components that converts a fuel into electricity and thermal energy. Such system also includes all secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency and power factors. Such system must have an electricity-only generation efficiency of not less than 26 percent at International Standard Organization conditions and a capacity of less than 2,000 kilowatts.



Geothermal heat pump property

The energy credit applies to qualified geothermal heat pump property placed in service prior to January 1, 2017. The credit rate is 10 percent. Qualified geothermal heat pump property is equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.



Small wind property

The energy credit applies to qualified small wind energy property placed in service prior to January 1, 2017. The credit rate is 30 percent. The credit is limited to $4,000 per year with respect to all wind energy property of any taxpayer. Qualified small wind energy property is property that uses a qualified wind turbine to generate electricity. A qualifying wind turbine means a wind turbine of 100 kilowatts of rated capacity or less.



Combined heat and power property

The energy credit applies to combined heat and power ("CHP") property placed in service prior to January 1, 2017. The credit rate is 10 percent.

CHP property is property: (1) that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications); (2) that has an electrical capacity of not more than 50 megawatts or a mechanical energy capacity of no more than 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities; (3) that produces at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power, and produces at least 20 percent of its total useful energy in the form of electrical or mechanical power (or a combination thereof); and (4) the energy efficiency percentage of which exceeds 60 percent. CHP property does not include property used to transport the energy source to the generating facility or to distribute energy produced by the facility.

The otherwise allowable credit with respect to CHP property is reduced to the extent the property has an electrical capacity or mechanical capacity in excess of any applicable limits. Property in excess of the applicable limit (15 megawatts or a mechanical energy capacity of more than 20,000 horsepower or an equivalent combination of electrical and mechanical energy capacities) is permitted to claim a fraction of the otherwise allowable credit. The fraction is equal to the applicable limit divided by the capacity of the property. For example, a 45 megawatt property would be eligible to claim 15/45ths, or one third, of the otherwise allowable credit. Again, no credit is allowed if the property exceeds the 50 megawatt or 67,000 horsepower limitations described above.

Additionally, the proposal provides that systems whose fuel source is at least 90 percent open-loop biomass and that would qualify for the credit but for the failure to meet the efficiency standard are eligible for a credit that is reduced in proportion to the degree to which the system fails to meet the efficiency standard. For example, a system that would otherwise be required to meet the 60-percent efficiency standard, but which only achieves 30-percent efficiency, would be permitted a credit equal to one-half of the otherwise allowable credit (i.e., a 5-percent credit).


Description of Proposal


The proposal eliminates the credit caps applicable to qualified small wind energy property. The proposal also removes the rule that reduces the basis of the property for purposes of claiming the credit if the property is financed in whole or in part by subsidized energy financing or with proceeds from private activity bonds.


Effective Date


The proposal applies to periods after December 31, 2008, under rules similar to the rules of section 48(m) of the Code (as in effect on the day before the enactment of the Revenue Reconciliation Act of 1990).



4. Expand new clean renewable energy bonds


Present Law




New Clean Renewable Energy Bonds

New clean renewable energy bonds ("New CREBs") may be issued by qualified issuers to finance qualified renewable energy facilities. Qualified renewable energy facilities are facilities: (1) that qualify for the tax credit under section 45 (other than Indian coal and refined coal production facilities), without regard to the placed-in-service date requirements of that section; and (2) that are owned by a public power provider, governmental body, or cooperative electric company.

The term "qualified issuers" includes: (1) public power providers; (2) a governmental body; (3) cooperative electric companies; (4) a not-for-profit electric utility that has received a loan or guarantee under the Rural Electrification Act; and (5) clean renewable energy bond lenders. The term "public power provider" means a State utility with a service obligation, as such terms are defined in section 217 of the Federal Power Act (as in effect on the date of the enactment of this paragraph). A "governmental body" means any State or Indian tribal government, or any political subdivision thereof. The term "cooperative electric company" means a mutual or cooperative electric company (described in section 501(c)(12) or section 1381(a)(2)(C)). A clean renewable energy bond lender means a cooperative that is owned by, or has outstanding loans to, 100 or more cooperative electric companies and is in existence on February 1, 2002 (including any affiliated entity which is controlled by such lender).

There is a national limitation for New CREBs of $800 million. No more than one third of the national limit may be allocated to projects of public power providers, governmental bodies, or cooperative electric companies. Allocations to governmental bodies and cooperative electric companies may be made in the manner the Secretary determines appropriate. Allocations to projects of public power providers shall be made, to the extent practicable, in such manner that the amount allocated to each such project bears the same ratio to the cost of such project as the maximum allocation limitation to projects of public power providers bears to the cost of all such projects.

New CREBs are a type of qualified tax credit bond for purposes of section 54A of the Code. As such, 100 percent of the available project proceeds of New CREBs must be used within the three-year period that begins on the date of issuance. Available project proceeds are proceeds from the sale of the bond issue less issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 100 percent of the available project proceeds are used to finance qualified projects during the three-year spending period, bonds will continue to qualify as New CREBs if unspent proceeds are used within 90 days from the end of such three-year period to redeem bonds. The three-year spending period may be extended by the Secretary upon the qualified issuer's request demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and the projects will continue to proceed with due diligence.

New CREBs generally are subject to the arbitrage requirements of section 148. However, available project proceeds invested during the three-year spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the New CREBs are issued.

The maturity of New CREBs is the term that the Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the New CREBs are issued.

As with other tax credit bonds, a taxpayer holding New CREBs on a credit allowance date is entitled to a tax credit. Unlike CREBs, however, the credit rate on New CREBs is set by the Secretary at a rate that is 70 percent of the rate that would permit issuance of such bonds without discount and interest cost to the issuer. The applicable credit rate for the bond is the rate that the Secretary estimates will permit the issuance of the qualified tax credit bond with a specified maturity or redemption date without discount and without interest cost to the qualified issuer. 25 The Secretary determines credit rates for tax credit bonds based on general assumptions about credit quality of the class of potential eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings.

The amount of the tax credit is determined by multiplying the bond's credit rate by the face amount of the holder's bond. The credit accrues quarterly, is includible in gross income (as if it were an interest payment on the bond), and can be claimed against regular income tax liability and alternative minimum tax liability. Unused credits may be carried forward to succeeding taxable years. In addition, credits may be separated from the ownership of the underlying bond similar to how interest coupons can be stripped for interest-bearing bonds.

An issuer of New CREBs is treated as meeting the "prohibition on financial conflicts of interest" requirement in section 54A(d)(6) if it certifies that it satisfies (i) applicable State and local law requirements governing conflicts of interest and (ii) any additional conflict of interest rules prescribed by the Secretary with respect to any Federal, State, or local government official directly involved with the issuance of New CREBs.


Description of Proposal


The proposal expands the New CREBs program. The proposal authorizes issuance of up to an additional $1.6 billion of New CREBs.


Effective Date


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



5. Expand qualified energy conservation bonds


Present Law


Qualified energy conservation bonds may be used to finance qualified conservation purposes.

The term "qualified conservation purpose" means:
1. Capital expenditures incurred for purposes of reducing energy consumption in publicly owned buildings by at least 20 percent; implementing green community programs; rural development involving the production of electricity from renewable energy resources; or any facility eligible for the production tax credit under section 45 (other than Indian coal and refined coal production facilities);

2. Expenditures with respect to facilities or grants that support research in: (A) development of cellulosic ethanol or other nonfossil fuels; (B) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels; (C) increasing the efficiency of existing technologies for producing nonfossil fuels; (D) automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation; and (E) technologies to reduce energy use in buildings;

3. Mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting;

4. Demonstration projects designed to promote the commercialization of: (A) green building technology; (B) conversion of agricultural waste for use in the production of fuel or otherwise; (C) advanced battery manufacturing technologies; (D) technologies to reduce peak-use of electricity; and (D) technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity; and

5. Public education campaigns to promote energy efficiency (other than movies, concerts, and other events held primarily for entertainment purposes).

There is a national limitation on qualified energy conservation bonds of $800 million. Allocations of qualified energy conservation bonds are made to the States with sub-allocations to large local governments. Allocations are made to the States according to their respective populations, reduced by any sub-allocations to large local governments (defined below) within the States. Sub-allocations to large local governments shall be an amount of the national qualified energy conservation bond limitation that bears the same ratio to the amount of such limitation that otherwise would be allocated to the State in which such large local government is located as the population of such large local government bears to the population of such State. The term large local government means: any municipality or county if such municipality or county has a population of 100,000 or more. Indian tribal governments also are treated as large local governments for these purposes (without regard to population).

Each State or large local government receiving an allocation of qualified energy conservation bonds may further allocate issuance authority to issuers within such State or large local government. However, any allocations to issuers within the State or large local government shall be made in a manner that results in not less than 70 percent of the allocation of qualified energy conservation bonds to such State or large local government being used to designate bonds that are not private activity bonds (i.e., the bond cannot meet the private business tests or the private loan test of section 141).

Qualified energy conservation bonds are a type of qualified tax credit bond for purposes of section 54A of the Code. As a result, 100 percent of the available project proceeds of qualified energy conservation bonds must be used for qualified conservation purposes. In the case of qualified conservation bonds issued as private activity bonds, 100 percent of the available project proceeds must be used for capital expenditures. In addition, qualified energy conservation bonds may be issued by Indian tribal governments only to the extent such bonds are issued for purposes that satisfy the present law requirements for tax-exempt bonds issued by Indian tribal governments (i.e., essential governmental functions and certain manufacturing purposes).

Under present law 100 percent of the available project proceeds of qualified energy conservation bonds must be used within the three-year period that begins on the date of issuance. Available project proceeds are proceeds from the sale of the issue less issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 100 percent of the available project proceeds are used to finance qualified conservation purposes during the three-year spending period, bonds will continue to qualify as qualified energy conservation bonds if unspent proceeds are used within 90 days from the end of such three-year period to redeem bonds. The three-year spending period may be extended by the Secretary upon the issuer's request demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and the projects will continue to proceed with due diligence.

Qualified energy conservation bonds generally are subject to the arbitrage requirements of section 148. However, available project proceeds invested during the three-year spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified energy conservation bonds are issued.

The maturity of qualified energy conservation bonds is the term that the Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified energy conservation bonds are issued.

As with other tax credit bonds, the taxpayer holding qualified energy conservation bonds on a credit allowance date is entitled to a tax credit. The credit rate on the bonds is set by the Secretary at a rate that is 70 percent of the rate that would permit issuance of such bonds without discount and interest cost to the issuer. 26 The Secretary determines credit rates for tax credit bonds based on general assumptions about credit quality of the class of potential eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings. The amount of the tax credit is determined by multiplying the bond's credit rate by the face amount of the holder's bond. The credit accrues quarterly, is includible in gross income (as if it were an interest payment on the bond), and can be claimed against regular income tax liability and alternative minimum tax liability. Unused credits may be carried forward to succeeding taxable years. In addition, credits may be separated from the ownership of the underlying bond similar to how interest coupons can be stripped for interest-bearing bonds.

Issuers of qualified energy conservation bonds are required to certify that the financial disclosure requirements that applicable State and local law requirements governing conflicts of interest are satisfied with respect to such issue, as well as any other additional conflict of interest rules prescribed by the Secretary with respect to any Federal, State, or local government official directly involved with the issuance of qualified energy conservation bonds.


Description of Proposal


The proposal expands the present-law qualified energy conservation bond program. The proposal authorizes issuance of an additional $2.4 billion of qualified energy conservation bonds.


Effective Date


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



6. Extension and modification of credit for nonbusiness energy property


Present Law


Section 25C provides a 10-percent credit for the purchase of qualified energy efficiency improvements to existing homes. A qualified energy efficiency improvement is any energy efficiency building envelope component (1) that meets or exceeds the prescriptive criteria for such a component established by the 2000 International Energy Conservation Code as supplemented and as in effect on August 8, 2005 (or, in the case of metal roofs with appropriate pigmented coatings, meets the Energy Star program requirements); (2) that is installed in or on a dwelling located in the United States and owned and used by the taxpayer as the taxpayer's principal residence; (3) the original use of which commences with the taxpayer; and (4) that reasonably can be expected to remain in use for at least five years. The credit is nonrefundable.

Building envelope components are: (1) insulation materials or systems which are specifically and primarily designed to reduce the heat loss or gain for a dwelling; (2) exterior windows (including skylights) and doors; and (3) metal or asphalt roofs with appropriate pigmented coatings or cooling granules that are specifically and primarily designed to reduce the heat gain for a dwelling.

Additionally, section 25C provides specified credits for the purchase of specific energy efficient property. The allowable credit for the purchase of certain property is (1) $50 for each advanced main air circulating fan, (2) $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and (3) $300 for each item of qualified energy efficient property.

An advanced main air circulating fan is a fan used in a natural gas, propane, or oil furnace originally placed in service by the taxpayer during the taxable year, and which has an annual electricity use of no more than two percent of the total annual energy use of the furnace (as determined in the standard Department of Energy test procedures).

A qualified natural gas, propane, or oil furnace or hot water boiler is a natural gas, propane, or oil furnace or hot water boiler with an annual fuel utilization efficiency rate of at least 95.

Qualified energy-efficient property is: (1) an electric heat pump water heater which yields an energy factor of at least 2.0 in the standard Department of Energy test procedure, (2) an electric heat pump which has a heating seasonal performance factor (HSPF) of at least 9, a seasonal energy efficiency ratio (SEER) of at least 15, and an energy efficiency ratio (EER) of at least 13, (3) a central air conditioner with energy efficiency of at least the highest efficiency tier established by the Consortium for Energy Efficiency as in effect on Jan. 1, 2006 27 , (4) a natural gas, propane, or oil water heater which has an energy factor of at least 0.80 or thermal efficiency of at least 90 percent, and (5) biomass fuel property.

Biomass fuel property is a stove that burns biomass fuel to heat a dwelling unit located in the United States and used as a principal residence by the taxpayer, or to heat water for such dwelling unit, and that has a thermal efficiency rating of at least 75 percent. Biomass fuel is any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants, grasses, residues, and fibers.

Under section 25C, the maximum credit for a taxpayer with respect to the same dwelling for all taxable years is $500, and no more than $200 of such credit may be attributable to expenditures on windows.

The taxpayer's basis in the property is reduced by the amount of the credit. Special proration rules apply in the case of jointly owned property, condominiums, and tenant-stockholders in cooperative housing corporations. If less than 80 percent of the property is used for nonbusiness purposes, only that portion of expenditures that is used for nonbusiness purposes is taken into account.

For purposes of determining the amount of expenditures made by any individual with respect to any dwelling unit, there shall not be taken into account expenditures which are made from subsidized energy financing The term "subsidized energy financing" means financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.

The credit applies to expenditures made after December 31, 2008 for property placed in service after December 31, 2008, and prior to January 1, 2010.


Description of Proposal


The proposal raises the 10 percent credit rate to 30 percent. Additionally, all energy property otherwise eligible for the $50, $100, or $150 credits is instead eligible for a 30 percent credit on expenditures for such property.

The proposal additionally extends the proposal for one year, through December 31, 2010. Finally, the $500 lifetime cap (and the $200 lifetime cap with respect to windows) is eliminated and replaced with an aggregate cap of $1,500 in the case of property placed in service after December 31, 2008 and prior to January 1, 2011.

The present law rule related to subsidized energy financing is eliminated.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



7. Credit for residential energy efficient property


Present Law


Section 25D provides a personal tax credit for the purchase of qualified solar electric property and qualified solar water heating property that is used exclusively for purposes other than heating swimming pools and hot tubs. The credit is equal to 30 percent of qualifying expenditures, with a maximum credit of $2,000 with respect to qualified solar water heating property. There is no cap with respect to qualified solar electric property.

Section 25D also provides a 30 percent credit for the purchase of qualified geothermal heat pump property, qualified small wind energy property, and qualified fuel cell power plants. The credit for geothermal heat pump property is capped at $2,000, the credit for qualified small wind energy property is limited to $500 with respect to each half kilowatt of capacity, not to exceed $4,000, and the credit for any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity.

The credit with respect to all qualifying property may be claimed against the alternative minimum tax.

Qualified solar electric property is property that uses solar energy to generate electricity for use in a dwelling unit. Qualifying solar water heating property is property used to heat water for use in a dwelling unit located in the United States and used as a residence if at least half of the energy used by such property for such purpose is derived from the sun.

A qualified fuel cell power plant is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that (1) converts a fuel into electricity using electrochemical means, (2) has an electricity-only generation efficiency of greater than 30 percent. The qualified fuel cell power plant must be installed on or in connection with a dwelling unit located in the United States and used by the taxpayer as a principal residence.

Qualified small wind energy property is property that uses a wind turbine to generate electricity for use in a dwelling unit located in the U.S. and used as a residence by the taxpayer.

Qualified geothermal heat pump property means any equipment which (1) uses the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool such dwelling unit, (2) meets the requirements of the Energy Star program which are in effect at the time that the expenditure for such equipment is made, and (3) is installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.

The credit is nonrefundable, and the depreciable basis of the property is reduced by the amount of the credit. Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit are eligible expenditures.

Special proration rules apply in the case of jointly owned property, condominiums, and tenant-stockholders in cooperative housing corporations. If less than 80 percent of the property is used for nonbusiness purposes, only that portion of expenditures that is used for nonbusiness purposes is taken into account.

For purposes of determining the amount of expenditures made by any individual with respect to any dwelling unit, there shall not be taken into account expenditures which are made from subsidized energy financing. The term "subsidized energy financing" means financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.

The credit applies to property placed in service prior to January 1, 2017.


Description of Proposal


The proposal eliminates the credit caps for solar hot water, geothermal, and wind property and eliminates the reduction in credits for property using subsidized energy financing.


Effective Date


The proposal is effective for property placed in service after December 31, 2008, in taxable years ending after such date.



8. Temporary increase in credit for alternative fuel vehicle refueling property


Present Law


Taxpayers may claim a 30-percent credit for the cost of installing qualified clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. 28 The credit may not exceed $30,000 per taxable year per location, in the case of qualified refueling property used in a trade or business and $1,000 per taxable year per location, in the case of qualified refueling property installed on property which is used as a principal residence.

Qualified refueling property is property (not including a building or its structural components) for the storage or dispensing of a clean-burning fuel or electricity into the fuel tank or battery of a motor vehicle propelled by such fuel or electricity, but only if the storage or dispensing of the fuel or electricity is at the point of delivery into the fuel tank or battery of the motor vehicle. The use of such property must begin with the taxpayer.

Clean-burning fuels are any fuel at least 85 percent of the volume of which consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen. In addition, any mixture of biodiesel and diesel fuel, determined without regard to any use of kerosene and containing at least 20 percent biodiesel, qualifies as a clean fuel.

Credits for qualified refueling property used in a trade or business are part of the general business credit and may be carried back for one year and forward for 20 years. Credits for residential qualified refueling property cannot exceed for any taxable year the difference between the taxpayer's regular tax (reduced by certain other credits) and the taxpayer's tentative minimum tax. Generally, in the case of qualified refueling property sold to a tax-exempt entity, the taxpayer selling the property may claim the credit.

A taxpayer's basis in qualified refueling property is reduced by the amount of the credit. In addition, no credit is available for property used outside the United States or for which an election to expense has been made under section 179.

The credit is available for property placed in service after December 31, 2005, and (except in the case of hydrogen refueling property) before January 1, 2011. In the case of hydrogen refueling property, the property must be placed in service before January 1, 2015.


Description of Proposal


For property placed in service in 2009 or 2010, the proposal increases the maximum credit available for business property to $200,000 for qualified hydrogen refueling property and to $50,000 for other qualified refueling property. For nonbusiness property, the maximum credit is increased to $2,000. In addition, the credit rate is increased from 30 percent to 50 percent, except in the case of hydrogen refueling property.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



9. Energy research credit


Present Law




General rule

A taxpayer may claim a research credit equal to 20 percent of the amount by which the taxpayer's qualified research expenses for a taxable year exceed its base amount for that year. 29 Thus, the research credit is generally available with respect to incremental increases in qualified research.

A 20-percent research tax credit is also available with respect to the excess of (1) 100 percent of corporate cash expenses (including grants or contributions) paid for basic research conducted by universities (and certain nonprofit scientific research organizations) over (2) the sum of (a) the greater of two minimum basic research floors plus (b) an amount reflecting any decrease in nonresearch giving to universities by the corporation as compared to such giving during a fixed-base period, as adjusted for inflation. This separate credit computation is commonly referred to as the university basic research credit. 30

Finally, a research credit is available for a taxpayer's expenditures on research undertaken by an energy research consortium. This separate credit computation is commonly referred to as the energy research credit. Unlike the other research credits, the energy research credit applies to all qualified expenditures, not just those in excess of a base amount.

The research credit, including the university basic research credit and the energy research credit, expires for amounts paid or incurred after December 31, 2009. 31



Computation of allowable credit

Except for energy research payments and certain university basic research payments made by corporations, the research tax credit applies only to the extent that the taxpayer's qualified research expenses for the current taxable year exceed its base amount. The base amount for the current year generally is computed by multiplying the taxpayer's fixed-base percentage by the average amount of the taxpayer's gross receipts for the four preceding years. If a taxpayer both incurred qualified research expenses and had gross receipts during each of at least three years from 1984 through 1988, then its fixed-base percentage is the ratio that its total qualified research expenses for the 1984-1988 period bears to its total gross receipts for that period (subject to a maximum fixed-base percentage of 16 percent). All other taxpayers (so-called start-up firms) are assigned a fixed-base percentage of three percent. 32

In computing the credit, a taxpayer's base amount cannot be less than 50 percent of its current-year qualified research expenses.

To prevent artificial increases in research expenditures by shifting expenditures among commonly controlled or otherwise related entities, a special aggregation rule provides that all members of the same controlled group of corporations are treated as a single taxpayer. 33 Under regulations prescribed by the Secretary, special rules apply for computing the credit when a major portion of a trade or business (or unit thereof) changes hands, under which qualified research expenses and gross receipts for periods prior to the change of ownership of a trade or business are treated as transferred with the trade or business that gave rise to those expenses and receipts for purposes of recomputing a taxpayer's fixed-base percentage. 34



Alternative incremental research credit regime

Taxpayers are allowed to elect an alternative incremental research credit regime. 35 If a taxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tiered fixed-base percentage (that is lower than the fixed-base percentage otherwise applicable under present law) and the credit rate likewise is reduced.

Generally, for amounts paid or incurred prior to 2007, under the alternative incremental credit regime, a credit rate of 2.65 percent applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of one percent (i.e., the base amount equals one percent of the taxpayer's average gross receipts for the four preceding years) but do not exceed a base amount computed by using a fixed-base percentage of 1.5 percent. A credit rate of 3.2 percent applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of 1.5 percent but do not exceed a base amount computed by using a fixed-base percentage of two percent. A credit rate of 3.75 percent applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of two percent. Generally, for amounts paid or incurred after 2006, the credit rates listed above are increased to three percent, four percent, and five percent, respectively. 36

An election to be subject to this alternative incremental credit regime can be made for any taxable year beginning after June 30, 1996, and such an election applies to that taxable year and all subsequent years unless revoked with the consent of the Secretary of the Treasury. The alternative incremental credit regime terminates for taxable years beginning after December 31, 2008.



Alternative simplified credit

Generally, for amounts paid or incurred after 2006, taxpayers may elect to claim an alternative simplified credit for qualified research expenses. 37 The alternative simplified research credit is equal to 12 percent (14 percent for taxable years beginning after December 31, 2008) of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. The rate is reduced to six percent if a taxpayer has no qualified research expenses in any one of the three preceding taxable years.

An election to use the alternative simplified credit applies to all succeeding taxable years unless revoked with the consent of the Secretary. An election to use the alternative simplified credit may not be made for any taxable year for which an election to use the alternative incremental credit is in effect. A transition rule applies which permits a taxpayer to elect to use the alternative simplified credit in lieu of the alternative incremental credit if such election is made during the taxable year which includes January 1, 2007. The transition rule applies only to the taxable year which includes that date.



Eligible expenses

Qualified research expenses eligible for the research tax credit consist of: (1) in-house expenses of the taxpayer for wages and supplies attributable to qualified research; (2) certain time-sharing costs for computer use in qualified research; and (3) 65 percent of amounts paid or incurred by the taxpayer to certain other persons for qualified research conducted on the taxpayer's behalf (so-called contract research expenses). 38 Notwithstanding the limitation for contract research expenses, qualified research expenses include 100 percent of amounts paid or incurred by the taxpayer to an eligible small business, university, or Federal laboratory for qualified energy research.

To be eligible for the credit, the research not only has to satisfy the requirements of present-law section 174 (described below) but also must be undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and substantially all of the activities of which constitute elements of a process of experimentation for functional aspects, performance, reliability, or quality of a business component. Research does not qualify for the credit if substantially all of the activities relate to style, taste, cosmetic, or seasonal design factors. 39 In addition, research does not qualify for the credit: (1) if conducted after the beginning of commercial production of the business component; (2) if related to the adaptation of an existing business component to a particular customer's requirements; (3) if related to the duplication of an existing business component from a physical examination of the component itself or certain other information; or (4) if related to certain efficiency surveys, management function or technique, market research, market testing, or market development, routine data collection or routine quality control. 40 Research does not qualify for the credit if it is conducted outside the United States, Puerto Rico, or any U.S. possession.



Relation to deduction

Under section 174, taxpayers may elect to deduct currently the amount of certain research or experimental expenditures paid or incurred in connection with a trade or business, notwithstanding the general rule that business expenses to develop or create an asset that has a useful life extending beyond the current year must be capitalized. 41 However, deductions allowed to a taxpayer under section 174 (or any other section) are reduced by an amount equal to 100 percent of the taxpayer's research tax credit determined for the taxable year. 42 Taxpayers may alternatively elect to claim a reduced research tax credit amount under section 41 in lieu of reducing deductions otherwise allowed. 43


Description of Proposal


The proposal creates a new 20 percent credit for all qualified energy research expenses paid or incurred in 2009 or 2010. Qualified energy research expenses are qualified research expenses related to the fields of fuel cells and battery technology, renewable energy, energy conservation technology, efficient transmission and distribution of electricity, and carbon capture and sequestration.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



10. Five-year carryback of general business credit


Present Law


Present law permits a credit against tax for the sum of the business credit carryforwards carried to the taxable year, the amount of the current year business credit, and the business credit carrybacks carried to the taxable year. 44 The business credit is comprised of several different credits, such as the work opportunity credit, the research credit, and the low-income housing credit. 45 The business credit for any taxable year may not exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25 percent of so much of the taxpayer's net regular tax liability as exceeds $25,000. 46 Business credits in excess of the limitation may be carried back one taxable year and forward up to 20 taxable years. 47


Description of Proposal


The proposal extends the carryback period of business credits from 2008 and 2009 to five years.


Effective Date


The proposal is effective for taxable years ending after December 31, 2007, and to carrybacks of business credits from such taxable years.



11. Temporary provision allowing general business credits to offset 100 percent of Federal income tax liability


Present Law


The business credit for any taxable year may not exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25 percent of so much of the taxpayer's net regular tax liability as exceeds $25,000. 48


Description of Proposal


The proposal allows business credits carried to taxable years ending in 2008 and 2009 to offset the entire net income tax without regard to the present-law limitation. The proposal also allows carrybacks of business credits from taxable years ending in 2008 and 2009 to offset the entire net income tax without regard to the present-law limitation.

The proposal may be illustrated by the following examples:

Example 1 .-Taxpayer has a $50 business credit carryover to 2008. In 2008, Taxpayer has $60 of net income tax, $40 of tentative minimum tax, and $0 of current year business credit. The business credit allowed in 2008 is $50.

Example 2 .-Taxpayer has a $100 business credit carryover from 2002. In 2003, Taxpayer has $100 of net income tax, $60 of tentative minimum tax, and $0 of current year business credit. In 2003, the taxpayer uses $40 of its business credit carryover under the limitation in section 38(c) and carries forward the remaining $60. In 2004 through 2007, Taxpayer utilizes $20 of the carryover and has $40 remaining. In 2008, Taxpayer has $0 of net income tax, $0 of tentative minimum tax, and $100 of current year business credits. Taxpayer may carryback the $40 credit carryover from prior years and $20 of the 2008 credit to offset the $60 of net income tax (equal to the tentative minimum tax) in 2003. 49


Effective Date


The proposal is effective for taxable years ending after December 31, 2007, and to carrybacks of business credits from such taxable years.


III. TAX INCENTIVES FOR BUSINESS




1. Special allowance for certain property acquired during 2009


Present Law


Present law permits an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property. 50 The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes for the taxable year in which the property is placed in service. 51 The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. In addition, there are no adjustments to the allowable amount of depreciation for purposes of computing a taxpayer's alternative minimum taxable income with respect to property to which the proposal applies. The amount of the additional first-year depreciation deduction is not affected by a short taxable year. The taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.

The interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance may be illustrated as follows. Assume that in 2008, a taxpayer purchases new depreciable property and places it in service. 52 The property's cost is $1,000, and it is 5-year property subject to the half-year convention. The amount of additional first-year depreciation allowed is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5-year property. Thus, 20 percent, or $100, is also allowed as a depreciation deduction in 2008. The total depreciation deduction with respect to the property for 2008 is $600. The remaining $400 cost of the property is recovered under otherwise applicable rules for computing depreciation.

In order for property to qualify for the additional first-year depreciation deduction it must meet all of the following requirements. First, the property must be (1) property to which the modified accelerated cost recovery system ("MACRS") applies with an applicable recovery period of 20 years or less, (2) water utility property (as defined in section 168(e)(5)), (3) computer software other than computer software covered by section 197, or (4) qualified leasehold improvement property (as defined in section 168(k)(3)). 53 Second, the original use 54 of the property must commence with the taxpayer after December 31, 2007. 55 Third, the taxpayer must purchase the property within the applicable time period. Finally, the property must be placed in service after December 31, 2007, and before January 1, 2009. An extension of the placed in service date of one year (i.e., to January 1, 2010) is provided for certain property with a recovery period of ten years or longer and certain transportation property. 56 Transportation property is defined as tangible personal property used in the trade or business of transporting persons or property.

The applicable time period for acquired property is (1) after December 31, 2007, and before January 1, 2009, but only if no binding written contract for the acquisition is in effect before January 1, 2008, or (2) pursuant to a binding written contract which was entered into after December 31, 2007, and before January 1, 2009. 57 With respect to property that is manufactured, constructed, or produced by the taxpayer for use by the taxpayer, the taxpayer must begin the manufacture, construction, or production of the property after December 31, 2007, and before January 1, 2009. Property that is manufactured, constructed, or produced for the taxpayer by another person under a contract that is entered into prior to the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by the taxpayer. For property eligible for the extended placed in service date, a special rule limits the amount of costs eligible for the additional first-year depreciation. With respect to such property, only the portion of the basis that is properly attributable to the costs incurred before January 1, 2009 ("progress expenditures") is eligible for the additional first-year depreciation. 58

Property does not qualify for the additional first-year depreciation deduction when the user of such property (or a related party) would not have been eligible for the additional first-year depreciation deduction if the user (or a related party) were treated as the owner. For example, if a taxpayer sells to a related party property that was under construction prior to January 1, 2008, the property does not qualify for the additional first-year depreciation deduction. Similarly, if a taxpayer sells to a related party property that was subject to a binding written contract prior to January 1, 2008, the property does not qualify for the additional first-year depreciation deduction. As a further example, if a taxpayer (the lessee) sells property in a sale-leaseback arrangement, and the property otherwise would not have qualified for the additional first-year depreciation deduction if it were owned by the taxpayer-lessee, then the lessor is not entitled to the additional first-year depreciation deduction.

The limitation on the amount of depreciation deductions allowed with respect to certain passenger automobiles (sec. 280F) is increased in the first-year by $8,000 for automobiles that qualify (and do not elect out of the increased first year deduction). The $8,000 increase is not indexed for inflation.

Corporations otherwise eligible for additional first-year depreciation under section 168(k) may elect to claim additional research or minimum tax credits in lieu of claiming depreciation under section 168(k) for "eligible qualified property." 59


Description of Proposal


The proposal extends the additional first-year depreciation deduction for one year, generally through 2009 (through 2010 for certain longer-lived and transportation property).

The proposal modifies the definition of qualified property to include certain motion picture film or video tape (within the meaning of section 168(f)(3)) for which a deduction is allowable under section 167(a) (without regard to section 168) and with respect to which an election is not in effect under section 181. For purposes of the election out of bonus depreciation, all motion picture film and video tape property is treated as one class of property. The proposal does not apply to any property for which records are required under section 2257 of Title 18 U.S.C. to be maintained with respect to any performer in such film or video.

The proposal does not modify the property eligible for the election to accelerate AMT and research credits in lieu of bonus depreciation under section 168(k)(4). 60


Effective Date


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

The technical amendment to section 168(k)(4)(D) is effective for taxable years ending after March 31, 2008.



2. Temporary increase in limitations on expensing of certain depreciable business assets


Present Law


In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may elect to deduct (or "expense") such costs under section 179. Present law provides that the maximum amount a taxpayer may expense for taxable years beginning in 2008 is $250,000 of the cost of qualifying property placed in service for the taxable year. 61 For taxable years beginning in 2009 and 2010, the limitation is $125,000. In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Off-the-shelf computer software placed in service in taxable years beginning before 2011 is treated as qualifying property. For taxable years beginning in 2008, the $250,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000. For taxable years beginning in 2009 and 2010, the $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000. The $125,000 and $500,000 amounts are indexed for inflation in taxable years beginning in 2009 and 2010.

The amount eligible to be expensed for a taxable year may not exceed the taxable income for a taxable year that is derived from the active conduct of a trade or business (determined without regard to this proposal). Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years (subject to similar limitations). No general business credit under section 38 is allowed with respect to any amount for which a deduction is allowed under section 179. An expensing election is made under rules prescribed by the Secretary. 62

For taxable years beginning in 2011 and thereafter (or before 2003), the following rules apply. A taxpayer with a sufficiently small amount of annual investment may elect to deduct up to $25,000 of the cost of qualifying property placed in service for the taxable year. The $25,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $200,000. The $25,000 and $200,000 amounts are not indexed for inflation. In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business (not including off-the-shelf computer software). An expensing election may be revoked only with consent of the Commissioner. 63


Description of Proposal


The proposal extends the $250,000 and $800,000 amounts to taxable years beginning in 2009.


Effective Date


The proposal is effective for taxable years beginning after December 31, 2008.



3. Five-year carryback of operating losses


Present Law


Under present law, a net operating loss ("NOL") generally means the amount by which a taxpayer's business deductions exceed its gross income. In general, an NOL may be carried back two years and carried over 20 years to offset taxable income in such years. 64 NOLs offset taxable income in the order of the taxable years to which the NOL may be carried. 65

The alternative minimum tax rules provide that a taxpayer's NOL deduction cannot reduce the taxpayer's alternative minimum taxable income ("AMTI") by more than 90 percent of the AMTI.

Different rules apply with respect to NOLs arising in certain circumstances. A three-year carryback applies with respect to NOLs (1) arising from casualty or theft losses of individuals, or (2) attributable to Presidentially declared disasters for taxpayers engaged in a farming business or a small business. A five-year carryback applies to NOLs (1) arising from a farming loss (regardless of whether the loss was incurred in a Presidentially declared disaster area), (2) certain amounts related to Hurricane Katrina, Gulf Opportunity Zone, and Midwestern Disaster Area, or (3) qualified disaster losses. 66 Special rules also apply to real estate investment trusts (no carryback), specified liability losses (10-year carryback), and excess interest losses (no carryback to any year preceding a corporate equity reduction transaction). Additionally, a special rule applies to certain electric utility companies.

In the case of a life insurance company, present law allows a deduction for the taxable year for operations loss carryovers and carrybacks in lieu of the deduction for net operating losses allowed to other corporations. 67 A life insurance company is permitted to treat a loss from operations (as defined under section 810(c)) for any taxable year as an operations loss carryback to each of the three taxable years preceding the loss year and an operations loss carryover to each of the 15 taxable years following the loss year. 68 Special rules apply to new life insurance companies.


Description of Proposal


The proposal increases the general NOL carryback period from two years to five years in the case of an NOL for any taxable year ending during 2008 or 2009. The proposal also suspends the 90-percent limitation on the use of any alternative tax NOL deduction attributable to carrybacks from taxable years ending during 2008 or 2009, and carryovers to taxable years ending during 2008 and 2009.

A taxpayer may elect to have the carryback period determined without regard to the special five year period or may use any whole number of years less than five in its place. For example, a taxpayer incurring a net operating loss in 2008 may elect to carry the loss back to 2004 (i.e., four years).

For life insurance companies, the proposal increases the carryback period for losses from operations from three years to any whole amount of years less than six in the case of losses from operations for any taxable year ending during 2008 or 2009.

For a net operating loss for a taxable year ending during 2008, the proposal includes three transition rules: (1) any election to waive the carryback period under either sections 172(b)(3) or 810(b)(3) with respect to such loss may be revoked before the applicable date; (2) any election to disregard the five year carryback period in favor of a shorter carryback period under section 172(k) or to use a carryback period under section 810(b)(4) with respect to such loss is treated as timely made if made before the applicable date; and (3) any application for a tentative carryback adjustment under section 6411(a) with respect to such loss is treated as timely filed if filed before the applicable date. For purposes of the transition rules, the applicable date is the date which is 60 days after the date of the enactment of the proposal.

The proposal does not apply to: (1) any taxpayer if (a) the Federal Government acquires, at any time, an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008, or (b) the Federal Government acquires, at any time, any warrant (or other right) to acquire any equity interest with respect to the taxpayer pursuant to such Act; (2) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation; and (3) any taxpayer that in 2008 or 2009 is a member of the same affiliated group (as defined in section 1504 without regard to subsection (b) thereof) as a taxpayer to which the proposal does not otherwise apply.


Effective Date


The proposal is generally effective for net operating losses arising in taxable years ending after December 31, 2007. The modification to the alternative tax NOL deduction applies to taxable years ending after 1997. The modification with respect to operating loss deductions of life insurance companies applies to losses from operations arising in taxable years ending after December 31, 2007.



4. Modification of work opportunity tax credit


Present Law




In general

The work opportunity tax credit is available on an elective basis for employers hiring individuals from one or more of nine targeted groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer (two years in the case of an individual in the long-term family assistance recipient category).



Targeted groups eligible for the credit

Generally an employer is eligible for the credit only for qualified wages paid to members of a targeted group.



(1) Families receiving TANF

An eligible recipient is an individual certified by a designated local employment agency (e.g., a State employment agency) as being a member of a family eligible to receive benefits under the Temporary Assistance for Needy Families Program ("TANF") for a period of at least nine months part of which is during the 18-month period ending on the hiring date. For these purposes, members of the family are defined to include only those individuals taken into account for purposes of determining eligibility for the TANF.



(2) Qualified veteran

There are two subcategories of qualified veterans related to eligibility for Food stamps and compensation for a service-connected disability.



Food stamps

A qualified veteran is a veteran who is certified by the designated local agency as a member of a family receiving assistance under a food stamp program under the Food Stamp Act of 1977 for a period of at least three months part of which is during the 12-month period ending on the hiring date. For these purposes, members of a family are defined to include only those individuals taken into account for purposes of determining eligibility for a food stamp program under the Food Stamp Act of 1977.



Entitled to compensation for a service-connected disability

A qualified veteran also includes an individual who is certified as entitled to compensation for a service-connected disability and: (1) having a hiring date which is not more than one year after having been discharged or released from active duty in the Armed Forces of the United States, or (2) having been unemployed for six months or more (whether or not consecutive) during the one-year period ending on the date of hiring.



Definitions

For these purposes, being entitled to compensation for a service-connected disability is defined with reference to section 101 of Title 38, U.S. Code, which means having a disability rating of 10-percent or higher for service connected injuries.

For these purposes, a veteran is an individual who has served on active duty (other than for training) in the Armed Forces for more than 180 days or who has been discharged or released from active duty in the Armed Forces for a service-connected disability. However, any individual who has served for a period of more than 90 days during which the individual was on active duty (other than for training) is not a qualified veteran if any of this active duty occurred during the 60-day period ending on the date the individual was hired by the employer. This latter rule is intended to prevent employers who hire current members of the armed services (or those departed from service within the last 60 days) from receiving the credit.



(3) Qualified ex-felon

A qualified ex-felon is an individual certified as: (1) having been convicted of a felony under any State or Federal law, and (2) having a hiring date within one year of release from prison or the date of conviction.



(4) Designated community residents

A designated community resident is an individual certified as being at least age 18 but not yet age 40 on the hiring date and as having a principal place of abode within an empowerment zone, enterprise community, renewal community or a rural renewal community. For these purposes, a rural renewal county is a county outside a metropolitan statistical area (as defined by the Office of Management and Budget) which had a net population loss during the five-year periods 1990-1994 and 1995-1999. Qualified wages do not include wages paid or incurred for services performed after the individual moves outside an empowerment zone, enterprise community, renewal community or a rural renewal community.



(5) Vocational rehabilitation referral

A vocational rehabilitation referral is an individual who is certified by a designated local agency as an individual who has a physical or mental disability that constitutes a substantial handicap to employment and who has been referred to the employer while receiving, or after completing: (a) vocational rehabilitation services under an individualized, written plan for employment under a State plan approved under the Rehabilitation Act of 1973; (b) under a rehabilitation plan for veterans carried out under Chapter 31 of Title 38, U.S. Code; or (c) an individual work plan developed and implemented by an employment network pursuant to subsection (g) of section 1148 of the Social Security Act. Certification will be provided by the designated local employment agency upon assurances from the vocational rehabilitation agency that the employee has met the above conditions.



(6) Qualified summer youth employee

A qualified summer youth employee is an individual: (a) who performs services during any 90-day period between May 1 and September 15, (b) who is certified by the designated local agency as being 16 or 17 years of age on the hiring date, (c) who has not been an employee of that employer before, and (d) who is certified by the designated local agency as having a principal place of abode within an empowerment zone, enterprise community, or renewal community (as defined under Subchapter U of Subtitle A, Chapter 1 of the Internal Revenue Code). As with designated community residents, no credit is available on wages paid or incurred for service performed after the qualified summer youth moves outside of an empowerment zone, enterprise community, or renewal community. If, after the end of the 90-day period, the employer continues to employ a youth who was certified during the 90-day period as a member of another targeted group, the limit on qualified first year wages will take into account wages paid to the youth while a qualified summer youth employee.



(7) Qualified food stamp recipient

A qualified food stamp recipient is an individual at least age 18 but not yet age 40 certified by a designated local employment agency as being a member of a family receiving assistance under a food stamp program under the Food Stamp Act of 1977 for a period of at least six months ending on the hiring date. In the case of families that cease to be eligible for food stamps under section 6(o) of the Food Stamp Act of 1977, the six-month requirement is replaced with a requirement that the family has been receiving food stamps for at least three of the five months ending on the date of hire. For these purposes, members of the family are defined to include only those individuals taken into account for purposes of determining eligibility for a food stamp program under the Food Stamp Act of 1977.



(8) Qualified SSI recipient

A qualified SSI recipient is an individual designated by a local agency as receiving supplemental security income ("SSI") benefits under Title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date.



(9) Long-term family assistance recipients

A qualified long-term family assistance recipient is an individual certified by a designated local agency as being: (a) a member of a family that has received family assistance for at least 18 consecutive months ending on the hiring date; (b) a member of a family that has received such family assistance for a total of at least 18 months (whether or not consecutive) after August 5, 1997 (the date of enactment of the welfare-to-work tax credit) 69 if the individual is hired within two years after the date that the 18-month total is reached; or (c) a member of a family who is no longer eligible for family assistance because of either Federal or State time limits, if the individual is hired within two years after the Federal or State time limits made the family ineligible for family assistance.



Qualified wages

Generally, qualified wages are defined as cash wages paid by the employer to a member of a targeted group. The employer's deduction for wages is reduced by the amount of the credit.

For purposes of the credit, generally, wages are defined by reference to the FUTA definition of wages contained in section 3306(b) (without regard to the dollar limitation therein contained). Special rules apply in the case of certain agricultural labor and certain railroad labor.



Calculation of the credit

The credit available to an employer for qualified wages paid to members of all targeted groups except for long-term family assistance recipients equals 40 percent (25 percent for employment of 400 hours or less) of qualified first-year wages. Generally, qualified first-year wages are qualified wages (not in excess of $6,000) attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual began work for the employer. Therefore, the maximum credit per employee is $2,400 (40 percent of the first $6,000 of qualified first-year wages). With respect to qualified summer youth employees, the maximum credit is $1,200 (40 percent of the first $3,000 of qualified first-year wages). Except for long-term family assistance recipients, no credit is allowed for second-year wages.

In the case of long-term family assistance recipients, the credit equals 40 percent (25 percent for employment of 400 hours or less) of $10,000 for qualified first-year wages and 50 percent of the first $10,000 of qualified second-year wages. Generally, qualified second-year wages are qualified wages (not in excess of $10,000) attributable to service rendered by a member of the long-term family assistance category during the one-year period beginning on the day after the one-year period beginning with the day the individual began work for the employer. Therefore, the maximum credit per employee is $9,000 (40 percent of the first $10,000 of qualified first-year wages plus 50 percent of the first $10,000 of qualified second-year wages).

In the case of a qualified veteran who is entitled to compensation for a service connected disability, the credit equals 40 percent of $12,000 of qualified first-year wages. This expanded definition of qualified first-year wages does not apply to the veterans qualified with reference to a food stamp program, as defined under present law.



Certification rules

An individual is not treated as a member of a targeted group unless: (1) on or before the day on which an individual begins work for an employer, the employer has received a certification from a designated local agency that such individual is a member of a targeted group; or (2) on or before the day an individual is offered employment with the employer, a pre-screening notice is completed by the employer with respect to such individual, and not later than the 28th day after the individual begins work for the employer, the employer submits such notice, signed by the employer and the individual under penalties of perjury, to the designated local agency as part of a written request for certification. For these purposes, a pre-screening notice is a document (in such form as the Secretary may prescribe) which contains information provided by the individual on the basis of which the employer believes that the individual is a member of a targeted group.



Minimum employment period

No credit is allowed for qualified wages paid to employees who work less than 120 hours in the first year of employment.



Other rules

The work opportunity tax credit is not allowed for wages paid to a relative or dependent of the taxpayer. No credit is allowed for wages paid to an individual who is a more than fifty-percent owner of the entity. Similarly, wages paid to replacement workers during a strike or lockout are not eligible for the work opportunity tax credit. Wages paid to any employee during any period for which the employer received on-the-job training program payments with respect to that employee are not eligible for the work opportunity tax credit. The work opportunity tax credit generally is not allowed for wages paid to individuals who had previously been employed by the employer. In addition, many other technical rules apply.



Expiration

The work opportunity tax credit is not available for individuals who begin work for an employer after August 31, 2011.


Description of Proposal


The proposal creates a new targeted group for the work opportunity tax credit. That new category is unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010.

An unemployed veteran is defined as an individual certified by the designated local agency as someone who: (1) has served on active duty (other than for training) in the Armed Forces for more than 180 days or who has been discharged or released from active duty in the Armed Forces for a service-connected disability; (2) has been discharged or released from active duty in the Armed Forces during 2008, 2009, or 2010; and (3) has received unemployment compensation under State or Federal law for not less than four weeks during the one-year period ending on the hiring date.

A disconnected youth is defined as an individual certified by the designated local agency as someone: (1) at least age 16 but not yet age 25 on the hiring date; (2) not regularly attending any secondary, technical, or post-secondary school during the six-month period preceding the hiring date; (3) not regularly employed during the six-month period preceding the hiring date; and (4) not readily employable by reason of lacking a sufficient number of skills.


Effective Date


The proposals are effective for individuals who begin work for an employer after December 31, 2008.



5. Extension of election to accelerate AMT and research credits in lieu of bonus depreciation


Present Law


Corporations otherwise eligible for additional first year depreciation under section 168(k) may elect to claim additional research or minimum tax credits in lieu of claiming depreciation under section 168(k) for "eligible qualified property" placed in service after March 31, 2008. 70 A corporation making the election forgoes the depreciation deductions allowable under section 168(k) and instead increases the limitation under section 38(c) on the use of research credits or section 53(c) on the use of minimum tax credits. 71 The increases in the allowable credits are treated as refundable for purposes of this proposal. The depreciation for qualified property is calculated for both regular tax and AMT purposes using the straight-line method in place of the method that would otherwise be used absent the election under this proposal.

The research credit or minimum tax credit limitation is increased by the bonus depreciation amount, which is equal to 20 percent of bonus depreciation 72 for certain eligible qualified property that could be claimed absent an election under this proposal. Generally, eligible qualified property included in the calculation is bonus depreciation property that meets the following requirements: (1) the original use of the property must commence with the taxpayer after March 31, 2008; (2) the taxpayer must purchase the property either (a) after March 31, 2008, and before January 1, 2009, but only if no binding written contract for the acquisition is in effect before April 1, 2008, 73 or (b) pursuant to a binding written contract which was entered into after March 31, 2008, and before January 1, 2009; 74 and (3) the property must be placed in service after March 31, 2008, and before January 1, 2009 (January 1, 2010 for certain longer-lived and transportation property).

The bonus depreciation amount is limited to the lesser of: (1) $30 million, or (2) six percent of the sum of research credit carryforwards from taxable years beginning before January 1, 2006 and minimum tax credits allocable to the adjusted minimum tax imposed for taxable years beginning before January 1, 2006. All corporations treated as a single employer under section 52(a) shall be treated as one taxpayer for purposes of the limitation, as well as for electing the application of this proposal.


Description of Proposal


The proposal generally permits corporations to increase the research credit or minimum tax credit limitation by the bonus depreciation amount with respect to certain property placed in service in 2009 (2010 in the case of certain longer-lived and transportation property).

The proposal applies with respect to extension property, which is defined as property that is eligible qualified property solely because it meets the requirements under the extension of the special allowance for certain property acquired during 2009. 75

The proposal allows a taxpayer that has made an election to increase the research credit or minimum tax credit limitation for its first taxable year ending after March 31, 2008, to have that election not apply to extension property. Further, the proposal allows a taxpayer that has not made an election for its first taxable year ending after March 31, 2008, to elect under this proposal for extension property for its first taxable year ending after December 31, 2008. In the case of a taxpayer electing to increase the research or minimum tax credit for both eligible qualified property and extension property, separate maximum increase amounts are applied to these two groups of property.


Effective Date


The proposal is effective for taxable years ending after December 31, 2008.



6. Deferral of certain income from the discharge of indebtedness


Present Law


In general, gross income includes income that is realized by a debtor from the discharge of indebtedness, subject to certain exceptions for debtors in Title 11 bankruptcy cases, insolvent debtors, certain student loans, certain farm indebtedness, and certain real property business indebtedness. 76 In cases involving discharges of indebtedness that are excluded from gross income under the exceptions to the general rule, taxpayers generally are required to reduce certain tax attributes, including net operating losses, general business credits, minimum tax credits, capital loss carryovers, and basis in property, by the amount of the discharge of indebtedness. 77

The amount of discharge of indebtedness excluded from income by an insolvent debtor not in a Title 11 bankruptcy case cannot exceed the amount by which the debtor is insolvent. In the case of a discharge in bankruptcy or where the debtor is insolvent, any reduction in basis may not exceed the excess of the aggregate bases of properties held by the taxpayer immediately after the discharge over the aggregate of the liabilities of the taxpayer immediately after the discharge. 78

For all taxpayers, the amount of discharge of indebtedness generally is equal to the difference between the adjusted issue price of the debt being cancelled and the amount used to satisfy the debt. These rules generally apply to the exchange of an old obligation for a new obligation, including a modification of indebtedness that is treated as an exchange (a debt-for-debt exchange). Similarly, if a debtor repurchases its debt instrument for an amount that is less than the "adjusted issue price" of such debt instrument, the debtor realizes income equal to the excess of the adjusted issue price over the repurchase price. 79 In addition, indebtedness acquired by a person who bears a relationship to the debtor described in section 267(b) or section 707(b) is treated as if it were acquired by the debtor. 80 Thus, where a debtor's indebtedness is acquired for less than its adjusted issue price by a person related to the debtor (within the meaning of section 267(b) or 707(b)), the debtor recognizes income from the cancellation of indebtedness.


Description of Proposal


The proposal permits a taxpayer to elect to defer income from cancellation of indebtedness recognized by the taxpayer as a result of a repurchase by (1) the taxpayer or (2) a person who bears a relationship to the taxpayer described in section 267(b) or section 707(b), of a "debt instrument" that was issued by the taxpayer. The proposal applies only to repurchases of debt that (1) occur after December 31, 2008, and prior to January 1, 2011, and (2) are repurchases for cash. Thus, for example, the proposal does not apply to a debt-for-debt exchange or to any exchange of the taxpayer's equity for a debt instrument of the taxpayer. For purposes of the proposal, a "debt instrument" is broadly defined to include any bond, debenture, note, certificate or any other instrument or contractual arrangement constituting indebtedness.

A taxpayer electing to defer cancellation of debt from income under the proposal is required to include in income an amount equal to 25 percent of the deferred amount in each of the four taxable years beginning in the year following the year of the repurchase.


Effective Date


The proposal is effective for repurchases after December 31, 2008.



7. Qualified small business stock


Present Law


Under present law, individuals may exclude 50-percent (60-percent for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. The taxable portion of the gain is taxed at a maximum rate of 28 percent. Seven percent (forty-two percent after 2010) of the excluded gain is an alternative minimum tax preference. The amount of gain eligible for the exclusion by an individual with respect to any corporation is the greater of (1) ten times the taxpayer's basis in the stock or (2) $10 million. In order to qualify as a small business, when the stock is issued, the gross assets of the corporation may not exceed $50 million. The corporation also must meet certain active trade or business requirements.


Description of Proposal


Under the proposal, the percentage exclusion for qualified small business stock sold by an individual is increased to 75 percent for stock issued after the date of enactment and before January 1, 2011.


Effective Date


The provision is effective for stock issued after the date of enactment.


IV. MANUFACTURING RECOVERY PROVISIONS




1. Expand industrial development bonds to include creation of intangible property and other modifications


Present Law


Qualified small issue bonds (commonly referred to as "industrial development bonds" or "small issue IDBs") are tax-exempt bonds issued by State and local governments to finance private business manufacturing facilities (including certain directly related and ancillary facilities) or the acquisition of land and equipment by certain farmers. In both instances, these bonds are subject to limits on the amount of financing that may be provided, both for a single borrowing and in the aggregate. In general, no more than $1 million of small-issue bond financing may be outstanding at any time for property of a business (including related parties) located in the same municipality or county. Generally, this $1 million limit may be increased to $10 million if, in addition to outstanding bonds, all other capital expenditures of the business (including related parties) in the same municipality or county are counted toward the limit over a six-year period that begins three years before the issue date of the bonds and ends three years after such date. Outstanding aggregate borrowing is limited to $40 million per borrower (including related parties) regardless of where the property is located.

For bonds issued after September 30, 2009, the Code permits up to $10 million of capital expenditures to be disregarded, in effect increasing from $10 million to $20 million the maximum allowable amount of total capital expenditures by an eligible business in the same municipality or county. However, no more than $10 million of bond financing may be outstanding at any time for property of an eligible business (including related parties) located in the same municipality or county. Other limits (e.g., the $40 million per borrower limit) also continue to apply.

A manufacturing facility is any facility which is used in the manufacturing or production of tangible personal property (including the processing resulting in a change in the condition of such property). Manufacturing facilities include facilities that are directly related and ancillary to a manufacturing facility (as described in the previous sentence) if (1) such facilities are located on the same site as the manufacturing facility and (2) not more than 25 percent of the net proceeds of the issue are used to provide such facilities. 81



Description of Proposal

The proposal expands the definition of manufacturing facilities to mean any facility that is used in the manufacturing, creation, or production of tangible property or intangible property (within the meaning of section 197(d)(1)(C)(iii)). For this purpose, intangible property means any patent, copyright, formula, process, design, knowhow, format, or other similar item.

In addition, the proposal provides that facilities that are functionally related and subordinate to the manufacturing facility are treated as a manufacturing facility and the 25 percent of net proceeds restriction does not apply to such facilities. Functionally related and subordinate facilities must be located on the same site as the manufacturing facility.

The proposal is effective for bonds issued after the date of enactment and before January 1, 2011.


Effective Date


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



2. Credit for investment in advanced energy property


Present Law


An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities. 82 Qualified energy resources comprise wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources.

An income tax credit is also allowed for certain energy property placed in service. Qualifying property includes certain fuel cell property, solar property, geothermal power production property, small wind energy property, combined heat and power system property, and geothermal heat pump property. 83

In addition to these, numerous other credits are available to taxpayers to encourage renewable energy production and energy conservation, including, among others, credits for certain biofuels, plug-in electric vehicles, and energy efficient appliances, and for improvements to heating, air conditioning, and insulation.

No credit is specifically designed under present law to encourage the development of a domestic manufacturing base to support the industries described above.


Description of Proposal


The proposal establishes a 30 percent credit for investment in qualified property used in a qualified advanced energy manufacturing project. A qualified advanced energy manufacturing project is a project that re-equips, expands, or establishes a manufacturing facility for the production of property: (1) designed to be used to produce energy from the sun, wind, or geothermal deposits (within the meaning of section 613(e)(2)); (2) designed to manufacture fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles; (3) designed to manufacture electric grids to support the transmission of intermittent sources of renewable energy; or (4) designed to manufacture equipment for use for carbon capture or sequestration.

Qualified property must be depreciable (tangible) property used in a qualified advanced energy manufacturing project. The construction, reconstruction, or erection of such property must be completed by the taxpayer after October 31, 2008 (or, if purchased, the original use 84 of the property must commence with the taxpayer after such date). Qualified property does not include property designed to manufacture equipment for use in the refining or blending of any transportation fuel. The basis of qualified property must be reduced by the amount of credit received.

Credits are available only for qualified advanced energy manufacturing projects certified by the Secretary of Treasury, in consultation with the Secretary of Energy. The Secretary of Treasury must establish a certification program no later than 180 days after date of enactment, and may allocate up to $2 billion in credits. Each project application must be submitted during the three-year period beginning on the date such certification program is established. An applicant for certification has two years from the date the Secretary accepts the application to provide the Secretary with evidence that the requirements for certification have been met. Upon certification, the applicant has five years from the date of issuance of the certification to place the project in service.


Effective Date


The proposal is effective on date of enactment.


V. ECONOMIC RECOVERY TOOLS




1. Recovery Zone Bonds


Present Law




In general

Under present law, gross income does not include interest on State or local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds the proceeds of which are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds unless the bonds are issued for certain permitted purposes ("qualified private activity bonds") and other Code requirements are met.



Private activity bonds

The Code defines a private activity bond as any bond that satisfies (1) the private business use test and the private security or payment test ("the private business test"); or (2) "the private loan financing test." 85



Private business test

Under the private business test, a bond is a private activity bond if it is part of an issue in which:
1. More than 10 percent of the proceeds of the issue (including use of the bond-financed property) are to be used in the trade or business of any person other than a governmental unit ("private business use"); and

2. More than 10 percent of the payment of principal or interest on the issue is, directly or indirectly, secured by (a) property used or to be used for a private business use or (b) to be derived from payments in respect of property, or borrowed money, used or to be used for a private business use ("private payment test"). 86

A bond is not a private activity bond unless both parts of the private business test (i.e., the private business use test and the private payment test) are met. Thus, a facility that is 100 percent privately used does not cause the bonds financing such facility to be private activity bonds if the bonds are not secured by or paid with private payments. For example, land improvements that benefit a privately-owned factory may be financed with governmental bonds if the debt service on such bonds is not paid by the factory owner or other private parties and such bonds are not secured by the property.



Private loan financing test

A bond issue satisfies the private loan financing test if proceeds exceeding the lesser of $5 million or five percent of such proceeds are used directly or indirectly to finance loans to one or more nongovernmental persons. Private loans include both business and other (e.g., personal) uses and payments to private persons; however, in the case of business uses and payments, all private loans also constitute private business uses and payments subject to the private business test.



Arbitrage restrictions

The exclusion from income for interest on State and local bonds does not apply to any arbitrage bond. 87 An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are reasonably expected to be used (or intentionally are used) to acquire higher yielding investments or to replace funds that are used to acquire higher yielding investments. 88 In general, arbitrage profits may be earned only during specified periods (e.g., defined "temporary periods") before funds are needed for the purpose of the borrowing or on specified types of investments (e.g., "reasonably required reserve or replacement funds"). Subject to limited exceptions, investment profits that are earned during these periods or on such investments must be rebated to the Federal Government.



Qualified private activity bonds

Qualified private activity bonds permit States or local governments to act as conduits providing tax-exempt financing for certain private activities. The definition of qualified private activity bonds includes an exempt facility bond, or qualified mortgage, veterans' mortgage, small issue, redevelopment, 501(c)(3), or student loan bond (sec. 141(e)).

The definition of an exempt facility bond includes bonds issued to finance certain transportation facilities (airports, ports, mass commuting, and high-speed intercity rail facilities); qualified residential rental projects; privately owned and/or operated utility facilities (sewage, water, solid waste disposal, and local district heating and cooling facilities, certain private electric and gas facilities, and hydroelectric dam enhancements); public/private educational facilities; qualified green building and sustainable design projects; and qualified highway or surface freight transfer facilities (sec. 142(a)).

In most cases, the aggregate volume of qualified private activity bonds is restricted by annual aggregate volume limits imposed on bonds issued by issuers within each State ("State volume cap"). For calendar year 2007, the State volume cap, which is indexed for inflation, equals $85 per resident of the State, or $256.24 million, if greater. Exceptions to the State volume cap are provided for bonds for certain governmentally owned facilities (e.g., airports, ports, high-speed intercity rail, and solid waste disposal) and bonds which are subject to separate local, State, or national volume limits (e.g., public/private educational facility bonds, enterprise zone facility bonds, qualified green building bonds, and qualified highway or surface freight transfer facility bonds).

Qualified private activity bonds generally are subject to restrictions on the use of proceeds for the acquisition of land and existing property. In addition, qualified private activity bonds generally are subject to restrictions on the use of proceeds to finance certain specified facilities (e.g., airplanes, skyboxes, other luxury boxes, health club facilities, gambling facilities, and liquor stores), and use of proceeds to pay costs of issuance (e.g., bond counsel and underwriter fees). Small issue and redevelopment bonds also are subject to additional restrictions on the use of proceeds for certain facilities (e.g., golf courses and massage parlors).

Moreover, the term of qualified private activity bonds generally may not exceed 120 percent of the economic life of the property being financed and certain public approval requirements (similar to requirements that typically apply under State law to issuance of governmental debt) apply under Federal law to issuance of private activity bonds.



Qualified tax credit bonds

In lieu of interest, holders of qualified tax credit bonds receive a tax credit that accrues quarterly. The following bonds are qualified tax credit bonds: qualified forestry conservation bonds, new clean renewable energy bonds, qualified energy conservation bonds, and qualified zone academy bonds. 89

Section 54A of the Code sets forth general rules applicable to qualified tax credit bonds. These rules include requirements regarding the expenditure of available project proceeds, reporting, arbitrage, maturity limitations, and financial conflicts of interest, among other special rules.

A taxpayer who holds a qualified tax credit bond on one or more credit allowance dates of the bond during the taxable year shall be allowed a credit against the taxpayer's income tax for the taxable year. In general, the credit amount for any credit allowance date is 25 percent of the annual credit determined with respect to the bond. The annual credit is determined by multiplying the applicable credit rate by the outstanding face amount of the bond. The applicable credit rate for the bond is the rate that the Secretary estimates will permit the issuance of the qualified tax credit bond with a specified maturity or redemption date without discount and without interest cost to the qualified issuer. 90 The Secretary determines credit rates for tax credit bonds based on general assumptions about credit quality of the class of potential eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings.

The credit is included in gross income and, under regulations prescribed by the Secretary, may be stripped. 91

Section 54A of the Code requires that 100 percent of the available project proceeds of qualified tax credit bonds must be used within the three-year period that begins on the date of issuance. Available project proceeds are proceeds from the sale of the bond issue less issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 100 percent of the available project proceeds are used to finance qualified projects during the three-year spending period, bonds will continue to qualify as qualified tax credit bonds if unspent proceeds are used within 90 days from the end of such three-year period to redeem bonds. The three-year spending period may be extended by the Secretary upon the issuer's request demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and the projects will continue to proceed with due diligence.

Qualified tax credit bonds generally are subject to the arbitrage requirements of section 148. However, available project proceeds invested during the three-year spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified tax credit bonds are issued.

The maturity of qualified tax credit bonds is the term that the Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified tax credit bonds are issued.


Description of Proposal




In general

The proposal permits an issuer to designate one or more areas as recovery zones. The area must have significant poverty, unemployment, or rate of home foreclosures, or be any area for which a designation as an empowerment zone or renewal community is in effect. Issuers may issue recovery zone economic development bonds and recovery zone facility bonds with respect to these zones.

There is a national recovery zone economic development bond limitation of $10 billion. In addition, there is a separate national recovery zone facility bond limitation of $15 billion. The Secretary is to separately allocate the bond limitations among the States in the proportion that each State's employment decline bears to the aggregate 2008 State employment declines for all States. In turn each State is to reallocate its allocation among the counties (parishes) and large municipalities in such State in the proportion that each such county or municipality's 2008 employment decline bears to the aggregate employment declines for all counties and municipalities in such State. In calculating the local employment decline with respect to a county, the portion of such decline attributable to a large municipality is disregarded for purposes of determining the county's portion of the State employment decline and is attributable to the large municipality only.

In making allocations to the States, the Secretary shall ensure that the minimum allocation for each State does not fall below two percent of the respective national bond limitation.

For purposes of the proposal "2008 State employment decline" means, with respect to any State, the excess (if any) of (i) the number of individuals employed in such State as determined for December 2007, over (ii) the number of individuals employed in such State as determined for December 2008. The term "large municipality" means a municipality with a population of more than 100,000.



Recovery Zone Economic Development Bonds

New section 54AA(h) of the proposal creates a special rule for qualified bonds (a type of taxable governmental bond) issued before January 1, 2011, that entitles the issuer of such bonds to receive an advance tax credit equal to 35 percent of the interest payable on an interest payment date. 92 For taxable governmental bonds that are designated recovery zone economic development bonds, the applicable percentage is 40 percent.

A recovery zone economic development bond is a taxable governmental bond issued as part of an issue if 100 percent of the available project proceeds of such issue are to be used for one or more qualified economic development purposes and the issuer designates such bond for purposes of this section. A qualified economic development purpose means expenditures for purposes of promoting development or other economic activity in a recovery zone, including (1) capital expenditures paid or incurred with respect to property located in such zone, (2) expenditures for public infrastructure and construction of public facilities located in a recovery zone.

The aggregate face amount of bonds which may be designated by any issuer cannot exceed the amount of the recovery zone economic development bond limitation allocated to such issuer.



Recovery Zone Facility Bonds

The proposal creates a new category of exempt facility bonds, "recovery zone facility bonds." A recovery zone facility bond means any bond issued as part of an issue if: (1) 95 percent or more of the net proceeds of such issue are to be used for recovery zone property and (2) such bond is issued before January 1, 2011, and (3) the issuer designates such bond as a recovery zone facility bond. The aggregate face amount of bonds which may be designated by any issuer cannot exceed the amount of the recovery zone facility bond limitation allocated to such issuer.

Under the proposal, the term "recovery zone property" means any property subject to depreciation to which section 168 applies (or would apply but for section 179) if (1) such property was acquired by the taxpayer by purchase after the date on which the designation of the recovery zone took effect; (2) the original use of such property in the recovery zone commences with the taxpayer; and (3) substantially all of the use of such property is in the recovery zone and is in the active conduct of a qualified business by the taxpayer in such zone. The term "qualified business" means any trade or business except that the rental to others of real property located in a recovery zone shall be treated as a qualified business only if the property is not residential rental property (as defined in section 168(e)(2)) and does not include any trade or business consisting of the operation of any facility described in section 144(c)(6)(B) (i.e., any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal purpose of which is the sale of alcoholic beverages for consumption off premises).

Subject to the following exceptions and modifications, issuance of recovery zone facility bonds is subject to the general rules applicable to issuance of qualified private activity bonds:
1. Issuance of the bonds is not subject to the aggregate annual State private activity bond volume limits (sec. 146);

2. The restriction on acquisition of existing property does not apply (sec. 147(d));


Effective Date


The proposal is effective for obligations issued after the date of enactment.



2. Tribal Economic Development Bonds


Present Law


Under present law, gross income does not include interest on State or local bonds. 93 State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds the proceeds of which are primarily used to finance governmental facilities or the debt is repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons. For these purposes, the term "nongovernmental person" includes the Federal government and all other individuals and entities other than States or local governments. 94 Interest on private activity bonds is taxable, unless the bonds are issued for certain purposes permitted by the Code and other requirements are met. 95

Although not States or subdivisions of States, Indian tribal governments are provided with a tax status similar to State and local governments for specified purposes under the Code. 96 Among the purposes for which a tribal government is treated as a State is the issuance of tax-exempt bonds. Under section 7871(c), tribal governments are authorized to issue tax-exempt bonds only if substantially all of the proceeds are used for essential governmental functions. 97 The term essential governmental function does not include any function that is not customarily performed by State and local governments with general taxing powers. Section 7871(c) further prohibits Indian tribal governments from issuing tax-exempt private activity bonds (as defined in section 141(a) of the Code) with the exception of certain bonds for manufacturing facilities.


Description of Proposal




Tribal Economic Development Bonds

The proposal allows Indian tribal governments to issue "tribal economic development bonds." There is a national bond limitation of $2 billion, to be allocated as the Secretary determines appropriate, in consultation with the Secretary of the Interior. Tribal economic development bonds issued by an Indian tribal government are treated as if such bond were issued by a State except that section 146 (relating to State volume limitations) does not apply.

A tribal economic development bond is any bond issued by an Indian tribal government (1) the interest on which would be tax-exempt if issued by a State or local government but would be taxable under section 7871(c), and (2) that is designated by the Indian tribal government as a tribal economic development bond. The aggregate face amount of bonds that may be designated by any Indian tribal government cannot exceed the amount of national tribal economic development bond limitation allocated to such government.

Tribal economic development bonds cannot be used to finance any portion of a building in which class II or class III gaming (as defined in section 4 of the Indian Gaming Regulatory Act) is conducted, or housed, or any other property used in the conduct of such gaming. Nor can tribal economic development bonds be used to finance any facility located outside of the Indian reservation.



Treasury Study

The proposal requires that the Treasury Department study the effects of tribal economic development bonds. One year after the date of enactment, a report is to be submitted to Congress providing the results of such study along with any recommendations, including whether the restrictions of section 7871(c) should be eliminated or otherwise modified.


Effective Date


The proposal applies to obligations issued after the date of enactment.



3. Extend and modify the new markets tax credit


Present Law


Section 45D provides a new markets tax credit for qualified equity investments made to acquire stock in a corporation, or a capital interest in a partnership, that is a qualified community development entity ("CDE"). 98 The amount of the credit allowable to the investor (either the original purchaser or a subsequent holder) is (1) a five-percent credit for the year in which the equity interest is purchased from the CDE and for each of the following two years, and (2) a six-percent credit for each of the following four years. The credit is determined by applying the applicable percentage (five or six percent) to the amount paid to the CDE for the investment at its original issue, and is available for a taxable year to the taxpayer who holds the qualified equity investment on the date of the initial investment or on the respective anniversary date that occurs during the taxable year. The credit is recaptured if, at any time during the seven-year period that begins on the date of the original issue of the qualified equity investment, the issuing entity ceases to be a qualified CDE, the proceeds of the investment cease to be used as required, or the equity investment is redeemed.

A qualified CDE is any domestic corporation or partnership: (1) whose primary mission is serving or providing investment capital for low-income communities or low-income persons; (2) that maintains accountability to residents of low-income communities by providing them with representation on any governing board of or any advisory board to the CDE; and (3) that is certified by the Secretary as being a qualified CDE. A qualified equity investment means stock (other than nonqualified preferred stock) in a corporation or a capital interest in a partnership that is acquired directly from a CDE for cash, and includes an investment of a subsequent purchaser if such investment was a qualified equity investment in the hands of the prior holder. Substantially all of the investment proceeds must be used by the CDE to make qualified low-income community investments. For this purpose, qualified low-income community investments include: (1) capital or equity investments in, or loans to, qualified active low-income community businesses; (2) certain financial counseling and other services to businesses and residents in low-income communities; (3) the purchase from another CDE of any loan made by such entity that is a qualified low-income community investment; or (4) an equity investment in, or loan to, another CDE.

A "low-income community" is a population census tract with either (1) a poverty rate of at least 20 percent or (2) median family income which does not exceed 80 percent of the greater of metropolitan area median family income or statewide median family income (for a non-metropolitan census tract, does not exceed 80 percent of statewide median family income). In the case of a population census tract located within a high migration rural county, low-income is defined by reference to 85 percent (rather than 80 percent) of statewide median family income. For this purpose, a high migration rural county is any county that, during the 20-year period ending with the year in which the most recent census was conducted, has a net out-migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of such period.

The Secretary has the authority to designate "targeted populations" as low-income communities for purposes of the new markets tax credit. For this purpose, a "targeted population" is defined by reference to section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. sec. 4702(20)) to mean individuals, or an identifiable group of individuals, including an Indian tribe, who (A) are low-income persons; or (B) otherwise lack adequate access to loans or equity investments. Under such Act, "lowincome" means (1) for a targeted population within a metropolitan area, less than 80 percent of the area median family income; and (2) for a targeted population within a non-metropolitan area, less than the greater of 80 percent of the area median family income or 80 percent of the statewide non-metropolitan area median family income. 99 Under such Act, a targeted population is not required to be within any census tract. In addition, a population census tract with a population of less than 2,000 is treated as a low-income community for purposes of the credit if such tract is within an empowerment zone, the designation of which is in effect under section 1391, and is contiguous to one or more low-income communities.

A qualified active low-income community business is defined as a business that satisfies, with respect to a taxable year, the following requirements: (1) at least 50 percent of the total gross income of the business is derived from the active conduct of trade or business activities in any low-income community; (2) a substantial portion of the tangible property of such business is used in a low-income community; (3) a substantial portion of the services performed for such business by its employees is performed in a low-income community; and (4) less than five percent of the average of the aggregate unadjusted bases of the property of such business is attributable to certain financial property or to certain collectibles.

The maximum annual amount of qualified equity investments is capped at $3.5 billion per year for calendar years 2006 through 2009. Lower caps applied for calendar years 2001 through 2005.


Description of Proposal


For calendar years 2008 and 2009, the proposal increases the maximum amount of qualified equity investments by $1.5 billion (to $5 billion for each year). The proposal requires that the additional amount for 2008 be allocated to qualified CDEs that submitted an allocation application with respect to calendar year 2008 and either (1) did not receive an allocation for such calendar year, or (2) received an allocation for such calendar year in an amount less than the amount requested in the allocation application. The proposal also provides alternative minimum tax relief for equity investment allocations subject to the 2009 annual limitation.


Effective Date


The proposal is effective for taxable years ending after the date of enactment and to carrybacks of such credits.


VI. INFRASTRUCTURE FINANCING TOOLS




1. De minimis safe harbor exception for tax-exempt interest expense of financial institutions and modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions


Present Law


Present law disallows a deduction for interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is exempt from tax. 100 In general, an interest deduction is disallowed only if the taxpayer has a purpose of using borrowed funds to purchase or carry tax-exempt obligations; a determination of the taxpayer's purpose in borrowing funds is made based on all of the facts and circumstances. 101


Two-percent rule for individuals and certain nonfinancial corporations


In the absence of direct evidence linking an individual taxpayer's indebtedness with the purchase or carrying of tax-exempt obligations, the Internal Revenue Service takes the position that it ordinarily will not infer that a taxpayer's purpose in borrowing money was to purchase or carry tax-exempt obligations if the taxpayer's investment in tax-exempt obligations is "insubstantial." 102 An individual's holdings of tax-exempt obligations are presumed to be insubstantial if during the taxable year the average adjusted basis of the individual's tax-exempt obligations is two percent or less of the average adjusted basis of the individual's portfolio investments and assets held by the individual in the active conduct of a trade or business.

Similarly, in the case of a corporation that is not a financial institution or a dealer in tax-exempt obligations, where there is no direct evidence of a purpose to purchase or carry tax-exempt obligations, the corporation's holdings of tax-exempt obligations are presumed to be insubstantial if the average adjusted basis of the corporation's tax-exempt obligations is two percent or less of the average adjusted basis of all assets held by the corporation in the active conduct of its trade or business.



Financial institutions

In the case of a financial institution, the Code generally disallows that portion of the taxpayer's interest expense that is allocable to tax-exempt interest. 103 The amount of interest that is disallowed is an amount which bears the same ratio to such interest expense as the taxpayer's average adjusted bases of tax-exempt obligations acquired after August 7, 1986, bears to the average adjusted bases for all assets of the taxpayer.



Exception for certain obligations of qualified small issuers

The general rule in section 265(b), denying financial institutions' interest expense deductions allocable to tax-exempt obligations, does not apply to "qualified tax-exempt obligations." 104 Instead, as discussed in the next section, only 20 percent of the interest expense allocable to "qualified tax-exempt obligations" is disallowed. 105 A "qualified tax-exempt obligation" is a tax-exempt obligation that (1) is issued after August 7, 1986, by a qualified small issuer, (2) is not a private activity bond, and (3) is designated by the issuer as qualifying for the exception from the general rule of section 265(b).

A "qualified small issuer" is an issuer that reasonably anticipates that the amount of tax-exempt obligations that it will issue during the calendar year will be $10 million or less. 106 The Code specifies the circumstances under which an issuer and all subordinate entities are aggregated. 107 For purposes of the $10 million limitation, an issuer and all entities that issue obligations on behalf of such issuer are treated as one issuer. All obligations issued by a subordinate entity are treated as being issued by the entity to which it is subordinate. An entity formed (or availed of) to avoid the $10 million limitation and all entities benefiting from the device are treated as one issuer.

Composite issues (i.e., combined issues of bonds for different entities) qualify for the "qualified tax-exempt obligation" exception only if the requirements of the exception are met with respect to (1) the composite issue as a whole (determined by treating the composite issue as a single issue) and (2) each separate lot of obligations that is part of the issue (determined by treating each separate lot of obligations as a separate issue). 108 Thus a composite issue may qualify for the exception only if the composite issue itself does not exceed $10 million, and if each issuer benefitting from the composite issue reasonably anticipates that it will not issue more than $10 million of tax-exempt obligations during the calendar year, including through the composite arrangement.



Treatment of financial institution preference items

Section 291(a)(3) reduces by 20 percent the amount allowable as a deduction with respect to any financial institution preference item. Financial institution preference items include interest on debt to carry tax-exempt obligations acquired after December 31, 1982, and before August 8, 1986. 109 Section 265(b)(3) treats qualified tax-exempt obligations as if they were acquired on August 7, 1986. As a result, the amount allowable as a deduction by a financial institution with respect to interest incurred to carry a qualified tax-exempt obligation is reduced by 20 percent.


Description of Proposal




Two-percent safe harbor for financial institutions

The proposal provides that tax-exempt obligations issued during 2009 or 2010 and held by a financial institution, in an amount not to exceed two percent of the adjusted basis of the financial institution's assets, are not taken into account for the purpose of determining the portion of the financial institution's interest expense subject to the pro rata interest disallowance rule of section 265(b). For purposes of this rule, a refunding bond (whether a current or advance refunding) is treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).

The proposal also amends section 291(e) to provide that tax-exempt obligations issued during 2009 and 2010, and not taken into account for purposes of the calculation of a financial institution's interest expense subject to the pro rata interest disallowance rule, are treated as having been acquired on August 7, 1986. As a result, such obligations are financial institution preference items, and the amount allowable as a deduction by a financial institution with respect to interest incurred to carry such obligations is reduced by 20 percent.



Modifications to qualified small issuer exception

With respect to tax-exempt obligations issued during 2009 and 2010, the proposal increases from $10 million to $30 million the annual limit for qualified small issuers.

In addition, in the case of "qualified financing issue" issued in 2009 or 2010, the proposal applies the $30 million annual volume limitation at the borrower level (rather than at the level of the pooled financing issuer). Thus, for the purpose of applying the requirements of the section 265(b)(3) qualified small issuer exception, the portion of the proceeds of a qualified financing issue that are loaned to a "qualified borrower" that participates in the issue are treated as a separate issue with respect to which the qualified borrower is deemed to be the issuer.

A "qualified financing issue" is any composite, pooled or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to one or more ultimate borrowers all of whom are qualified borrowers. A "qualified borrower" means (1) a State or political subdivision of a State or (2) an organization described in section 501(c)(3) and exempt from tax under section 501(a). Thus, for example, a $100 million pooled financing issue that was issued in 2009 could qualify for the section 265(b)(3) exception if the proceeds of such issue were used to make four equal loans of $25 million to four qualified borrowers. However, if (1) more than $30 million were loaned to any qualified borrower, (2) any borrower were not a qualified borrower, or (3) any borrower would, if it were the issuer of a separate issue in an amount equal to the amount loaned to such borrower, fail to meet any of the other requirements of section 265(b)(3), the entire $100 million pooled financing issue would fail to qualify for the exception.

For purposes of determining whether an issuer meets the requirements of the small issuer exception, qualified 501(c)(3) bonds issued in 2009 or 2010 are treated as if they were issued by the 501(c)(3) organization for whose benefit they were issued (and not by the actual issuer of such bonds). In addition, in the case of an organization described in section 501(c)(3) and exempt from taxation under section 501(a), requirements for "qualified financing issues" shall be applied as if the section 501(c)(3) organization were the issuer. Thus, in any event, an organization described in section 501(c)(3) and exempt from taxation under section 501(a) shall be limited to the $30 million per issuer cap for qualified tax exempt obligations described in section 265(b)(3).


Effective Date


The proposals are effective for obligations issued after December 31, 2008.



2. Repeal of alternative minimum tax limitations on tax exempt bonds issued in 2009 and 2010


Present Law


Present law imposes an alternative minimum tax ("AMT") on individuals and corporations. AMT is the amount by which the tentative minimum tax exceeds the regular income tax. The tentative minimum tax is computed based upon a taxpayer's alternative minimum taxable income ("AMTI"). AMTI is the taxpayer's taxable income modified to take into account certain preferences and adjustments. One of the preference items is tax-exempt interest on certain tax-exempt bonds issued for private activities (sec. 57(a)(5)). Also, in the case of a corporation, an adjustment based on current earnings is determined, in part, by taking into account 75 percent of items, including tax-exempt interest, that are excluded from taxable income but included in the corporation's earnings and profits (sec. 56(g)(4)(B)).


Description of Proposal


The proposal provides that tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference for purposes of the alternative minimum tax and interest on tax exempt bonds issued in 2009 and 2010 is not included in the corporate adjustment based on current earnings. For these purposes, a refunding bond is treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).




Effective Date


The proposal applies to interest on bonds issued after December 31, 2008.



3. One-year delay of withholding on government contractors


Present law


For payments made after December 31, 2010, the Code imposes a withholding requirement at a three-percent rate on certain payments to persons providing property or services made by the Government of the United States, every State, every political subdivision thereof, and every instrumentality of the foregoing (including multi-State agencies). The withholding requirement applies regardless of whether the government entity making such payment is the recipient of the property or services. Political subdivisions of States (or any instrumentality thereof) with less than $100 million of annual expenditures for property or services that would otherwise be subject to withholding under this proposal are exempt from the withholding requirement.

Payments subject to the three-percent withholding requirement include any payment made in connection with a government voucher or certificate program which functions as a payment for property or services. For example, payments to a commodity producer under a government commodity support program are subject to the withholding requirement. The proposal imposes information reporting requirements on the payments that are subject to withholding under the proposal.

The three-percent withholding requirement does not apply to any payments made through a Federal, State, or local government public assistance or public welfare program for which eligibility is determined by a needs or income test. The three-percent withholding requirement also does not apply to payments of wages or to any other payment with respect to which mandatory (e.g., U.S.-source income of foreign taxpayers) or voluntary (e.g., unemployment benefits) withholding applies under present law. Although the proposal applies to payments that are potentially subject to backup withholding under section 3406, it does not apply to those payments from which amounts are actually being withheld under backup withholding rules.

The three-percent withholding requirement also does not apply to the following: payments of interest; payments for real property; payments to tax-exempt entities or foreign governments; intra-governmental payments; payments made pursuant to a classified or confidential contract (as defined in section 6050M(e)(3)), and payments to government employees that are not otherwise excludable from the new withholding proposal with respect to the employees' services as employees.


Description of Proposal


The proposal delays the implementation of the three percent withholding requirement by one year to apply to payments after December 31, 2011.


Effective Date


The proposal is effective on the date of enactment.



4. Qualified school construction bonds


Present Law




Tax-exempt bonds

Interest on State and local governmental bonds generally is excluded from gross income for Federal income tax purposes if the proceeds of the bonds are used to finance direct activities of these governmental units or if the bonds are repaid with revenues of the governmental units. These can include tax-exempt bonds which finance public schools. 110 An issuer must file with the IRS certain information about the bonds issued in order for that bond issue to be tax-exempt. 111 Generally, this information return is required to be filed no later than the 15th day of the second month after the close of the calendar quarter in which the bonds were issued.

The tax exemption for State and local bonds does not apply to any arbitrage bond. 112 An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are reasonably expected to be used (or intentionally are used) to acquire higher yielding investments or to replace funds that are used to acquire higher yielding investments. 113 In general, arbitrage profits may be earned only during specified periods (e.g., defined "temporary periods") before funds are needed for the purpose of the borrowing or on specified types of investments (e.g., "reasonably required reserve or replacement funds"). Subject to limited exceptions, investment profits that are earned during these periods or on such investments must be rebated to the Federal Government.



Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States and local governments were given the authority to issue "qualified zone academy bonds." 114 A total of $400 million of qualified zone academy bonds is authorized to be issued annually in calendar years 1998 through 2009. The $400 million aggregate bond cap is allocated each year to the States according to their respective populations of individuals below the poverty line. Each State, in turn, allocates the credit authority to qualified zone academies within such State.

A taxpayer holding a qualified zone academy bond on the credit allowance date is entitled to a credit. The credit is includible in gross income (as if it were a taxable interest payment on the bond), and may be claimed against regular income tax and alternative minimum tax liability.

The Treasury Department sets the credit rate at a rate estimated to allow issuance of qualified zone academy bonds without discount and without interest cost to the issuer. 115 The Secretary determines credit rates for tax credit bonds based on general assumptions about credit quality of the class of potential eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings. The maximum term of the bond is determined by the Treasury Department, so that the present value of the obligation to repay the principal on the bond is 50 percent of the face value of the bond.

"Qualified zone academy bonds" are defined as any bond issued by a State or local government, provided that (1) at least 95 percent of the proceeds are used for the purpose of renovating, providing equipment to, developing course materials for use at, or training teachers and other school personnel in a "qualified zone academy" and (2) private entities have promised to contribute to the qualified zone academy certain equipment, technical assistance or training, employee services, or other property or services with a value equal to at least 10 percent of the bond proceeds.

A school is a "qualified zone academy" if (1) the school is a public school that provides education and training below the college level, (2) the school operates a special academic program in cooperation with businesses to enhance the academic curriculum and increase graduation and employment rates, and (3) either (a) the school is located in an empowerment zone or enterprise community designated under the Code, or (b) it is reasonably expected that at least 35 percent of the students at the school will be eligible for free or reduced-cost lunches under the school lunch program established under the National School Lunch Act.

The arbitrage requirements which generally apply to interest-bearing tax-exempt bonds also generally apply to qualified zone academy bonds. In addition, an issuer of qualified zone academy bonds must reasonably expect to and actually spend 100 percent or more of the proceeds of such bonds on qualified zone academy property within the three years period that begins on the date of issuance. To the extent less than 100 percent of the proceeds are used to finance qualified zone academy property during the three years spending period, bonds will continue to qualify as qualified zone academy bonds if unspent proceeds are used within 90 days from the end of such three years period to redeem any nonqualified bonds. The three years spending period may be extended by the Secretary if the issuer establishes that the failure to meet the spending requirement is due to reasonable cause and the related purposes for issuing the bonds will continue to proceed with due diligence.

Two special arbitrage rules apply to qualified zone academy bonds. First, available project proceeds invested during the three-year period beginning on the date of issue are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). Available project proceeds are proceeds from the sale of an issue of qualified zone academy bonds, less issuance costs (not to exceed two percent) and any investment earnings on such proceeds. Thus, available project proceeds invested during the three-year spending period may be invested at unrestricted yields, but the earnings on such investments must be spent on qualified zone academy property. Second, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified zone academy bonds are issued.

Issuers of qualified zone academy bonds are required to report issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds.


Description of Proposal




In general

The proposal creates a new category of tax-credit bonds, qualified school construction bonds. Qualified school construction bonds must meet three requirements: (1) 100 percent of the available project proceeds of the bond issue is used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a bond-financed facility is to be constructed; (2) the bond is issued by a State or local government within which such school is located; and (3) the issuer designates such bonds as a qualified school construction bond.


National limitation


There is a national limitation on qualified school construction bonds of $5 billion for calendar years 2009 and 2010, respectively. Allocations of the national limitation of qualified school construction bonds are divided between the States and certain large school districts. The States receive 60 percent of the national limitation for a calendar year and the remaining 40 percent of the national limitation for a calendar year is allocated to certain of the largest school districts.


Allocation to the States


Generally allocations are made to the States under the 60 percent allocation according to their respective populations of children aged five through seventeen. However, the Secretary of the Treasury shall adjust the annual allocations among the States to ensure that for each State the sum of its allocations under the 60 percent allocation plus any allocations to large educational agencies within the States is not less than a minimum percentage. A State's minimum percentage for a calendar year is a product of 1.68 and the minimum percentage described in section 1124(d) of the Elementary and Secondary Education Act of 1965 for such State for the most recent fiscal year ending before such calendar year.

For allocation purposes, a State includes the District of Columbia and any possession of the United States. The proposal provides a special allocation for possessions of the United States other than Puerto Rico under the 60 percent share of the national limitation for States. Under this special rule an allocation to a possession other than Puerto Rico is made on the basis of the respective populations of individuals below the poverty line (as defined by the Office of Management and Budget) rather than respective populations of children aged five through seventeen. This special allocation reduces the State allocation share of the national limitation otherwise available for allocation among the States. Under another special rule the Secretary of the Interior may allocate $200 million of school construction bonds for 2009 and 2010, respectively to Indian schools. This special allocation for Indian schools is to be used for purposes of the construction, rehabilitation, and repair of schools funded by the Bureau of Indian Affairs. For purposes of such allocations Indian tribal governments are qualified issuers. The special allocation for Indian schools does not reduce the State allocation share of the national limitation otherwise available for allocation among the States.

If an amount allocated under this allocation to the States is unused for a calendar year it may be carried forward by the State to the next calendar year.



Allocation to large school districts

The remaining 40 percent of the national limitation for a calendar year is allocated by the Secretary of the Treasury among local educational agencies which are large local educational agencies for such year. This allocation is made in proportion to the respective amounts each agency received for Basic Grants under subpart 2 of Part A of Title I of the Elementary and Secondary Education Act of 1965 for the most recent fiscal year ending before such calendar year. Any unused allocation of any agency within a State may be allocated by the agency to such State. With respect to a calendar year, the term large local educational agency means: any local educational agency if such agency is: (1) among the 100 local educational agencies with the largest numbers of children aged 5 through 17 from families living below the poverty level, or (2) one of not more than 25 local educational agencies (other than in 1, immediately above) that the Secretary of Education determines are in particular need of assistance, based on a low level of resources for school construction, a high level of enrollment growth, or other such factors as the Secretary of Education deems appropriate. If any amount allocated to large local educational agency is unused for a calendar year the agency may reallocate such amount to the State in which the agency is located.

The proposal makes qualified school construction bonds a type of qualified tax credit bond for purposes of section 54A of the Code. In addition, qualified school construction bonds may be issued by Indian tribal governments only to the extent such bonds are issued for purposes that satisfy the present law requirements for tax-exempt bonds issued by Indian tribal governments (i.e., essential governmental functions and certain manufacturing purposes).

The proposal requires 100 percent of the available project proceeds of qualified school construction bonds to be used within the three-year period that begins on the date of issuance. Available project proceeds are proceeds from the sale of the issue less issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 100 percent of the available project proceeds are used to finance qualified purposes during the three-year spending period, bonds will continue to qualify as qualified school construction bonds if unspent proceeds are used within 90 days from the end of such three-year period to redeem bonds. The three-year spending period may be extended by the Secretary upon the issuer's request demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and the projects will continue to proceed with due diligence.

Qualified school construction bonds generally are subject to the arbitrage requirements of section 148. However, available project proceeds invested during the three-year spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified school construction bonds are issued.

The maturity of qualified school construction bonds is the term that the Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified school construction bonds are issued.

As with present-law tax credit bonds, the taxpayer holding qualified school construction bonds on a credit allowance date is entitled to a tax credit. The credit rate on the bonds is set by the Secretary at a rate that is 100 percent of the rate that would permit issuance of such bonds without discount and interest cost to the issuer. The amount of the tax credit is determined by multiplying the bond's credit rate by the face amount on the holder's bond. The credit accrues quarterly, is includible in gross income (as if it were an interest payment on the bond), and can be claimed against regular income tax liability and alternative minimum tax liability. Unused credits may be carried forward to succeeding taxable years. In addition, credits may be separated from the ownership of the underlying bond similar to how interest coupons can be stripped for interest-bearing bonds.

Issuers of qualified school construction bonds are required to certify that the financial disclosure requirements that applicable State and local law requirements governing conflicts of interest are satisfied with respect to such issue, as well as any other additional conflict of interest rules prescribed by the Secretary with respect to any Federal, State, or local government official directly involved with the issuance of qualified school construction bonds.


Effective Date


The proposal is effective for bonds issued after December 31, 2008.



5. Extend and expand qualified zone academy bonds


Present Law




Tax-exempt bonds

Interest on State and local governmental bonds generally is excluded from gross income for Federal income tax purposes if the proceeds of the bonds are used to finance direct activities of these governmental units or if the bonds are repaid with revenues of the governmental units. These can include tax-exempt bonds which finance public schools. 116 An issuer must file with the IRS certain information about the bonds issued in order for that bond issue to be tax-exempt. 117 Generally, this information return is required to be filed no later the 15th day of the second month after the close of the calendar quarter in which the bonds were issued.

The tax exemption for State and local bonds does not apply to any arbitrage bond. 118 An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are reasonably expected to be used (or intentionally are used) to acquire higher yielding investments or to replace funds that are used to acquire higher yielding investments. 119 In general, arbitrage profits may be earned only during specified periods (e.g., defined "temporary periods") before funds are needed for the purpose of the borrowing or on specified types of investments (e.g., "reasonably required reserve or replacement funds"). Subject to limited exceptions, investment profits that are earned during these periods or on such investments must be rebated to the Federal Government.



Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States and local governments were given the authority to issue "qualified zone academy bonds." 120 A total of $400 million of qualified zone academy bonds is authorized to be issued annually in calendar years 1998 through 2009. The $400 million aggregate bond cap is allocated each year to the States according to their respective populations of individuals below the poverty line. Each State, in turn, allocates the credit authority to qualified zone academies within such State.

A taxpayer holding a qualified zone academy bond on the credit allowance date is entitled to a credit. The credit is includible in gross income (as if it were a taxable interest payment on the bond), and may be claimed against regular income tax and alternative minimum tax liability.

The Treasury Department sets the credit rate at a rate estimated to allow issuance of qualified zone academy bonds without discount and without interest cost to the issuer. 121 The Secretary determines credit rates for tax credit bonds based on general assumptions about credit quality of the class of potential eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings. The maximum term of the bond is determined by the Treasury Department, so that the present value of the obligation to repay the principal on the bond is 50 percent of the face value of the bond.

"Qualified zone academy bonds" are defined as any bond issued by a State or local government, provided that (1) at least 95 percent of the proceeds are used for the purpose of renovating, providing equipment to, developing course materials for use at, or training teachers and other school personnel in a "qualified zone academy" and (2) private entities have promised to contribute to the qualified zone academy certain equipment, technical assistance or training, employee services, or other property or services with a value equal to at least 10 percent of the bond proceeds.

A school is a "qualified zone academy" if (1) the school is a public school that provides education and training below the college level, (2) the school operates a special academic program in cooperation with businesses to enhance the academic curriculum and increase graduation and employment rates, and (3) either (a) the school is located in an empowerment zone or enterprise community designated under the Code, or (b) it is reasonably expected that at least 35 percent of the students at the school will be eligible for free or reduced-cost lunches under the school lunch program established under the National School Lunch Act.

The arbitrage requirements which generally apply to interest-bearing tax-exempt bonds also generally apply to qualified zone academy bonds. In addition, an issuer of qualified zone academy bonds must reasonably expect to and actually spend 100 percent or more of the proceeds of such bonds on qualified zone academy property within the three-year period that begins on the date of issuance. To the extent less than 100 percent of the proceeds are used to finance qualified zone academy property during the three-year spending period, bonds will continue to qualify as qualified zone academy bonds if unspent proceeds are used within 90 days from the end of such three-year period to redeem any nonqualified bonds. The three-year spending period may be extended by the Secretary if the issuer establishes that the failure to meet the spending requirement is due to reasonable cause and the related purposes for issuing the bonds will continue to proceed with due diligence.

Two special arbitrage rules apply to qualified zone academy bonds. First, available project proceeds invested during the three-year period beginning on the date of issue are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). Available project proceeds are proceeds from the sale of an issue of qualified zone academy bonds, less issuance costs (not to exceed two percent) and any investment earnings on such proceeds. Thus, available project proceeds invested during the three-year spending period may be invested at unrestricted yields, but the earnings on such investments must be spent on qualified zone academy property. Second, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified zone academy bonds are issued.

Issuers of qualified zone academy bonds are required to report issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds.


Description of Proposal


The proposal extends and expands the present-law qualified zone academy bond program. The proposal authorizes issuance of up to $1.4 billion of qualified zone academy bonds annually for 2009 and 2010, respectively.


Effective Date


The proposal applies to bonds issued after December 31, 2008.



6. Build America Bonds


Present Law




In general

Under present law, gross income does not include interest on State or local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds the proceeds of which are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes ("qualified private activity bonds") and other Code requirements are met.



Private activity bonds

The Code defines a private activity bond as any bond that satisfies (1) the private business use test and the private security or payment test ("the private business test"); or (2) "the private loan financing test." 122



Private business test

Under the private business test, a bond is a private activity bond if it is part of an issue in which:
1. More than 10 percent of the proceeds of the issue (including use of the bond-financed property) are to be used in the trade or business of any person other than a governmental unit ("private business use"); and

2. More than 10 percent of the payment of principal or interest on the issue is, directly or indirectly, secured by (a) property used or to be used for a private business use or (b) to be derived from payments in respect of property, or borrowed money, used or to be used for a private business use ("private payment test"). 123

A bond is not a private activity bond unless both parts of the private business test (i.e., the private business use test and the private payment test) are met. Thus, a facility that is 100 percent privately used does not cause the bonds financing such facility to be private activity bonds if the bonds are not secured by or paid with private payments. For example, land improvements that benefit a privately-owned factory may be financed with governmental bonds if the debt service on such bonds is not paid by the factory owner or other private parties.


Private loan financing test


A bond issue satisfies the private loan financing test if proceeds exceeding the lesser of $5 million or five percent of such proceeds are used directly or indirectly to finance loans to one or more nongovernmental persons. Private loans include both business and other (e.g., personal) uses and payments by private persons; however, in the case of business uses and payments, all private loans also constitute private business uses and payments subject to the private business test.



Arbitrage restrictions

The exclusion from income for interest on State and local bonds does not apply to any arbitrage bond. 124 An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are reasonably expected to be used (or intentionally are used) to acquire higher yielding investments or to replace funds that are used to acquire higher yielding investments. 125 In general, arbitrage profits may be earned only during specified periods (e.g., defined "temporary periods") before funds are needed for the purpose of the borrowing or on specified types of investments (e.g., "reasonably required reserve or replacement funds"). Subject to limited exceptions, investment profits that are earned during these periods or on such investments must be rebated to the Federal Government.



Qualified tax credit bonds

In lieu of interest, holders of qualified tax credit bonds receive a tax credit that accrues quarterly. The following bonds are qualified tax credit bonds: qualified forestry conservation bonds, new clean renewable energy bonds, qualified energy conservation bonds, and qualified zone academy bonds. 126

Section 54A of the Code sets forth general rules applicable to qualified tax credit bonds. These rules include requirements regarding credit allowance dates, the expenditure of available project proceeds, reporting, arbitrage, maturity limitations, and financial conflicts of interest, among other special rules.

A taxpayer who holds a qualified tax credit bond on one or more credit allowance dates of the bond during the taxable year shall be allowed a credit against the taxpayer's income tax for the taxable year. In general, the credit amount for any credit allowance date is 25 percent of the annual credit determined with respect to the bond. The annual credit is determined by multiplying the applicable credit rate by the outstanding face amount of the bond. The applicable credit rate for the bond is the rate that the Secretary estimates will permit the issuance of the qualified tax credit bond with a specified maturity or redemption date without discount and without interest cost to the qualified issuer. 127 The Secretary determines credit rates for tax credit bonds based on general assumptions about credit quality of the class of potential eligible issuers and such other factors as the Secretary deems appropriate. The Secretary may determine credit rates based on general credit market yield indexes and credit ratings.

The credit is included in gross income and, under regulations prescribed by the Secretary, may be stripped (a separation (including at issuance) of the ownership of a qualified tax credit bond and the entitlement to the credit with respect to such bond).

Section 54A of the Code requires that 100 percent of the available project proceeds of qualified tax credit bonds must be used within the three-year period that begins on the date of issuance. Available project proceeds are proceeds from the sale of the bond issue less issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 100 percent of the available project proceeds are used to finance qualified projects during the three-year spending period, bonds will continue to qualify as qualified tax credit bonds if unspent proceeds are used within 90 days from the end of such three-year period to redeem bonds. The three-year spending period may be extended by the Secretary upon the issuer's request demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and the projects will continue to proceed with due diligence.

Qualified tax credit bonds generally are subject to the arbitrage requirements of section 148. However, available project proceeds invested during the three-year spending period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified tax credit bonds are issued.

The maturity of qualified tax credit bonds is the term that the Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the qualified tax credit bonds are issued.


Description of Proposal




In general

For bonds issued in 2009 through 2011, the proposal permits an issuer to elect to have an otherwise tax-exempt bond treated as a "taxable governmental bond." A "taxable governmental bond" is any obligation (other than a private activity bond) if the interest on such obligation would be (but for this proposal) excludable from gross income under section 103 and the issuer makes an irrevocable election to have the proposal apply. In determining if an obligation would be tax-exempt under section 103, the credit (or the payment discussed below for qualified bonds) is not treated as a Federal guarantee. Further, the yield on a taxable governmental bond is determined without regard to the credit. A taxable governmental bond does not include any bond if the issue price has more than a de minimis amount of premium over the stated principal amount of the bond.

The holder of a taxable governmental bond will accrue a tax credit in the amount of 35 percent of the interest payable on the interest payment dates of the bond during the calendar year. The interest payment date is any date on which the holder of record of the taxable governmental bond is entitled to a payment of interest under such bond. The sum of the accrued credits is allowed against regular and alternative minimum tax. Unused credit may be carried forward to succeeding taxable years. The credit, as well as the interest paid by the issuer, is included in gross income and the credit may be stripped under rules similar to those provided in section 54A regarding qualified tax credit bonds. Rules similar to those that apply for S corporations, partnerships and regulated investment companies with respect to qualified tax credit bonds also apply to the credit.



Special rule for qualified bonds issued during 2009 and 2010

A "qualified bond" is any taxable governmental bond issued as part of an issue if 100 percent of the available project proceeds of such issue are to be used for capital expenditures. 128 The bond must be issued after the date of enactment of the proposal and before January 1, 2011. The issuer must make an irrevocable election to have the special rule for qualified bonds apply.

Under the special rule for qualified bonds, in lieu of the tax credit to the holder, the issuer is allowed a credit equal to 35 percent of each interest payment made under such bond. Under the proposal, the Secretary will pay to the issuer the amount of the credit accrued with respect to an interest payment date. The payment by the Secretary is to be made contemporaneously with the interest payment made by the issuer, and may be made either in advance or as reimbursement. In lieu of payment to the issuer, the payment may be made to a person making interest payments on behalf of the issuer. For purposes of the arbitrage rules, the yield on a qualified bond is reduced by the amount of the credit/payment.



Transitional coordination with State law

As noted above, interest on a taxable governmental bond and the related credit are includible in gross income to the holder for Federal tax purposes. The proposal provides that until a State provides otherwise, the interest on any taxable governmental bond and the amount of any credit determined with respect to such bond shall be treated as being exempt from Federal income tax for purposes of State income tax laws.


Effective Date


The proposal is effective for obligations issued after the date of enactment.


VII. DESCRIPTION OF NONTAX ITEMS




1. Prohibition on collection of certain payments 129


Present Law


The Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) (19 U.S.C. 1675c), which was repealed in the Deficit Reduction Act of 2005 (Pub. L. No. 109-171), required U.S. Customs and Border Protection (CBP) to distribute certain duties collected on imports to U.S. companies that petitioned the U.S. Government for relief. From 2001 - 2005, CBP distributed these duties to eligible U.S. companies, including those companies that petitioned for relief from Mexican and Canadian imports.

In 2006, CBP stopped distributing duties collected on Mexican and Canadian imports on the grounds that the U.S. Court of International Trade (CIT) and the U.S. Court of Appeals for the Federal Circuit (CAFC) found that the CDSOA did not specifically apply to Canada and Mexico, and was therefore inconsistent with U.S. legislation implementing the North American Free Trade Agreement. The CIT and CAFC granted prospective relief, and specifically refused to opine on whether CBP should require repayment of, or otherwise recoup, duties collected on imports of Canadian and Mexican imports that were previously distributed.

In November 2008, CBP sent letters to several U.S. companies that received distributions of duties collected on Mexican and Canadian imports, demanding that the companies repay duties distributed between January 1, 2001, and January 1, 2006. CBP granted the companies an extension for repayment until March 28, 2009.


Description of Proposal


The proposal has four sections. First, it prohibits the Secretary of Homeland Security, or any other person, from requiring repayment of, or in any other way recouping, duties that were (1) distributed pursuant to the CDSOA; (2) assessed and paid on imports of goods from Canada and Mexico; and (3) distributed on or after January 1, 2001, and before January 1, 2006. Second, it prohibits CBP from offsetting any current or future duty distributions on goods from countries other than Canada and Mexico in an attempt to recoup duties described above. Third, the provision requires CBP to refund any such duty repayments or recoupments it has already received. Further, it requires CBP to fully distribute any duties it is withholding as an offset against current or future duty distributions. Fourth, the provision clarifies that CBP is not prohibited from collecting payments resulting from (1) false statements or other misconduct by a recipient of a duty payment or (2) re-liquidation of entries with respect to which duty payments were made.



2. Extension of trade adjustment assistance programs 130


Present Law


The current TAA programs (19 U.S.C. 2271 et seq.) provide U.S. workers, firms, and farmers who are negatively impacted by trade with various forms of government-funded adjustment assistance.

Chapter 2 of the Trade Act of 1974 provides for the TAA for Workers Program. Workers who lose their jobs due to increased imports or shifts in production to certain countries, including those with a free trade agreement with the United States, are eligible to receive adjustment assistance such as career counseling; up to two years of training; income support during training; a health care tax credit; and job search and relocation allowances. Chapter 2 also provides for an Alternative TAA Program, which permits older workers (over 50 years old) for whom retraining may not be appropriate to accept reemployment at a lower wage and receive a wage subsidy.

Chapter 3 of the Trade Act of 1974 provides for a TAA for Firms Program. The TAA for Firms Program provides manufacturing firms that (1) separate, or may have to separate, a significant part of their workforce and (2) experience declining sales or production; as a result of import competition with financial and technical assistance to improve the manufacturer's competitiveness.

Chapter 4 of the Trade Act of 1974 provided for a TAA for Communities Program, which was terminated in 1982. The program provided assistance to distressed communities.

Chapter 6 of the Trade Act of 1974 establishes the TAA for Farmers program, which permits agricultural commodity producers to seek adjustment assistance if there has been (1) a 20% decline in the price for a commodity; (2) an increase in imports of that commodity; and (3) such increased imports contributed importantly to the decline in price. Once a commodity is certified by the Secretary of Agriculture, individual producers may qualify for benefits, which include technical assistance and cash payments. Authorization for the TAA for Farmers program expired on December 31, 2007, and has not been renewed.

The TAA for Workers and Firms programs expired on December 31, 2007; however, the Workers and Firms programs continue to operate under appropriations provided to the Departments of Labor and Commerce, respectively, under H.R. 2638, the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009 (Pub. L. 110-329).


Description of Proposal


First, the proposal amends section 245(a) of the Trade Act of 1974 to extend the authorization for the TAA for Workers program until December 31, 2010. Second, the proposal amends section 246(b)(1) of the Trade Act of 1974 to extend the authorization for Alternative Trade Adjustment Assistance program by two years. Third, the proposal amends section 256(b) of the Trade Act of 1974 to extend the authorization for the TAA for Firms program until December 31, 2010. Fourth, the proposal amends section 298(a) of the Trade Act of 1974 to extend the TAA for Farmers program until December 31, 2010. Fifth, the proposal amends section 285 of the Trade Act of 1974 to extend the overall termination date of the TAA programs until December 31, 2010. Sixth, the proposal provides that these amendments shall have an effective date of January 1, 2008. Seventh, the proposal includes a Sense of the Senate that a TAA for Communities program should be revived.



3. Economic recovery payments to recipients of Social Security, supplement security income, railroad retirement, and Veterans disability benefits 131


Present Law


No provision.


Description of Proposal


The provision directs the Secretary of the Treasury to provide a onetime economic recovery payment of $300 to adults who were eligible for Social Security benefits, Railroad Retirement benefits, or veterans compensation or pension benefits; 132 or individuals 133 who were eligible for Supplement Security Income (SSI) benefits (excluding individuals who receive SSI while in a Medicaid institution). Only individuals who were eligible for one of the four programs for any of the three months prior to the month of enactment shall receive an economic recovery payment.

The provision stipulates that economic recovery payments will only be made to individuals whose address of record is in 1 of the 50 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa, or the Northern Mariana Islands.

An individual shall only receive one $300 economic recovery payment under this section regardless of whether the individual is eligible for a benefit from more than one of the four federal programs. If the individual is also eligible for the "Making Work Pay" credit from Section XX, that credit shall be reduced by the economic recovery payment made under this section.

An individual who is otherwise eligible for a economic recovery payment will not receive a payment if their federal program benefits have been suspended because they are in prison, a fugitive, a probation or parole violator, they committed fraud, or they are no longer lawfully present in the United States.

The provision directs the Commissioner of Social Security, the Railroad Retirement Board, and the Secretary of Veterans Affairs to provide the Secretary of the Treasury with information and data necessary in order to identify individuals eligible for economic recovery payments and to make the payments.

The provision provides that the $300 economic recovery payments shall not be taken into account as income or taken into account as resources for the month of receipt and the following 9 months, for purposes of determining the eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.

The provision provides that economic recovery payments shall not be considered gross income for income tax purposes and that the payments are protected by the assignment and garnishment provisions of the four federal benefit programs.

The provision stipulates that if an individual who is eligible for an economic recovery payment has a representative payee, the payment shall be made to the representative payee and the entire payment shall only be used for the benefit of the individual who is entitled to the economic recovery payment.

The provision appropriates the following amounts for FY2009 to carry out the provisions of this section: to the Secretary of the Treasury, funds to make the payments and $7 million for administrative cost; to the Commissioner of Social Security, $90 million; to the Railroad Retirement Board, $1 million; and to the Secretary of Veterans Affairs, $7.2 million.


Effective Date


The Secretary of the Treasury shall commence making payments as soon as possible, but no later than 120 days after the date of enactment. No economic recovery payments shall be made after December 31, 2010.



4. Increase in the statutory limit on the public debt 134


Present Law


The statutory limit on the public debt is $11,315 billion.


Description of Proposal


The provision increases the statutory limit on the public debt by $825 billion to $12,140 billion.


Effective Date


The provision is effective on the date of enactment.

1 This document may be cited as follows: Joint Committee on Taxation, "Description of the American Recovery and Reinvestment Tax Act of 2009," January 23, 2009, (JCX-10-09). This document can also be found on our website at www.jct.gov .

2 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income, plus (2) the amount of the individual's net self-employment earnings.

3 Unless otherwise stated, all section references are to the Internal Revenue Code of 1986, as amended (the "Code" ).

4 Possessions with mirror code tax systems are the United States Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.

5 Possessions that do not have mirror code tax systems are Puerto Rico and American Samoa.

6 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income, plus (2) the amount of the individual's net self-employment earnings.

7 A foster child must reside with the taxpayer for the entire taxable year.

8 All income thresholds are indexed for inflation annually.

9 All income thresholds are indexed for inflation annually.

10 All income thresholds are indexed for inflation annually.

11 Sec. 25A. The Hope credit generally may not be claimed against a taxpayer's alternative minimum tax liability. However, the credit may be claimed against a taxpayer's alternative minimum tax liability for taxable years beginning prior to January 1, 2009.

12 For purposes of this description, the term "account" is used interchangeably to refer to a prepaid tuition benefit contract or a tuition savings account established pursuant to a qualified tuition program.

13 Section 529 refers to contributors and designated beneficiaries, but does not define or otherwise refer to the term account owner, which is a commonly used term among qualified tuition programs.

14 Sec. 45. In addition to the electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.

15 Sec. 38(b)(8).

16 Sec. 38(c)(4)(B)(ii).

17 Secs. 1381-1383.

18 Sec. 1382.

19 Sec. 45. In addition to the electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.

20 Sec. 48.

21 An additional proposal that allows section 45 facilities to elect to be treated as section 48 energy property is described in section II.2 of this document.

22 Sec. 48.

23 Sec. 38(b)(1).

24 Sec. 39.

25 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.

26 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.

27 The highest tier in effect at this time was tier 2, requiring SEER of at least 15 and EER of at least 12.5 for split central air conditioning systems and SEER of at least 14 and EER of at least 12 for packaged central air conditioning systems.

28 Sec. 30C.

29 Sec. 41.

30 Sec. 41(e).

31 Sec. 41(h).

32 The Small Business Job Protection Act of 1996 expanded the definition of start-up firms under section 41(c)(3)(B)(i) to include any firm if the first taxable year in which such firm had both gross receipts and qualified research expenses began after 1983. A special rule (enacted in 1993) is designed to gradually recompute a start-up firm's fixed-base percentage based on its actual research experience. Under this special rule, a start-up firm is assigned a fixed-base percentage of three percent for each of its first five taxable years after 1993 in which it incurs qualified research expenses. A start-up firm's fixed-base percentage for its sixth through tenth taxable years after 1993 in which it incurs qualified research expenses is a phased-in ratio based on the firm's actual research experience. For all subsequent taxable years, the taxpayer's fixed-base percentage is its actual ratio of qualified research expenses to gross receipts for any five years selected by the taxpayer from its fifth through tenth taxable years after 1993. Sec. 41(c)(3)(B).

33 Sec. 41(f)(1).

34 Sec. 41(f)(3).

35 Sec. 41(c)(4).

36 A special transition rule applies for fiscal year 2006-2007 taxpayers.

37 A special transition rule applies for fiscal year 2006-2007 taxpayers.

38 Under a special rule, 75 percent of amounts paid to a research consortium for qualified research are treated as qualified research expenses eligible for the research credit (rather than 65 percent under the general rule under section 41(b)(3) governing contract research expenses) if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6) and is organized and operated primarily to conduct scientific research, and (2) such qualified research is conducted by the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).

39 Sec. 41(d)(3).

40 Sec. 41(d)(4).

41 Taxpayers may elect 10-year amortization of certain research expenditures allowable as a deduction under section 174(a). Secs. 174(f)(2) and 59(e).

42 Sec. 280C(c).

43 Sec. 280C(c)(3).

44 Sec. 38(a).

45 See section 38(b) for a complete list of business credits.

46 Sec. 38(c)(1).

47 Sec. 39(a)(1).

48 Sec. 38(c)(1).

49 The business credit carryback period is extended to five years for 2008 and 2009 carrybacks in another section of the Chairman's Mark.

50 Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules regarding whether an item is deductible under section 162 or instead is subject to capitalization under section 263 or section 263A.

51 However, the additional first-year depreciation deduction is not allowed for purposes of computing earnings and profits.

52 Assume that the cost of the property is not eligible for expensing under section 179.

53 A special rule precludes the additional first-year depreciation deduction for any property that is required to be depreciated under the alternative depreciation system of MACRS.

54 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer.

If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).

55 A special rule applies in the case of certain leased property. In the case of any property that is originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the taxpayer within three months after the date that the property was placed in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback.

If property is originally placed in service by a lessor (including by operation of section 168(k)(2)(D)(i)), such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale.

56 In order for property to qualify for the extended placed in service date, the property is required to have an estimated production period exceeding one year and a cost exceeding $1 million.

57 Property does not fail to qualify for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect prior to January 1, 2008.

58 For purposes of determining the amount of eligible progress expenditures, it is intended that rules similar to sec. 46(d)(3) as in effect prior to the Tax Reform Act of 1986 shall apply.

59 Sec. 168(k)(4).

60 The proposal includes a technical amendment to section 168(k)(4)(D) providing that no written binding contract for the acquisition of eligible qualified property may be in effect before April 1, 2008.

61 Additional section 179 incentives are provided with respect to qualified property meeting applicable requirements that is used by a business in an empowerment zone (sec. 1397A) or a renewal community (sec. 1400J), qualified section 179 Gulf Opportunity Zone property (sec. 1400N(e)), qualified Recovery Assistance property placed in service in the Kansas disaster area (Pub. L. No. 110-234, sec. 15345 (2008)), and qualified disaster assistance property (sec. 179(e)).

62 Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election under section 179 without the consent of the Commissioner on an amended Federal tax return for that taxable year. This amended return must be filed within the time prescribed by law for filing an amended return for the taxable year. T.D. 9209, July 12, 2005.

63 Sec. 179(c)(2).

64 Sec. 172(b)(1)(A).

65 Sec. 172(b)(2).

66 Sec. 172(b)(1)(J).

67 Secs. 810, 805(a)(5).

68 Sec. 810(b)(1).

69 The welfare-to-work tax credit was consolidated into the work opportunity tax credit in the Tax Relief and Health Care Act of 2006, for qualified individuals who begin to work for an employer after December 31, 2006.

70 In the case of an electing corporation that is a partner in a partnership, the corporate partner's distributive share of partnership items is determined as if section 168(k) does not apply to any eligible qualified property and the straight line method is used to calculate depreciation of such property.

71 Special rules apply to an applicable partnership.

72 For this purpose, bonus depreciation is the difference between (i) the aggregate amount of depreciation for all eligible qualified property determined if section 168(k)(1) applied using the most accelerated depreciation method (determined without regard to this proposal), and shortest life allowable for each property, and (ii) the amount of depreciation that would be determined if section 168(k)(1) did not apply using the same method and life for each property.

73 In the case of passenger aircraft, the written binding contract limitation does not apply.

74 Special rules apply to property manufactured, constructed, or produced by the taxpayer for use by the taxpayer.

75 The additional first year depreciation under section 168(k) is extended to certain property placed in service in 2009 in another proposal contained in the Chairman's Mark.

76 See sections 61(a)(12) and 108; but see sec. 102 (a debt cancellation which constitutes a gift or bequest is not treated as income to the donee debtor).

77 Sec. 108(b).

78 Sec. 1017.

79 Treas. Reg. sec. 1.61-12(c)(2)(ii). Treas. Reg. sec. 1.1275-1(b) defines "adjusted issue price."

80 Sec. 108(e)(4).

81 The 25 percent restriction was enacted by the Technical and Miscellaneous Tax Act of 1988 because of concern over the scope of the definition of manufacturing facility. See H.R. Rpt. No. 100-795 (1988). The amendment was intended to clarify that while the manufacturing facility definition does not preclude the financing of ancillary activities, the 25 percent restriction was intended to limit the use of bond proceeds to finance facilities other than for "core manufacturing."

82 Sec. 45. In addition to the electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.

83 Sec. 48.

84 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer. If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).

85 Sec. 141.

86 The 10 percent private business test is reduced to five percent in the case of private business uses (and payments with respect to such uses) that are unrelated to any governmental use being financed by the issue.

87 Sec. 103(a) and (b)(2).

88 Sec. 148.

89 See secs. 54B, 54C, 54D, and 54E.

90 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.

91 "Stripped" means a separation (including at issuance) of the ownership of a qualified tax credit bond from the entitlement to the credit with respect to such bond.

92 See "Build America Bonds" discussed below.

93 Sec. 103.

94 Sec. 141(b)(6); Treas. Reg. sec. 1.141-1(b).

95 Secs. 103(b)(1) and 141.

96 Sec. 7871.

97 Sec. 7871(c).

98 Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-554 (2000).

99 12 U.S.C. sec. 4702(17) (defines "low-income" for purposes of 12 U.S.C. sec. 4702(20)).

100 Sec. 265(a).

101 See Rev. Proc. 72-18, 1972-1 C.B. 740.

102 Id.

103 Sec. 265(b)(1). A "financial institution" is any person that (1) accepts deposits from the public in the ordinary course of such person's trade or business and is subject to Federal or State supervision as a financial institution or (2) is a corporation described in section 585(a)(2). Sec. 265(b)(5).

104 Sec. 265(b)(3).

105 Secs. 265(b)(3)(A), 291(a)(3) and 291(e)(1).

106 Sec. 265(b)(3)(C).

107 Sec. 265(b)(3)(E).

108 Sec. 265(b)(3)(F).

109 Sec. 291(e)(1).

110 Sec. 103.

111 Sec. 149(e).

112 Sec. 103(a) and (b)(2).

113 Sec. 148.

114 Sec. 1397E.

115 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.

116 Sec. 103.

117 Sec. 149(e).

118 Sec. 103(a) and (b)(2).

119 Sec. 148.

120 Sec. 1397E.

121 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.

122 Sec. 141.

123 The 10 percent private business test is reduced to five percent in the case of private business uses (and payments with respect to such uses) that are unrelated to any governmental use being financed by the issue.

124 Sec. 103(a) and (b)(2).

125 Sec. 148.

126 See secs. 54B, 54C, 54D, and 54E.

127 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.

128 Under Treas. Reg. sec. 150-1(b), capital expenditure means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election or with the application of the definition of placed in service under Treas. Reg. sec. 1.150-2(c)) under general Federal income tax principles. For purposes of applying the "general Federal income tax principles" standard, an issuer should generally be treated as if it were a corporation subject to taxation under subchapter C of chapter 1 of the Code. An example of a capital expenditure would include expenditures made for the purchase of fiber-optic cable to provide municipal broadband service.

129 Description of present law and the proposal were prepared by the majority staff of the Senate Committee on Finance.

130 Description of present law and the proposal were prepared by the majority staff of the Senate Committee on Finance.

131 Description of present law and the proposal were prepared by the majority staff of the Senate Committee on Finance.

132 Due to administrative constraints, this category includes a small number of individuals under age 18 who are eligible for veteran compensation or pension benefits.

133 This includes SSI recipients who are under age 18.

134 Description of present law and the proposal were prepared by the majority staff of the Senate Committee on Finance.

Consideration for an Offer in Compromise. Can you pay the IRS something other than cash as consideration for an Offer in Compromises? The answer is no.An IRS Appeals officer properly sustained a notice of federal tax lien against an attorney for unpaid employment taxes was proper. Further, the Appeals officer did not abuse his discretion when he did not treat the taxpayer's offer to assign a civil judgment for a specific sum to the IRS as an offer-in-compromise (OIC). The taxpayer did not submit a financial statement, a formal OIC or his two previous tax returns to the officer by the deadline he was given.



Warren Lee Brandt v. Commissioner.

Dkt. No. 787-07L , TC Memo. 2009-16, January 26, 2009.[ Code Sec. 6330]Individual: Offer-in-compromise: Employment taxes. --


Warren Lee Brandt, pro se; Kristin M. Timmons, for respondent.


MEMORANDUM OPINION

SWIFT, Judge: This matter is before us on respondent's motion for summary judgment under Rule 121. Petitioner does not dispute any of the material facts relied upon in respondent's motion for summary judgment. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

In this collection case under section 6320 petitioner challenges respondent's notice of Federal tax lien filing relating to $70,434 in outstanding Federal employment taxes petitioner owes in connection with his law practice.


Background

At the time the petition was filed, petitioner resided in Wisconsin. Petitioner is a lawyer and practices law in the community in which he resides.

During the periods in issue petitioner employed a legal assistant to aid him in carrying out day-to-day activities of his law practice. Petitioner's law practice periodically withheld and remitted to respondent employment taxes withheld from employee wages. Petitioner generally relied on his legal assistant to prepare and timely file Federal employment tax returns and to remit to respondent the employment taxes that were due in connection with wages paid to employees.

For 1998, for the last quarter of 2000, and for 2001, 2002, and 2003, however, petitioner's legal assistant prepared but did not file with respondent the Federal employment tax returns that were due.

For the above periods petitioner's legal assistant also did not remit to respondent any of the employment taxes that were due. Rather, petitioner's legal assistant embezzled from petitioner the employment taxes owed to respondent.

In September 2004 petitioner discovered his legal assistant's failure to file the above Federal employment tax returns and her embezzlement. Petitioner thereafter filed with respondent the Federal employment tax returns, but petitioner did not remit to respondent the employment taxes reported due thereon.

On March 29, 2006, respondent mailed to petitioner a notice of Federal tax lien filing with respect to the total $70,434 in employment taxes, interest, and penalties that were due for the above periods.

On May 5, 2006, petitioner timely filed with respondent a Form 12153, Request for a Collection Due Process Hearing. At that time petitioner had not filed his 2004 or 2005 individual Federal income tax return.

On July 11, 2006, respondent and petitioner participated in a collection due process (CDP) hearing. During the CDP hearing petitioner stated that he was willing to assign to respondent his rights to an $88,500 Wisconsin State court civil judgment that petitioner had obtained against his former legal assistant. Petitioner also stated that he was willing to assign to respondent all rights to restitution that he someday might receive as a result of an anticipated criminal prosecution of his legal assistant for embezzlement. Petitioner acknowledged to respondent's Appeals officer that the resolution of any criminal prosecution against his legal assistant would take time, and petitioner therefore also offered to enter into an offer-in-compromise with respondent.

The Appeals officer granted petitioner an extension until August 8, 2006, to submit to respondent a financial information statement and a formal offer-in-compromise and to file with respondent his 2004 and 2005 individual Federal income tax returns.

Petitioner, however, did not submit to respondent a financial statement, a formal offer-in-compromise, or his 2004 and 2005 individual Federal income tax returns by the August 8, 2006, deadline, and on December 4, 2006, respondent issued a notice of determination sustaining the notice of Federal tax lien filed against petitioner.

On January 9, 2007, petitioner filed his petition herein.


Discussion

When no material fact remains at issue, we may grant summary judgment as a matter of law. Rule 121(b); Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 75-76 (2004), affd. on other grounds 404 F.3d 1291 (11th Cir. 2005).

At no point herein has petitioner contested his liability for the employment tax liabilities for the periods in issue. We review respondent's Appeals Office determination for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).

Although petitioner's argument is not completely clear, petitioner appears to be arguing that respondent's Appeals Office should have treated as an offer-in-compromise petitioner's offer to assign to respondent the $88,500 civil judgment and any judgment for restitution that might be awarded against his former legal assistant.

In light of petitioner's failure to file with respondent his 2004 and 2005 Federal income tax returns and petitioner's failure to submit to respondent a financial statement and a formal offer-in-compromise, respondent clearly did not abuse his discretion in establishing a deadline for petitioner to submit a proper offer-in-compromise and in not treating as an eligible offer-in-compromise petitioner's willingness to assign to respondent civil judgments petitioner had been awarded or that he might be awarded. See Kendricks v. Commissioner, 124 T.C. 69, 79 (2005); Cavazos v. Commissioner, T.C. Memo. 2008-257; see also Prater v. Commissioner, T.C. Memo. 2007-241; Roman v. Commissioner, T.C. Memo. 2004-20; Rodriguez v. Commissioner, T.C. Memo. 2003-153; Londono v. Commissioner, T.C. Memo. 2003-99; McCorkle v. Commissioner, T.C. Memo. 2003-34; Internal Revenue Manual, pt. 5.8.3.4.1(1)(A) (Sept. 1, 2005).

For the reasons stated, we shall grant summary judgment in favor of respondent.

We have considered petitioner's other arguments and find them unpersuasive.

To reflect the foregoing,

An appropriate order and decision will be entered for respondent.

Priority of IRS tax liens under section 6321. Lien priority questions involving a federal tax lien are decided by federal law under the principle of "the first in time is the first in right ." United States v. McDermott, 507 U.S. 447, 449 (1993). Under 26 U.S.C. § 6321, once the IRS makes an assessment that tax is due from a taxpayer, a lien is created in favor of the Untied States without any particular filing requirement. Id. at 449. The "general rule is that the tax collector prevails even if he has not recorded at all." Id. at 454.

Section 6323 of the Internal Revenue Code, however, establishes that certain interests can be superior to a tax lien. Subsection (d) of Section 6323 provides for priority against a filed federal tax lien for security interests in property arising out of advances made within 45 days of the filing of the IRS's tax lien or until knowledge is obtained of the filing of the lien, if earlier. 26 U.S.C. § 6323; see also Slodov v. United States, 436 U.S. 238, 258 n.22 (1978) ("when a security agreement exists and filing has occurred prior to the filing of a tax lien to secure advances made after the tax filing, perfection is, at the least, achieved when the secured party makes the advance. When that occurs after the tax lien has been filed, section 6323(d) protects the secured party from the federal tax lien if the advance is made not later than 45 days after the filing of the tax lien or upon receipt of actual notice of the tax lien filing, whichever is sooner.").

Federal tax liens had priority over a third-party creditor's security interest in the proceeds a corporation received from the settlement of a lawsuit because the security interest was not choate when the government filed the tax liens. In the Rich case, the security interest covered the corporation's receivables and was properly perfected before the recording of the first tax lien, but it did not cover the settlement proceeds. The settlement agreement did not specifically identify the funds as payment of outstanding accounts receivable. The tax liens had priority because the security interest and the tax liens became choate simultaneously. The creditor's subsequent amendment of its security interest to include the settlement proceeds suggested that the creditor did not believe it had a security interest in those proceeds under the original agreement.


Rich Financial, LLC, Plaintiffs v. United States of America, Defendant.

U.S. District Court, Dist. Utah, Central Div.; 2:07CV403DAK, January 12, 2009.

[ Code Secs. 6323 and 7426] Priority of tax liens: Security interest: Settlement proceeds: Accounts receivable: Chronological priority: Doctrine of choateness. --




MEMORANDUM DECISION AND ORDER


KIMBALL, United States District Judge: This matter is before the court on cross motions for summary judgment on the issue of the priority of the parties' rights in funds levied by the IRS. The court held a hearing on these motions on November 25, 2008. At the hearing, Plaintiff was represented by Craig Howe, and Defendant was represented by Rick Watson. The court took the motions under advisement. The court has carefully considered all pleadings, memoranda, and other materials submitted by the parties, the arguments made by counsel at the hearing, and the law and facts relevant to the motions. Now being fully advised, the court enters the following Memorandum Decision and Order.


BACKGROUND


Plaintiff Rich Financial is a third party creditor who loaned money to BCBU, or Rocky Mountain Home Care. Rich Financial is an entity controlled by Lamar and Jay Bangerter. Rocky Mountain is controlled by their cousin Dee Bangerter. On March 5, 1995, Rich Financial and Rocky Mountain signed a promissory note for $2.1 million in favor of Rich Financial. Pursuant to the promissory note, Rich Financial established a line of credit to Rocky Mountain ("Rocky Mountain account"). The promissory note was secured by a security agreement, which granted Rich Financial a lien in and to all of BCBU's accounts receivable, equipment, leasehold improvements, and the proceeds of each.

Paragraph 4 of the promissory note states that it is secured by "all Accounts Receivable of [Rocky Mountain] in addition to all leasehold improvements on [its] premises." The security agreement further defines collateral as "All of [Rocky Mountain]'s accounts receivable evidencing any right to payment for goods sold or leased or for services rendered." The security agreement also defines Rocky Mountain's payment obligations as "the sum evidenced by the above-mentioned note or any renewals or extensions thereof executed pursuant to this security agreement in accordance with the terms of such note and any other obligations that now exist or may hereafter accrue from [Rocky Mountain] to [Rich Financial]."

The line of credit agreement was periodically renewed between the two parties on essentially the same terms. None of these renewals changed the collateral or terms of the line of credit or the security agreement. Beginning on March 3, 1995, and continuing until at least April 9, 2007, Rich Financial regularly made advances to Rocky Mountain under this line of credit. The purpose of the line of credit and the advances was to fund the operations of Rocky Mountain. Rich Financial recorded the line of credit and security agreement with the Department of Commerce on July 9, 2002.

At various dates prior to and including December 31, 2002, Rich Financial also began including obligations other than those representing advances directly to Rocky Mountain in the Rocky Mountain account. On October 9, 1997, Rich Financial added an obligation of $118,000 to the Rocky Mountain account representing a distribution or loan to the mother of Dee and Lee Bangerter, the individuals who controlled Rocky Mountain. Rich Financial provides no explanation for why Rocky Mountain would be responsible to Rich Financial for monies distributed to an individual rather than the company.

In addition, between May 1997 and August 1999, Rich Financial also established lines of credit with several other entities controlled by Dee and Lee Bangerter. These other entities included United Alternative Home Care, Nurse Network of Utah, Pro Med, Inc., United Home Health Care of Southern California, United Home Care dba CSM Home Health Care, and Premier Home Care Services. However, no documents related to these lines of credit were ever recorded with the Utah Department of Commerce, with the exception of documents relating to the line of credit with CSM Home Health Care.

Rich Financial made advances to these entities under the separate lines of credit. The advances were made for the separate entity, not Rocky Mountain. However, all of these additional lines of credit ultimately went into default. On February 15, 2000, the defaulted lines of credit between Rich Financial and United Alternative Home Care, Nurse Network of Utah, Pro Med, Inc., United Home Health Care of Southern California, and Premier Home Care Services were consolidated into the line of credit between Rich Financial and Rocky Mountain. On December 31, 2002, the line of credit between Rich and United Home Care dba CSM Home Health Care was consolidated into the line of credit between Rich Financial and Rocky Mountain. These consolidations were done to make payment of the separate obligations more convenient for Dee and Lee Bangerter.

On March 20, 2003, a representative of the Secretary of the Treasury recorded a Notice of Federal Tax Lien ("NFTL") concerning the tax liabilities of Rocky Mountain with the County Recorder in Davis County, Utah, the proper place to record such an instrument. Other NFTLs concerning the liabilities of Rocky Mountain were recorded in Salt Lake and Davis Counties at this time and subsequently. The total amount ultimately levied by the IRS pursuant to the NFTLS was $1,306,227.00.

As of May 5, 2003, which is legally significant because it is 45 days after the NFTL was filed, the principal balance on Rocky Mountain's line of credit for sums directly advanced to Rocky Mountain was $423,959.40. The consolidated amount due and owing on May 5, 2003, however, was $2,875,181.42.

The last advance to Rocky Mountain under the line of credit prior to May 5, 2003, was on July 22, 2002. But, beginning again on December 23, 2003, and continuing until at least April 9, 2007, Rich Financial continued to make other regular advances to Rocky Mountain. Also after May 5, 2003, Rocky Mountain made payments to Rich Financial totaling $1,510,000. Neither Rich Financial, Rocky Mountain, nor the underlying documents made any designation as to how these payments were to be applied.

On December 13, 2002, Rocky Mountain and other entities controlled by Dee and Lee Bangerter, none of which include the entities who received a line of credit from Rich Financial and whose obligations were consolidated into Rocky Mountain's account, filed a lawsuit against the State of Utah. The lawsuit alleged breach of contract and breach of the implied covenant of good faith and fair dealing relating to the State's Medicaid reimbursements to Rocky Mountain. The entities claimed that the State had established and paid rates to them that were below the reimbursement rates required by certain Medicaid policies, standards, and methods. Rocky Mountain and the other entities sought damages of over $16 million and injunctive relief.

On March 14, 2007, the parties to the action filed a stipulated motion for dismissal with prejudice. That motion indicated that the parties had "resolved the matter, without either party denying or admitting liability to the other, based on a payment from [the State] to Plaintiffs in the amount of $7 million dollars and in exchange for mutual releases concerning the subject matter of the claims." On March 20, 2007, the court dismissed the suit based on the stipulation. On April 5, 2007, the IRS levied on the settlement funds Rocky Mountain was to receive from the State.

On June 19, 2007, Rich Financial filed this action against the United States asserting two causes of action: (1) wrongful levy pursuant to 26 U.S.C. § 7426; and (2) declaratory judgment pursuant to the federal Declaratory Judgment Act, 28 U.S.C. § 2201, and the Utah Declaratory Judgments Act, Utah Code Ann. § 78-33-1. On a previous motion to dismiss, this court dismissed Rich's second cause of action.

After this litigation began, on November 10, 2008, Rich re-recorded with the Utah Department of Commerce a new UCC-1 filing statement concerning the line of credit between Rich Financial and Rocky Mountain. The collateral obligation was now defined to include proceeds from the litigation against the Utah Department of Health, although the terms of the line of credit did not change.


DISCUSSION


The parties have filed cross motions for summary judgment asserting a priority of interest in the settlement funds levied by the IRS. Rich Financial claims that its security interest in the funds is superior to the IRS's NFTL and that the IRS wrongfully levied Rocky Mountain's settlement funds. Conversely, the government argues that the NFTL is superior to Rich Financial's security interest and that Rich Financial does not have a security interest in the settlement funds that Rocky Mountain obtained from the State of Utah.



A. Priority of Interests

Lien priority questions involving a federal tax lien are decided by federal law under the principle of "the first in time is the first in right ." United States v. McDermott, 507 U.S. 447, 449 (1993). Under 26 U.S.C. § 6321, once the IRS makes an assessment that tax is due from a taxpayer, a lien is created in favor of the Untied States without any particular filing requirement. Id. at 449. The "general rule is that the tax collector prevails even if he has not recorded at all." Id. at 454.

Section 6323 of the Internal Revenue Code, however, establishes that certain interests can be superior to a tax lien. Subsection (d) of Section 6323 provides for priority against a filed federal tax lien for security interests in property arising out of advances made within 45 days of the filing of the IRS's tax lien or until knowledge is obtained of the filing of the lien, if earlier. 26 U.S.C. § 6323; see also Slodov v. United States, 436 U.S. 238, 258 n.22 (1978) ("when a security agreement exists and filing has occurred prior to the filing of a tax lien to secure advances made after the tax filing, perfection is, at the least, achieved when the secured party makes the advance. When that occurs after the tax lien has been filed, section 6323(d) protects the secured party from the federal tax lien if the advance is made not later than 45 days after the filing of the tax lien or upon receipt of actual notice of the tax lien filing, whichever is sooner.").

It is undisputed in this case that the United States first filed an NFTL in Davis County, Rocky Mountain's place of business, on March 20, 2003. Under Section 6323(d), Rich had 45 days from that date, or until May 5, 2003, to make advances to Rocky Mountain under the line of credit in order to secure them against the United States's NFTL. All later extensions of credit, and interest and costs accrued thereon, are similarly secured, but remain in third-priority position behind the United States' tax lien. Therefore, the parties' dispute focuses on the amount Rocky Mountain was obligated to pay Rich Financial as of May 5, 2003.

The government does not dispute that Rich Financial properly perfected its security interest on July 9, 2002. Also, the government does not dispute both that the Medicaid payments at issue constitute "accounts receivable" and that the accounts receivable arose when Rocky Mountain performed the Medicaid services, which was before the recording of the first NFTL. Rather, in its motion, the government contends that it has priority to the disputed funds because Rocky Mountain discharged any amount that would have had priority, Rich Financial's security interest in accounts receivable does not include the settlement funds with the State, and, even if Rich had an interest in the settlement funds, it was inchoate at the time the government filed the first tax lien.

Between May 5, 2003, and December 8, 2006, Rocky Mountain made $1,510,000 in payments to Rich Financial on its line of credit. Rocky Mountain also made numerous draws on the line of credit after May 5, 2003. However, where the security is the same, payments are applied to the oldest balance first, unless otherwise designated. United States v. Kirkpatrick, 22 U.S. 720, 737-38 (1824); American Investment Financial v. United States, 364 F. Supp. 2d 1321 (D. Utah 2005) (security interest only protected for 45 days after the filing of a notice of federal tax lien).

In Lee v. Yano, 997 P.2d 68 (Hawaii Ct. App. 2000), the court noted that, as a "general rule, a third person who is secondarily liable on a debt, such as a guarantor, surety, or endorser, cannot control the application which either the debtor or the creditor makes of a payment, and neither the debtor nor the creditor need apply the payment in the manner most beneficial to such person." Id. at 76.

Rich Financial relies on this language from Lee to argue that the court should not apply the presumptive rule because it is most beneficial to the government. Moreover, Rich Financial claims that the presumptive rule relied on by the government applies, if at all, only when the parties themselves have not agreed on an allocation of the payments or have not otherwise allocated the payments. See Standard Surety & Cas. Co. v. United States, 154 F.2d 335, 337 (10th Cir. 1946) (stating that if both parties to a contract fail to make the allocation, "then the law will make the allocation"). When the law makes the allocation according to its own notions of justice, the Standard Surety case explained that the correct rules is that "[w]hen the security is the same, the state and federal rule is to apply the payment first to the oldest obligation. When the security is not the same, the rule is to apply the payment first to the obligation least secured, or whose security is most precarious." Id.

Rich Financial claims that in the promissory notes executed by Rich and Rocky Mountain, the parties agreed on how payments would be allocated to the outstanding obligations. The allocation of payments described in the line of credit agreement, however, is: 1) costs of enforcement; 2) interest; and 3) the unpaid principal under the Note. In this case, there are no costs of enforcement and there is no dispute over interest payments. The relevant issue is how to apply payments after the perfection of the federal tax liens to the unpaid principal under the Note. The issue is not enforcement costs or interest. Here, the underlying instrument does not specify that payments are to be applied to specific advances, nor do the payments themselves contain any such designation. In this case, the security for the line of credit was the same throughout. Although the line of credit was renewed several times before and after May 5, 2003, the definition of security in the line of credit and the security agreement did not change. Neither Rich, nor Rocky Mountain, nor the line of credit itself, made any designation of how the payments were to be applied. Accordingly, the court must apply the general presumption and Rocky Mountain's payments are deemed to be applied against the oldest incurred advance on a first-in-first-out basis. Kirkpatrick, 22 U.S. at 737-38.

The question, then, becomes what was the balance owed by Rocky Mountain on the line of credit on May 5, 2003. Plaintiff provided a summary chart of all activity on this line of credit from its inception until the present date. From this chart, the amount due on May 5, 2003, the 46th day from the filing of the tax lien, is $2,875,181.42. This amount includes debt that was incurred on several other lines of credit that were entered into with other entities controlled by Dee and Lee Bangerter and Rich Financial. Rich Financial agreed to consolidate these other obligations with Rocky Mountain's line of credit. In addition, money that was given or loaned to Lee and Dee Bangerter's mother was consolidated in Rocky Mountain's line of credit. But Rich Financial has agreed that the amount due and owing should be reduced by the $49,086.05 paid to the Bangerters' mother. Therefore, Rich Financial asserts that the consolidated amount due and owing to it on May 5, 2003, was $2,806,267.47.

The government, however, contends that Rocky Mountain was not obligated in any way on these other notes, and, in such a situation, any priority accorded to the line of credit between Rich Financial and Rocky Mountain would not apply to these other obligations. Rich Financial claims that it has an oral guaranty to pay the amounts consolidated into its line of credit with Rich Financial. The government claims that the correct amount due and owing Rich Financial was $305,959.40, which includes the amount directly received by Rocky Mountain on its line of credit minus $118,000 that the government alleges was paid to the Bangerter's mother.

Rich Financial asserts that the government is not in a position to argue that the amount owed to Rich Financial as of May 5, 2003, should be reduced by the amounts of the notes executed by United Alternative, Nurse Network, ProMed, and the other related third-party entities that it combined with the Rocky Mountain note-receivable account. because Rocky Mountain owed Rich Financial the amounts set forth in the documents produced by Rich Financial. Rich Financial and Rocky Mountain claim that they entered into an oral guaranty agreement whereby Rocky Mountain agreed to be a guaranty on these other lines of credit and agreed to consolidate the defaulted lines of credit into its own line of credit with Rich Financial.

The government has not cited to any authority that two parties to a guaranty agreement cannot orally agree to such an obligation. Under Utah law, a party to an oral agreement to guarantee an obligation may assert the statute of frauds as a defense to the enforcement of the agreement. See Utah Code Ann. § 25-5-4(b). However, a third party cannot raise the statute of frauds defense to an oral guaranty agreement. See Garland v. Fleischmann, 831 P.2d 107, 109 (Utah 1992).

Representatives of both Rich and Rocky Mountain consistently testified that Rocky Mountain had, in fact, guaranteed the payment of the obligations. Also, there is no evidence that Rocky Mountain itself has ever disputed the amounts due to Rich Financial, including amounts owed to Rich Financial pursuant to Rocky Mountain's guaranty of other debtors' obligations. The government's argument that the obligations were combined simply to make the payment obligations more convenient ignores that Rocky Mountain guaranteed the payment of the related entities' obligations to Rich Financial. The court finds no basis in the law or the factual circumstances in this case that would invalidate the alleged oral guaranty.

Given that these consolidated amounts are guaranteed by Rocky Mountain, the court must then determine whether these obligations were secured obligations under Rich Financial and Rocky Mountain's security agreement. By its terms, the security agreement provides that Rocky Mountain's payment obligations to Rich Financial include amounts of any notes executed pursuant to the security agreement "and any other obligations that now exist or may hereafter accrue from [Rocky Mountain] to [Rich Financial]."

The government argues that Rich Financial provides no authority for its proposition that oral guaranties can bring the obligations of other entities within the security agreement between Rich Financial and Rocky Mountain and that oral guaranties can defeat a properly filed NFTL. In order to defeat the general rule that the tax lien prevails, Rich Financial must show that it falls within an exception to the general rule as set out in 26 U.S.C. § 6323. There is no dispute, however, that Rich Financial has a perfected security agreement. Therefore, the issue is whether the terms of the security agreement cover those obligations. The language of the security agreement states "any other obligations." Rocky Mountain's guaranty of the other lines of credit constitute other obligations. There is no dispute between the parties to the agreement, Rich Financial and Rocky Mountain, that the guaranteed obligations reflect proper contractual obligations of Rocky Mountain to Rich Financial under the secured line of credit. Therefore, Rich Financial's security interest covering Rocky Mountain's obligations was properly perfected before the recording of the first NFTL in the amount of $2,806,267.47.

It is undisputed that between May 5, 2003, and December 8, 2006, Rocky Mountain made $1,510,000 in payments to Rich Financial on the line of credit. It is clear that subsequent payments can extinguish this obligation. See United States v. Kirkpatrick, 22 U.S. 720, 737-38 (1824). Rocky Mountain's subsequent payments, however, are not enough to extinguish the total amount Rocky Mountain owed Rich Financial on May 5, 2003.

Next, the court must determine whether Rich Financial's security interest in Rocky Mountain's accounts receivable included Rocky Mountain's settlement proceeds from its litigation against the State and whether its interest in such proceeds were choate before the government filed its NFTL. Rocky Mountain reached its settlement with the state several years after the government filed its first NFTL.

If a security interest is to prevail over a subsequently filed federal tax lien, the interest must "exist" within the meaning of 26 U.S.C. § 6323(h)(1). To determine whether a security interest exists and has priority over a competing tax lien under the federal rule, courts look at two factors: (1) chronological priority and (2) compliance with the doctrine of choateness. United States v. 110-118 Riverside Tenants Corp., 886 F.2d 514, 518 (2d Cir. 1989). Therefore, not only does the security interest need to be first in time, it must also be choate to defeat the federal tax lien.

"A lien is choate where (1) the identity of the lienor, (2) the property subject to the lien, and (3) the amount of the lien are established." National Communications Ass'n v. National Telecommunications Ass'n, 1995 U.S. Dist. LEXIS 5333, *42 (S.D.N.Y. April 21, 1995). "Where the three-part test for choateness is satisfied at the time the IRS files its notice of tax lien, or within 45 days thereafter, the state-created security interest takes priority over the competing tax lien." Id. at *43.

The dispute in this case is whether Rich Financial's security interest in Rocky Mountain's settlement proceeds were in existence before the federal tax lien arose. The government argues that the settlement proceeds did not come into existence until Rocky Mountain reached its settlement with the State. Rich Financial, however, argues that the settlement proceeds consist of accounts receivable that the State owed it for services rendered prior to the government's federal tax lien.

Both parties agree that Medicaid reimbursements can constitute accounts receivable. Both parties also agree that a lien on accounts receivable becomes choate, and the receivables exist, when the services giving rise to the accounts receivable are performed and payment becomes due . However, the parties dispute whether the settlement funds can be characterized as accounts receivable and whether they were choate prior to the filing of the federal tax lien.

Rocky Mountain's claims against the state was for breach of contract and breach of the covenant of good faith and fair dealing. The suit challenged the State's formula for payments on Medicaid reimbursements under Medicaid policies. Rocky Mountain sought $16 million from the State. The parties ultimately reached a settlement in which neither party admitted fault or liability and the State agreed to pay Rocky Mountain and the other named plaintiffs $7 million.

In National Communications, the court addressed a dispute over settlement funds between a party with a security interest in accounts receivable and the government, who had filed a federal tax lien. Id. at *61. Similar to Rich Financial, the secured party claimed that the settlement fund was simply proceeds of the preexisting accounts receivable because his security interest was in the underlying collateral itself and his lien became choate when the debtor performed services giving rise to the debt. Id. The court stated that the secured party's security interest in the accounts receivable would have had priority over the federal tax lien "had there been no dispute over the payment of those accounts, and no subsequent litigation resulting in the compromise of multiple claims between the parties." Id. at *65. The court found that the settlement was not directly linked enough to the underlying collateral --accounts receivable. Id. at *67. The proceeds of the settlement fund were not specifically earmarked as settlement of the claims for accounts receivable, but rather a compromised amount for multiple claims and included monies owed under the contract and claims for damages. Id. Accordingly, the court found that the settlement fund represented a new asset that did not exist for priority purposes at the time the federal tax lien was filed. Id. The court concluded that because the settlement occurred after all the liens had arisen, the security interest lien and the federal tax lien attached to the settlement proceeds and became choate simultaneously. Id. at *67-68.

Rich Financial claims that this case is distinguishable from National Communications because Rocky Mountain's settlement proceeds consist only of payment on accounts receivables. Rich Financial relies on Mecco Inc. v. Capital Hardware Supply, Inc., 486 F. Supp. 2d 537 (D. Md. 2007), in which the court concluded after a bench trial that the case was distinguishable from National Communications because the settlement agreement in Mecco referred specifically to the settlement of a claim for unpaid labor and materials and sufficiently earmarked an amount for the resolution of the claim for unpaid accounts receivable. Id. at 548.

The court finds this case more similar to National Communications than to Mecco. The settlement between Rocky Mountain and the State did not specifically earmark the monies as past due reimbursements. In fact, the State did not admit to any liability and the parties agreed to exchange mutual releases for the subject matter of the litigation. The settlement agreement in this case represents a compromise reached by the parties that is not specifically earmarked as a payment of outstanding accounts receivable. The court cannot conclude that Rich Financial's security interest was choate prior to the government's filing of the NFTLs. Because both the security interest and the NFTLS were in existence at the time that Rocky Mountain and the State entered into the settlement agreement, both the security interest and the NFTLS became choate simultaneously. Accordingly, the NFTLs have priority over Rich Financial's security interest.

Based on the court's conclusion that the security interest was not choate at the time the government filed the NFTLs, the court need not address whether the settlement proceeds were in fact accounts receivable or general intangibles. The court, however, notes that this court has previously found that a claim to a tax refund was a general intangible rather than account receivable. See In re Certified Packaging, Inc., 1970 U.S. Dist. LEXIS 13030 (D. Utah 1970). A cause of action is generally considered to be a general intangible. Utah Code Ann. § 70A-9a-102(42)(a).

In this case, Rich Financial had a security interest in Rocky Mountain's accounts receivable but, unlike the secured parties in National Communications and Mecco, it did not have a security interest in general intangibles. The court notes, however, that the security agreement provided Rich Financial with the right to bring an action on Rocky Mountain's behalf for collection of accounts receivable. Rich Financial, however, chose not to be a plaintiff in the action against the State. In addition, Rich Financial amended its security interest to include the proceeds of Rocky Mountain's settlement with the State after it instituted this action. Such an amendment suggests that Rich Financial did not believe it had a security interest in the settlement proceeds under its original security agreement that was in place at the time that the government filed the NFTLs.

The court concludes that the government's NFTLs have priority over Rich Financial's security interest in the settlement proceeds. Accordingly, the court grants the government's Motion for Summary Judgment and denies Rich Financial's motion for summary judgment.


CONCLUSION


For the reasons stated above, the government's Motion for Summary Judgment is GRANTED, and Rich Financial's Motion for Summary Judgment is DENIED. The Clerk of Court is directed to close this case, each party to bear its own fees and costs.

DATED this 12 th day of January, 2009.

Security interest. --Validity and Priority Against Third Parties: Security interest

A flying service corporation was held to have a valid equitable lien upon contract proceeds held by a bank. The lien was based upon a contract of payment from the bank and the flying service corporation had a security interest and took priority over the government's lien since the latter was not filed until after the security interest was perfected.

Morrison Flying Service, CA-10, 68-2 USTC ¶9465, 404 F2d 856.

A private security interest was subordinate to federal tax liens where the security interest had not been perfected under applicable state law prior to the time the federal tax liens were duly filed.

Sams, Pa. SCt, 70-1 USTC ¶9315.

A.E. Richardson, DC, 73-1 USTC ¶9319, 358 FSupp 994.

Lanning Equipment Corp., DC 73-1 USTC ¶9160, 346 FSupp 1068.

Nevada Rock and Sand Co., DC 74-2 USTC ¶9617.

L.B. Smith, Inc., DC, 72-1 USTC ¶9230, 341 FSupp 810.

Interstate Tire Co., DC 73-1 USTC ¶9428.

M. Blide, DC, 73-2 USTC ¶9716.

T.C. Trigg, CA-8, 72-2 USTC ¶9642, 465 F2d 1264.

R. Brennecke, DC, 75-1 USTC ¶9358.

Security Savings Bank of Marshalltown, Iowa, DC, 77-2 USTC ¶9738, 440 FSupp 444.

American Fidelity Fire Ins. Co., DC, 75-2 USTC ¶9636.

Merchants and Marine Bank, Miss. SCt, 74-1 USTC ¶9392, 392 So2d 151.

E.G. Smith, Jr., DC, 75-1 USTC ¶9138.

J. Iversen, DC, 75-2 USTC ¶9806.

Commercial Credit Corp., DC, 78-1 USTC ¶9113.

R.E. Dever, DC, 81-1 USTC ¶9163. Taxpayer on appeal to CA-6.

J.S. Minges, DC, 81-1 USTC ¶9336.

J. Sanchez, CA-2, 83-1 USTC ¶9126, 696 F2d 213.

New York City Transit Authority, DC N.Y., 84-1 USTC ¶9112, 565 FSupp 388.

First National Bank of Valdosta, DC, 83-2 USTC ¶9487.

Hunter's Supply Co., Inc., DC Ind., 86-1 USTC ¶9423.

M.L. Schons, DC Wash., 85-2 USTC ¶9764, 54 BR 665.

P.D. Rotherham, CA-7, 88-1 USTC ¶9135, 836 F2d 359.

Rocky Mountain F.S.B., DC Wyo., 89-2 USTC ¶9546.

Crystal Bar, Inc., DC S.D., 91-1 USTC ¶50,114, 758 FSupp 543.

Citizens State Bank, CA-6, 91-1 USTC ¶50,228, 932 F2d 490.

G.M. Poling, DC Ohio, 99-2 USTC ¶50,886.

Wayne County Board of County Commissioner, DC Ohio, 2000-2 USTC ¶50,562. Aff'd, CA-6 (unpublished opinion), 2001-2 USTC ¶50,734.

Air Operations International Corp., DC Fla., 2002-1 USTC ¶50,423.

A corporation's security interest in a motor vehicle did not take priority over the federal tax lien because the corporation did not perfect its security interest by recording it with the Motor Vehicle Division under the applicable Minnesota statute.

Ceco Corp., DC, 83-1 USTC ¶9135, 554 FSupp 569.

A steel floating dry dock, although not specifically described in the pertinent security agreements or financing statements, fell within the general references made in these documents to all "docks", "machinery", "tangible personal property" and "equipment". Thus, a security interest was perfected and took priority. The Uniform Commercial Code, as adopted in California, contemplates a system of "notice filing".

National Equipment Rental, Ltd., DC, 78-2 USTC ¶9780.

A federal lien took priority over a security interest because, under Indiana law, it was possible for a hypothetical creditor to obtain a judgment lien against property purportedly in the custody of the law without obtaining knowledge of the security interest.

H. Dragstrem, CA-7, 77-1 USTC ¶9301, 549 F2d 20.

Although Florida law mandates the filing of an assignment of a claim, a secured creditor's failure to file did not defeat his priority over a tax lien. The Florida requirement is designed to protect those who part with something of value, in dealing with a debtor, on the basis of the state or local public records. The government is not in the position of such a person.

Major Electrical Supplies, Inc., DC, 77-1 USTC ¶9280, 427 FSupp 752.

A creditor's interest in an unacknowledged and unrecorded assigned cause of action was protected under Arkansas law and entitled to priority over the government's subsequent lien for taxes.

Brown & Root, Inc., CA-8, 85-2 USTC ¶9523, 767 F2d 464.

Where the secured creditor perfected its interest at the same time that the government perfected its interest in the accounts receivable by filing a notice of lien, Code Sec. 6323 required the secured creditor and the government to share in the fund in proportion to their claims.

Southern Rock, Inc., CA-5, 83-2 USTC ¶9529, 711 F2d 683.

The "office" of a bankrupt professional basketball player was located in the state in which he deposited his salary checks and in which was located the office of the team for which he played. Thus, a security interest filed in the proper location in that state, in an executory contract of employment, was properly filed and had priority over a federal lien.

C. Neumann, DC, 78-1 USTC ¶9322.

C. Neumann, DC, 79-1 USTC ¶9375.

A bank's security interest had priority over a federal tax lien.

First Natl. Bank of Louisville, DC, 73-1 USTC ¶9223.

A tax lien did not have priority over a bank's security interest in accounts receivable held by a debtor even though the bank's interest was originally in the inventory.

Fourth Natl. Bank of Tulsa, DC, 75-2 USTC ¶9594.

Under the 1966 version of the Uniform Commercial Code, as adopted in Florida, insurance payable by reason of loss or damage to collateral is proceeds. That the drafters of the UCC so intended is evidenced by the fact that they expressly incorporated this rule in the 1972 amendments.

J. Paskow, CA-5, 78-2 USTC ¶9697, 579 F2d 949.

A debtor has not received its interest in accounts receivable at the time a bank filed a security interest and the bank's lien did not have priority.

Juengel Construction Co., DC, 78-2 USTC ¶9812.

A bank's secured interest in funds owed to a contractor by a city did not have priority over a federal tax lien because the interest did not meet the choateness requirement.

City of Houston, Texas, DC Tex., 86-1 USTC ¶9101.

A corporation was a purchaser within the meaning of Code Sec. 6323(a) where it gave consideration consisting of $1, an extension of further credit to the taxpayer, and a forbearance of its right to repossess certain tools.

Roselyn Corp., Calif. SCt, 57-2 USTC ¶9842.

The lower court did not err when it found that the taxpayer's relatives, who paid him $10 and assumed his obligation, were purchasers for valuable consideration.

S.O. Smith, CA-5, 66-1 USTC ¶9378, 359 F2d 924.

A bank had no security interest in funds in a creditor's account. There was no contractual security interest and the bank's interest was not protected under local (New York) law against a subsequent judgment lien arising out of an unsecured obligation.

Manufacturers and Traders Trust Co., DC, 75-2 USTC ¶9872.

A purchaser of property who had no actual knowledge that a tax lien had been filed against the property but who had actual notice of existence of the lien itself was subordinated to the lien.

Gallup, DC, 73-2 USTC ¶9684.

A government's lien for taxes which was filed on October 3, 1967, had priority status to insurance proceeds over that of an assignor whose interest arose from an assignment dated October 2, 1967, but which was not recorded until October 30, 1967. Nor was the assignor entitled to priority under the Uniform Commercial Code since claims or interests in insurance policies cannot be the subject of a security interest. Likewise, the Government's lien was prior in time to those of other claimants whose claims arose after the filing of the Government's lien.

Aetna Casualty & Surety Co. of Hartford, Conn., DC, 69-1 USTC ¶9214.

A purchase money security interest or mortgage valid under local law is protected even though it may arise after a notice of federal tax lien has been filed.

Rev. Rul. 68-57, 1968-1 CB 553.

An individual who had a security interest in property that took precedence over a tax lien lost such priority when a second trust deed was executed later which secured a larger and different sum of indebtedness than originally created.

G.A. Peterson, DC, 81-1 USTC ¶9469, 511 FSupp 250.

A purchase money security interest perfected after a federal tax lien was perfected but two months after the debtor had taken possession of the collateral was not entitled to priority over the federal lien. The secured interest holder did not come within the penumbra of Rev. Rul. 68-57, which merely gives priority to a security interest arising after a tax lien has been filed if the interest is filed within ten days after the debtor takes possession of the collateral.

First National Bank of Marlton, DC, 76-1 USTC ¶9450.

A landlord who financed the raising of a crop on his farm in consideration for his tenants' agreement to pay him half of the proceeds had a lien that was superior to a federal tax lien. The landlord's financing gave him a security interest.

Willstead, Ill. CA Ct., 73-1 USTC ¶9329.

A security interest arising from an optional advance made within 45 days after the filing of a federal tax lien, without actual notice or knowledge of the lien, is protected against the lien, provided the applicable local law is Article 9 of the Uniform Commercial Code and provided that the security interest has been perfected within the meaning of Article 9 prior to filing of the lien.

Rev. Rul. 72-290, 1972-1 CB 385.

Bank loans were made more than 45 days after a federal tax lien was filed; so a secured creditor was not entitled to priority status.

Penetryn International, Inc., DC, 75-1 USTC ¶9361, 391 FSupp 729.

A security interest in all of the delinquent corporate taxpayer's existing accounts receivable and contract rights attached to the taxpayer's right to recover any part of a security deposit required under a lease that it executed. Accordingly, the Government was not entitled to priority over the holder of the security interest who had perfected his security interest before the federal tax lien was filed.

Samel Refining Corp., CA-5, 72-2 USTC ¶9480, 461 F2d 941.

The IRS improperly levied upon a bank account to satisfy a tax lien that was inferior to the bank's lien.

Trust Company of Columbus, CA-11, 84-2 USTC ¶9614.

The IRS wrongfully levied upon the proceeds of a promissory note that had been in the possession of a law firm acting as an agent/bailee for the secured party.

Sacramento Valley Insurance, Inc., DC Calif., 86-1 USTC ¶9136.

A security interest granted under a lease in items of property in the leased premises was perfected prior to filing of a tax lien and took priority over it. The taxpayer was given ninety days to foreclose its interest in those assets.

Huntsville Real Estate Investment Trust, DC, 72-1 USTC ¶9463.

The lower court erred in deciding that a tax lien was entitled to priority over the lien of a security interest holder because the property was not described specifically enough in the security agreement. Instead, it should have decided what portion of the value of products finished more than 45 days after filing of the lien was attributable to the value of property that the secured creditor owed within the 45-day period, and it should have awarded the creditor priority on the portion so attributable.

P. Donald, CA-10, 73-2 USTC ¶9623, 483 F2d 837.

Although the "security interest" contemplated by Code Sec. 6323(h)(1) must be in existence at the time of filing of a tax lien in order to have priority over the lien, the same is not true of a Code Sec. 6323(c) security interest. A claim arising out of a commercial transactions financing agreement had priority over a federal lien.

Natl. Bank of Commerce of Birmingham, DC, 76-2 USTC ¶9532.

A bank that filed its financing statement covering an assignment of accounts and a security interest in contract rights before the government filed its tax lien had a prior lien on the debtor's assets. Rights in a valid, binding contract that could be ordered to be specifically performed if breached are "existing property" under the Tax Lien Act of 1966, even though the contract has not yet been performed.

Centex Construction Co., Inc., DC, 72-1 USTC ¶9289.

A company was not exempted from filing a financing statement by that section of the Uniform Commercial Code (as adopted in Utah) that exempts from filing security interests consisting of assignments of accounts or contract rights when the assignments are an insignificant part of the outstanding accounts or rights of the assignor. Since there was no evidence that the assignment was not one of a significant part of the rights, it did not matter that the transaction was an isolated or casual one for the assignor.

Consolidated Film Industries, CA-10, 77-1 USTC ¶9188, 547 F2d 533.

Federal tax liens were found to have priority over claims of a New York taxpayer's creditors to assets in a fund held by the court in an interpleader action.

G. Mantovani, DC, 80-2 USTC ¶9468.

The Government's tax lien was superior to a bank's claim that it held a security interest in interpleaded funds transferred to the court by the delinquent taxpayer. The lien relied on by the bank was not in an established amount nor was there identifiable property to which it attached until the expiration of the 45-day grace period after the filing of the Notice of Federal Tax Lien.

Texas Oil & Gas Corp., CA-5, 72-2 USTC ¶9653, 466 F2d 1040. Cert. denied, 410 US 929.

Followed.

North Side Deposit Bank, DC, 83-2 USTC ¶9503, 569 FSupp 948.

A secured creditor was not entitled to priority over a tax lien because the account subject to the security agreement was not acquired by the debtor until well after the 45-day grace period. And, since a security interest could not attach until the debtor acquired rights in the collateral, the interest had to lose out because the tax lien was filed prior to the time those rights were acquired.

Community State Bank of Hayti, DC, 77-1 USTC ¶9436.

A lien for unpaid FICA and withholding taxes on the assets of a debtor had priority over a creditor's security interest in the debtor's after-acquired inventory, even though the creditor's lien arose and was filed before the tax lien. The creditor did not know when the debtor acquired the inventory that had been seized to satisfy the lien and thus was unable to show that the inventory was acquired by the debtor before the 46th day after the filing of the tax lien. The creditor therefore could not show that his security interest came within the exception to the priority of a federal tax lien for a security interest that came into existence before the 46th day after the date of the filing of the tax lien.

Rice Investment Co., CA-5, 80-2 USTC ¶9654, 625 F2d 565.

The district court erred in extending the priority of the commercial lender's private lien over the unsatisfied federal tax lien beyond the forty-five day safe harbor period.

Shawnee State Bank, CA-8, 84-1 USTC ¶9513.

A bank had no security interest in funds in a depositor's account and so did not have priority over a federal lien.

Farmers-Peoples Bank, DC, 74-1 USTC ¶9382.

A bank had not perfected its security interest by filing in accordance with the Uniform Commercial Code and, therefore, its interest was subordinate to the duly filed federal tax lien.

George W. Ultch Lumber Co., DC, 80-1 USTC ¶9396, 477 FSupp 1060.

A bank with a valid security interest in accounts receivable of a hospital held a lien superior to a federal tax lien that was filed more than five years after the bank had perfected its security interest. A California law that may have made the bank's security interest unenforceable against the state or its agents did not render assignments unenforceable against the U.S.

Bank of America N.T. & S.A., DC, 79-2 USTC ¶9699.

A wife who was assigned a fund of her husband in return for her agreement to allow him to be released from custody was not a purchaser of a security interest. The agreement was not consideration in money or money's worth. Thus, she was subordinated to a federal tax lien filed before the assignment, even though she was unaware of the lien at that time.

D. Fritz, DC, 71-1 USTC ¶9425, 328 FSupp 1343.

A secured creditor had priority as to a relocation payment due the debtor as the result of a condemnation action even though the amount of the payment was not finally determined by a court until after the government had filed its lien. The payment had accrued at the time of the original judgment (when the lien was not filed) and so was a "thing in action" within the meaning of the Uniform Commercial Code.

M. Kapp, DC, 77-1 USTC ¶9227.

A secured creditor did not lose its priority merely by lending the debtor further money, cancelling an old deed and executing another deed after the federal lien was filed. The original debt was not cancelled but was merely intended by the parties to be "brought forward". However, the additional sum advanced after the lien was filed was not entitled to priority.

P.A. Gant, DC, 78-2 USTC ¶9789.

A financing statement that listed an individual as a debtor did not take priority over a lien filed against a corporation of which he was the dominating force. The corporation and the individual were separate entities.

Watkins Corp., DC, 78-2 USTC ¶9726.

A document in which the bankrupt authorized a bank to assign funds held by the bank to his attorney (P) was not a security and did not give P priority over the government's tax lien. It was merely a nonnegotiable instrument evidencing money held by the bank for the bankrupt. The document was never in P's possession and was unknown to him prior to the levy.

First National Bank of Memphis, CA-6, 72-1 USTC ¶9357, 453 F2d 560.

A security interest in an aircraft is not necessarily invalid against all parties for all purposes and under all conditions solely because it is not filed with the Federal Aviation Administration. The case was remanded where the evidence indicated that the levy was wrongful because the debtor had no interest in the seized property and such seizure would have destroyed the creditor's senior lien.

CIM International, CA-9, 81-1 USTC ¶9146, 641 F2d 671.

A security interest properly filed under state law (Virginia) had not lapsed. Commencement of the instant litigation tolled any obligation by the interest-holder to subsequently file a continuation statement.

Chrysler Credit Corp., DC, 78-2 USTC ¶9481.

Insurance payments made to a debtor as a result of the destruction of collateral were not proceeds of the collateral.

National Fire Insurance Co., DC, 77-2 USTC ¶9660.

Insurance proceeds are merely the collateral in another form. Thus, a security interest was transferred to the proceeds paid when the collateral was destroyed. The interest existed and had priority over a federal lien.

Aetna Insurance Co., DC, 77-2 USTC ¶9726, 436 FSupp 371. Aff'd, per curiam, CA-5, 79-1 USTC ¶9287, 591 F2d 1035.

Although the power of attorney executed by a taxpayer gave his lawyer the authority to apply funds seized in a drug arrest against his attorney's fees, a tax lien accompanying a termination had priority since the power of attorney merely created a security interest in the funds.

J.D. Brooks, DC, 82-1 USTC ¶9321.

The father of a delinquent taxpayer failed to prove that he had a secured interest in his son's truck.

Hess, CA-10, 82-2 USTC ¶9676, 693 F2d 113.

When a tavern was sold to a corporation, the seller failed to perfect a lien against the transferred liquor license. As a result, his interest was subordinate to that of the government.

American Way Food Service Corp., BC-DC Mich., 85-1 USTC ¶9296, 48 BR 79.

The IRS had no claim to a client's interest in Oriental rugs that had been delivered into the physical possession of a law firm as security for the client's payment of legal fees.

Fritschler, Pellino, Schrank & Rosen, DC Wis., 89-1 USTC ¶9111, 716 FSupp 1157.

The surety of a performance and maintenance bond was entitled to summary judgment because the principal possessed no right to a city's partial payment to which an IRS lien could attach. Even if the principal possessed an interest or right in the partial payment, the surety's equitable lien to funds owing to the principal upon the surety's performance was superior to the IRS's lien.

Kansas City, Mo., DC Mo., 89-1 USTC ¶9148.

A Delaware corporation's perfected security interest in a Texas corporation's accounts receivables ceased having priority over a federal tax lien filed against the Texas corporation for delinquent employment taxes. The Delaware corporation had only been granted a security interest in the Texas corporation's collateral; it had not purchased all of the corporation's rights to property.

Heller Financial, Inc., DC Tex., 89-1 USTC ¶9368.

Federal tax liens had priority over the inchoate state wage and benefit claims of the lessee's unpaid coal miners. However, the priority between the tax liens and the perfected, choate security interests of the lessor of the mine, acquired by virtue of the lease, depended upon which was first in time.

C.D. Stratton, W.Va., 88-2 USTC ¶9533.

A bank did not hold a security interest in a corporation's bank accounts which primed the IRS's interest because the bank's interest in the accounts could only arise post-deposit. Since a tax lien attaches to all property or rights in property held by a delinquent taxpayer, any deposits made after the IRS files its tax lien notices would be deposited in the bank already impressed with the tax lien.

Texas Commerce Bank-Fort Worth, N.A., CA-5, 90-1 USTC ¶50,155, 896 F2d 152.

In a dispute regarding the priority of competing interests in a debtor's assets, held in escrow, a private creditor's security interest in the debtor's litigation proceeds had priority over a subsequently filed federal tax lien even though the creditor's security interest was not filed in both places required for perfection. The private creditor filed its security interest with the appropriate state officials, but failed to file a notice in the debtor's local county. However, the IRS's investigating agent obtained actual knowledge of the creditor's competing interest long before the IRS filed its tax lien. The private creditor therefore prevailed under Maryland's good faith filing exception.

Security Finance Group, Inc., DC D.C. 90-1 USTC ¶50,086, 706 FSupp 83.

An individual who was a holder of a security interest and a judgment lien creditor before the IRS filed a notice of federal tax lien with respect to interpleaded funds had priority over the IRS with respect to such funds.

N.S. Holcombe, DC Wash., 90-1 USTC ¶50,177.

A private debtor did not have a valid lien ahead of the IRS's lien for taxes owed as to after-acquired accounts receivable which were acquired after the 46th day of the tax lien filing.

Ralls & Associates, Inc., BC-DC Okla., 90-1 USTC ¶50,299, 114 BR 744.

A corporate assignee possessed a valid security interest in the debtor's present and future accounts receivable that was created before a tax lien, even though the assignment of the commercial financing agreement occurred after the tax lien was filed. Such commercial financing agreement was acquired in the ordinary course of business. The assignee did not have notice or knowledge of the tax lien filing and even if it did such knowledge would not defeat its priority status because the disbursements were made before the tax lien filing.

Western Works, Inc., BC-DC Utah, 90-2 USTC ¶50,351.

A federal tax lien had priority over a savings and loan association's prior security interest in the debtor-taxpayer's savings accounts because the security agreement did not prohibit the debtor from making withdrawals. Although the savings and loan association had met state and federal requirements for creation of a security interest when it lent money to the debtor subject to a security agreement that pledged the debtor's savings deposits with the association, it failed to take priority over the later tax lien because the loan was not mature at the time the federal lien attached and because the debtor was free to make withdrawals from the deposits.

R.G. Weninger, DC Colo., 90-2 USTC ¶50,510, 119 BR 238.

A federal tax lien was superior to the security interest of a bank in a debtor's accounts receivable. The bank did not obtain a purchase money security interest in certain accounts receivable when it advanced funds to the debtor that enabled the debtor to complete performance of specified contractual obligations. Therefore, the bank's interest was not entitled to purchase money priority over a tax lien previously filed by the IRS.

First Interstate Bank of Utah, CA-10, 91-2 USTC ¶50,303, 930 F2d 1531.

An IRS tax lien against real estate was subordinated to a previously recorded security interest in the property. Under Michigan law, the security interest was perfected when an Affidavit of Interest was filed with a county register of deeds.

J. Cipriano, DC Mich., 91-1 USTC ¶50,132, 757 FSupp 1484.

An individual who simultaneously released a mortgage interest on residential property and who was assigned an interest in the land contract for the purchase of farm property had given money or money's worth, and, thereby, he obtained a security interest in the farm property. Accordingly, the interest a second individual purchased in the farm property at an IRS-conducted tax sale was subordinate to the first individual's assigned interest in the farm property because the second individual's priority position was the same as the priority of the federal tax lien at the time of sale. At the time of sale, the first individual's interest was prior to the IRS's interest because he held a security interest in the farm property.

J. Cipriano, DC Mich., 91-2 USTC ¶50,338.

Land contract vendors had a valid lien on restaurant property and priority over subsequently recorded IRS tax liens. The vendor's acquisition of a possessory interest following state (Michigan) forfeiture proceedings did not extinguish any interests held, as claimed by the IRS. The vendor's lien did not merge upon the acquisition of the interest in the property, and the IRS's liens remained solely on the vendee's equitable interest, not the vendor's legal title.

F.J. Vereyken, CA-6, 92-2 USTC ¶50,310, 964 F2d 593.

The IRS was granted summary judgment and a guarantor who claimed a security interest superior to the IRS's April 1989 tax lien on the borrower's accounts receivable was precluded from challenging the levy because the nine-month statute of limitations provided by Code Sec. 6532(c)(1) for claiming an interest in property subject to a wrongful levy had expired.

L. Evangelista, DC N.Y., 92-2 USTC ¶50,533.

Under local (Tennessee) law, past consideration acquired in accordance with an installment sale contract was sufficient to allow a bank to enforce a lien against a motor vehicle seized and sold at auction by the IRS. Thus, the court refused to dismiss the bank's wrongful levy action on the grounds that its lien against the vehicle was inchoate. The bank financed two vehicles purchased by the debtor. The installment sale contract for the second vehicle, which was seized by the IRS, contained a dragnet clause, under which the vehicle was collateral security for any debt owed to the bank. At the time the IRS filed its tax lien, the bank, which had repossessed but not sold the first vehicle, remained free to proceed against the second vehicle to satisfy its security interests.

First Peoples Bank of Jefferson County, DC Tenn., 92-2 USTC ¶50,578, 806 FSupp 187.

Federal tax liens filed against a dairy company's property to satisfy the tax debt of the majority shareholders were valid and properly enforced. The IRS's rights to a corporate checking account levied upon were superior to the rights of a bank which held a security interest in the account. The bank did not properly perfect its interest in the property and it failed to establish that it had exercised its right of setoff.

Horton Dairy, Inc., CA-8, 93-1 USTC ¶50,195, 986 F2d 286.

The debtors' tax debt was given priority over purchase money liens to the extent of the IRS's secured claims against each item of the debtors' property as determined by fixing the value of the debtors' property at the time of the filing of the bankruptcy petition and subtracting the value of any higher priority liens.

T.A. Boch, BC-DC Pa., 93-1 USTC ¶50,197, 154 BR 647.

A secured party's claim to funds prevailed over the government's lien under the "first in time, first in right" rule, since the interest, which was assigned to the secured party, was perfected before the IRS filed its notice of tax lien. Although the interest came into existence before the federal lien for taxes arose, such lien may attach to after-acquired property. The assignee's interest in the property was perfected at the time of assignment, even though no financing statement was filed. Under state (Nevada) law, the assignee was not required to file a financing statement because the assignment did not constitute a significant part of the assignor's accounts.

J. Conzola, DC Fla., 93-1 USTC ¶50,308.

The government's tax lien against a corporation's distributive share of the assets of a partnership had priority over another creditor's security interest because the creditor was not a creditor of the partnership. Although the creditor submitted several documents to evidence the partnership's undertaking of debt, no document explicitly referred to the partnership. Accordingly, because the government properly recorded notices of its tax liens against the corporation, the creditor was not allowed to be paid in preference to the government.

Park Towers, Inc., CA-5, 94-1 USTC ¶50,066.

A creditor's properly filed security agreements gave it a perfected security interest in a debtor's oil and gas properties that had priority over the IRS's subsequently filed notice of tax lien, even for oil and gas produced after the tax lien was filed. Under state (Texas) law, the creditor's security agreements created a single continuous and uninterrupted lien that attached to the minerals under the ground and persisted after extraction.

J.M. Hawn, BC-DC Tex., 94-1 USTC ¶50,165, 149 BR 450.

A state (Florida) court's pre-judgment order requiring the deposit of a check in a bank account pending the outcome of a case to determine the ownership of the funds did not create a security interest for the creditors who were the payees of the checks. Instead, a tax lien, which was filed prior to entry of a final judgment, had priority over the creditors' claims. The tax lien also attached before the initiation of an interpleader action by the bank holding the deposited amount to recover attorney fees and costs.

Central Bank of Tampa, DC Fla., 94-1 USTC ¶50,290, 845 FSupp 860. Aff'd, per curiam, CA-11 (unpublished opinion), 95-2 USTC ¶50,558.

An investor, the holder of a security interest in the proceeds of a liquidated limited partnership, perfected that interest before four of five notices of federal tax lien had been properly filed by the government. Accordingly, the investor, who complied with the state's (Pennsylvania) obligatory financing statement requirements, succeeded in collecting all of the proceeds except those attributable to the government's first lien. Although an IRS lien is afforded priority over most liens and claims asserted against a defaulting taxpayer's property, it is ineffective against the holder of a previously perfected security interest. Consideration for the security interest was adequate because the holder provided value in exchange for the interest, and the fact that he stood to reap a profit from the transaction did not eradicate the existence of consideration. Finally, the fact that the holder gave money to the taxpayer's primary creditor to satisfy the taxpayer's debt, rather than directly to the taxpayer, did not invalidate the security interest. There is no requirement that "money or money's worth" be given directly to the party conveying the security interest as long as the payment to the third party is more than circumstantially connected to the arrangement.

Adelvision, L.P., DC Pa., 94-2 USTC ¶50,394, 859 FSupp 797.

A state (Florida) court's prejudgment order requiring the deposit of a check in a bank account pending the outcome of a case to determine the ownership of the funds did not create a security interest for the creditors who were the payees of the check. Instead, a tax lien, which was filed prior to entry of a final judgment, had priority over the creditors' claims. The tax lien also attached before the initiation of an interpleader action by the bank holding the deposited amount to recover attorney fees and costs. The creditors failed to prove that the government waived its right to the deposited funds when it allowed them to relinquish a landlord lien based on the belief that the funds were available to satisfy the debt owed to them. Because there was no genuine issue of material fact to be decided, the government's motion for summary judgment was granted.

Central Bank of Tampa, DC Fla., 94-1 USTC ¶50,290, 845 FSupp 860.

The merger of two banks following a loan made by the successor bank did not retroactively secure the loan to the time that the target bank had made a loan with an "open-end" provision to the same individual. A second loan made by the target bank prior to the merger and which was secured under the open-end provision of its original loan did not qualify as a security interest until the money for the second loan was actually advanced. Therefore, an IRS lien, which was filed prior to the successor bank's loan and the target bank's second loan, had priority.

R.W. Littleton, BC-DC Ga., 95-1 USTC ¶50,145, 177 BR 407.

A bank's properly perfected security interest in an accounting firm's existing and after-acquired contract rights and accounts receivable had priority over an IRS tax lien with respect to funds received after the filing of the lien because the disputed funds were proceeds received by the firm from a client under a pre-existing contract. A contract existed under state (Tennessee) law because there was a meeting of the minds. The agreement did not fail to qualify as a contract merely because it did not specify a duration or a final price. The firm agreed to provide accounting services to the client, and the client agreed to pay a reasonable fee that would be determined at the end of a specified project. Thus, the bank's security interest extended to the disputed funds.

Dorrough, Parks & Co., DC Tenn., 95-2 USTC ¶50,337.

A creditor who asserted that he had a security interest in a debtor's country club membership that was perfected prior to the filing of the IRS's notice of tax lien had no interest in the proceeds from the sale of the debtor's membership. Pursuant to the country club's by-laws, the debtor could not encumber his membership.

New Las Vegas Country Club, DC Nev., 96-1 USTC ¶50,218.

A bank's security interest in real property was choate and, therefore, had priority over later-filed tax liens. The bank had a valid security interest because the interest was appropriately filed and perfected under state (West Virginia) law and the bank parted with money or money's worth in the form of several large loans in obtaining the interest. The property at issue was not the payment of rent due pursuant to a sublease that was executed after the liens were filed. Instead it consisted of the leasehold estate, the rents, and the underlying real property. The sublease did not alter the essential character of the property subject to the security interest.

Bank One, West Virgina, N.A., DC W.Va., 96-1 USTC ¶50,272.

The IRS's claim to the proceeds of a Miller Act bond prevailed over a bank's security interest in a subcontractor's contracts because the IRS's properly filed tax lien on the subcontractor's property for withholding tax delinquencies was first in time. The bond proceeds resulted from a contractor's default on its contract with the subcontractor. Even though prior to extending a line of credit the bank received assurances from the IRS that a levy against the subcontractor's property had been released, the bank was not told that the lien had been lifted, and it neglected to ascertain whether a tax lien had been filed against the subcontractor. Further, the lien attached to the bond proceeds even though the terms of a security agreement placed the funds directly into the bank's possession.

Norse, Inc., DC Guam, 96-1 USTC ¶50,288.

A bank's security interest in a corporate taxpayer's theft insurance proceeds had priority over federal tax liens and other creditors' claims. Although the tax liens arose before the bank filed its financing statement, the bank's statement was filed, and its lien perfected, before the government perfected its lien by filing its tax lien notices. The IRS tax lien had priority over the claims of other creditors, however, since its lien was perfected earlier.

Accurate Filter Products, Inc., DC Mich., 96-1 USTC ¶50,278.

An IRS tax lien had priority on the proceeds of a bankrupt individual's business account receivable because a bank did not have a security interest in the account receivable. The description of the collateral covered by the security agreement did not encompass any accounts except those arising from a disposition of the debtor's equipment or inventory. Moreover, the security interest was not perfected by filing in the appropriate recording office.

B.A. Straight, BAP-10, 97-1 USTC ¶50,374, 207 BR 217.

Acting on a motion for reconsideration filed by the IRS, the District Court reversed its earlier conclusion and ruled that tax liens against an individual's real property for taxes assessed before the property was transferred into a land trust had priority over the land trust's interest in the property. Since the assessments were made prior to the transfer, the tax liens attached to all of the individual's property. Thus, the real property was transferred to the land trust subject to the tax liens. Further, a creditor who executed, with the individual who was the trust's beneficiary, a collateral assignment of beneficial interest in the land trust was not a holder of a security interest in the beneficial interest of the land trust. The creditor who did not loan any additional funds when she executed the collateral assignment did not part with any "money or money's worth" under Code Sec. 6323. Even if the creditor had a security interest, she did not hold a security interest in the res of the land trust. Under state (Illinois) law, a beneficial interest in a land trust is an interest in personal property, not a direct interest in the res of the trust.

V.H. McAnulty, DC Ill., 96-2 USTC ¶50,485, on motion for reconsideration of 96-2 USTC ¶50,484.

The IRS wrongfully levied on funds owed by a school district to a construction company because a bank had perfected a security interest in the funds under state (Arkansas) law before the tax lien was filed. The description of the property in the financing statement that was required to perfect the security interest was sufficient for third parties to inquire further in identifying the property.

The Twin City Bank, DC Ark., 96-2 USTC ¶50,694.

A corporation that was assigned a bank's perfected security interest in a medical entity's equipment and fixtures did not possess a secured interest in a glove-making machine, which the bank agreed in a letter, issued by its president, to exclude from the collateral. Thus, the corporation did not have priority over an IRS tax lien with respect to the machine. Pursuant to a state (Florida) statute, the bank could release collateral by a signed statement, and the release did not have to be filed with the Secretary of State to be effective. Accordingly, the bank had no interest in the machine to assign to the corporation.

Bradley Factor, Inc., DC Fla., 97-1 USTC ¶50,278.

A bank's perfected security interest in a debtor's contract rights was superior to a federal tax lien. The debtor's accounts receivable generated by its shipment of goods in accordance with a contract's minimum requirements were identifiable proceeds of contract rights and, thus, were rights acquired by the debtor on the date it acquired the contract rights. However, rights to be paid for shipments of goods in excess of a contract's minimum requirements were merely accounts receivable, not proceeds of the debtor's pre-existing contract rights. Therefore, those rights were not acquired until the debtor earned payment by performing its services, which occurred after expiration of the 45-day safe-harbor period for disbursements with respect to security interests. Thus, the bank's perfected security interest in those rights was not superior to the tax lien. The issue of whether and to what extent goods were shipped in fulfillment of minimum requirements provisions in the debtor's contracts with other companies was remanded to the trial court for determination.

Bremen Bank and Trust Co., CA-8, 98-1 USTC ¶50,116, aff'g, rev'g and rem'g in part an unreported District Court decision.

A bank's interest in the accounts of a corporate borrower that had defaulted on its loans did not have priority over IRS tax liens against the borrower for delinquent payroll and unemployment taxes; thus, the IRS properly levied against those accounts. Under state (Indiana) law, the bank did not acquire a security interest in the accounts before the IRS filed its notice of tax lien. While the bank had the right to set-off amounts that the borrower owed with the funds in the accounts, it waived that right when it allowed the borrower to make withdrawals from the accounts following its default on the loans. Also, the loan agreements did not give the bank contractual security interests in the accounts. Finally, the bank failed to show that the funds in the accounts represented proceeds of the borrower's accounts receivable over which it could acquire a continuously perfected security interest.

Farmers State Bank of Mentone, Inc., DC Ind., 98-1 USTC ¶50,258.

A federal tax lien was properly granted priority over a creditor's pre-existing security interest in the sale proceeds of a bankrupt corporation's liquor license. Under state (New Jersey) law, the liquor license and the rights granted under it are not subject to creditors' liens. However, tax liens under Code Sec. 6321 attach to any property of the taxpayer, including property, such as liquor licenses, that is subject to state anti-alienation laws. Thus, the IRS had the only valid lien against the license and was entitled to the proceeds from the sale.

Main Street Beverage Corp., DC N.J. (unpublished opinion), 99-1 USTC ¶50,272, 232 BR 303, aff'g an unreported Bankruptcy Court decision.

Federal tax liens filed on condemnation proceeds owed to a delinquent taxpayer by a state (New York) had priority over the claim of a bank's successor-in-interest to the interpleaded funds. The record established that the bank and the taxpayer intended that the assignment be for collateral/security purposes; the parties' agreement did not constitute an outright assignment of the proceeds. As a result, the successor's position was confined to the original assignment and could not be expanded because the bank failed to perfect its security position. Since the successor merely held an unperfected security interest, the government gained priority by filing valid tax liens against the condemnation proceeds.

Talco Contractors, Inc., DC N.Y., 99-1 USTC ¶50,577.

A local solid waste management committee's security interest was superior to federal tax claims with respect to the interpleaded proceeds of a delinquent waste management facility's fire insurance policy. The committee perfected its security interest in a lien that attached to the facility's fixtures under both state (Nebraska) and federal law before the tax lien was filed.

Allied Mutual Insurance Co., DC Neb., 99-1 USTC ¶50,485.

An attorney who was granted a mortgage on his client's home as security for the debt for fees owed with respect to his criminal defense work and his handling of various civil matters for the client and his company held a valid security interest in the property under state (Alabama) law. Since that interest was perfected before the IRS filed tax liens against the client, the mortgage had priority over the liens. The attorney was found to have "parted with money or money's worth." His billing records substantiated a portion of the fees owed to him for legal work performed on behalf of the client and the company; the record established that the parties had agreed to a fixed fee for the attorney's representation in connection with the client's criminal indictment; and the client testified that he considered himself to be personally liable to the attorney for his legal fees.

C.W. Fletcher, Sr., BC-DC Ala., 99-2 USTC ¶50,709.

A bank's security interest in contract payments arising from a delinquent taxpayer's performance of services to a hospital had priority over the IRS's competing tax lien. The contract between the taxpayer and the hospital qualified as a commercial financial security agreement and the agreement between the bank and the taxpayer was a commercial transactions financing agreement. The bank acquired the hospital contract rights within 45 days of filing the tax lien filing. Therefore, contract rights were qualified property covered by the bank's security interest and protected by the safe harbor provision regarding after-acquired property.

Plymouth Savings Bank, CA-1, 99-2 USTC ¶50,807, 187 F3d 203.

A bank with a security interest in a third party's accounts receivable did not have a perfected security interest in the cash proceeds of the accounts that were voluntarily paid to the IRS. Although the bank perfected its security interest in the accounts receivable prior to an IRS notice of lien, it did not perfect its security interest in the proceeds by taking possession. Moreover, the bank did not allege that the third-party's payments to the IRS were from identifiable proceeds of the accounts receivable or that they were fraudulent.

Bank of New Hampshire, DC N.H., 2000-2 USTC ¶50,657.

The IRS was entitled to recover funds subject to tax liens that debtors had transferred to third party creditors. The debtors had transferred cash and assigned rights under annuity contracts to their mortgage holder banks after the IRS perfected the tax liens. That the banks had a perfected security interest in real property secured by a mortgage did not give them priority as to the government with respect to the encumbered funds. Moreover, the creditors were not entitled to the super-priority safe harbor relief under Code Sec. 6323. The banks were not includible in the classes of interest holders addressed by the statute; moreover, even if they were, the banks took the funds from the annuities after notice had been filed.

A.J. Cobb, BC-DC La., 2002-1 USTC ¶50,446.

The government was entitled to the full amount of interpled funds calculated in debtors' bankruptcy proceeding. The federal tax lien was superior to a mortgage. Before reaching the federal inquiry regarding priority, the court determined that the mortgage was a valid property interest under state (Florida) law. However, it was not a security interest that could compete with a federal tax lien. The mortgagee did not have priority over the federal tax lien because it did not meet all four conditions of a security interest as defined by Code Sec. 6323, even though the government failed to properly record the tax lien. Moreover, the bankruptcy trustee was not entiled to attorney's fees and costs because the interpled funds were insufficient to cover the government's tax liens.

A.M. Garcia, DC Fla., 2003-1 USTC ¶50,147.

On the date when the IRS levied on funds owed by a delinquent airline company to a corporate creditor, the creditor had no security interest or lien with respect to those monies that was superior to the IRS's tax lien. By the time the creditor obtained a perfected security interest or a judgment lien, the levy had been consummated and the government had actual possession of the funds in dispute. Thus, the creditor's wrongful levy claim was properly denied.

Air Operation International Corp., CA-11, 2003-1 USTC ¶50,231.

A third party subrogee was not entitled to summary judgment with respect to its claim of priority interest over an IRS tax lien for funds held by its subcontractor. The court rejected the subrogee's argument that its security interest qualified as an obligatory disbursement agreement pursuant to Code Sec. 6323(c)(1)(B). Even though the bonds issued for the contract qualified as security interests, the subrogee failed to show that its security interest was protected under local law.

Merchants Bonding Co., DC Mich., 2003-1 USTC ¶50,499.

A properly filed federal tax lien had priority over a mortgagee's security interest in residential property. Although the mortgage was executed and recorded before the tax lien arose and the mortgagee had not received notice of the lien, mortgage funds were disbursed to the taxpayers after the expiration of the 45-day grace period under Code Sec. 6323(d).

Bank of America, N.A., DC Okla., 2005-1 USTC ¶50,105, 342 FSupp2d 1009.

Two IRS tax liens on a corporate taxpayer's accounts receivable had priority over a security interest held by the taxpayer's bank in the same accounts receivable, even though the bank's security interest predated the IRS's liens. Both the bank's and the IRS's liens predated creation of the accounts receivable. The IRS's liens and the bank's interest immediately attached to the accounts receivable as soon as they came into existence. In that situation, the federal tax lien has priority. Accordingly, the IRS rather than the bank was entitled to the proceeds from the accounts receivable.

Old National Bank, DC Ind., 2005-1 USTC ¶50,331.

An IRS tax lien took priority over an industrial loan corporation's security interest with regard to the cash amount collected by an after-hours medical care provider for services it rendered after the filing of the federal tax lien. Under the Federal Tax Lien Act, the disputed amount was properly classified as proceeds of accounts receivable because it stemmed from services provided after the 45-day safe harbor period that followed the filing of the federal tax lien had passed. The medical care provider's right to payment under the provider contracts it entered into with various insurance companies arose only when identifiable care was rendered to a patient and a specific account receivable was then created.

American Investment Financial, CA-10, 2007-1 USTC ¶50,301.

A bank's choate security interest in a couple's mortgaged real estate had priority over the IRS's federal tax liens on the couple's property. Since the IRS's tax lien was filed after the bank's security interest was perfected, the bank's lien had priority based on the "first in time, first in right" rule.

J.V. Wells, DC Ky., 2007-1 USTC ¶50,425.

The IRS's subsequently re-filed tax lien was subordinate to an individual's security interest. Contrary to the government's argument, the individual did not proceed on the basis that she was the property's purchaser; rather she argued that she was the holder of a security interest. Under Code Sec. 6323, the holder of a security interest is not required to part with full and adequate consideration; only money or money's worth. Since the individual paid at least $100,000 to purchase the contract she parted with "money or money's worth." Therefore, she held a qualified security interest and the IRS's tax lien was subordinate to that interest.

D. Somers, DC Wis., 2008-1 USTC ¶50,304.

Where a federal tax lien and a corporation's security interest were recorded simultaneously against a debtor corporation's property, the federal tax lien took priority as a matter of law and public policy. Although both liens were perfected at the exact same time, the government was an "involuntary creditor" that could not bargain for additional security, and the collection of taxes was essential to the government's functioning. Further, assuming that monies from two settlements were after-acquired property, both the tax lien and the security interest would have attached and became perfected under the state law simultaneously, but the federal tax lien would be rendered first in time. Finally, the corporation's lien did not satisfy the federal choateness doctrine because it was not reduced to judgment and the forty-five day safe harbor provision was not applicable because the corporation did not extend a line of credit.

In re Hulett Corporation, BC-DC Ill., 2008-2 USTC ¶50,537.

A national banking association's choate security interest in a corporation's account receivables had priority over the IRS's federal tax liens on the corporation's property. Since the association's choate interest arose before the IRS filed its first notice of tax lien, the association's interest had priority based on the "first in time, first in right" rule. The association's choate security interest had priority with respect to the corporation's receivables that arose before the 46th day after the IRS filed its tax lien. Consequently, the IRS's levy of the corporation's receivables was wrongful and the association was entitled to repayment of the levied funds.

Harris N.A., DC Ill., 2008-2 USTC ¶50,546.

A bank's property interest in debtors' after-acquired funds was superior to that of the IRS's interest in those funds because the bank was a perfected secured creditor with a valid security interest in the debtor's accounts receivable. Further, the bank's secured interest in the accounts receivable had priority over the subsequently filed tax lien. The IRS did not file its lien until more than three months after the debtors paid the funds to the IRS.

In re B.R. Zwosta, BAP-6, 2008-2 USTC ¶50,637.

An Appeals officer did not abuse his discretion in cancelling an offer-in-compromise (OIC) agreement, reinstating a taxpayer's original tax bill and sustaining a levy, based on the taxpayer's breach of the OIC. As a condition for the “offer in compromise”, the taxpayer agreed to file his tax returns and pay tax due for five years. However, the taxpayer failed to timely file returns for two years and pay tax for one of those years. Because the returns were never received by the IRS and there was no record of either a postmark, or certified or registered-mail receipt, the taxpayer could not rely on the presumption of delivery. Even assuming the Appeals officer had found the returns were timely filed, the IRS's evidence of nonreceipt was overwhelming. By not timely filing the returns and paying tax, the taxpayer was not in compliance with the express terms of the OIC. As a contract, the OIC was governed by general principles of federal common law. Clarifying its decision in J.M. Robinette, 123 TC 85, Dec. 55,698, the Tax Court stated that a national legal standard for construing OIC agreements was supported by three factors: federal government agency as litigant, contracts entered into under federal law and the need for nationwide uniformity in administration. Under general principles of the federal common law of contracts the taxpayer's obligation to file and pay taxes was an express condition of the contract that required strict compliance. The IRS used plain language to explain the terms and conditions of the OIC and the risk of forfeiture did not weigh against finding that the obligation to file and pay was an express condition of the OIC. Even without relying on principles of contract law, other federal courts have upheld the IRS's right to cancel an OIC when the taxpayer is in default because of the express language in the agreement. Finally, the IRS provided the taxpayer with several opportunities to become compliant and the only consideration for forgiveness of 95 percent of his tax debt was to timely file and pay his taxes for five years. Thus, the Appeal's officer's decision not to excuse the breach and reinstate the OIC was not an abuse of discretion. -

W. Trout v. Commissioner, Dkt. No. 5690-05L , 131 TC --, No. 16, December 16, 2008, [ Code Secs. 6330, 7122 and 7502] Levy and distraint: Returns: Mailing date: Offer-in-compromise agreement: Collection due process hearing. --
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Robert E. McKenzie and Kathleen M. Lach, for petitioner; Thomas D. Yang, for respondent.

In 1997, P entered into an offer-in-compromise (OIC) covering tax years 1989, 1990, 1991, and 1993. The OIC included a term requiring P to timely file and pay his taxes for five years. P filed his 1996 tax return late, then failed to file 1998 and 1999 returns. P filed his 1998 taxes, showing a refund due, in November 2003, but failed to sign his 1999 return, which showed a liability of $164. In March 2004, R sent P a notice of intent to levy and P requested a CDP hearing. P paid his liability for 1999 but still failed to file a signed return. R issued a notice of determination upholding the collection action in March 2005. P claims failure to file the 1999 return was not a material breach, relying on Robinette v. Commissioner [ Dec. 55,698], 123 T.C. 85 (2004). P claims that R abused his discretion (1) in finding that P had not timely filed his 1998 and 1999 returns and (2) in refusing to reinstate the OIC because the breach of the OIC's obligation to timely file was not material. Held, P did not gain the benefit of the exceptions listed in sec. 7502, I.R.C., to the general rule that a tax return is filed when received. Under Rule 122, the Court could not make a finding on P's credibility and overwhelming evidence indicated that R did not receive either return on time. Therefore, R's finding that 1998 and 1999 tax returns were not timely filed was not an abuse of discretion. Held, further, applying general principles of the federal common law of contracts, P's OIC agreement made timely filing and payment of tax express conditions. P was not powerless to avoid the breach, and the failure to reinstate his OIC caused no forfeiture, so R did not abuse his discretion in finding P had breached the OIC and determining to proceed with collection.


OPINION

HOLMES, Judge: David Trout offered the IRS $6,000 to settle his 1989, 1990, 1991, and 1993 tax bills which totaled $128,736.45. The Commissioner accepted this offer in 1997. As part of the deal, Trout agreed to file his tax returns, and pay any tax due, on time for the next five years. The Commissioner says that Trout broke that deal, and now wants to collect the original bill. Trout says that he did file his returns on time but that, even if he didn't, his failure was too immaterial to be a breach of his contract with the IRS. And even if it was a breach, he argues that his default did not justify reinstating his original tax bill.

In Robinette v. Commissioner [ Dec. 55,698], 123 T.C. 85 (2004), we faced a very similar question and in our lead opinion looked at least in part to the state law of Arkansas to resolve it. Id. at 109. The Eighth Circuit carefully noted that "it is not clear that the Tax Court applied or relied upon Arkansas law. To the extent that Arkansas law might differ from the contract principles that derive from federal common law, * * * federal law governs this case." Robinette v. Commissioner [ 2006-1 USTC ¶50,213], 439 F.3d 455, 462 n.6 (8th Cir. 2006). Today, we revisit the issue and state more plainly that the federal common law of contracts applies. Using that law, we conclude that Trout breached his contract with the Commissioner, and we hold that the Commissioner did not abuse his discretion in refusing to reinstate the original deal.


Background

Before offering to compromise his tax debt, Trout had not always filed on time. In the years before he signed the deal in January 1997, he was late more often than not:



Year Due Received

1989 4/15/90 6/13/91

1990 4/15/91 4/15/91

1991 4/15/92 4/15/92

1992 4/26/93 8/15/93

1993 10/15/94 3/25/96

1994 10/15/95 4/9/96

1995 8/15/96 11/7/96


Settling with the IRS in the form he did --called an offer-in-compromise (OIC) --gave Trout a chance for a fresh start with the tax system. But there was a catch --the OIC provided that he had to satisfy "all of the terms and conditions of the offer" or the Commissioner could reinstate his original tax liability. One of these terms was that Trout had to both file his returns on time, and pay the tax due, for five years after signing the OIC.

Trout, however, flopped back to his old ways within a year, by not filing his 1996 tax return until April 1998. The Commissioner either wanted to give Trout another chance or didn't notice, because the OIC wasn't defaulted. Trout filed and paid his 1997 taxes on time, but then fell back into trouble for 1998 and 1999. His 1998 return was due (with extensions) in October 1999. His 1999 tax return was due (again with an extension) in August 2000. The IRS says it never received either one, and the Commissioner finally noticed and sent "potential OIC default letters" to Trout and his lawyer in September 2001. 1 These letters gave him 30 days to file and pay any taxes that he owed for 1999, and threatened him with termination of the OIC and the reinstatement of any of his original tax liabilities remaining unpaid if he didn't.

After hearing nothing for almost seven months, the Commissioner sent Trout an "OIC default letter" on April 15, 2002. He sent this letter to Trout's address in Phoenix, Arizona --the same address to which he sent the "potential OIC default letter" and the address which both parties agree was Trout's residence during the 2001 and 2002 tax years. Another year passed, and in May 2003 the Commissioner sent a "Notice of Intent to Levy" (NIL) to Trout --and sent it not to Phoenix, but to a concededly wrong address.

Trout never responded to the NIL that the Commissioner mailed to the wrong address, so the IRS went ahead and levied on his salary in September 2003. Trout complained, but the Commissioner took the position that when Trout didn't timely file his 1998 return and pay the tax due, he was in default on the OIC's condition that he file and pay his taxes on time for five years.

Trout blames the accountant who prepared both his 1998 and 1999 returns, arguing that the accountant put the wrong Social Security number on them by turning a "5" into a "2" and so it was the accountant who caused those returns to lose their way. Trout claims that this was just an honest clerical mistake. The wrong number belonged to a man who died in 1978, however, and the Commissioner has no record of taxes being timely filed for those years under either the correct or the mistaken number. When Trout learned this, he said he would file the missing returns.

The Commissioner's heart then softened --he told Trout to go ahead and mail his missing 1998 and 1999 returns and resubmit the OIC. This got Trout moving, and the Commissioner finally received and filed the missing 1998 tax return in November 2003 (nearly four years after its extended due date). It showed the IRS owed him a small refund of about $1,350.

Trout's 1999 return remains a problem --the Commissioner claims that he still has not received it in proper form even after all these years, despite several requests and the active involvement of Trout's lawyers. The Commissioner did receive an unsigned copy of the 1999 return with a self-reported liability of $164 in late 2003. In December 2003, the Commissioner asked Trout to sign this late-filed 1999 return and send copies of both the 1998 and 1999 original returns (the ones that Trout claimed the IRS must have misfiled because his accountant got the social security number wrong) to prove that he had filed them when due. Trout never did so, and in March 2004 the Commissioner sent Trout another notice of his intent to levy. 2 Trout requested a "Collection Due Process" (CDP) hearing. In May 2004, the Commissioner released the first levy and postponed levying under the second, having concluded that Trout was indeed entitled to a pre-levy hearing.

The 1999 return continued to bedevil both parties --on May 14, 2004, the Commissioner told Trout that that return was still unfiled. In November 2004, the Commissioner received another unsigned 1999 return which he promptly sent back for signing. In December 2004 --although the Commissioner still hadn't gotten a signed 1999 return --he did get two checks. One was from Trout for $163, and the other one, written by Trout's lawyers, was for $1. The Commissioner incorrectly posted these checks to Trout's 1989 and 1990 accounts.

The missing 1999 return popped up again on January 12, 2005, when Trout's lawyer faxed another unsigned 1999 return with a hand-corrected social security number. The Commissioner again bounced this one back for lack of a signature. Trout's lawyer responded on January 27, 2005, with a letter insisting that Trout had filed his 1999 return (and citing Robinette). In February 2005, Trout's lawyer finally sent in a signed 1999 return, but again with an incorrect social security number.

The CDP process ground on while the 1999 returns were being batted back and forth. In March 2005, the Appeals officer issued a notice of determination upholding the levy, and denying reinstatement of the OIC. The Appeals officer determined that Trout did not timely file his returns for 1998 and 1999 or timely pay the balance due for 1999. (He also noted that Trout had been late in filing his 1996 tax return.) The Appeals officer concluded that there wasn't a less intrusive alternative to the levy, since Trout offered no collection alternatives besides the reinstatement of the OIC. 3

Trout contends that the Appeals officer ignored Robinette by not considering whether the alleged nonfiling of the returns was a material breach of contract. The Appeals officer acknowledged that Trout believes Robinette to be the controlling precedent, but concluded in his case memorandum: "In my opinion, whether there was or was not a material breech [sic] of contract does not matter. The taxpayer failed to comply with the terms of the [OIC]."

The case was set for trial in Chicago, though Trout was a resident of Arizona when he filed his petition. 4 The parties submitted the case for decision under Rule 122, and stipulated most of the record. They disagree only on whether Trout timely filed his 1998 and 1999 tax returns, whether he timely paid his 1999 tax due, and whether a letter from the USPS can be introduced into evidence. Only Trout's tax liability for 1993 remains at issue, because the Commissioner has conceded that the statute of limitations for collection after assessment has expired for tax years 1989, 1990, and 1991.

Trout argues that the Appeals officer abused his discretion in refusing Trout's request to reinstate his OIC. He relies heavily on the similarities between his case and Robinette, and so argues that even if he didn't file his returns, the Commissioner should still have reinstated the OIC because his purported breach is immaterial. He also asserts that the ten-year collection statute has expired even for 1993. 5


Discussion

Both parties agree that we're reviewing not a challenge to Trout's underlying tax liability, but only the Commissioner's decision to sustain the levy. See sec. 6330(c)(2)(A). The question therefore is whether the Commissioner abused his discretion. We look to see if he "'ma[de] an error of law * * * or rest[ed] [his] determination on a clearly erroneous finding of fact * * * [or] applie[d] the correct law to the facts which are not clearly erroneous but rule[d] in an irrational manner.'" Indus. Investors v. Commissioner, T.C. Memo. 2007-93 (quoting United States v. Sherburne, 249 F.3d 1121, 1125-26 (9th Cir. 2001)); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 402-03 (1990).

In Robinette, we held that the Commissioner abused his discretion by not reinstating an OIC despite Robinette's failure to timely file his tax returns. In that case, we held that

[d]espite the late filing * * *, under the facts and circumstances of this case, [the Commissioner] abused his discretion in determining to proceed with collection. The Appeals officer acted arbitrarily and without sound basis in law and had a closed mind to the arguments presented on petitioner's behalf. He failed to consider the facts and circumstances of this case. He determined to proceed with collection even though the breach in the contract was not material and under contract law the contract remained in effect.

123 T.C. at 107.

Trout argues that his case is just like Robinette's --even the Appeals officer in this case is the same --and so he argues that we have to reach the same result here, even though we were reversed on appeal. 6 He claims that his case is even stronger than Robinette's because the facts show that he didn't actually breach his OIC, much less breach it materially.

We first address whether the Commissioner erred in finding that Trout breached the OIC by not timely filing his 1998 and 1999 returns. We then analyze whether our decision in Robinette compels us to hold that the OIC was still in effect because any breach was not material. And, finally, we review the Commissioner's exercise of discretion in ultimately sustaining the levy.



A. Did the Appeals Officer Abuse his Discretion in Finding that Trout Didn't Timely File and Pay for 1998 and 1999?
Trout claims that he timely filed his returns for 1998 and 1999. He argues that his accountant prepared returns for both years, but explains the absence of any IRS record of their receipt by suggesting that they might have been filed under the wrong social security number. We're skeptical about this explanation at the outset, because Trout filed requests for extensions of his filing deadlines for both those years using the same wrong social security number, and the Commissioner managed to successfully process both of them.

The Commissioner also argues that it's up to Trout to prove timely filing. And, other than unsigned copies of his returns, Trout points to nothing in the record (e.g. a certified mail receipt) that proves he mailed the returns, proffered no testimony from his accountant, and most importantly, introduced no canceled checks or bank records suggesting that he timely paid the balance due on his 1999 taxes, or received his refund for 1998. When the Appeals officer checked IRS records for Trout's 1999 tax return, he found that it still hadn't been processed as of January 12, 2005 --despite numerous requests for a signed 1999 tax return and the assistance of two attorneys from two different law firms.

The general rule is that a tax return is filed when it's received. United States v. Lombardo, 241 U.S. 73, 76 (1916). Section 7502 provides exceptions to this general rule for returns received after, but postmarked by the USPS on or before, their due date --and even for returns not received at all if they were sent by registered or certified mail. Sec. 7502; sec. 301.7502-1(c)(1)(iii)(A),(2), Proced. & Admin. Regs. Trout's original returns were never received. And there is no evidence in the record of either a postmark, or a certified or registered-mail receipt. Sec. 7502(a)(1) and (c). This was also an issue in Robinette, but in that case there was a detailed explanation of the postmark, physical evidence of the postmark, and a detailed itinerary of the whereabouts of the accountant who mailed the return. Robinette, 123 T.C. at 88, 106.

Some courts allow other evidence that the taxpayer has fulfilled the requirements of section 7502. In Anderson v. United States [ 92-1 USTC ¶50,308], 966 F.2d 487, 490-92 (9th Cir. 1992), the Ninth Circuit held that although section 7502 created a statutory mailbox rule, it did not displace the common-law mailbox rule that the proper mailing of an envelope creates a rebuttable presumption of its receipt. But this presumption, absent physical evidence such as a postmark, requires a finding on the credibility of the taxpayer. In Anderson v. United States, 746 F. Supp. at 15,(E.D. Wash. 1990), the District Court found credible the taxpayer's testimony that she saw the postal clerk postmark her return and place the envelope in the mail. The Anderson court also found that the government lacked credibility when it claimed not to have received the tax return, since it admitted losing other taxpayers' documents. Id. at 16.

Because Trout submitted this case for decision without trial under Rule 122, we are unable to make findings of credibility on this issue. Nor has Trout offered any evidence to prove that he ever mailed his tax returns before the IRS started levying on his property, much less that he timely mailed them. So Trout cannot rely on any presumption of delivery. Cf. Robinette, 123 T.C. at 106.

Even if the Appeals officer had found that Trout timely mailed his tax returns, the Commissioner rebutted whatever advantage the common-law mailbox rule might have given Trout. See Smith v. Commissioner [ Dec. 49,903(M)], T.C. Memo. 1994-270, affd. without published opinion 81 F.3d 170 (9th Cir. 1996). The Commissioner's evidence of nonreceipt was overwhelming: The Appeals officer conducted a nationwide search on the master files of the IRS to see if any return had been filed for 1998 or 1999 under either Trout's real social security number or the one he says he used. The Commissioner also notes that the IRS issued no refund for 1998, even though Trout requested a refund on his return. And Trout offered no proof that he received the refund he was owed on his 1998 taxes. As for the 1999 tax year, the IRS had no record of a timely $164 payment, and Trout has no canceled check to back up his claim.

We conclude that the Appeals officer did not clearly err in finding that the IRS did not receive the 1998 and 1999 returns on time. See Walden v. Commissioner [ Dec. 44,768], 90 T.C. 947, 951-52 (1988). We therefore find no abuse of discretion in his determination that Trout failed to timely file those returns.

But was that enough to justify the Commissioner's decision to pull the OIC?



B. Did the Appeals Officer Abuse His Discretion in Defaulting the OIC?
Trout believes that his case is exactly like Robinette, and he specifically appeals to our holding that Robinette's failure to timely file was not a material breach of his OIC. Because the breach wasn't material, we held that the OIC was still in effect under general principles of contract law. Id. at 108 (citing TXO Prod. Corp. v. Page Farms, Inc., 698 S.W.2d 791, 793, (Ark. 1985)). And since "the offer-in-compromise was not in default, it was an abuse of discretion for [the Commissioner] to determine to proceed with collection of [Robinette's] tax liability." Robinette, 123 T.C. at 112.

In this case, the Appeals officer decided that Trout breached his OIC by not timely filing his 1998 and 1999 returns, not timely paying his 1999 taxes, and because timely filing and paying was an express condition of the OIC. The Appeals officer knew about Robinette, but believed that Trout's noncompliance with the express terms of the OIC made irrelevant the materiality of those breaches. After the Eighth Circuit issued its opinion, we have faced a similar problem at least twice. But in both Ng v. Commissioner, T.C. Memo. 2007-8, and West v. Commissioner, T.C. Memo. 2008-30, we were able to conclude that the taxpayer had both materially breached his OIC and violated its express conditions.

We think it best now to decide the issue of whether the Commissioner should analyze violations of OICs for materiality of breach or express conditions, rather than require both the Commissioner and taxpayers to argue both theories in every case because of the uncertainty now present in the caselaw.

We start by being precise in describing what it was that we held in Robinette. We began with the proposition that OICs are contracts, and so their construction is governed by general principles of contract law. Id. at 108 Our lead opinion cited Arkansas law --Robinette being a resident of Arkansas when he filed the petition and during the tax years at issue --for the proposition that a material breach discharges a party's obligation to perform, whereas a minor breach does not. Id. We then analyzed whether the breach was material under the five-factor test from 2 Restatement, Contracts 2d, sec. 241 (1981), carefully noting that Arkansas had adopted this analysis. These five factors balance:

(a) the extent to which the injured party (here the Commissioner) is deprived of the benefit he reasonably expected from entering into the OIC;

(b) the extent to which the Commissioner is adequately compensated for the loss of that benefit;

(c) the extent to which the breaching party (here the taxpayer) suffers forfeiture;

(d) the probability that the breaching party will cure his breach, taking into account all of the circumstances including "reasonable assurances"; and

(e) the extent to which the breaching party's behavior comports with standards of good faith and fair dealing.

After balancing these factors, we found that the breach wasn't material. Robinette, 123 T.C. at 112.

This opinion garnered the votes of 6 of the 17 judges then in office. It also attracted a number of concurrences. Judge Wells wrote that our focus on contract law was unnecessary in deciding that the Commissioner abused his discretion, and that Appeals officers shouldn't be "required to rigidly apply contract law." Id. at 112-13. He would have focused the analysis on whether the Appeals officer conducted a proper balancing analysis of the competing interests of the taxpayer and Commissioner under section 6330(c)(3)(C) --the intrusiveness of collection action with the Commissioner's interest in efficient tax collection. Id. at 113. His position attracted 4 other votes, including 2 from judges who also agreed with the lead opinion.

Judge Thornton's concurrence emphasized that a taxpayer's "express agreement" to timely file his returns is an "integral condition" to the Commissioner's acceptance of the OIC, and that such a condition is reasonable because it merely confirms a statutory obligation even in cases where a refund is due. Id. at 116. This position won the approval of a majority of the Court --11 of 17, including 5 of the 6 votes in favor of the lead opinion.

Judge Marvel's concurrence questioned the lead opinion's reliance on principles of contract law, but concluded that the Appeals officer's failure to investigate whether the OIC could be reinstated (when this was obviously an important collection alternative) was a more than sufficient basis to sustain a finding of abuse of discretion. Id. at 117-18. Her position was joined by two judges, one of whom had supported the lead opinion, and one who had joined Judge Wells's concurrence.

And Judge Haines wrote to warn specifically that the lead opinion's citations to Arkansas state law shouldn't be construed as requiring the use of the law of a taxpayer's state of residence rather than general contract principles. Id. at 118. He warned of the "administrative nightmare" that would result from requiring Appeals officers to apply state, rather than general, contract law. He also noted that the Internal Revenue Manual said that an OIC may be defaulted when subsequent tax returns aren't timely filed. Id. at 119. This position was supported by 2 other judges.

Judge Wherry's concurrence didn't touch on any questions of contract law, and the dissent (which gathered only 2 votes), only echoed the concerns of Judge Haines's concurring opinion on this point. Id. at 130 n.8.

Given the multiple opinions in Robinette, it is not clear whether a majority of the Court supported the possible reliance on Arkansas contract law --on that issue, the vote seems to have been 6-5 (the lead opinion having 6 votes, and the dissent plus Judge Haines's concurring opinion together having 5). This led the Eighth Circuit on appeal to be unsure whether we had. Robinette, 439 F.3d at 462 n.6. That court made it clear nevertheless that it thought federal, rather than state, common-law principles govern OICs. Id. (citing United States v. Kimbell Foods, Inc., 440 U.S. 715, 726 (1979)).

In light of the Eighth Circuit's reversal, we think it necessary to clarify our position in Robinette that the "general principles of contract law" that we applied in Robinette are the general principles of the federal common law of contracts. See West v. Commissioner, T.C. Memo. 2008-30 (citing Dutton v. Commissioner [ Dec. 55,542], 122 T.C. 133, 138 (2004)). See also Clearfield Trust Co. v. United States, 318 U.S. 363, 366-67 (1943).

We have several reasons to do so. First, this is litigation between an agency of the federal government and a taxpayer. Though not sufficient in itself, this is a factor weighing in favor of using federal common law. See Boyle v. United Techs. Corp., 487 U.S. 500, 504 (1988). Second, OICs are a creation of several provisions of the Code and regulations --all federal law. See Kimbell Foods, 440 U.S. at 726, 728. It is also a program that the IRS has to run across the country, and the "administrative nightmare" that Judge Haines referred to in his concurrence supports a uniform national legal standard for construing OIC agreements. These three factors --a federal government agency as litigant, contracts entered into under federal law, and the need for nationwide uniformity in administration, all point us to the federal common law of contracts as our source of rules. See Boyle, 487 U.S. at 504; Kimbell Foods, 440 U.S. at 728.

Our cites to Arkansas law in Robinette should henceforth be taken to illustrate general principles of the federal common law of contracts. That many states --like Arkansas --use the Restatement of Contracts tends to prove that the Restatement is a good source for discerning these general principles. Courts applying federal common law find in the Restatement "the standard principles of contract law --more precisely, the core principles of the common law of contract that are in force in most states." United States v. Natl. Steel Corp. [ 96-1 USTC ¶50,071], 75 F.3d 1146, 1150 (7th Cir. 1996) (citing Fleming v. United States Postal Serv., 27 F.3d 259, 260-61 (7th Cir. 1994)).

Precedents from the Court of Federal Claims are also a rich source of this federal common law. And that court, like the Restatement, tells us to give contractual language the "meaning that would be derived from the contract by a reasonable intelligent person acquainted with the contemporaneous circumstances. * * * [A] court must give reasonable meaning to all parts of the contract and not render portions of the contract meaningless." Gutz v. United States, 45 Fed. Cl. 291, 296-97 (1999) (citations omitted); see also 2 Restatement, Contracts 2d, sec. 203(a) (1981).

The interpretation of the OIC agreement is crucial here because the parties disagree about whether the five-years-of-timely-filing requirement is an "express condition." Trout claims that even if he didn't timely file and pay, his breach is immaterial. But it is literally hornbook law that an express condition is subject to strict performance, thus making the materiality of the breach irrelevant. Calamari & Perillo on Contracts, sec. 11.15 (5th ed. 2003). So if Trout's obligation to file and pay taxes is an express condition, strict performance is required, and filing late for even one year is enough to find that he breached the OIC.

Whether a condition is an express condition is a matter of contractual interpretation. Id. Express conditions can be made by agreement of the parties, and there are certain words that are often used to create express conditions such as "on condition that", "provided that", and "if". 2 Restatement, Contracts 2d, sec. 226 cmt. a (1981). The Ninth Circuit, applying federal common-law principles, has favored interpretation of OICs according to the plain meaning of their words, unless the parties manifest a different intention. Johnston v. Commissioner [ 2006-2 USTC ¶50,538], 461 F.3d 1162, 1165 (9th Cir. 2006), (citing 2 Restatement, sec. 202(3)), affg. 122 T.C. 124 (2004).

The OIC agreement that Trout signed says in bold type in paragraph 7:

By submitting this offer, I/we understand and agree to the following terms and conditions:

* * *

(d) I/we will comply with all provisions of the Internal Revenue Code relating to filing my/our returns and paying my/our required taxes for five (5) years from the date IRS accepts the offer, * * *

(j) I/we understand that I/we remain responsible for the full amount of the tax liability unless and until IRS accepts the offer in writing and I/we have met all the terms and conditions of the offer. IRS won't remove the original amount of the tax liability from its records until I/we have met all the terms and conditions of the offer.

(k) I/we understand that the tax I/we offer to compromise is and will remain a tax liability until I/we meet all the terms and conditions of this offer.* * *

(o) If I/we fail to meet any of the terms and conditions of the offer, the offer is in default, and IRS may:

* * * * * * *

(iii) disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of tax liability;

The "Instructions" part of the OIC agreement says in the "Tax Compliance" paragraph: "Please note that the terms of the offer also require your future compliance (i.e. filing and paying for five years) after acceptances." And it cautions in item 7:

It is important that you understand that when you make this offer, you are agreeing that:

* * *(d) [I]RS can reinstate the entire amount owed if you don't comply with all the terms and conditions of the offer, including the requirement to file returns and pay tax for five years.

The Commissioner could hardly have used plainer language to explain the terms and conditions of the OIC or to express his intent. He repeatedly cautioned the taxpayer who signs the OIC: "It is important that you understand that", and "Please note that"; he used a bold font, and he stated that he can reinstate the original liability for failure to meet any of the terms and conditions in paragraph o. Finally, just to be sure that Trout understood that the terms of the offer required timely filing and payment for five years after entering into the OIC, the OIC form lists it clearly and in boldface, as a "term and condition" in paragraph d. It's listed on the Instruction part of the OIC agreement to boot.

Courts may in borderline cases nevertheless favor construction against finding an express condition, especially if doing so would avoid a forfeiture. 2 Restatement, Contracts 2d, sec. 227 and cmt. b (1981). This is also true if the occurrence or nonoccurrence of a condition was outside the contracting party's control. Id. But there's neither a risk of forfeiture nor evidence that Trout was powerless to avoid a breach here. There's no forfeiture because payments Trout made under the OIC remain credited to his account, and there's nothing in the record to suggest that the timely filing of his tax returns was not under his control. In any event, we don't have to rely too much on general principles of the contract law of express conditions --other federal courts construing OICs have already upheld the Commissioner's right to cancel them when a taxpayer defaults because the agreement expressly provided "with language * * * so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by the Government here was fully authorized by the compromise agreement." United States v. Lane [ 62-1 USTC ¶9467], 303 F.2d 1, 4 (5th Cir. 1962). The Third Circuit had similarly held that the Commissioner could default an OIC when a taxpayer failed to make a payment because "[b]y the clear language of the offer-in-compromise [the taxpayer] agreed that, upon his default, the Commissioner * * * could terminate the compromise agreement." United States v. Feinberg [ 67-1 USTC ¶9176], 372 F.2d 352, 357-58 (3d Cir. 1965). The court relied on this conclusion in Fortenberry v. United States, 49 AFTR 2d 82-1027, 82-1 USTC par. 9191 (S.D. Miss. 1981), to hold that the Commissioner could declare a compromise agreement in default when the taxpayer didn't make payments as agreed. And of course, the Eighth Circuit in Robinette itself held that the terms of an OIC were express conditions. Robinette, 439 F.3d at 462.

So we hold that the Appeals officer committed no error of law in concluding that Trout's timely-filing-and-paying requirement was an express condition of his contract with the IRS, and that it required strict compliance to avoid breach --making the question of whether his breach was material irrelevant. Or, as the Ninth Circuit has said in reviewing the obligations of an OIC: "[A] deal is a deal, even with the tax man." Johnston, 461 F.3d at 1164.



C. Did the Appeals Officer Abuse His Discretion in Sustaining the Levy?
Even though we hold timely filing and payment was an express condition, and so agree with the Appeals officer that Trout did breach his OIC agreement, we must not end our analysis there. Section 6330(c)(3)(C) commands the Commissioner to balance the need for efficient collection of taxes with the legitimate concern that collection be no more intrusive than necessary. In Robinette, we found that the Appeals officer "had a closed mind to the arguments presented on petitioner's behalf" in deciding to proceed with collection even though the breach in the contract wasn't material. Id. at 107. A major conclusion of the lead and concurring opinions was that the Commissioner abused his discretion in not carrying out his mandate under section 6330 to conduct the required balancing analysis. We homed in on the Commissioner's refusal even to consider reinstatement of the OIC as proof that his analysis was flawed.

This case is different. Here the Commissioner did not lightly default the OIC and reinstate the liability for a de minimis fault, but made several efforts to bring Trout back into the taxpaying fold. First, he ignored Trout's late filing in 1996. When the 1999 tax return wasn't filed, he waited almost two years before sending a potential OIC default letter, even though the terms of the OIC said that the OIC could be defaulted without warning if it wasn't strictly complied with. Although Trout claims to have received no notice, it's understandable why the Appeals officer might not have found this claim credible since this letter was also mailed to his lawyer and it's improbable that neither received the letter. Nor is there any evidence from the lawyer on this point. And although the potential OIC default letter warned Trout that he had 30 days to pay his taxes, the Commissioner actually waited almost seven months to default the OIC.

The Appeals officer understood even then that he had the discretion to excuse the breach of the express condition and reinstate the OIC. He chose not to. This is understandable --Trout's only consideration for the potential forgiveness of almost 95 percent of his tax debt was his promise to timely file and pay his taxes for five years after the OIC. In Robinette, the consideration given by the taxpayer for the OIC was not only a timely-filing-and-paying promise but also an agreement to pay substantial portions of his income exceeding $100,000. Not so here: All the IRS was getting other than the small $6,000 in upfront money was Trout's promise to comply with the law. This focused the Appeals officer's concentration on Trout's compliance history (both before and after the OIC) --which featured multiple requests for extensions of his filing deadlines, followed by returns that he filed late or not at all. Trout also offered no other collection alternatives, such as an installment agreement, even though he was doing fairly well. 7

The Appeals officer balanced the competing interests of the taxpayer and Commissioner, as required under section 6330(c)(3)(C). Stated in the OIC agreement itself is the paragraph entitled "IRS policy," which told Trout that the purpose of the OIC program is to give taxpayers a fresh start in tax compliance by allowing them to settle tax debts for less than they owe. This is undermined if a taxpayer can reduce his liabilities with an OIC, yet still indulge in late-filing recidivism. The record before the Appeals officer here was not the record before him in Robinette, where, for example, the taxpayer probably missed one filing deadline by only a few hours. 439 F.3d at 459 n.2. It is instead the story of a taxpayer who filed months late or not at all for three of the five years after he signed the OIC.

The stated goal of the OIC program --returning wayward taxpayers to the path of tax righteousness --would be entirely blocked if we were to hold that the express condition of timely filing agreed to by a taxpayer really meant that he could file returns late as long as they showed a net refund. We'd be stripping the Commissioner not only of his chosen remedy (reinstatement of the original debt), but also of his chosen emphasis on a taxpayer's future compliance as an aim of the OIC program.

We therefore find that the Appeals officer didn't abuse his discretion in not excusing an express condition of Trout's contract with the IRS. The Appeals officer considered reinstatement of the OIC as a collection alternative, but believed that Trout wasn't entitled to a second chance after looking at his pattern of noncompliance. Moreover, Trout's failure to successfully file his 1999 return (which he just had to sign and file under his correct social security number), even with the help of two attorneys, and even while the CDP hearing was pending, reasonably failed to inspire the Appeals officer's confidence that Trout was serious about timely filing and paying his taxes going forward.

In conclusion, we sustain the Appeals officer's finding that Trout didn't timely file his returns for 1998 and 1999 or timely pay his tax for 1999, and also sustain his decision not to reinstate the OIC. Accordingly,

An order and decision for respondent as to tax year 1993 will be entered.

Reviewed by the Court.

COHEN, WELLS, HALPERN, FOLEY, GALE, THORNTON, HAINES, GOEKE, WHERRY, KROUPA, GUSTAFSON, PARIS, and MORRISON, JJ., agree with this majority opinion.

MARVEL, J., concurring in the result: I agree with the result reached by the majority. I write separately, however, to emphasize the obligation of the Appeals Office of the IRS to verify whether applicable administrative procedures governing the default of an offer-in-compromise (OIC) were followed in a section 6330 proceeding involving a defaulted OIC for an alleged breach of the OIC's timely filing/payment provision (compliance provision). Although petitioner clearly breached his OIC and the IRS properly exercised its discretion in reinstating petitioner's original tax liability, there have been and no doubt will be other cases where that conclusion is not so evident.

The majority points out that an express condition is subject to strict performance. See majority op. p. 21. It then examines the language of the OIC and concludes that petitioner's obligation to file timely returns and to pay all required taxes for a 5-year period beginning on the date the OIC is accepted is an "express condition" of the IRS's obligation to perform under the OIC. The majority holds "that the Appeals officer committed no error of law in concluding that * * * [petitioner's] timely-filing-and-paying requirement was an express condition of his contract with the IRS, and that it required strict compliance to avoid breach --making the question of whether his breach was material irrelevant." Majority op. p. 25.

The majority quotes from the OIC to which petitioner and the IRS agreed to be bound. The relevant language of the OIC states that (1) if the taxpayer fails to meet any of the terms and conditions of the offer, "the offer is in default"; 1 and (2) the IRS may take certain actions because of the taxpayer's failure, including reinstating and collecting the compromised liability. See 2 Administration, Internal Revenue Manual (IRM) (CCH), pt. 5.19.7.3.26(1), at 18,537 (Dec. 5, 2006). 2 However, the OIC does not state that the IRS must terminate it (or that the OIC automatically terminates) in the event of a breach. Rather, the OIC states that the IRS may terminate it (by reinstating the original liability and collecting it). I construe this language as giving the IRS discretion to terminate an OIC if the taxpayer breaches one of the OIC's terms and conditions.

The discretion that I believe the OIC confers on the IRS to deal with a breach of the compliance provision is also reflected in the procedures that IRS personnel are expected to follow in monitoring an OIC and determining a course of action in the event of an alleged breach. The IRM contains provisions that instruct IRS personnel how to proceed with potential default cases. For example, 1 Administration, IRM (CCH), pt. 5.8.9.3(1)(B), at 16,404 (Sept. 23, 2008), states that an offer can reach "potential default status" if "The taxpayer has not adhered to the compliance provisions of the offer". In such cases, the "Campus MOIC [Monitoring Offer in Compromise] units have responsibility and authority to make determinations on potential offer default cases", 1 Administration, IRM (CCH), pt. 5.8.9.3(2), at 16,404 (Sept. 23, 2008), pursuant to procedures currently set forth in 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5, at 18,544-18,550 (Dec. 5, 2006). The IRM further states:

The MOIC unit will make an attempt to secure compliance. If the taxpayer fails to comply with any requests for delinquent returns or payments, the MOIC unit will default the offer. After all appropriate letters have been sent, generate a * * * [Taxpayer Delinquent Investigation] or * * * [Taxpayer Delinquent Account], as appropriate and close the case as a default. [1 Administration, IRM (CCH), pt. 5.8.9.3(3), at 16,404 (Sept. 23, 2008).]

The procedures that the MOIC units are expected to follow when a potential default is attributable to the taxpayer's alleged failure to file a required return include sending a letter to the taxpayer about the missing return. See 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5(7), at 18,544-18,545 (Dec. 5, 2006). Under IRM procedures the taxpayer is supposed to be given an opportunity to explain why a return is not due and/or to file the delinquent return if one is due and unfiled. See 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5(8), at 18,545-18,548 (Dec. 5, 2006). Only after IRS employees have followed the procedures governing "Failure to Adhere to Compliance Terms" are the employees instructed to process a default in accordance with the provisions of the IRM. See, e.g., 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5(7) and (8). The IRM recognizes that it may not always be in the best interests of the IRS to terminate an OIC even though the taxpayer has breached one of the OIC's terms and conditions. See, e.g., 2 Administration, IRM (CCH), pt. 5.19.7.3.27(3) at 18,552 (Dec. 5, 2006).

The majority points out that section 6330(c)(3)(C) requires the Appeals Office, in making its determination, to take into consideration "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." The majority's analysis on this point distinguishes the factual situation in Robinette v. Commissioner [ Dec. 55,698], 123 T.C. 85 (2004), revd .[ 2006-1 USTC ¶50,213], 439 F.3d 455 (8th Cir. 2006), and emphasizes that "the Commissioner did not lightly default the OIC and reinstate the liability for a de minimis fault, but made several efforts to bring * * * [petitioner] back into the taxpaying fold." Majority op. p. 26.

The "Discussion and Analysis" attached to the notice of determination issued to petitioner summarily states that "All legal and procedural requirements are concluded to have been met in this case" without specifying whether the Appeals Office verified that the procedures specified in the IRM for terminating an agreed OIC for noncompliance with the OIC's compliance provision were followed. Nevertheless, the facts recited in the attachment to the notice of determination and as found by the majority confirm that the Appeals officer verified the IRS had warned petitioner about his missing returns and had given him an opportunity to file the missing returns before the IRS terminated the OIC and decided to proceed with collection by levy. The facts recited in the attachment to the notice of determination also confirm that unlike the taxpayer in Robinette who had missed one filing deadline by only a few hours, see majority op. p. 28, petitioner had an extended post-OIC record of noncompliance that the Appeals Office took into account in deciding whether the levy could proceed. In addition, petitioner did not offer any collection alternative other than the reinstatement of the original OIC. 3 Consequently, I agree with the majority's conclusion that the Appeals Office did not abuse its discretion in determining that the proposed levy can proceed.

I remain concerned, however, about how the Appeals Office articulates, and will continue to describe, its obligations under section 6330 in a case involving the termination of an OIC where the IRS does not attempt to notify a taxpayer of an alleged failure to satisfy the OIC's compliance provision or to provide the taxpayer with a reasonable opportunity to cure an alleged breach of that provision, or where the totality of the facts and circumstances reveals an immaterial breach in Robinette parlance. See Robinette v. Commissioner, supra at 108-112. Although this Court and others have held that procedures set forth in the IRM "do not have the force or effect of law" and a failure to adhere to them does not rise to the level of a constitutional violation, see, e.g., Vallone v. Commissioner [ Dec. 43,824], 88 T.C. 794, 807-808 (1987) (checks obtained in violation of IRM not a constitutional violation requiring suppression); Riland v. Commissioner [ Dec. 39,230], 79 T.C. 185 (1982) (failure to abide by IRM procedures not a violation of due process), and that the IRM does not create any enforceable rights for taxpayers, see Fargo v. Commissioner [ 2006-1 USTC ¶50,326], 447 F.3d 706, 713 (9th Cir. 2006), affg. [ Dec. 55,514(M)], T.C. Memo. 2004-13, section 6330(c)(1) specifically requires that the Appeals officer at the section 6330 hearing shall obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. Moreover, section 6330(c)(3) provides that the determination by an Appeals officer under section 6330(c) shall take into consideration the verification presented under section 6330(c)(1).

In Chief Counsel Notice CC-2006-019 (Aug. 18, 2006), respondent's Office of Chief Counsel describes what an Appeals officer dealing with a collection due process case is expected to do regarding the section 6330(c)(1) verification requirement:

IV. Sections 6320 and 6330

5. Matters considered at hearing

a. Section 6330(c)(1) verification

Sections 6320(c) and 6330(c)(1) require the appeals officer to obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. Verification can be obtained at any time prior to the issuance of the determination by Appeals. Treas. Reg. § § 301.6320-1(e)(1), 301.6330-1(e)(1). The requirements the appeals officer [is] verifying are those things that the Code, Treasury Regulations, and the IRM require the Service to do before collection can take place. [Emphasis added.]

The quoted language recognizes that in enacting section 6330, Congress clearly expressed its intention (1) that the IRS present verification during the section 6330 hearing that it followed all applicable administrative procedures before enforced collection action may proceed and (2) that the Appeals officer conducting the section 6330 hearing take that verification into account in deciding whether to proceed with collection. See sec. 6330(c)(1), (3).

Although there may be an unresolved issue of statutory interpretation regarding the meaning of "any applicable * * * administrative procedure" under section 6330(c), 4 the IRM contains procedures that the IRS expects its personnel to follow in administering Federal tax law. See 1 Administration, IRM (CCH), pt. 1.11.2.1.1(1), at ___ (Apr. 1, 2007). 5 More precisely, the IRM contains procedures that IRS personnel are expected to follow before terminating an agreed OIC after a breach of the OIC's compliance provision. These procedures regarding potential OIC defaults are sensible and reflect the fact that an OIC authorizes but does not require the IRS to terminate the OIC if a taxpayer allegedly fails to comply with his filing obligation under the compliance provision. The IRM procedures instruct IRS employees monitoring OICs to investigate the alleged failure to comply and, if there is such a failure, to give the taxpayer a chance to correct it before a decision is made to default (terminate) the offer. These procedures (which have been in place for many years in one form or another) reflect a wise and balanced approach to monitoring existing OICs and dealing with potential defaults. When the IRS takes the very serious step of terminating an OIC and reinstating a taxpayer's original tax liability, the Appeals Office should verify that the IRS's administrative procedures for defaulting (terminating) the OIC were followed before it sustains a determination to proceed with collection. Sensible tax administration and section 6330(c) would appear to require it.

COLVIN, COHEN, VASQUEZ, GALE, HAINES, WHERRY, and PARIS, JJ., agree with this concurring opinion.

1 In fairness to Trout, we do note that he then had a run of timely filed and paid returns for tax years 2000-02.

2 The IRS hadn't released the first levy at this point, but apparently sent this second NIL because such notices are supposed to be sent to a taxpayer's last known address. Sec. 6330(a)(2)(C); Buffano v. Commissioner, T.C. Memo. 2007-32.

Unless otherwise indicated, all section references are to the Internal Revenue Code; all Rule references are to the Tax Court Rules of Practice and Procedure.

3 Trout had asked for an installment agreement in his request for a CDP hearing, but he never pursued the issue at that hearing or in his petition to our Court.

4 This means that any appeal would lie to the Ninth Circuit unless the parties stipulate otherwise. See sec. 7482(b)(1)(A) and (2).

5 Trout does not, however, argue the point at any length. Nor could he do so successfully, because the 1993 tax was assessed on May 6, 1996. Section 6502(a)(1)'s ten-year period for collection began on that date, but it is tolled during the pendency of an OIC, a CDP hearing, and a Tax Court case. Secs. 6330(e)(1), 6331(i)(5) and (k)(1), 6502(a), and 6503. Even disregarding language in paragraph 7(n) of the OIC waiving the statute of limitations, the statute was at least tolled from the date of the OIC's submission to the date of its acceptance (from June 10, 1996 to January 15, 1997), during the CDP hearing process (from April 5, 2004 to March 3, 2005), and while this case is pending in our Court. This is more than enough time to keep this case within the ten-year limitation period.

6 We follow our reviewed opinions in later cases, Lawrence v. Commissioner [ Dec. 22,222], 27 T.C. 713, 717 (1957), revd. on other grounds 258 F.2d 562 (9th Cir. 1958), unless doing so would as a practical matter be pointless, because appeal lies to a circuit court that has ruled to the contrary, Golsen v. Commissioner [ Dec. 30,049], 54 T.C. 742, 757 (1970), affd. [ 71-2 USTC ¶9497], 445 F.2d 985 (10th Cir. 1971). But nothing in Golsen or in Lawrence precludes us from revisiting an issue, as we do here, when the issue on which there has been an intervening reversal arises anew. We said in Lawrence, 27 T.C. at 717, that in these circumstances, we "must thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, the obvious procedure is to follow the higher court."

7 Unlike Robinette, who had an annual income of less than $100,000 in tax years 1995-99, but whose reinstated tax liability was for roughly $1 million, Robinette, 123 T.C. at 86 n.2, Trout had earned between $130,000 and $836,000 annually in the three years before his request for a CDP hearing. And by the time the Commissioner got around to collecting Trout's tax debt, the statute of limitations had run on all but one year, leaving him with a reinstated liability of less than $90,000.

1 The IRM seems to use the term "default" in two different contexts. It uses the term "default" to describe the situation when a taxpayer reaches potential default status by not adhering to the compliance provisions of the offer. See, e.g., 1 Administration, IRM (CCH), pt. 5.8.9.3(1)(B), at 16,404 (Sept. 23, 2008). It also uses the term "defaulted" to describe the process of reinstating the original liability. See, e.g., 2 Administration, IRM (CCH), pt. 5.19.7.3.27(1), at 18,551 (Dec. 5, 2006). For purposes of this concurrence, I use the term "breach" to mean a failure to comply with the OIC's compliance provision and "terminate" or its derivative to refer to the process of reinstating the original liability because of a breach.

2 References to the IRM are to the current edition.

3 The part in the IRM captioned "Actions on Defaults Offers" contains a provision that states: "The Service may accept a compromise of a compromise" and "There is no standard form for such a proposal." 4 Administration, IRM (CCH), pt. 8.23.3.13(7), at 27,997-487 (Oct. 16, 2007). A taxpayer who has breached the compliance provision of an OIC might propose a new OIC containing substantially the same terms as the previous OIC or different terms (e.g. an enhanced compliance period, a collateral agreement, an additional lump-sum payment or deferred payment) designed to convince the IRS that it is still in the best interests of the IRS to compromise the liability despite the taxpayer's breach. A taxpayer might also propose other collection alternatives such as an installment agreement, a third-party payment or transfer of an asset that is otherwise unavailable to the IRS. In this case, the only collection alternative apparently presented by petitioner was the reinstatement of the original OIC. The IRS, however, has taken the position that "If the hearing officer determines that there was a default, the termination of the OIC was legally authorized; neither Headquarters nor the Office of Appeals can 'reinstate' the OIC." 4 Administration, IRM (CCH), pt. 8.22.2.2.9(1), at 27,997-366 (Dec. 1, 2006); see also Chief Counsel Advice 200113031 (Mar. 30, 2001).

4 Compare Drake v. Commissioner [ Dec. 56,571(M)], T.C. Memo. 2006-151, affd. 511 F.3d 65 (1st Cir. 2007) with Carlson v. United States [ 2005-2 USTC ¶50,606], 394 F. Supp. 2d 321, 329 (D. Mass. 2005).

5 1 Administration, IRM (CCH), pt. 1.11.2.1.1(1), at ___ (Apr. 1, 2007), states in pertinent part as follows:

The IRM serves as the single, official source of IRS "instructions to staff" relating to the administration and operation of the Service. The IRM provides a central repository of uniform guidelines on operating policies and procedures for use by all IRS offices. It contains guidance on IRS policies and directions our employees need to carry out their responsibilities in administering the tax laws or other agency obligations.

Before its amendment in 2007, 1 Administration, IRM (CCH) pt. 1.11.2.1(2), at 5,027 (Oct. 10, 2003), stated in pertinent part as follows:

The IRM outlines business rules and administrative procedures and guidelines used by the agency to conduct business. It contains policy, direction and delegations of authority that are necessary to carry out IRS responsibilities to administer tax law and other legal provisions. The business rules, operating guidelines and procedures and delegations guide managers and employees in carrying out day to day responsibilities. [Emphasis added.]


Breach of agreement. --Compromises: Breach of agreement

Where the taxpayer failed to plead in the District Court the three-year statute of limitations on assessment as a defense to the Government's suit on an assessment to collect taxes, after the taxpayer had defaulted on payments to be made under a compromise agreement entered into after the three-year limitations period had passed, he could not raise for the first time on appeal the question of whether the compromise agreement was an effective waiver of the limitations period. A waiver of the statute of limitations found in the compromise agreement was fully effective against the taxpayer.

B. Feinberg, CA-3, 67-1 USTC ¶9176, 372 F2d 352.

Similarly, where the taxpayer failed to meet the monthly installment payments under an agreement for compromise of his tax liability. The doctrines of estoppel and modification of contract by subsequent conduct were not applicable merely because the Government did not bring action immediately after the breach of the first installment and before the taxpayer made any other payments.

S. Saladoff, CA-3, 65-2 USTC ¶9645.

On retrial, the trial court properly entered summary judgment for the Government for the amount of taxes proved to be due, where the taxpayer offered no counter proof, and also properly dismissed a separate injunction suit.

R.C. Lane, CA-5, 64-1 USTC ¶9273, 328 F2d 602.

Where the taxpayer failed to file sworn statements of annual income pursuant to the terms of a collateral income agreement which accompanied an agreement for compromise of his tax liability, the compromise agreement was breached and the Government was entitled to revive the original tax liability, subject to credit for previous payments made under the compromise agreement.

R.C. Lane, CA-5, 62-1 USTC ¶9467, 303 F2d 1.

The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.

D.W. Jordan, FedCl, 2007-2 USTC ¶50,601.

The IRS properly terminated an offer in compromise (OIC) submitted by the president and majority shareholder of S corporations in connection with his delinquent taxes for five tax years and a trust fund recovery penalty imposed with respect to one of the entities. The taxpayer materially breached his obligation under the OIC when he incurred a delinquent tax liability for a subsequent tax year. As a result, the government was authorized, under the terms of the OIC, to declare the taxpayer in default of the agreement and to pursue collection activities against him. The substantial performance doctrine was irrelevant because the taxpayer failed to timely pay his taxes in order to offset his tax liability for that year with his losses from the following year.

M.J. Roberts, DC Mo., 2002-1 USTC ¶50,173, 225 FSupp2d 1138.

The mere fact that the IRS had cashed money orders tendered by a taxpayer was insufficient to support his claim that the government had breached a settlement agreement. A letter from his counsel indicating that an IRS agent had requested a payment in the amount of those money orders was insufficient to state a claim for breach of settlement agreement absent proof that the taxpayer had been notified in writing of the IRS's acceptance of his offer of compromise.

L.R. Ousley, DC Nev., 98-2 USTC ¶50,827.

A taxpayer who breached the payment terms of his compromise agreement was not entitled to notice of the amount due thereunder before the IRS collected the balance of his original liability. The agreement specifically stated that he would not be entitled to notice in this situation.

D.J. Fortenberry, DC Miss., 82-1 USTC ¶9191.

The government was awarded summary judgment in the suit brought by the taxpayer who protested that taxes he owed were collected after the running of the statute of limitations. The government and the taxpayer had entered into a compromise agreement as to the amount of taxes owed by the taxpayer. A provision of the agreement provided that the statute of limitations would be extended if the taxpayer missed a payment, and the court concluded that, since the taxpayer showed no detriment suffered, the provision was not void as against public policy.

A.J. Parenteau, DC N.J., 74-1 USTC ¶9270.

Although a later, independent decision changed the time for which interest would be payable on accumulated earnings tax deficiencies, the Attorney General had authority to settle three pending cases on the understanding that other suits not filed would be disposed of on the same basis. The compromise settlement could not be abrogated.

D.D.I. Inc., CtCls, 72-2 USTC ¶9703, 467 F2d 497. Cert. denied, 414 US 830.

Taxpayer was estopped from seeking recovery of a payment made in a compromise settlement of income tax assessments against it and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the taxpayer as transferee. The taxpayer was barred by equitable estoppel from violating the compromise agreement since the agreement represented a so-called package deal, involving several taxpayers in addition to the taxpayer, and the Government, in reliance on the settlement, had permitted the statute to run against the claims against the other taxpayers involved in the settlement and could not recoup, through its right of set-off, against these taxpayers. There was no merit to the taxpayer's contention that all unabated assessments against it were paid in full and not compromised or settled because the Government, at the taxpayer's request, allocated the payment to all unabated transferee claims against the taxpayer.

Cooper Agency, DC S.C., 69-2 USTC ¶9560, 301 FSupp 871. Aff'd, per curiam, CA-4, 70-1 USTC ¶9321, 422 F2d 1331; DC S.C., 71-1 USTC ¶9490, 327 FSupp 948.

The taxpayer failed to fulfill his obligations under an agreement collateral to an executed offer in compromise --where the agreement called for additional consideration to be based on graduated percentages of annual income --by transferring income-producing property held at the time of the agreement without consideration. Contract rules under Tennessee law permit the implication of terms in a contract. Were the promise not to transfer income-producing property held at the time of the agreement not to be implied, the taxpayer could have effectively destroyed the value of the collateral agreement. However, the implied promise did not apply to income-producing property acquired after execution of the collateral agreement.

R.C. Hoskins, DC Tenn., 69-1 USTC ¶9407, 299 FSupp 1229. Aff'd, per curiam, CA-6, 70-1 USTC ¶9382, 425 F2d 1301.

An IRS Appeals officer did not abuse her discretion by sustaining the default of a married taxpayer's offer in compromise (OIC) and determining to proceed with collection. The taxpayer failed to comply with the terms of the OIC, which required him to timely pay all required taxes for five years following its acceptance. Further, the taxpayer failed to timely respond to an IRS letter notifying him that failure to pay the balances due within 30 days would result in a default of the OIC. Finally, the taxpayer did not propose any collection alternatives during his Collection Due Process (CDP) hearing.

M. Poindexter, 95 TCM 1378, Dec. 57,404(M), TC Memo. 2008-99.

The IRS Appeals office did not abuse its discretion by sustaining a levy against a married couple whose repeated violations of the terms of their offer-in-compromise (OIC) resulted in the offer's termination. The couple's failure to keep their tax obligations current during the compliance period was a significant and material breach of the OIC. Moreover, the IRS's failure to send copies of correspondence to the couple's representative did not provide a basis to reject the collection action because the notices were sent to the couple's last know address.

J.E. West, 95 TCM 1116, Dec. 57,333(M), TC Memo. 2008-30.

The IRS did not abuse its discretion in determining that an individual had defaulted on an offer in compromise (OIC) and proceeding with collection of his unpaid tax liability. The taxpayer materially breached the terms of the OIC by incurring a delinquent tax liability for a subsequent tax year. The taxpayer failed to comply with the express terms of the agreement by failing to pay his tax liability for well over a year after it was due, thereby depriving the government of a material financial benefit. The record did not indicate that requiring the taxpayer to strictly comply with the terms of the agreement would result in a disproportionate forfeiture or penalty. Therefore, because the condition that the taxpayer timely pay his taxes was a material part of the OIC agreement, it could not be excused.

W.K. Ng, 93 TCM 675, Dec. 56,809(M), TC Memo. 2007-8.

The IRS may not unilaterally default a joint offer in compromise in the case of a taxpayer-husband that breached his obligations under a separate, but related, offer in compromise on the basis of an oral agreement tying the two offers together. The regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement.

Field Service Advice Memorandum 200130043, June 25, 2001.

An Appeals officer did not abuse his discretion in cancelling an offer-in-compromise (OIC) agreement, reinstating a taxpayer's original tax bill and sustaining a levy, based on the taxpayer's breach of the OIC. The federal common law of contracts applied in determining whether a taxpayer breached his offer-in-compromise agreement. The OIC agreement required that the taxpayer timely file returns and pay tax for a period of five years. His failure to do so was a breach of an express condition of the agreement that required strict performance. Even without relying on principles of contract law, other federal courts have upheld the IRS's right to cancel an OIC when the taxpayer is in default because of the express language in the agreement. Finally, the IRS provided the taxpayer with several opportunities to become compliant and the only consideration for forgiveness of 95 percent of his tax debt was to timely file and pay his taxes for five years. Thus, the Appeal's officer's decision not to excuse the breach and reinstate the OIC was not an abuse of discretion.

D.W. Trout, Dec. 57,615, 131 TC --, No. 16.

IR-2008-141 provides a new expedited procedure by IRS to discharge certain IRS tax liens. Financially-distressed homeowners may avoid having a federal tax lien block the refinancing of a mortgage or the sale of a home by requesting that the IRS make the tax lien secondary to the refinancing institution's lien or, under certain circumstances, that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The taxpayer or its representative, which may include the lender, must submit a request to the IRS in writing in order to obtain this expedited treatment from the IRS. IRS News Release IR-2008-141, December 17, 2008. [Code Secs. 6323 and 7425] Federal tax lien: Subordination of tax lien: Discharge of tax lien:

The Internal Revenue Service announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

"We don't want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes," said Doug Shulman, IRS commissioner.

"We realize these are difficult times for many Americans," Shulman said. "We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions."

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution's, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency's Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.



SEC. 7425. DISCHARGE OF LIENS.
7425(a) JUDICIAL PROCEEDINGS. --If the United States is not joined as a party, a judgment in any civil action or suit described in subsection (a) of section 2410 of title 28 of the United States Code, or a judicial sale pursuant to such a judgment, with respect to property on which the United States has or claims a lien under the provisions of this title --

7425(a)(1) shall be made subject to and without disturbing the lien of the United States, if notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced, or

7425(a)(2) shall have the same effect with respect to the discharge or divestment of such lien of the United States as may be provided with respect to such matters by the local law of the place where such property is situated, if no notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced or if the law makes no provision for such filing.

If a judicial sale of property pursuant to a judgment in any civil action or suit to which the United States is not a party discharges a lien of the United States arising under the provisions of this title, the United States may claim, with the same priority as its lien had against the property sold, the proceeds (exclusive of costs) of such sale at any time before the distribution of such proceeds is ordered.

7425(b) OTHER SALES. --Notwithstanding subsection (a)[, a] sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property --

7425(b)(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or

7425(b)(2) shall have the same effect with respect to the discharge or divestment of such lien or such title of the United States, as may be provided with respect to such matters by the local law of the place where such property is situated, if --

7425(b)(2)(A) notice of such lien or such title was not filed or recorded in the place provided by law for such filing more than 30 days before such sale,

7425(b)(2)(B) the law makes no provision for such filing, or

7425(b)(2)(C) notice of such sale is given in the manner prescribed in subsection (c)(1).

7425(c) SPECIAL RULES. --

7425(c)(1) NOTICE OF SALE. --Notice of a sale to which subsection (b) applies shall be given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary.

7425(c)(2) CONSENT TO SALE. --Notwithstanding the notice requirement of subsection (b)(2)(C), a sale described in subsection (b) of property shall discharge or divest such property of the lien or title of the United States if the United States consents to the sale of such property free of such lien or title.

7425(c)(3) SALE OF PERISHABLE GOODS. --Notwithstanding the notice requirement of subsection (b)(2)(C), a sale described in subsection (b) of property liable to perish or become greatly reduced in price or value by keeping, or which cannot be kept without great expense, shall discharge or divest such property of the lien or title of the United States if notice of such sale is given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, to the Secretary before such sale. The proceeds (exclusive of costs) of such sale shall be held as a fund subject to the liens and claims of the United States, in the same manner and with the same priority as such liens and claims had with respect to the property sold, for not less than 30 days after the date of such sale.

7425(c)(4) FORFEITURES OF LAND SALES CONTRACTS. --For purposes of subsection (b), a sale of property includes any forfeiture of a land sales contract.

7425(d) REDEMPTION BY UNITED STATES. --

7425(d)(1) RIGHT TO REDEEM. --In the case of a sale of real property to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

7425(d)(2) AMOUNT TO BE PAID. --In any case in which the United States redeems real property pursuant to paragraph (1), the amount to be paid for such property shall be the amount prescribed by subsection (d) of section 2410 of title 28 of the United States Code.

7425(d)(3) CERTIFICATE OF REDEMPTION. --

7425(d)(3)(A) IN GENERAL. --In any case in which real property is redeemed by the United States pursuant to this subsection, the Secretary shall apply to the officer designated by local law, if any, for the documents necessary to evidence the fact of redemption and to record title to such property in the name of the United States. If no such officer is designated by local law or if such officer fails to issue such documents, the Secretary shall execute a certificate of redemption therefor.

7425(d)(3)(B) FILING. --The Secretary shall, without delay, cause such documents or certificate to be duly recorded in the proper registry of deeds. If the State in which the real property redeemed by the United States is situated has not by law designated an office in which such certificate may be recorded, the Secretary shall file such certificate in the office of the clerk of the United States district court for the judicial district in which such property is situated.

7425(d)(3)(C) EFFECT. --A certificate of redemption executed by the Secretary shall constitute prima facie evidence of the regularity of such redemption and shall, when recorded, transfer to the United States all the rights, title, and interest in and to such property acquired by the person from whom the United States redeems such property by virtue of the sale of such property.



Validity and Priority Against Third Parties: Priority over recorded mortgage

An IRS lien had priority over a reinstated mortgage lien where the federal tax lien was filed prior to the reinstatement of the mistakenly released mortgage lien.

B.E. Haas, CA-11, 94-2 USTC ¶50,496, 31 F3d 1081. Cert. denied, 6/19/95.

So long as the security devise used by the Veterans Administration in guaranteeing property purchases is in the true nature of a purchase money mortgage, the lien created by such devise is superior to the lien of the Federal Government against a property purchaser who acquires title after the VA lien is brought into effect.

General Counsel's Opinion 13-60, August 11, 1960, 617 CCH ¶6307.

Hart, CA-8, 53-2 USTC ¶9612, 207 F2d 813. Cert. denied, 347 US 919.

A collateral mortgage note, pledged before the government's tax lien was recorded, had priority over and outranked the tax lien.

Rex Finance Co., CA, State of La., 63-1 USTC ¶9319.

A "trust mortgage" executed to certain trustees for the benefit of unsecured creditors of a taxpayer is not a mortgage within the purview of Code Sec. 6323. Therefore, the trustees under such a "trust mortgage" do not have priority over a subsequently recorded federal tax lien.

Kobiela, DC, 57-2 USTC ¶9948, 152 FSupp 489.

The contrary position taken in the case of United States v. Benjamin Gargill, Trustee, 218 F2d 556, 55-1 USTC ¶9164, will not be accepted by the Internal Revenue Service as a precedent in the disposition of other cases involving similar fact situations.

Rev. Rul. 56-592, 1956-2 CB 945.

A mortgage of restaurant properties, which was a voluntary assignment for the benefit of unsecured creditors, made at a time when business prospects were extremely poor, did not take precedence over a Federal lien for unpaid income and employment taxes where the following two conditions existed: (1) the mortgagor did not have a substantial equity of redemption, and (2) control over the mortgaged property was relinquished to trustees.

H. Wing, DC, 62-2 USTC ¶9584, 208 FSupp 5.

Security given to a corporation in order to defraud the IRS was inferior to the U.S. interests.

Sea Ventures Holdings, DC Me., 88-1 USTC ¶9226.

An unrecorded tax lien was subordinate to a recorded mortgage on a vessel.

Runyan Machine & Boiler Works, Inc., DC, 56-1 USTC ¶9179.

The government had a valid and preferential tax lien against all property owned by the taxpayers to the extent that each of them was principally liable or liable as a transferee. However, for one piece of real property, a deed of trust running against the property and securing a loan owing by the taxpayer-wife was held to be prior in right to the government's tax lien.

Payne, DC, 56-2 USTC ¶9996. Aff'd and rev'd on other issues, CA-8, 57-2 USTC ¶9889, 247 F2d 481.

A security interest in an Illinois land trust was superior to a federal tax lien.

G.C. Canellis, DC, 80-2 USTC ¶9715.

Similarly. It is immaterial that, at the time the mortgage was executed, the parties knew of the assessment of the tax liability.

Beaver Run Coal Co., CA-3, 38-2 USTC ¶9540, 99 F2d 610.

Profaci, N.Y. SCt, Kings County, 54-2 USTC ¶9683.

A mortgage company's existing mortgage on certain community real property had priority over the Government's tax lien.

J.A. Overman, DC, 69-1 USTC ¶9251.

A contract for the conditional sale of property under which title to the property was retained by the seller was security of a mortgagee within the meaning of Code Sec. 6323 which became specific and perfected upon execution. As such, it was entitled to priority over a Federal tax lien filed after execution of the contract.

J.C. Gauvey, CA-8, 61-1 USTC ¶9478, 291 F2d 42.

The government's tax lien attached to the taxpayer's equitable estate in the property (right of redemption) where taxpayer executed a security deed conveying title to the property to secure a debt and containing a power of sale, which deed was recorded prior to the filing of the tax lien.

Cox, DC, 54-1 USTC ¶9136, 119 FSupp 147.

Similarly.

Rahar's Inn, Inc., DC, 65-1 USTC ¶9411, 243 FSupp 459.

Although income tax lien notice was filed prior to filing of a mortgage lien on the property, the lien of the government was not superior thereto where the proceeds of the mortgage loan were used to pay off another mortgage filed prior to the tax lien.

Bigley, DC, 46-1 USTC ¶9161, 64 FSupp 389.

A mortgagee, the Territory of Hawaii and the United States Government claimed priority of their respective liens. The order of priority was determined: (1) the U.S. tax liens filed prior to the recording of the chattel mortgage, (2) the balance due on the note and mortgage (the fund set apart for this purpose, however, should first satisfy the Territory for its general excise tax liens before being applied to satisfy the mortgagee), and (3) the other U.S. tax liens filed after the recording of the mortgage and the Territory compensation and dividend tax liens, in their respective order, based on the dates when the liens arose.

A.A. Smith, DC, 54-1 USTC ¶9256.

A.A. Smith, DC, 53-2 USTC ¶9533.

Where property is encumbered in its full value prior to filing by U.S. of a lien for unpaid tax, the U.S. has no equity in the property, and the holders of the superior lien, having foreclosed and taken title, are entitled to a decree removing the cloud of the lien from their title.

Minnesota Mutual Life Insurance Co., DC, 2 USTC ¶682, 47 F2d 942.

Although a mortgagee could have paid delinquent real estate taxes and water rent, with the amount so paid becoming part of the mortgage debt covered by the mortgage lien, it did not do so and a City, to whom the debts were owed, could not obtain priority over antecedent federal tax liens. Since such debts were not specifically provided for in the statute, the first-in-time, first-in-right rule prevailed.

City of New Britain, Conn., SCt, 54-1 USTC ¶9191, 347 US 81, vac'g and rem'g Conn. SCt of Errors.

Followed, on remand,

L. Brown, Conn. SCt, 55-1 USTC ¶9427, 113 A2d 601.

The principles of law set out in City of New Britain, Conn., will be followed by the IRS.

Rev. Rul. 61-101, 1961-1 CB 715.

Where a mortgagee paid taxes owed by the mortgagor in order to protect the mortgaged property against a threatened sale by the government, he was entitled to refund of the taxes paid where it was shown that the mortgage lien had priority.

Halton Tractor Co., CA-9, 58-2 USTC ¶9774, 258 F2d 612.

Edmundson, 50-1 USTC ¶9318.

Plains Motors, Inc., DC, 52-2 USTC ¶9441.

To the contrary.

R. Brown, DC Ga., 53-2 USTC ¶9534.

A federal tax lien had priority over a landlord's earlier lien for unpaid rent, bolstered by a chattel mortgage in the lease. The unrecorded chattel mortgage was invalid as to creditors, a status held by the Government.

Mason City and Clear Lake Railroad Co., DC, 57-2 USTC ¶9736, 152 FSupp 145.

The Government's lien for taxes against the taxpayer was perfected prior to the creditor's judgment, and therefore the United States was held to have a prior lien.

Macatee, Inc., CA-5, 54-2 USTC ¶9550, 214 F2d 717.

Federal tax liens were held to be superior to local real estate tax liens because the Federal liens were perfected earlier.

Marsh, DC, 54-2 USTC ¶9606.

Federal tax liens were subordinate to a mortgagee's claim to proceeds from the sale of mortgaged property, even though the affidavit for extending the mortgage (which had expired) was filed shortly after the notice of the tax liens was filed.

W.F. Eagle, DC, 59-2 USTC ¶9656.

Under Sec. 6323 a Federal tax lien was specifically and expressly subordinate to an unrecorded chattel mortgage which was valid between the parties to it and antedated the filing of the tax lien.

Gauvey, DC, 60-2 USTC ¶9634, 185 FSupp 374.

An oral contract that created a mortgage was binding between the parties and, thus, the mortgagee was entitled to priority over a subsequently filed tax lien.

Roberts, DC, 73-1 USTC ¶9300, 358 FSupp 392.

Where the United States filed its claim of lien for tax after a third party had made a loan to the property owner, said lien was inferior and subordinate to the third party's right to exact from the property full payment of the debt which the property secured.

Bank of America, Natl. Tr. & Savings Ass'n, DC, 49-2 USTC ¶9405.

An existing FDIC lien did not extend to vehicles owned by the taxpayer because the lien only attached to inventory and the vehicles were equipment used in the taxpayer's business.

Travelers Petroleum, Inc., BC-DC Okla., 88-1 USTC ¶9266, 86 BR 246.

The government had a valid tax lien on a delinquent taxpayer's one-half interest in two lots of real property. However, a mortgage on one of the two lots took priority over the tax lien because the mortgage was recorded before the notice of tax lien was filed.

J.F. McKeown, DC Ind., 94-1 USTC ¶50,217. Aff'd on another issue, CA-7 (unpublished opinion), 97-1 USTC ¶50,291.

Title to real property was subject first to a mortgage lien and then to a U.S. tax lien that was recorded after the mortgage was recorded. A title insurance search conducted by the mortgage company revealed that no liens existed against the mortgagor's real property. It had no actual or constructive knowledge that the property was encumbered by any IRS lien.

Associates Financial Services Co. of Alabama, Inc., DC Ala., 94-2 USTC ¶50,557.

A taxpayer's mother-in-law held a valid assignment of first mortgage on his property, which had priority over federal tax liens, where she received it in exchange for cash used to settle a lawsuit between the taxpayer and his first wife. Although the assignment was not recorded, state (Pennsylvania) law did not require mortgage assignments to be recorded to have priority over subsequent creditors.

H.I. Green, DC Pa., 98-1 USTC ¶50,348. Aff'd on another issue, CA-3, 2000-1 USTC ¶50,151, 201 F3d 251.

For purposes of Code Sec. 6323(a), a purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor is protected against a statutory tax lien for which a notice of federal tax lien has not been filed, notwithstanding actual knowledge of the lien.

Rev. Rul. 2003-108, 2003-2 CB 963.

Financially-distressed homeowners may avoid having a federal tax lien block the refinancing of a mortgage or the sale of a home by requesting that the IRS make the tax lien secondary to the refinancing institution's lien or, under certain circumstances, that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The taxpayer or its representative, which may include the lender, must submit a request to the IRS in writing in order to obtain this expedited treatment from the IRS.

Discharge of Liens: Lien extinguished

Certain actions by two mortgagees in a "title" State, whereby they conducted nonjudicial sales of the mortgaged properties without giving notice to the IRS, elevated two junior tax liens on the taxpayer-mortgagor's equitable rights of redemption to first liens on the realty. When the mortgagees purchased the properties at the foreclosure sales, the doctrine of merger operated to extinguish the mortgage indebtedness and the related liens. No equitable considerations precluded the harsh result because the result could have been easily avoided by the mortgagee-purchasers and it was consistent with the plain language of Code Sec. 7425, its legislative history, and the overall purpose of the tax collection system. In addition, State law was inapplicable and, therefore, the mortgagee-purchasers' contention that the government only held a statutory right of redemption after the sales was meritless.

Southern Bank of Lauderdale County, CA-11, 85-2 USTC ¶9670, 770 F2d 1001. Cert. denied, 106 SCt 2890.

Followed.

Great Western Savings, DC Calif., 87-1 USTC ¶9364.

The district court erred by characterizing the sellers' state action as a confirmation of the sellers' rights under a real estate sales contract rather than an action to quiet title under Washington law, because the contract sellers did not declare a forfeiture upon the contract buyer's delinquency, which would have extinguished the tax liens, but instead they elected to have a Washington court restore them to possession and terminate the contract buyer's right of redemption and his equitable interest in the property.

S. Winterburn, CA-9, 85-1 USTC ¶9119.

A federal tax lien was extinguished following the cancellation or termination of a contract for deed, since the court determined that under the applicable state law a forfeiture was not considered a nonjudicial sale within the meaning of Code Sec. 7425(b) and notice to the federal government was not required. In so holding the court followed the reasoning enunciated in F.M. Hedlund, DC Wash., 81-2 USTC ¶9744, 520 FSupp 81, and later approved by the Ninth Circuit in Brookbank Inc., CA-9, 83-2 USTC ¶9507, that Treas. Reg. §301.7425-2 was invalid to the extent that it mandated that such forfeitures be treated as nonjudicial sales. Furthermore, in reaching this conclusion, the court contrasted the treatment of a contract for deed with that of a mortgage under state law and noted that in the case of the former the seller retains legal title until the buyer fully discharges his obligations under the contract while in the latter the mortgagor holds legal title. Finally, the court denied the seller's motion for attorney's fees.

A.B. Johnson, CA-8, 86-2 USTC ¶9643.

A district court's holding that a tax lien was extinguished by a nonjudicial foreclosure sale of the property was based on an erroneous conclusion that the lien was junior to a bank's lien. The Court of Appeals determined that, under state law, the bank's interest in the property under a defectively acknowledged deed of trust was not protected against a subsequent judgment creditor. Therefore, the judgment was reversed.

Metropolitan Natl. Bk., CA-5, 90-1 USTC ¶50,331, 901 F2d 1297.

Where property was purchased at a regular judicial sale pursuant to a judgment in a civil action in which the Government's claimed lien could have been asserted and no notice of the lien had been filed locally at commencement of the action, the provisions of Code Sec. 7425(a)(2) applied, and the interests of the Government were subordinated under Texas law to those of taxpayer. The Government also failed to prove that the purchase price was inadequate.

L. Von Cseh, DC, 73-1 USTC ¶9238, 354 FSupp 315.

Vendors were entitled to summary judgment with respect to federal tax liens on real property sold on contract to a vendee that had attached while the contract was in effect. The vendors had declared a forfeiture under the contract and such a declaration was not a sale of property within the meaning of Code Sec. 7425(b), which provides for the nondischargeability of tax liens. Reg. Sec. 301.7425-2(a), defining a nonjudicial sale to include a forfeiture or termination under the provisions of a real estate sales contract, was invalid since it enlarged the scope of the statute and failed to give consideration to the modifying phrase "under a statutory lien on such property," which restricts the meaning of a "judicial sale" to one authorized by a statute providing for a lien on property.

F.M. Hedlund, DC, 81-2 USTC ¶9744, 520 FSupp 81.

A taxpayer was held not to have a superior lien to truck property because he had not perfected his security interest in the property prior to the tax sale to a third party. Although the taxpayer argued that the tax lien was junior to his interest, the district court determined that it would be inequitable to permit him to recover the truck property since he had taken no steps to perfect his security interest under state law and because the debtor had transferred the property to trust, with the permission of the taxpayer, which had extinguished any security interest the taxpayer might have had.

C.L. Hess, DC, 80-2 USTC ¶9693.

Although a public trustee did not deliver a deed until some time later, the date of sale of property occurred under Colorado law, as of the time the purchaser paid for the property and received a certificate of purchase, and the IRS's junior lien was extinguished by a lack of a timely redemption.

San Miguel Investment Co., DC, 81-2 USTC ¶9589.

A tax lien that was based on taxes owed by contractors for the purchase of property and that was filed against that property was extinguished when the contract for deed to that property was cancelled. Since the cancellation of a contract for deed was not a non-judicial sale for the purpose of section 7425(b), the government did not have to be notified before extinction could occur. The property owner's motion for summary judgment to declare the tax lien extinguished was granted.

B. Sigel, DC Minn., 86-2 USTC ¶9514.

Failure by a purchaser of real property to make payments as provided in the contract for sale, which resulted in a declaration of forfeiture on the contract, was not considered a nonjudicial sale requiring notice of discharge of tax liens that attached to the property. The district court ruled that under state law, a declaration for forfeiture is not a sale of property within the meaning of the Code. Consequently, judgment was entered in favor of the government against the delinquent taxpayers for the amount of the liens, plus interest, penalties and other additions to tax but not as against the property.

R.F. Aden, DC Wyo., 86-2 USTC ¶9618.

Property purchased by the taxpayers at a nonjudicial foreclosure sale was taken subject to federal tax liens imposed by the government because notice of the nonjudicial foreclosure sale had not been sent to the proper district director.

G.L. Musick, DC Calif., 87-2 USTC ¶9632.

An IRS lien was discharged when another creditor gave the IRS proper notice that it had repossessed and sold the property. Under state law (Kentucky), a lien similar to the IRS's would not have continued in the surplus proceeds of a nonjudicial sale if the claimant had not (as the IRS had not) demanded satisfaction before distribution of the sale proceeds.

D.W. Cope, DC Ky., 87-2 USTC ¶9651.

A federal tax lien was extinguished by redemption of the property following a tax sale by a person who held a senior lien.

L. Black, DC Ala., 88-1 USTC ¶9207, 683 FSupp 770.

Similarly.

J. Espinoza, DC Colo., 90-1 USTC ¶50,073.

Federal tax liens, which were discharged from real property sold, attached to the proceeds of sale.

M. Caldwell, Jr., DC Ga., 90-1 USTC ¶50,100, 742 FSupp 650.

A judgment creditor was entitled to the proceeds of a sheriff's sale of the debtor's personal property, despite the fact that the IRS had a senior tax lien. Under state (Arkansas) law, the debtor had no rights with respect to the proceeds to which the IRS's lien could attach. Finally, the court had jurisdiction over the appeal because the lower court's order was final. The lower court decided who was entitled to the proceeds, the sole issue for decision, and the fact that it refused to rule on the validity or priority of the liens of the numerous other intervening claimants did not undermine the finality of that decision.

R.A. Miller, CA-8, 92-2 USTC ¶50,524, 975 F2d 547.

An IRS junior tax lien was extinguished at a property's foreclosure sale because the mortgage holder who purchased the property provided adequate notice of the sale to the IRS and acted in good faith. In addition, the redemption period following the foreclosure sale had expired.

E.D. Edmundson, DC La., 95-2 USTC ¶50,345, 886 FSupp 1314.

A third-party purchaser of property subject to a tax lien was granted summary judgment in its quiet title case against the IRS. The property subject to the tax lien was sold by the local county collector for past due real estate taxes. Although the purchaser timely notified the IRS of the sale as required by Code Sec. 7425, and although the IRS received the notice, the notice was incorrectly addressed. The IRS argued that the purchaser's failure to correctly address the notice made the notice fatally inadequate and, therefore, its obligation to notify the petitioner of any inadequacies in the notice never arose. However, the court determined that, under Reg. §301.7425(d)(2), the timely notice of sale triggered the IRS's duty to provide notice of any inadequacy to the foreclosing party. The IRS could not use a technical deficiency to disregard its obligation to provide notice of inadequacy and sit back and wait for the sender of the notice to "fall into its trap."

Glasgow Realty, LLC, DC Mo., 2005-1 USTC ¶50,124.

Financially-distressed homeowners may avoid having a federal tax lien block the refinancing of a mortgage or the sale of a home by requesting that the IRS make the tax lien secondary to the refinancing institution's lien or, under certain circumstances, that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien. The taxpayer or its representative, which may include the lender, must submit a request to the IRS in writing in order to obtain this expedited treatment from the IRS.

6323(a) PURCHASERS, HOLDERS OF SECURITY INTERESTS, MECHANIC'S LIENORS, AND JUDGMENT LIEN CREDITORS. --
The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.




6323(b) PROTECTION FOR CERTAIN INTERESTS EVEN THOUGH NOTICE FILED. --
Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid --




6323(b)(1) SECURITIES. --
With respect to a security (as defined in subsection (h)(4)) --

6323(b)(1)(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien; and

6323(b)(1)(B) as against a holder of a security interest in such security who, at the time such interest came into existence, did not have actual notice or knowledge of the existence of such lien.




6323(b)(2) MOTOR VEHICLES. --
With respect to a motor vehicle (as defined in subsection (h)(3)), as against a purchaser of such motor vehicle, if --

6323(b)(2)(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and

6323(b)(2)(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent.




6323(b)(3) PERSONAL PROPERTY PURCHASED AT RETAIL. --
With respect to tangible personal property purchased at retail, as against a purchaser in the ordinary course of the seller's trade or business, unless at the time of such purchase such purchaser intends such purchase to (or knows such purchase will) hinder, evade, or defeat the collection of any tax under this title.




6323(b)(4) PERSONAL PROPERTY PURCHASED IN CASUAL SALE. --
With respect to household goods, personal effects, or other tangible personal property described in section 6334(a) purchased (not for resale) in a casual sale for less than $1,000, as against the purchaser, but only if such purchaser does not have actual notice or knowledge (A) of the existence of such lien, or (B) that this sale is one of a series of sales.




6323(b)(5) PERSONAL PROPERTY SUBJECT TO POSSESSORY LIEN. --
With respect to tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of such property, as against a holder of such a lien, if such holder is, and has been, continuously in possession of such property from the time such lien arose.




6323(b)(6) REAL PROPERTY TAX AND SPECIAL ASSESSMENT LIENS. --
With respect to real property, as against a holder of a lien upon such property, if such lien is entitled under local law to priority over security interests in such property which are prior in time, and such lien secures payment of --

6323(b)(6)(A) a tax of general application levied by any taxing authority based upon the value of such property;

6323(b)(6)(B) a special assessment imposed directly upon such property by any taxing authority, if such assessment is imposed for the purpose of defraying the cost of any public improvement; or

6323(b)(6)(C) charges for utilities or public services furnished to such property by the United States, a State or political subdivision thereof, or an instrumentality of any one or more of the foregoing.




6323(b)(7) RESIDENTIAL PROPERTY SUBJECT TO A MECHANIC'S LIEN FOR CERTAIN REPAIRS AND IMPROVEMENTS. --
With respect to real property subject to a lien for repair or improvement of a personal residence (containing not more than four dwelling units) occupied by the owner of such residence, as against a mechanic's lienor, but only if the contract price on the contract with the owner is not more than $5,000.




6323(b)(8) ATTORNEYS' LIENS. --
With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.




6323(b)(9) CERTAIN INSURANCE CONTRACTS. --
With respect to a life insurance, endowment, or annuity contract, as against the organization which is the insurer under such contract, at any time --

6323(b)(9)(A) before such organization had actual notice or knowledge of the existence of such lien;

6323(b)(9)(B) after such organization had such notice or knowledge, with respect to advances required to be made automatically to maintain such contract in force under an agreement entered into before such organization had such notice or knowledge; or

6323(b)(9)(C) after satisfaction of a levy pursuant to section 6332(b), unless and until the Secretary delivers to such organization a notice, executed after the date of such satisfaction, of the existence of such lien.




6323(b)(10) DEPOSIT-SECURED LOANS. --
With respect to a savings deposit, share, or other account, with an institution described in section 581 or 591, to the extent of any loan made by such institution without actual notice or knowledge of the existence of such lien, as against such institution, if such loan is secured by such account.




6323(c) PROTECTION FOR CERTAIN COMMERCIAL TRANSACTIONS FINANCING AGREEMENTS, ETC. --

6323(c)(1) IN GENERAL. --To the extent provided in this subsection, even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which --

6323(c)(1)(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting --

6323(c)(1)(A)(i) a commercial transactions financing agreement,

6323(c)(1)(A)(ii) a real property construction or improvement financing agreement, or

6323(c)(1)(A)(iii) an obligatory disbursement agreement, and

6323(c)(1)(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

6323(c)(2) COMMERCIAL TRANSACTIONS FINANCING AGREEMENT. --For purposes of this subsection --

6323(c)(2)(A) DEFINITION. --The term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business) --

6323(c)(2)(A)(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, or

6323(c)(2)(A)(ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business;

but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

6323(c)(2)(B) LIMITATION ON QUALIFIED PROPERTY. --The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

6323(c)(2)(C) COMMERCIAL FINANCING SECURITY DEFINED. --The term "commercial financing security" means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory.

6323(c)(2)(D) PURCHASER TREATED AS ACQUIRING SECURITY INTEREST. --A person who satisfies subparagraph (A) by reason of clause (ii) thereof shall be treated as having acquired a security interest in commercial financing security.

6323(c)(3) REAL PROPERTY CONSTRUCTION OR IMPROVEMENT FINANCING AGREEMENT. --For purposes of this subsection --

6323(c)(3)(A) DEFINITION. --The term "real property construction or improvement financing agreement" means an agreement to make cash disbursements to finance --

6323(c)(3)(A)(i) the construction or improvement of real property,

6323(c)(3)(A)(ii) a contract to construct or improve real property, or

6323(c)(3)(A)(iii) the raising or harvesting of a farm crop or the raising of livestock or other animals.

For purposes of clause (iii), the furnishing of goods and services shall be treated as the disbursement of cash.

6323(c)(3)(B) LIMITATION ON QUALIFIED PROPERTY. --The term "qualified property", when used with respect to a real property construction or improvement financing agreement, includes only --

6323(c)(3)(B)(i) in the case of subparagraph (A)(i), the real property with respect to which the construction or improvement has been or is to be made,

6323(c)(3)(B)(ii) in the case of subparagraph (A)(ii), the proceeds of the contract described therein, and

6323(c)(3)(B)(iii) in the case of subparagraph (A)(iii), property subject to the lien imposed by section 6321 at the time of tax lien filing and the crop or the livestock or other animals referred to in subparagraph (A)(iii).

6323(c)(4) OBLIGATORY DISBURSEMENT AGREEMENT. --For purposes of this subsection --

6323(c)(4)(A) DEFINITION. --The term "obligatory disbursement agreement" means an agreement (entered into by a person in the course of his trade or business) to make disbursements, but such an agreement shall be treated as coming within the term only to the extent of disbursements which are required to be made by reason of the intervention of the rights of a person other than the taxpayer.

6323(c)(4)(B) LIMITATION ON QUALIFIED PROPERTY. --The term "qualified property", when used with respect to an obligatory disbursement agreement, means property subject to the lien imposed by section 6321 at the time of tax lien filing and (to the extent that the acquisition is directly traceable to the disbursements referred to in subparagraph (A)) property acquired by the taxpayer after tax lien filing.

6323(c)(4)(C) SPECIAL RULES FOR SURETY AGREEMENTS. --Where the obligatory disbursement agreement is an agreement ensuring the performance of a contract between the taxpayer and another person --

6323(c)(4)(C)(i) the term "qualified property" shall be treated as also including the proceeds of the contract the performance of which was ensured, and

6323(c)(4)(C)(ii) if the contract the performance of which was ensured was a contract to construct or improve real property, to produce goods, or to furnish services, the term "qualified property" shall be treated as also including any tangible personal property used by the taxpayer in the performance of such ensured contract.




6323(d) 45- DAY PERIOD FOR MAKING DISBURSEMENTS. --
Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing by reason of disbursements made before the 46th day after the date of tax lien filing, or (if earlier) before the person making such disbursements had actual notice or knowledge of tax lien filing, but only if such security interest --

6323(d)(1) is in property (A) subject, at the time of tax lien filing, to the lien imposed by section 6321, and (B) covered by the terms of a written agreement entered into before tax lien filing, and

6323(d)(2) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.




6323(e) PRIORITY OF INTEREST AND EXPENSES. --
If the lien imposed by section 6321 is not valid as against a lien or security interest, the priority of such lien or security interest shall extend to --

6323(e)(1) any interest or carrying charges upon the obligation secured,

6323(e)(2) the reasonable charges and expenses of an indenture trustee or agent holding the security interest for the benefit of the holder of the security interest,

6323(e)(3) the reasonable expenses, including reasonable compensation for attorneys, actually incurred in collecting or enforcing the obligation secured,

6323(e)(4) the reasonable costs of insuring, preserving, or repairing the property to which the lien or security interest relates,

6323(e)(5) the reasonable costs of insuring payment of the obligation secured, and

6323(e)(6) amounts paid to satisfy any lien on the property to which the lien or security interest relates, but only if the lien so satisfied is entitled to priority over the lien imposed by section 6321,

to the extent that, under local law, any such item has the same priority as the lien or security interest to which it relates.




6323(f) PLACE FOR FILING NOTICE; FORM. --

6323(f)(1) PLACE FOR FILING. --The notice referred to in subsection (a) shall be filed --

6323(f)(1)(A) UNDER STATE LAWS. --

6323(f)(1)(A)(i) REAL PROPERTY. --In the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and

6323(f)(1)(A)(ii) PERSONAL PROPERTY. --In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated, except that State law merely conforming to or reenacting Federal law establishing a national filing system does not constitute a second office for filing as designated by the laws of such State;

6323(f)(1)(B) WITH CLERK OF DISTRICT COURT. --In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A); or

6323(f)(1)(C) WITH RECORDER OF DEEDS OF THE DISTRICT OF COLUMBIA. --In the office of the Recorder of Deeds of the District of Columbia, if the property subject to the lien is situated in the District of Columbia.

6323(f)(2) SITUS OF PROPERTY SUBJECT TO LIEN. --For purposes of paragraphs (1) and (4), property shall be deemed to be situated --

6323(f)(2)(A) REAL PROPERTY. --In the case of real property, at its physical location; or

6323(f)(2)(B) PERSONAL PROPERTY. --In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, and the residence of a taxpayer whose residence is without the United States shall be deemed to be in the District of Columbia.

6323(f)(3) FORM. --The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

6323(f)(4) INDEXING REQUIRED WITH RESPECT TO CERTAIN REAL PROPERTY. --In the case of real property, if --

6323(f)(4)(A) under the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed, and

6323(f)(4)(B) there is maintained (at the applicable office under paragraph (1)) an adequate system for the public indexing of Federal tax liens,

then the notice of lien referred to in subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

6323(f)(5) NATIONAL FILING SYSTEMS. --The filing of a notice of lien shall be governed solely by this title and shall not be subject to any other Federal law establishing a place or places for the filing of liens or encumbrances under a national filing system.




6323(g) REFILING OF NOTICE. --
For purposes of this section --

6323(g)(1) GENERAL RULE. --Unless notice of lien is refiled in the manner prescribed in paragraph (2) during the required refiling period, such notice of lien shall be treated as filed on the date on which it is filed (in accordance with subsection (f)) after the expiration of such refiling period.

6323(g)(2) PLACE FOR FILING. --A notice of lien refiled during the required refiling period shall be effective only --

6323(g)(2)(A) if --

6323(g)(2)(A)(i) such notice of lien is refiled in the office in which the prior notice of lien was filed, and

6323(g)(2)(A)(ii) in the case of real property, the fact of refiling is entered and recorded in an index to the extent required by subsection (f)(4); and

6323(g)(2)(B) in any case in which, 90 days or more prior to the date of a refiling of notice of lien under subparagraph (A), the Secretary received written information (in the manner prescribed in regulations issued by the Secretary) concerning a change in the taxpayer's residence, if a notice of such lien is also filed in accordance with subsection (f) in the State in which such residence is located.

6323(g)(3) REQUIRED REFILING PERIOD. --In the case of any notice of lien, the term "required refiling period" means --

6323(g)(3)(A) the one-year period ending 30 days after the expiration of 10 years after the date of the assessment of the tax, and

6323(g)(3)(B) the one-year period ending with the expiration of 10 years after the close of the preceding required refiling period for such notice of lien.

6323(g)(4) TRANSITIONAL RULE. --Notwithstanding paragraph (3), if the assessment of the tax was made before January 1, 1962, the first required refiling period shall be the calendar year 1967.




6323(h) DEFINITIONS. --
For purposes of this section and section 6324 --

6323(h)(1) SECURITY INTEREST. --The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

6323(h)(2) MECHANIC'S LIENOR. --The term "mechanic's lienor" means any person who under local law has a lien on real property (or on the proceeds of a contract relating to real property) for services, labor, or materials furnished in connection with the construction or improvement of such property. For purposes of the preceding sentence, a person has a lien on the earliest date such lien becomes valid under local law against subsequent purchasers without actual notice, but not before he begins to furnish the services, labor, or materials.

6323(h)(3) MOTOR VEHICLE. --The term "motor vehicle" means a self-propelled vehicle which is registered for highway use under the laws of any State or foreign country.

6323(h)(4) SECURITY. --The term "security" means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument; or money.

6323(h)(5) TAX LIEN FILING. --The term "tax lien filing" means the filing of notice (referred to in subsection (a)) of the lien imposed by section 6321.

6323(h)(6) PURCHASER. --The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. In applying the preceding sentence for purposes of subsection (a) of this section, and for purposes of section 6324 --

6323(h)(6)(A) a lease of property,

6323(h)(6)(B) a written executory contract to purchase or lease property,

6323(h)(6)(C) an option to purchase or lease property or any interest therein, or

6323(h)(6)(D) an option to renew or extend a lease of property,

which is not a lien or security interest shall be treated as an interest in property.




6323(i) SPECIAL RULES. --

6323(i)(1) ACTUAL NOTICE OR KNOWLEDGE. --For purposes of this subchapter, an organization shall be deemed for purposes of a particular transaction to have actual notice or knowledge of any fact from the time such fact is brought to the attention of the individual conducting such transaction, and in any event from the time such fact would have been brought to such individual's attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information.

6323(i)(2) SUBROGATION. --Where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by section 6321 or 6324.

6323(i)(3) FORFEITURES. --For purposes of this subchapter, a forfeiture under local law of property seized by a law enforcement agency of a State, county, or other local governmental subdivision shall relate back to the time of seizure, except that this paragraph shall not apply to the extent that under local law the holder of an intervening claim or interest would have priority over the interest of the State, county, or other local governmental subdivision in the property.

6323(i)(4) COST-OF-LIVING ADJUSTMENT. --In the case of notices of liens imposed by section 6321 which are filed in any calendar year after 1998, each of the dollar amounts under paragraph (4) or (7) of subsection (b) shall be increased by an amount equal to --

6323(i)(4)(A) such dollar amount, multiplied by

6323(i)(4)(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting "calendar year 1996" for "calendar year 1992" in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $10, such amount shall be rounded to the nearest multiple of $10.




6323(j) WITHDRAWAL OF NOTICE IN CERTAIN CIRCUMSTANCES. --

6323(j)(1) IN GENERAL. --The Secretary may withdraw a notice of a lien filed under this section and this chapter shall be applied as if the withdrawn notice had not been filed, if the Secretary determines that --

6323(j)(1)(A) the filing of such notice was premature or otherwise not in accordance with administrative procedures of the Secretary,

6323(j)(1)(B) the taxpayer has entered into an agreement under section 6159 to satisfy the tax liability for which the lien was imposed by means of installment payments, unless such agreement provides otherwise,

6323(j)(1)(C) the withdrawal of such notice will facilitate the collection of the tax liability, or

6323(j)(1)(D) with the consent of the taxpayer or the National Taxpayer Advocate, the withdrawal of such notice would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States.

Any such withdrawal shall be made by filing notice at the same office as the withdrawn notice. A copy of such notice of withdrawal shall be provided to the taxpayer.

6323(j)(2) NOTICE TO CREDIT AGENCIES, ETC. --Upon written request by the taxpayer with respect to whom a notice of a lien was withdrawn under paragraph (1), the Secretary shall promptly make reasonable efforts to notify credit reporting agencies, and any financial institution or creditor whose name and address is specified in such request, of the withdrawal of such notice. Any such request shall be in such form as the Secretary may prescribe.

Chairman's Amendment in the Nature of a Substitute to HR 598, the American Recovery And Reinvestment Tax Act of 2009

January 23, 2009

111th Congress
AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 598 OFFERED BY MR. RANGEL OF NEW YORK


Strike all after the enacting clause and insert the following:


TITLE I --TAX PROVISIONS




SECTION 1000. SHORT TITLE, ETC.

(a) SHORT TITLE. --This title may be cited as the "American Recovery and Reinvestment Tax Act of 2009".

(b) REFERENCE. --Except as otherwise expressly provided, whenever in this title an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

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


Sec. 1000. Short title, etc.




Subtitle A --Making Work Pay




Sec. 1001. Making work pay credit.




Subtitle B --Additional Tax Relief for Families With Children




Sec. 1101. Increase in earned income tax credit.

Sec. 1102. Increase of refundable portion of child credit.




Subtitle C --American Opportunity Tax Credit




Sec. 1201. American opportunity tax credit.




Subtitle D --Housing Incentives

Sec. 1301. Waiver of requirement to repay first-time homebuyer
credit.

Sec. 1302. Coordination of low-income housing credit and low-income
housing grants.




Subtitle E --Tax Incentives for Business




PART 1 --TEMPORARY INVESTMENT INCENTIVES




Sec. 1401. Special allowance for certain property acquired during
2009.

Sec. 1402. Temporary increase in limitations on expensing of certain
depreciable business assets.




PART 2 --5-YEAR CARRYBACK OF OPERATING LOSSES

Sec. 1411. 5-year carryback of operating losses.

Sec. 1412. Exception for TARP recipients.




PART 3 --INCENTIVES FOR NEW JOBS




Sec. 1421. Incentives to hire unemployed veterans and disconnected
youth.




PART 4 --CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN
LOSSES FOLLOWING AN OWNERSHIP CHANGE




Sec. 1431. Clarification of regulations related to limitations on
certain built-in losses following an ownership change.




Subtitle F --Fiscal Relief for State and Local Governments




PART 1 --IMPROVED MARKETABILITY FOR TAX-EXEMPT BONDS




Sec. 1501. De minimis safe harbor exception for tax-exempt interest
expense of financial institutions.

Sec. 1502. Modification of small issuer exception to tax-exempt
interest expense allocation rules for financial
institutions.

Sec. 1503. Temporary modification of alternative minimum tax
limitations on tax-exempt bonds.




PART 2 --TAX CREDIT BONDS FOR SCHOOLS




Sec. 1511. Qualified school construction bonds.

Sec. 1512. Extension and expansion of qualified zone academy bonds.




PART 3 --TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS




Sec. 1521. Taxable bond option for governmental bonds.




PART 4 --RECOVERY ZONE BONDS




Sec. 1531. Recovery zone bonds.

Sec. 1532. Tribal economic development bonds.




PART 5 --REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS




Sec. 1541. Repeal of withholding tax on government contractors.




Subtitle G --Energy Incentives




PART 1 --RENEWABLE ENERGY INCENTIVES




Sec. 1601. Extension of credit for electricity produced from certain
renewable resources.

Sec. 1602. Election of investment credit in lieu of production
credit.

Sec. 1603. Repeal of certain limitations on credit for renewable
energy property.

Sec. 1604. Coordination with renewable energy grants.




PART 2 --INCREASED ALLOCATIONS OF NEW CLEAN RENEWABLE ENERGY BONDS AND QUALIFIED
ENERGY CONSERVATION BONDS




Sec. 1611. Increased limitation on issuance of new clean renewable
energy bonds.

Sec. 1612. Increased limitation and expansion of qualified energy
conservation bonds.




PART 3 --ENERGY CONSERVATION INCENTIVES




Sec. 1621. Extension and modification of credit for nonbusiness
energy property.

Sec. 1622. Modification of credit for residential energy efficient
property.

Sec. 1623. Temporary increase in credit for alternative fuel vehicle
refueling property.




PART 4 --ENERGY RESEARCH INCENTIVES




Sec. 1631. Increased research credit for energy research.




Subtitle H --Other Provisions




PART 1 --APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN
TAX-FAVORED BONDS




Sec. 1701. Application of certain labor standards to projects
financed with certain tax-favored bonds.




PART 2 --GRANTS TO PROVIDE FINANCING FOR LOW-INCOME HOUSING




Sec. 1711. Grants to States for low-income housing projects in lieu
of low-income housing credit allocations for 2009.




PART 3 --GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS




Sec. 1721. Grants for specified energy property in lieu of tax
credits.




Subtitle A --Making Work Pay




SEC. 1001. MAKING WORK PAY CREDIT .

(a) IN GENERAL. --Subpart C of part IV of subchapter A of chapter 1 is amended by inserting after section 36 the following new section:



"SEC. 36A. MAKING WORK PAY CREDIT.

"(a) ALLOWANCE OF CREDIT. --In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the lesser of --
"(1) 6.2 percent of earned income of the taxpayer, or

"(2) $500 ($1,000 in the case of a joint return).

"(b) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME. --
"(1) IN GENERAL. --The amount allowable as a credit under subsection (a) (determined without regard to this paragraph) for the taxable year shall be reduced (but not below zero) by 2 percent of so much of the taxpayer's modified adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).

"(2) MODIFIED ADJUSTED GROSS INCOME. --For purposes of subparagraph (A), the term 'modified adjusted gross income' means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

"(c) DEFINITIONS. --For purposes of this section --
"(1) ELIGIBLE INDIVIDUAL. --The term 'eligible individual' means any individual other than --

"(A) any nonresident alien individual,

"(B) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins, and

"(C) an estate or trust.

"(2) EARNED INCOME. --The term 'earned income' has the meaning given such term by section 32(c)(2), except that such term shall not include net earnings from self-employment which are not taken into account in computing taxable income. For purposes of the preceding sentence, any amount excluded from gross income by reason of section 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year.

"(d) TERMINATION. --This section shall not apply to taxable years beginning after December 31, 2010.".

(b) TREATMENT OF POSSESSIONS. --
(1) PAYMENTS TO POSSESSIONS. --

(A) MIRROR CODE POSSESSION. --The Secretary of the Treasury shall pay to each possession of the United States with a mirror code tax system amounts equal to the loss to that possession by reason of the amendments made by this section with respect to taxable years beginning in 2009 and 2010. Such amounts shall be determined by the Secretary of the Treasury based on information provided by the government of the respective possession.

(B) OTHER POSSESSIONS. --The Secretary of the Treasury shall pay to each possession of the United States which does not have a mirror code tax system amounts estimated by the Secretary of the Treasury as being equal to the aggregate benefits that would have been provided to residents of such possession by reason of the amendments made by this section for taxable years beginning in 2009 and 2010 if a mirror code tax system had been in effect in such possession. The preceding sentence shall not apply with respect to any possession of the United States unless such possession has a plan, which has been approved by the Secretary of the Treasury, under which such possession will promptly distribute such payments to the residents of such possession.

(2) COORDINATION WITH CREDIT ALLOWED AGAINST UNITED STATES INCOME TAXES. --No credit shall be allowed against United States income taxes for any taxable year under section 36A of the Internal Revenue Code of 1986 (as added by this section) to any person --

(A) to whom a credit is allowed against taxes imposed by the possession by reason of the amendments made by this section for such taxable year, or

(B) who is eligible for a payment under a plan described in paragraph (1)(B) with respect to such taxable year.

(3) DEFINITIONS AND SPECIAL RULES. --

(A) POSSESSION OF THE UNITED STATES. --For purposes of this subsection, the term "possession of the United States" includes the Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands.

(B) MIRROR CODE TAX SYSTEM. --For purposes of this subsection, the term "mirror code tax system" means, with respect to any possession of the United States, the income tax system of such possession if the income tax liability of the residents of such possession under such system is determined by reference to the income tax laws of the United States as if such possession were the United States.

(C) TREATMENT OF PAYMENTS. --For purposes of section 1324(b)(2) of title 31, United States Code, the payments under this subsection shall be treated in the same manner as a refund due from the credit allowed under section 36A of the Internal Revenue Code of 1986 (as added by this section).

(c) REFUNDS DISREGARDED IN THE ADMINISTRATION OF FEDERAL PROGRAMS AND FEDERALLY ASSISTED PROGRAMS. --Any credit or refund allowed or made to any individual by reason of section 36A of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (b) of this section shall not be taken into account as income and shall not be taken into account as resources for the month of receipt and the following 2 months, for purposes of determining the eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.

(d) CONFORMING AMENDMENTS. --
(1) Section 6211(b)(4)(A) is amended by inserting "36A," after "36,".

(2) Section 1324(b)(2) of title 31, United States Code, is amended by inserting "36A," after "36,".

(3) The table of sections for subpart C of part IV of subchapter A of chapter 1 is amended by inserting after the item relating to section 36 the following new item:



"Sec. 36A. Making work pay credit.".

(e) EFFECTIVE DATE. --This section shall apply to taxable years beginning after December 31, 2008.


Subtitle B --Additional Tax Relief for Families With Children




SEC. 1101. INCREASE IN EARNED INCOME TAX CREDIT.

(a) IN GENERAL. --Subsection (b) of section 32 is amended by adding at the end the following new paragraph:
"(3) SPECIAL RULES FOR 2009 AND 2010 . --In the case of any taxable year beginning in 2009 or 2010 --

"(A) INCREASED CREDIT PERCENTAGE FOR 3 OR MORE QUALIFYING CHILDREN . --In the case of a taxpayer with 3 or more qualifying children, the credit percentage is 45 percent.

"(B) REDUCTION OF MARRIAGE PENALTY . --

"(i) IN GENERAL . --The dollar amount in effect under paragraph (2)(B) shall be $5,000.

"(ii) INFLATION ADJUSTMENT . --In the case of any taxable year beginning in 2010, the $5,000 amount in clause (i) shall be increased by an amount equal to --

"(I) such dollar amount, multiplied by

"(II) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting 'calendar year 2008' for 'calendar year 1992' in subparagraph (B) thereof.

"(iii) ROUNDING . --Subparagraph (A) of subsection (j)(2) shall apply after taking into account any increase under clause (ii).".

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.



SEC. 1102. INCREASE OF REFUNDABLE PORTION OF CHILD CREDIT .

(a) IN GENERAL . --Paragraph (4) of section 24(d) is amended to read as follows:
"(4) SPECIAL RULE FOR 2009 AND 2010 . --Not-withstanding paragraph (3), in the case of any taxable year beginning in 2009 or 2010, the dollar amount in effect for such taxable year under paragraph (1)(B)(i) shall be zero.".

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.


Subtitle C --American Opportunity Tax Credit




SEC. 1201. AMERICAN OPPORTUNITY TAX CREDIT .

(a) IN GENERAL . --Section 25A (relating to Hope scholarship credit) is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection:

"(i) AMERICAN OPPORTUNITY TAX CREDIT . --In the case of any taxable year beginning in 2009 or 2010 --
"(1) INCREASE IN CREDIT . --The Hope Scholarship Credit shall be an amount equal to the sum of --

"(A) 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $2,000, plus

"(B) 25 percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000.

"(2) CREDIT ALLOWED FOR FIRST 4 YEARS OF POST-SECONDARY EDUCATION . --Subparagraphs (A) and (C) of subsection (b)(2) shall be applied by substituting '4' for '2'.

"(3) QUALIFIED TUITION AND RELATED EXPENSES TO INCLUDE REQUIRED COURSE MATERIALS . --Subsection (f)(1)(A) shall be applied by substituting 'tuition, fees, and course materials' for 'tuition and fees'.

"(4) INCREASE IN AGI LIMITS FOR HOPE SCHOLARSHIP CREDIT . --In lieu of applying subsection (d) with respect to the Hope Scholarship Credit, such credit (determined without regard to this paragraph) shall be reduced (but not below zero) by the amount which bears the same ratio to such credit (as so determined) as --

"(A) the excess of --

"(i) the taxpayer's modified adjusted gross income (as defined in subsection (d)(3)) for such taxable year, over

"(ii) $80,000 ($160,000 in the case of a joint return), bears to

"(B) $10,000 ($20,000 in the case of a joint return).

"(5) CREDIT ALLOWED AGAINST ALTERNATIVE MINIMUM TAX . --In the case of a taxable year to which section 26(a)(2) does not apply, so much of the credit allowed under subsection (a) as is attributable to the Hope Scholarship Credit shall not exceed the excess of --

"(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over

"(B) the sum of the credits allowable under this subpart (other than this subsection and sections 23, 25D, and 30D) and section 27 for the taxable year.

Any reference in this section or section 24, 25, 26, 25B, 904, or 1400C to a credit allowable under this subsection shall be treated as a reference to so much of the credit allowable under subsection (a) as is attributable to the Hope Scholarship Credit.

"(6) PORTION OF CREDIT MADE REFUNDABLE . --40 percent of so much of the credit allowed under subsection (a) as is attributable to the Hope Scholarship Credit (determined after application of paragraph (4) and without regard to this paragraph and section 26(a)(2) or paragraph (5), as the case may be) shall be treated as a credit allowable under subpart C (and not allowed under subsection (a)). The preceding sentence shall not apply to any taxpayer for any taxable year if such taxpayer is a child to whom subsection (g) of section 1 applies for such taxable year.

"(7) COORDINATION WITH MIDWESTERN DISASTER AREA BENEFITS . --In the case of a taxpayer with respect to whom section 702(a)(1)(B) of the Heartland Disaster Tax Relief Act of 2008 applies for any taxable year, such taxpayer may elect to waive the application of this subsection to such taxpayer for such taxable year.".

(b) CONFORMING AMENDMENTS . --
(1) Section 24(b)(3)(B) is amended by inserting "25A(i)," after "23,".

(2) Section 25(e)(1)(C)(ii) is amended by inserting "25A(i)," after "24,".

(3) Section 26(a)(1) is amended by inserting "25A(i)," after "24,".

(4) Section 25B(g)(2) is amended by inserting "25A(i)," after "23,".

(5) Section 904(i) is amended by inserting "25A(i)," after "24,".

(6) Section 1400C(d)(2) is amended by inserting "25A(i)," after "24,".

(7) Section 1324(b)(2) of title 31, United States Code, is amended by inserting "25A," before "35".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

(d) APPLICATION OF EGTRRA SUNSET . --The amendment made by subsection (b)(1) shall be subject to title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 in the same manner as the provision of such Act to which such amendment relates.

(e) TREASURY STUDIES REGARDING EDUCATION INCENTIVES . --
(1) STUDY REGARDING COORDINATION WITH NON-TAX EDUCATIONAL INCENTIVES . --The Secretary of the Treasury, or the Secretary's delegate, shall study how to coordinate the credit allowed under section 25A of the Internal Revenue Code of 1986 with the Federal Pell Grant program under section 401 of the Higher Education Act of 1965.

(2) STUDY REGARDING IMPOSITION OF COMMUNITY SERVICE REQUIREMENTS . --The Secretary of the Treasury, or the Secretary's delegate, shall study the feasibility of requiring students to perform community service as a condition of taking their tuition and related expenses into account under section 25A of the Internal Revenue Code of 1986.

(3) REPORT . --Not later than 1 year after the date of the enactment of this Act, the Secretary of the Treasury, or the Secretary's delegate, shall report to Congress on the results of the studies conducted under this paragraph.


Subtitle D --Housing Incentives




SEC. 1301. WAIVER OF REQUIREMENT TO REPAY FIRST-TIME HOMEBUYER CREDIT .

(a) IN GENERAL . --Paragraph (4) of section 36(f) is amended by adding at the end the following new subparagraph:
"(D) WAIVER OF RECAPTURE FOR PURCHASES IN 2009 . --In the case of any credit allowed with respect to the purchase of a principal residence after December 31, 2008, and before July 1, 2009 --

"(i) paragraph (1) shall not apply, and

"(ii) paragraph (2) shall apply only if the disposition or cessation described in paragraph (2) with respect to such residence occurs during the 36-month period beginning on the date of the purchase of such residence by the taxpayer.".

(b) CONFORMING AMENDMENT . --Subsection (g) of section 36 is amended by striking "subsection (c)" and inserting "subsections (c) and (f)(4)(D)".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to residences purchased after December 31, 2008.



SEC. 1302. COORDINATION OF LOW-INCOME HOUSING CREDIT AND LOW-INCOME HOUSING GRANTS .

Subsection (i) of section 42 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:
"(9) COORDINATION WITH LOW-INCOME HOUSING GRANTS . --

"(A) REDUCTION IN STATE HOUSING CREDIT CEILING FOR LOW-INCOME HOUSING GRANTS RECEIVED IN 2009 . --For purposes of this section, the amounts described in clauses (i) through (iv) of subsection (h)(3)(C) with respect to any State for 2009 shall each be reduced by so much of such amount as is taken into account in determining the amount of any grant to such State under section 1711 of the American Recovery and Reinvestment Tax Act of 2009.

"(B) SPECIAL RULE FOR BASIS . --Basis of a qualified low-income building shall not be reduced by the amount of any grant described in subparagraph (A).".


Subtitle E --Tax Incentives for Business



PART 1 --TEMPORARY INVESTMENT INCENTIVES



SEC. 1401. SPECIAL ALLOWANCE FOR CERTAIN PROPERTY ACQUIRED DURING 2009 .


(a) IN GENERAL . --Paragraph (2) of section 168(k) is amended --
(1) by striking "January 1, 2010" and inserting "January 1, 2011", and

(2) by striking "January 1, 2009" each place it appears and inserting "January 1, 2010".

(b) CONFORMING AMENDMENTS . --
(1) The heading for subsection (k) of section 168 is amended by striking "JANUARY 1, 2009" and inserting "JANUARY 1, 2010".

(2) The heading for clause (ii) of section 168(k)(2)(B) is amended by striking "PRE-JANUARY 1, 2009" and inserting "PRE-JANUARY 1, 2010".

(3) Subparagraph (D) of section 168(k)(4) is amended --

(A) by striking "and" at the end of clause (i),

(B) by redesignating clause (ii) as clause (v), and

(C) by inserting after clause (i) the following new clauses:

"(ii) 'April 1, 2008' shall be substituted for 'January 1, 2008' in subparagraph (A)(iii)(I) thereof,

"(iii) 'January 1, 2009' shall be substituted for 'January 1, 2010' each place it appears,

"(iv) 'January 1, 2010' shall be substituted for 'January 1, 2011' in subparagraph (A)(iv) thereof, and".

(4) Subparagraph (B) of section 168(l)(5) is amended by striking "January 1, 2009" and inserting "January 1, 2010".

(5) Subparagraph (B) of section 1400N(d)(3) is amended by striking "January 1, 2009" and inserting "January 1, 2010".

(c) EFFECTIVE DATES . --
(1) IN GENERAL . --Except as provided in paragraph (2), the amendments made by this section shall apply to property placed in service after December 31, 2008, in taxable years ending after such date.

(2) TECHNICAL AMENDMENT . --Section 168(k)(4)(D)(ii) of the Internal Revenue Code of 1986, as added by subsection (b)(3)(C), shall apply to taxable years ending after March 31, 2008.



SEC. 1402. TEMPORARY INCREASE IN LIMITATIONS ON EXPENSING OF CERTAIN DEPRECIABLE BUSINESS ASSETS .

(a) IN GENERAL . --Paragraph (7) of section 179(b) is amended --
(1) by striking "2008" and inserting "2008, or 2009", and

(2) by striking "2008" in the heading thereof and inserting "2008, AND 2009".

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.


PART 2 --5-YEAR CARRYBACK OF OPERATING LOSSES




SEC. 1411. 5-YEAR CARRYBACK OF OPERATING LOSSES .

(a) IN GENERAL . --Subparagraph (H) of section 172(b)(1) is amended to read as follows:
"(H) CARRYBACK FOR 2008 AND 2009 NET OPERATING LOSSES . --

"(i) IN GENERAL . --In the case of an applicable 2008 or 2009 net operating loss with respect to which the taxpayer has elected the application of this subparagraph --

"(I) such net operating loss shall be reduced by 10 percent of such loss (determined without regard to this subparagraph),

"(II) subparagraph (A)(i) shall be applied by substituting any whole number elected by the taxpayer which is more than 2 and less than 6 for '2',

"(III) subparagraph (E)(ii) shall be applied by substituting the whole number which is one less than the whole number substituted under subclause (II) for '2', and

"(IV) subparagraph (F) shall not apply.

"(ii) APPLICABLE 2008 OR 2009 NET OPERATING LOSS . --For purposes of this subparagraph, the term 'applicable 2008 or 2009 net operating loss' means --

"(I) the taxpayer's net operating loss for any taxable year ending in 2008 or 2009, or

"(II) if the taxpayer elects to have this subclause apply in lieu of subclause (I), the taxpayer's net operating loss for any taxable year beginning in 2008 or 2009.

"(iii) ELECTION . --Any election under this subparagraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the net operating loss. Any such election, once made, shall be irrevocable.

"(iv) COORDINATION WITH ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION . --In the case of a taxpayer who elects to have clause (ii)(II) apply, section 56(d)(1)(A)(ii) shall be applied by substituting 'ending during 2001 or 2002 or beginning during 2008 or 2009' for 'ending during 2001, 2002, 2008, or 2009'.".

(b) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION . --Subclause (I) of section 56(d)(1)(A)(ii) is amended to read as follows:
"(I) the amount of such deduction attributable to the sum of carrybacks of net operating losses from taxable years ending during 2001, 2002, 2008, or 2009 and carryovers of net operating losses to such taxable years, or".

(c) LOSS FROM OPERATIONS OF LIFE INSURANCE COMPANIES . --Subsection (b) of section 810 is amended by adding at the end the following new paragraph:
"(4) CARRYBACK FOR 2008 AND 2009 LOSSES . --

"(A) IN GENERAL . --In the case of an applicable 2008 or 2009 loss from operations with respect to which the taxpayer has elected the application of this paragraph --

"(i) such loss from operations shall be reduced by 10 percent of such loss (determined without regard to this paragraph), and

"(ii) paragraph (1)(A) shall be applied, at the election of the taxpayer, by substituting '5' or '4' for '3'.

"(B) APPLICABLE 2008 OR 2009 LOSS FROM OPERATIONS . --For purposes of this paragraph, the term 'applicable 2008 or 2009 loss from operations' means --

"(i) the taxpayer's loss from operations for any taxable year ending in 2008 or 2009, or

"(ii) if the taxpayer elects to have this clause apply in lieu of clause (i), the taxpayer's loss from operations for any taxable year beginning in 2008 or 2009.

"(C) ELECTION . --Any election under this paragraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the loss from operations. Any such election, once made, shall be irrevocable.

"(D) COORDINATION WITH ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION . --In the case of a taxpayer who elects to have subparagraph (B)(ii) apply, section 56(d)(1)(A)(ii) shall be applied by substituting 'ending during 2001 or 2002 or beginning during 2008 or 2009' for 'ending during 2001, 2002, 2008, or 2009'.".

(d) CONFORMING AMENDMENT . --Section 172 is amended by striking subsection (k).

(e) EFFECTIVE DATE . --
(1) IN GENERAL . --Except as otherwise provided in this subsection, the amendments made by this section shall apply to net operating losses arising in taxable years ending after December 31, 2007.

(2) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION . --The amendment made by subsection (b) shall apply to taxable years ending after 1997.

(3) LOSS FROM OPERATIONS OF LIFE INSURANCE COMPANIES . --The amendment made by subsection (d) shall apply to losses from operations arising in taxable years ending after December 31, 2007.

(4) TRANSITIONAL RULE . --In the case of a net operating loss (or, in the case of a life insurance company, a loss from operations) for a taxable year ending before the date of the enactment of this Act --

(A) any election made under section 172(b)(3) or 810(b)(3) of the Internal Revenue Code of 1986 with respect to such loss may (notwithstanding such section) be revoked before the applicable date,

(B) any election made under section 172(b)(1)(H) or 810(b)(4) of such Code with respect to such loss shall (notwithstanding such section) be treated as timely made if made before the applicable date, and

(C) any application under section 6411(a) of such Code with respect to such loss shall be treated as timely filed if filed before the applicable date.

For purposes of this paragraph, the term "applicable date" means the date which is 60 days after the date of the enactment of this Act.



SEC. 1412. EXCEPTION FOR TARP RECIPIENTS .

The amendments made by this part shall not apply to --
(1) any taxpayer if --

(A) the Federal Government acquires, at any time, an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008, or

(B) the Federal Government acquires, at any time, any warrant (or other right) to acquire any equity interest with respect to the taxpayer pursuant to such Act,

(2) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and

(3) any taxpayer which at any time in 2008 or 2009 is a member of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, determined without regard to subsection (b) thereof) as a taxpayer described in paragraph (1) or (2).


PART 3 --INCENTIVES FOR NEW JOBS




SEC. 1421. INCENTIVES TO HIRE UNEMPLOYED VETERANS AND DISCONNECTED YOUTH .

(a) IN GENERAL . --Subsection (d) of section 51 is amended by adding at the end the following new paragraph:
"(14) CREDIT ALLOWED FOR UNEMPLOYED VETERANS AND DISCONNECTED YOUTH HIRED IN 2009 OR 2010 . --

"(A) IN GENERAL . --Any unemployed veteran or disconnected youth who begins work for the employer during 2009 or 2010 shall be treated as a member of a targeted group for purposes of this subpart.

"(B) DEFINITIONS . --For purposes of this paragraph --

"(i) UNEMPLOYED VETERAN . --The term 'unemployed veteran' means any veteran (as defined in paragraph (3)(B), determined without regard to clause (ii) thereof) who is certified by the designated local agency as --

"(I) having been discharged or released from active duty in the Armed Forces during 2008, 2009, or 2010, and

"(II) being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks during the 1-year period ending on the hiring date.

"(ii) DISCONNECTED YOUTH . --The term 'disconnected youth' means any individual who is certified by the designated local agency --

"(I) as having attained age 16 but not age 25 on the hiring date,

"(II) as not regularly attending any secondary, technical, or post-secondary school during the 6-month period preceding the hiring date,

"(III) as not regularly employed during such 6-month period, and

"(IV) as not readily employable by reason of lacking a sufficient number of basic skills.".

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to individuals who begin work for the employer after December 31, 2008.



PART 4 --CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILTIN LOSSES FOLLOWING AN OWNERSHIP CHANGE



SEC. 1431. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE .

(a) FINDINGS . --Congress finds as follows:
(1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.

(2) Internal Revenue Service Notice 2008-83 is inconsistent with the congressional intent in enacting such section 382(m).

(3) The legal authority to prescribe Internal Revenue Service Notice 2008-83 is doubtful.

(4) However, as taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury legislation is necessary to clarify the force and effect of Internal Revenue Service Notice 2008-83 and restore the proper application under the Internal Revenue Code of 1986 of the limitation on built-in losses following an ownership change of a bank.

(b) DETERMINATION OF FORCE AND EFFECT OF INTERNAL REVENUE SERVICE NOTICE 2008-83 EXEMPTING BANKS FROM LIMITATION ON CERTAIN BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE . --
(1) IN GENERAL . --Internal Revenue Service Notice 2008-83 --

(A) shall be deemed to have the force and effect of law with respect to any ownership change (as defined in section 382(g) of the Internal Revenue Code of 1986) occurring on or before January 16, 2009, and

(B) shall have no force or effect with respect to any ownership change after such date.

(2) BINDING CONTRACTS . --Notwithstanding paragraph (1), Internal Revenue Service Notice 2008-83 shall have the force and effect of law with respect to any ownership change (as so defined) which occurs after January 16, 2009 if such change --

(A) is pursuant to a written binding contract entered into on or before such date, or

(B) is pursuant to a written agreement entered into on or before such date and such agreement was described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change.


Subtitle F --Fiscal Relief for State and Local Governments



PART 1 --IMPROVED MARKETABILITY FOR TAXEXEMPT BONDS




SEC. 1501. DE MINIMIS SAFE HARBOR EXCEPTION FOR TAXEXEMPT INTEREST EXPENSE OF FINANCIAL INSTITUTIONS .

(a) IN GENERAL . --Subsection (b) of section 265 is amended by adding at the end the following new paragraph:
"(7) DE MINIMIS EXCEPTION FOR BONDS ISSUED DURING 2009 OR 2010 . --

"(A) IN GENERAL . --In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010.

"(B) LIMITATION . --The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B).

"(C) REFUNDINGS . --For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).".

(b) TREATMENT AS FINANCIAL INSTITUTION PREFERENCE ITEM . --Clause (iv) of section 291(e)(1)(B) is amended by adding at the end the following: "That portion of any obligation not taken into account under paragraph (2)(A) of section 265(b) by reason of paragraph (7) of such section shall be treated for purposes of this section as having been acquired on August 7, 1986.".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after December 31, 2008.



SEC. 1502. MODIFICATION OF SMALL ISSUER EXCEPTION TO TAX-EXEMPT INTEREST EXPENSE ALLOCATION RULES FOR FINANCIAL INSTITUTIONS .

(a) IN GENERAL . --Paragraph (3) of section 265(b) (relating to exception for certain tax-exempt obligations) is amended by adding at the end the following new subparagraph:
"(G) SPECIAL RULES FOR OBLIGATIONS ISSUED DURING 2009 AND 2010 . --

"(i) INCREASE IN LIMITATION . --In the case of obligations issued during 2009 or 2010, subparagraphs (C)(i), (D)(i), and (D)(iii)(II) shall each be applied by substituting '$30,000,000' for '$10,000,000'.

"(ii) QUALIFIED 501(C)(3) BONDS TREATED AS ISSUED BY EXEMPT ORGANIZATION . --In the case of a qualified 501(c)(3) bond issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer.

"(iii) SPECIAL RULE FOR QUALIFIED FINANCINGS . --In the case of a qualified financing issue issued during 2009 or 2010 --

"(I) subparagraph (F) shall not apply, and

"(II) any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue).

"(iv) QUALIFIED FINANCING ISSUE . --For purposes of this subparagraph, the term 'qualified financing issue' means any composite or pooled issue the proceeds of which are used directly or indirectly to make or finance loans to 2 or more ultimate borrowers all of whom are qualified borrowers.

"(v) QUALIFIED PORTION . --For purposes of this subparagraph, the term 'qualified portion' means that portion of the proceeds which are used with respect to each qualified borrower under the issue.

"(vi) QUALIFIED BORROWER . --For purposes of this subparagraph, the term 'qualified borrower' means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a).".

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after December 31, 2008.



SEC. 1503. TEMPORARY MODIFICATION OF ALTERNATIVE MINIMUM TAX LIMITATIONS ON TAX-EXEMPT BONDS .

(a) INTEREST ON PRIVATE ACTIVITY BONDS ISSUED DURING 2009 AND 2010 NOT TREATED AS TAX PREFERENCE ITEM . --Subparagraph (C) of section 57(a)(5) is amended by adding at the end a new clause:
"(vi) EXCEPTION FOR BONDS ISSUED IN 2009 AND 2010 . --For purposes of clause (i), the term 'private activity bond' shall not include any bond issued after December 31, 2008, and before January 1, 2011. For purposes of the preceding sentence, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).".

(b) NO ADJUSTMENT TO ADJUSTED CURRENT EARNINGS FOR INTEREST ON TAX-EXEMPT BONDS ISSUED AFTER 2008 . --Subparagraph (B) of section 56(g)(4) is amended by adding at the end the following new clause:
"(iv) TAX EXEMPT INTEREST ON BONDS ISSUED IN 2009 AND 2010 . --Clause (i) shall not apply in the case of any interest on a bond issued after December 31, 2008, and before January 1, 2011. For purposes of the preceding sentence, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after December 31, 2008.


PART 2 --TAX CREDIT BONDS FOR SCHOOLS




SEC. 1511. QUALIFIED SCHOOL CONSTRUCTION BONDS .

(a) IN GENERAL . --Subpart I of part IV of subchapter A of chapter 1 is amended by adding at the end the following new section:



"SEC. 54F. QUALIFIED SCHOOL CONSTRUCTION BONDS .

"(a) QUALIFIED SCHOOL CONSTRUCTION BOND . --For purposes of this subchapter, the term 'qualified school construction bond' means any bond issued as part of an issue if --
"(1) 100 percent of the available project proceeds of such issue are to be used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a facility is to be constructed with part of the proceeds of such issue,

"(2) the bond is issued by a State or local government within the jurisdiction of which such school is located, and

"(3) the issuer designates such bond for purposes of this section.

"(b) LIMITATION ON AMOUNT OF BONDS DESIGNATED . --The maximum aggregate face amount of bonds issued during any calendar year which may be designated under subsection (a) by any issuer shall not exceed the sum of --
"(1) the limitation amount allocated under subsection (d) for such calendar year to such issuer, and

"(2) if such issuer is a large local educational agency (as defined in subsection (e)(4)) or is issuing on behalf of such an agency, the limitation amount allocated under subsection (e) for such calendar year to such agency.

"(c) NATIONAL LIMITATION ON AMOUNT OF BONDS DESIGNATED . --There is a national qualified school construction bond limitation for each calendar year. Such limitation is --
"(1) $11,000,000,000 for 2009,

"(2) $11,000,000,000 for 2010, and

"(3) except as provided in subsection (f), zero after 2010.

"(d) 60 PERCENT OF LIMITATION ALLOCATED AMONG STATES . --
"(1) IN GENERAL . --60 percent of the limitation applicable under subsection (c) for any calendar year shall be allocated by the Secretary among the States in proportion to the respective numbers of children in each State who have attained age 5 but not age 18 for the most recent fiscal year ending before such calendar year. The limitation amount allocated to a State under the preceding sentence shall be allocated by the State to issuers within such State.

"(2) MINIMUM ALLOCATIONS TO STATES . --

"(A) IN GENERAL . --The Secretary shall adjust the allocations under this subsection for any calendar year for each State to the extent necessary to ensure that the sum of --

"(i) the amount allocated to such State under this subsection for such year, and

"(ii) the aggregate amounts allocated under subsection (e) to large local educational agencies in such State for such year,

is not less than an amount equal to such State's adjusted minimum percentage of the amount to be allocated under paragraph (1) for the calendar year.

"(B) ADJUSTED MINIMUM PERCENTAGE . --A State's adjusted minimum percentage for any calendar year is the product of --

"(i) the minimum percentage described in section 1124(d) of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6334(d)) for such State for the most recent fiscal year ending before such calendar year, multiplied by

"(ii) 1.68.

"(3) ALLOCATIONS TO CERTAIN POSSESSIONS . --The amount to be allocated under paragraph (1) to any possession of the United States other than Puerto Rico shall be the amount which would have been allocated if all allocations under paragraph (1) were made on the basis of respective populations of individuals below the poverty line (as defined by the Office of Management and Budget). In making other allocations, the amount to be allocated under paragraph (1) shall be reduced by the aggregate amount allocated under this paragraph to possessions of the United States.

"(4) ALLOCATIONS FOR INDIAN SCHOOLS . --In addition to the amounts otherwise allocated under this subsection, $200,000,000 for calendar year 2009, and $200,000,000 for calendar year 2010, shall be allocated by the Secretary of the Interior for purposes of the construction, rehabilitation, and repair of schools funded by the Bureau of Indian Affairs. In the case of amounts allocated under the preceding sentence, Indian tribal governments (as defined in section 7701(a)(40)) shall be treated as qualified issuers for purposes of this subchapter.

"(e) 40 PERCENT OF LIMITATION ALLOCATED AMONG LARGEST SCHOOL DISTRICTS . --
"(1) IN GENERAL . --40 percent of the limitation applicable under subsection (c) for any calendar year shall be allocated under paragraph (2) by the Secretary among local educational agencies which are large local educational agencies for such year.

"(2) ALLOCATION FORMULA . --The amount to be allocated under paragraph (1) for any calendar year shall be allocated among large local educational agencies in proportion to the respective amounts each such agency received for Basic Grants under subpart 2 of part A of title I of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6331 et seq.) for the most recent fiscal year ending before such calendar year.

"(3) ALLOCATION OF UNUSED LIMITATION TO STATE . --The amount allocated under this subsection to a large local educational agency for any calendar year may be reallocated by such agency to the State in which such agency is located for such calendar year. Any amount reallocated to a State under the preceding sentence may be allocated as provided in subsection (d)(1).

"(4) LARGE LOCAL EDUCATIONAL AGENCY . --For purposes of this section, the term 'large local educational agency' means, with respect to a calendar year, any local educational agency if such agency is --

"(A) among the 100 local educational agencies with the largest numbers of children aged 5 through 17 from families living below the poverty level, as determined by the Secretary using the most recent data available from the Department of Commerce that are satisfactory to the Secretary, or

"(B) 1 of not more than 25 local educational agencies (other than those described in subparagraph (A)) that the Secretary of Education determines (based on the most recent data available satisfactory to the Secretary) are in particular need of assistance, based on a low level of resources for school construction, a high level of enrollment growth, or such other factors as the Secretary deems appropriate.

"(f) CARRYOVER OF UNUSED LIMITATION . --If for any calendar year --
"(1) the amount allocated under subsection (d) to any State, exceeds

"(2) the amount of bonds issued during such year which are designated under subsection (a) pursuant to such allocation,

the limitation amount under such subsection for such State for the following calendar year shall be increased by the amount of such excess. A similar rule shall apply to the amounts allocated under subsection (d)(4) or (e).".

(b) CONFORMING AMENDMENTS . --
(1) Paragraph (1) of section 54A(d) is amended by striking "or" at the end of subparagraph (C), by inserting "or" at the end of subparagraph (D), and by inserting after subparagraph (D) the following new subparagraph:


"(E) a qualified school construction bond,".

(2) Subparagraph (C) of section 54A(d)(2) is amended by striking "and" at the end of clause (iii), by striking the period at the end of clause (iv) and inserting ", and", and by adding at the end the following new clause:


"(v) in the case of a qualified school construction bond, a purpose specified in section 54F(a)(1).".

(3) The table of sections for subpart I of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:


"Sec. 54F. Qualified school construction bonds.".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after December 31, 2008.



SEC. 1512. EXTENSION AND EXPANSION OF QUALIFIED ZONE ACADEMY BONDS .

(a) IN GENERAL . --Section 54E(c)(1) is amended by striking "and 2009" and inserting "and $1,400,000,000 for 2009 and 2010".

(b) EFFECTIVE DATE . --The amendment made by this section shall apply to obligations issued after December 31, 2008.


PART 3 --TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS




SEC. 1521. TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS .

(a) IN GENERAL . --Part IV of subchapter A of chapter 1 is amended by adding at the end the following new subpart:


"Subpart J --Taxable Bond Option for Governmental Bonds


"Sec. 54AA. Taxable bond option for governmental bonds.


"SEC. 54AA. TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS .


"(a) IN GENERAL . --If a taxpayer holds a taxable governmental bond on one or more interest payment dates of the bond during any taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credits determined under subsection (b) with respect to such dates.

"(b) AMOUNT OF CREDIT . --The amount of the credit determined under this subsection with respect to any interest payment date for a taxable governmental bond is 35 percent of the amount of interest payable by the issuer with respect to such date.

"(c) LIMITATION BASED ON AMOUNT OF TAX . --
"(1) IN GENERAL . --The credit allowed under subsection (a) for any taxable year shall not exceed the excess of --

"(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over

"(B) the sum of the credits allowable under this part (other than subpart C and this subpart).

"(2) CARRYOVER OF UNUSED CREDIT . --If the credit allowable under subsection (a) exceeds the limitation imposed by paragraph (1) for such taxable year, such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year (determined before the application of paragraph (1) for such succeeding taxable year).

"(d) TAXABLE GOVERNMENTAL BOND . --
"(1) IN GENERAL . --For purposes of this section, the term 'taxable governmental bond' means any obligation (other than a private activity bond) if --

"(A) the interest on such obligation would (but for this section) be excludable from gross income under section 103, and

"(B) the issuer makes an irrevocable election to have this section apply.

"(2) APPLICABLE RULES . --For purposes of applying paragraph (1) --

"(A) a taxable governmental bond shall not be treated as federally guaranteed by reason of the credit allowed under subsection (a) or section 6431,

"(B) the yield on a taxable governmental bond shall be determined without regard to the credit allowed under subsection (a), and

"(C) a bond shall not be treated as a taxable governmental bond if the issue price has more than a de minimis amount (determined under rules similar to the rules of section 1273(a)(3)) of premium over the stated principal amount of the bond.

"(e) INTEREST PAYMENT DATE . --For purposes of this section, the term 'interest payment date' means any date on which the holder of record of the taxable governmental bond is entitled to a payment of interest under such bond.

"(f) SPECIAL RULES . --
"(1) INTEREST ON TAXABLE GOVERNMENTAL BONDS INCLUDIBLE IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES . --For purposes of this title, interest on any taxable governmental bond shall be includible in gross income.

"(2) APPLICATION OF CERTAIN RULES . --Rules similar to the rules of subsections (f), (g), (h), and (i) of section 54A shall apply for purposes of the credit allowed under subsection (a).

"(g) SPECIAL RULE FOR QUALIFIED BONDS ISSUED BEFORE 2011 . --In the case of a qualified bond issued before January 1, 2011 --
"(1) ISSUER ALLOWED REFUNDABLE CREDIT . --In lieu of any credit allowed under this section with respect to such bond, the issuer of such bond shall be allowed a credit as provided in section 6431.

"(2) QUALIFIED BOND . --For purposes of this subsection, the term 'qualified bond' means any taxable governmental bond issued as part of an issue if --

"(A) 100 percent of the available project proceeds (as defined in section 54A) of such issue are to be used for capital expenditures, and

"(B) the issuer makes an irrevocable election to have this subsection apply.".

(b) CREDIT FOR QUALIFIED BONDS ISSUED BEFORE 2011 . --Subchapter B of chapter 65 is amended by adding at the end the following new section:



"SEC. 6431. CREDIT FOR QUALIFIED BONDS ALLOWED TO ISSUER.

"(a) IN GENERAL . --In the case of a qualified bond issued before January 1, 2011, the issuer of such bond shall be allowed a credit with respect to each interest payment under such bond which shall be payable by the Secretary as provided in subsection (b).

"(b) PAYMENT OF CREDIT . --The Secretary shall pay (contemporaneously with each interest payment date under such bond) to the issuer of such bond (or to any person who makes such interest payments on behalf of the issuer) 35 percent of the interest payable under such bond on such date.

"(c) APPLICATION OF ARBITRAGE RULES . --For purposes of section 148, the yield on a qualified bond shall be reduced by the credit allowed under this section.

"(d) INTEREST PAYMENT DATE . --For purposes of this subsection, the term 'interest payment date' means each date on which interest is payable by the issuer under the terms of the bond.

"(e) QUALIFIED BOND . --For purposes of this subsection, the term 'qualified bond' has the meaning given such term in section 54AA(h).".

(c) CONFORMING AMENDMENTS . --
(1) Section 1324(b)(2) of title 31, United States Code, is amended by striking "or 6428" and inserting "6428, or 6431,".

(2) Section 54A(c)(1)(B) is amended by striking "subpart C" and inserting "subparts C and J".

(3) Sections 54(c)(2), 1397E(c)(2), and 1400N(l)(3)(B) are each amended by striking "and I" and inserting ", I, and J".

(4) Section 6401(b)(1) is amended by striking "and I" and inserting "I, and J".

(5) The table of subparts for part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:


"Subpart J. Taxable bond option for governmental bonds.".

(6) The table of sections for subchapter B of chapter 65 is amended by adding at the end the following new item:


"Sec. 6431. Credit for qualified bonds allowed to issuer on advance basis.".

(d) TRANSITIONAL COORDINATION WITH STATE LAW . --Except as otherwise provided by a State after the date of the enactment of this Act, the interest on any taxable governmental bond (as defined in section 54AA of the Internal Revenue Code of 1986, as added by this section) and the amount of any credit determined under such section with respect to such bond shall be treated for purposes of the income tax laws of such State as being exempt from Federal income tax.

(e) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.


PART 4 --RECOVERY ZONE BONDS




SEC. 1531. RECOVERY ZONE BONDS.

(a) IN GENERAL . --Subchapter Y of chapter 1 is amended by adding at the end the following new part:


"PART III --RECOVERY ZONE BONDS


"Sec. 1400U-1. Allocation of recovery zone bonds.

"Sec. 1400U-2. Recovery zone economic development bonds.

"Sec. 1400U-3. Recovery zone facility bonds.



"SEC. 1400U-1. ALLOCATION OF RECOVERY ZONE BONDS.

"(a) ALLOCATIONS . --
"(1) IN GENERAL . --The Secretary shall allocate the national recovery zone economic development bond limitation and the national recovery zone facility bond limitation among the States in the proportion that each such State's 2008 State employment decline bears to the aggregate of the 2008 State employment declines for all of the States.

"(2) 2008 STATE EMPLOYMENT DECLINE . --For purposes of this subsection, the term '2008 State employment decline' means, with respect to any State, the excess (if any) of --

"(A) the number of individuals employed in such State determined for December 2007, over

"(B) the number of individuals employed in such State determined for December 2008.

"(3) ALLOCATIONS BY STATES . --

"(A) IN GENERAL . --Each State with respect to which an allocation is made under paragraph (1) shall reallocate such allocation among the counties and large municipalities in such State in the proportion the each such county's or municipality's 2008 employment decline bears to the aggregate of the 2008 employment declines for all the counties and municipalities in such State.

"(B) LARGE MUNICIPALITIES . --For purposes of subparagraph (A), the term 'large municipality' means a municipality with a population of more than 100,000.

"(C) DETERMINATION OF LOCAL EMPLOYMENT DECLINES . --For purposes of this paragraph, the employment decline of any municipality or county shall be determined in the same manner as determining the State employment decline under paragraph (2), except that in the case of a municipality any portion of which is in a county, such portion shall be treated as part of such municipality and not part of such county.

"(4) NATIONAL LIMITATIONS . --

"(A) RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS . --There is a national recovery zone economic development bond limitation of $10,000,000,000.

"(B) RECOVERY ZONE FACILITY BONDS . --There is a national recovery zone facility bond limitation of $15,000,000,000.

"(b) RECOVERY ZONE . --For purposes of this part, the term 'recovery zone' means --
"(1) any area designated by the issuer as having significant poverty, unemployment, home foreclosures, or general distress, and

"(2) any area for which a designation as an empowerment zone or renewal community is in effect.



"SEC. 1400U-2. RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS .

"(a) IN GENERAL . --In the case of a recovery zone economic development bond --
"(1) such bond shall be treated as a qualified bond for purposes of section 6431, and

"(2) subsection (b) of such section shall be applied by substituting '55 percent' for '35 percent'.

"(b) RECOVERY ZONE ECONOMIC DEVELOPMENT BOND . --
"(1) IN GENERAL . --For purposes of this section, the term 'recovery zone economic development bond' means any taxable governmental bond (as defined in section 54AA(d)) issued before January 1, 2011, as part of issue if --

"(A) 100 percent of the available project proceeds (as defined in section 54A) of such issue are to be used for one or more qualified economic development purposes, and

"(B) the issuer designates such bond for purposes of this section.

"(2) LIMITATION ON AMOUNT OF BONDS DESIGNATED . --The maximum aggregate face amount of bonds which may be designated by any issuer under paragraph (1) shall not exceed the amount of the recovery zone economic development bond limitation allocated to such issuer under section 1400U-1.

"(c) QUALIFIED ECONOMIC DEVELOPMENT PURPOSE . --For purposes of this section, the term 'qualified economic development purpose' means expenditures for purposes of promoting development or other economic activity in a recovery zone, including --
"(1) capital expenditures paid or incurred with respect to property located in such zone,

"(2) expenditures for public infrastructure and construction of public facilities, and

"(3) expenditures for job training and educational programs.



"SEC. 1400U-3. RECOVERY ZONE FACILITY BONDS.

"(a) IN GENERAL . --For purposes of part IV of subchapter B (relating to tax exemption requirements for State and local bonds), the term 'exempt facility bond' includes any recovery zone facility bond.

"(b) RECOVERY ZONE FACILITY BOND . --
"(1) IN GENERAL . --For purposes of this section, the term 'recovery zone facility bond' means any bond issued as part of an issue if --

"(A) 95 percent or more of the net proceeds (as defined in section 150(a)(3)) of such issue are to be used for recovery zone property,

"(B) such bond is issued before January 1, 2011, and

"(C) the issuer designates such bond for purposes of this section.

"(2) LIMITATION ON AMOUNT OF BONDS DESIGNATED . --The maximum aggregate face amount of bonds which may be designated by any issuer under paragraph (1) shall not exceed the amount of recovery zone facility bond limitation allocated to such issuer under section 1400U-1.

"(c) RECOVERY ZONE PROPERTY . --For purposes of this section --
"(1) IN GENERAL . --The term 'recovery zone property' means any property to which section 168 applies (or would apply but for section 179) if --

"(A) such property was acquired by the taxpayer by purchase (as defined in section 179(d)(2)) after the date on which the designation of the recovery zone took effect,

"(B) the original use of which in the recovery zone commences with the taxpayer, and

"(C) substantially all of the use of which is in the recovery zone and is in the active conduct of a qualified business by the taxpayer in such zone.

"(2) QUALIFIED BUSINESS . --The term 'qualified business' means any trade or business except that --

"(A) the rental to others of real property located in a recovery zone shall be treated as a qualified business only if the property is not residential rental property (as defined in section 168(e)(2)), and

"(B) such term shall not include any trade or business consisting of the operation of any facility described in section 144(c)(6)(B).

"(3) SPECIAL RULES FOR SUBSTANTIAL RENOVATIONS AND SALE-LEASEBACK . --Rules similar to the rules of subsections (a)(2) and (b) of section 1397D shall apply for purposes of this subsection.

"(d) NONAPPLICATION OF CERTAIN RULES . --Sections 146 (relating to volume cap) and 147(d) (relating to acquisition of existing property not permitted) shall not apply to any recovery zone facility bond.".

(b) CLERICAL AMENDMENT . --The table of parts for subchapter Y of chapter 1 of such Code is amended by adding at the end the following new item:

"PART III. RECOVERY ZONE BONDS.".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.



SEC. 1532. TRIBAL ECONOMIC DEVELOPMENT BONDS.

(a) IN GENERAL . --Section 7871 is amended by adding at the end the following new subsection:

"(f) TRIBAL ECONOMIC DEVELOPMENT BONDS . --
"(1) ALLOCATION OF LIMITATION . --

"(A) IN GENERAL . --The Secretary shall allocate the national tribal economic development bond limitation among the Indian tribal governments in such manner as the Secretary, in consultation with the Secretary of the Interior, determines appropriate.

"(B) NATIONAL LIMITATION . --There is a national tribal economic development bond limitation of $2,000,000,000.

"(2) BONDS TREATED AS EXEMPT FROM TAX . --In the case of a tribal economic development bond --

"(A) notwithstanding subsection (c), such bond shall be treated for purposes of this title in the same manner as if such bond were issued by a State, and

"(B) section 146 shall not apply.

"(3) TRIBAL ECONOMIC DEVELOPMENT BOND . --

"(A) IN GENERAL . --For purposes of this section, the term 'tribal economic development bond' means any bond issued by an Indian tribal government --

"(i) the interest on which is not exempt from tax under section 103 by reason of subsection (c) (determined without regard to this subsection) but would be so exempt if issued by a State or local government, and

"(ii) which is designated by the Indian tribal government as a tribal economic development bond for purposes of this subsection.

"(B) EXCEPTIONS . --The term tribal economic development bond shall not include any bond issued as part of an issue if any portion of the proceeds of such issue are used to finance --

"(i) any portion of a building in which class II or class III gaming (as defined in section 4 of the Indian Gaming Regulatory Act) is conducted or housed or any other property actually used in the conduct of such gaming, or

"(ii) any facility located outside the Indian reservation (as defined in section 168(j)(6)).

"(C) LIMITATION ON AMOUNT OF BONDS DESIGNATED . --The maximum aggregate face amount of bonds which may be designated by any Indian tribal government under subparagraph (A) shall not exceed the amount of national tribal economic development bond limitation allocated to such government under paragraph (1).".

(b) STUDY . --The Secretary of the Treasury, or the Secretary's delegate, shall conduct a study of the effects of the amendment made by subsection (a). Not later than 1 year after the date of the enactment of this Act, the Secretary of the Treasury, or the Secretary's delegate, shall report to Congress on the results of the studies conducted under this paragraph, including the Secretary's recommendations regarding such amendment.

(c) EFFECTIVE DATE . --The amendment made by subsection (a) shall apply to obligations issued after the date of the enactment of this Act.


PART 5 --REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS




SEC. 1541. REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS .

Section 3402 is amended by striking subsection (t).


Subtitle G --Energy Incentives



PART 1 --RENEWABLE ENERGY INCENTIVES




SEC. 1601. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES .

(a) IN GENERAL . --Subsection (d) of section 45 is amended --
(1) by striking "2010" in paragraph (1) and inserting "2013",

(2) by striking "2011" each place it appears in paragraphs (2), (3), (4), (6), (7) and (9) and inserting "2014", and

(3) by striking "2012" in paragraph (11)(B) and inserting "2014".

(b) TECHNICAL AMENDMENT . --Paragraph (5) of section 45(d) is amended by striking "and before" and all that follows and inserting "and before October 3, 2008.".

(c) EFFECTIVE DATE . --
(1) IN GENERAL . --The amendments made by subsection (a) shall apply to property placed in service after the date of the enactment of this Act.

(2) TECHNICAL AMENDMENT . --The amendment made by subsection (b) shall take effect as if included in section 102 of the Energy Improvement and Extension Act of 2008.



SEC. 1602. ELECTION OF INVESTMENT CREDIT IN LIEU OF PRODUCTION CREDIT .

(a) IN GENERAL . --Subsection (a) of section 48 is amended by adding at the end the following new paragraph:
"(5) ELECTION TO TREAT QUALIFIED FACILITIES AS ENERGY PROPERTY . --

"(A) IN GENERAL . --In the case of any qualified investment credit facility placed in service in 2009 or 2010 --

"(i) such facility shall be treated as energy property for purposes of this section, and

"(ii) the energy percentage with respect to such property shall be 30 percent.

"(B) DENIAL OF PRODUCTION CREDIT . --No credit shall be allowed under section 45 for any taxable year with respect to any qualified investment credit facility.

"(C) QUALIFIED INVESTMENT CREDIT FACILITY . --For purposes of this paragraph, the term 'qualified investment credit facility' means any facility described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) if no credit has been allowed under section 45 with respect to such facility and the taxpayer makes an irrevocable election to have this paragraph apply to such facility.".

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to facilities placed in service after December 31, 2008.



SEC. 1603. REPEAL OF CERTAIN LIMITATIONS ON CREDIT FOR RENEWABLE ENERGY PROPERTY .

(a) REPEAL OF LIMITATION ON CREDIT FOR QUALIFIED SMALL WIND ENERGY PROPERTY . --Paragraph (4) of section 48(c) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C).

(b) REPEAL OF LIMITATION ON PROPERTY FINANCED BY SUBSIDIZED ENERGY FINANCING . --
(1) IN GENERAL . --Subsection (a) of section 48 is amended by striking paragraph (4).

(2) CONFORMING AMENDMENTS . --

(A) Section 25C(e)(1) is amended by striking "(8), and (9)" and inserting "and (8)".

(B) Section 25D(e) is amended by striking paragraph (9).

(c) EFFECTIVE DATE . --
(1) IN GENERAL . --Except as provided in paragraph (2),the amendment made by this section shall apply to periods after December 31, 2008, under rules similar to the rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990).

(2) CONFORMING AMENDMENTS . --The amendments made by subsection (b)(2) shall apply to taxable years beginning after December 31, 2008.



SEC. 1604. COORDINATION WITH RENEWABLE ENERGY GRANTS .

Section 48 is amended by adding at the end the following new subsection:

"(d) COORDINATION WITH DEPARTMENT OF ENERGY GRANTS . --In the case of any property with respect to which the Secretary of Energy makes a grant under section 1721 of the American Recovery and Reinvestment Tax Act of 2009 --
"(1) DENIAL OF PRODUCTION AND INVESTMENT CREDITS . --No credit shall be determined under this section or section 45 with respect to such property for the taxable year in which such grant is made or any subsequent taxable year.

"(2) RECAPTURE OF CREDITS FOR PROGRESS EXPENDITURES MADE BEFORE GRANT . --If a credit was determined under this section with respect to such property for any taxable year ending before such grant is made --

"(A) the tax imposed under subtitle A on the taxpayer for the taxable year in which such grant is made shall be increased by so much of such credit as was allowed under section 38,

"(B) the general business carryforwards under section 39 shall be adjusted so as to recapture the portion of such credit which was not so allowed, and

"(C) the amount of such grant shall be determined without regard to any reduction in the basis of such property by reason of such credit.

"(3) TREATMENT OF GRANTS . --Any such grant shall --

"(A) not be includible in the gross income of the taxpayer, but

"(B) shall be taken into account in determining the basis of the property to which such grant relates, except that the basis of such property shall be reduced under section 50(c) in the same manner as a credit allowed under subsection (a).".



PART 2 --INCREASED ALLOCATIONS OF NEW CLEAN RENEWABLE ENERGY BONDS AND QUALIFIED ENERGY CONSERVATION BONDS



SEC. 1611. INCREASED LIMITATION ON ISSUANCE OF NEW CLEAN RENEWABLE ENERGY BONDS .

Subsection (c) of section 54C is amended by adding at the end the following new paragraph:
"(4) ADDITIONAL LIMITATION . --The national new clean renewable energy bond limitation shall be increased by $1,600,000,000. Such increase shall be allocated by the Secretary consistent with the rules of paragraphs (2) and (3).".



SEC. 1612. INCREASED LIMITATION AND EXPANSION OF QUALIFIED ENERGY CONSERVATION BONDS .

(a) INCREASED LIMITATION . --Subsection (e) of section 54D is amended by adding at the end the following new paragraph:
"(4) ADDITIONAL LIMITATION . --The national qualified energy conservation bond limitation shall be increased by $2,400,000,000. Such increase shall be allocated by the Secretary consistent with the rules of paragraphs (1), (2), and (3).".

(b) LOANS AND GRANTS TO IMPLEMENT GREEN COMMUNITY PROGRAMS . --
(1) IN GENERAL . --Subparagraph (A) of section 54D(f)(1) is amended by inserting "(or loans or grants for capital expenditures to implement any green community program)" after "Capital expenditures".

(2) BONDS TO IMPLEMENT GREEN COMMUNITY PROGRAMS NOT TREATED AS PRIVATE ACTIVITY BONDS FOR PURPOSES OF LIMITATIONS ON QUALIFIED ENERGY CONSERVATION BONDS . --Subsection (e) of section 54D is amended by adding at the end the following new paragraph:


"(4) BONDS TO IMPLEMENT GREEN COMMUNITY PROGRAMS NOT TREATED AS PRIVATE ACTIVITY BONDS . --For purposes of paragraph (3) and subsection (f)(2), a bond shall not be treated as a private activity bond solely because proceeds of the issue of which such bond is a part are to be used for loans or grants for capital expenditures to implement any green community program.".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.



PART 3 --ENERGY CONSERVATION INCENTIVES



SEC. 1621. EXTENSION AND MODIFICATION OF CREDIT FOR NONBUSINESS ENERGY PROPERTY .

(a) IN GENERAL . --Section 25C is amended by striking subsections (a) and (b) and inserting the following new subsections:

"(a) ALLOWANCE OF CREDIT . --In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 30 percent of the sum of --
"(1) the amount paid or incurred by the taxpayer during such taxable year for qualified energy efficiency improvements, and

"(2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year.

"(b) LIMITATION . --The aggregate amount of the credits allowed under this section for taxable years beginning in 2009 and 2010 with respect to any taxpayer shall not exceed $1,500.".

(b) EXTENSION . --Section 25C(g)(2) is amended by striking "December 31, 2009" and inserting "December 31, 2010".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.



SEC. 1622. MODIFICATION OF CREDIT FOR RESIDENTIAL ENERGY EFFICIENT PROPERTY .

(a) REMOVAL OF CREDIT LIMITATION FOR PROPERTY PLACED IN SERVICE . --
(1) IN GENERAL . --Paragraph (1) of section 25D(b) is amended to read as follows:


"(1) MAXIMUM CREDIT FOR FUEL CELLS . --In the case of any qualified fuel cell property expenditure, the credit allowed under subsection (a) (determined without regard to subsection (c)) for any taxable year shall not exceed $500 with respect to each half kilowatt of capacity of the qualified fuel cell property (as defined in section 48(c)(1)) to which such expenditure relates.".

(2) CONFORMING AMENDMENT . --Paragraph (4) of section 25D(e) is amended --

(A) by striking all that precedes subparagraph (B) and inserting the following:

"(4) FUEL CELL EXPENDITURE LIMITATIONS IN CASE OF JOINT OCCUPANCY . --In the case of any dwelling unit with respect to which qualified fuel cell property expenditures are made and which is jointly occupied and used during any calendar year as a residence by two or more individuals the following rules shall apply:
"(A) MAXIMUM EXPENDITURES FOR FUEL CELLS . --The maximum amount of such expenditures which may be taken into account under subsection (a) by all such individuals with respect to such dwelling unit during such calendar year shall be $1,667 in the case of each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) with respect to which such expenditures relate.", and

(B) by striking subparagraph (C).

(b) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.



SEC. 1623. TEMPORARY INCREASE IN CREDIT FOR ALTERNATIVE FUEL VEHICLE REFUELING PROPERTY .

(a) IN GENERAL . --Section 30C(e) is amended by adding at the end the following new paragraph:
"(6) SPECIAL RULE FOR PROPERTY PLACED IN SERVICE DURING 2009 AND 2010 . --In the case of property placed in service in taxable years beginning after December 31, 2008, and before January 1, 2011 --

"(A) in the case of any such property which does not relate to hydrogen --

"(i) subsection (a) shall be applied by substituting '50 percent' for '30 percent',

"(ii) subsection (b)(1) shall be applied by substituting '$50,000' for '$30,000', and

"(iii) subsection (b)(2) shall be applied by substituting '$2,000' for '$1,000', and

"(B) in the case of any such property which relates to hydrogen, subsection (b) shall be applied by substituting '$200,000' for '$30,000'.".

(b) EFFECTIVE DATE . --The amendment made by this section shall apply to taxable years beginning after December 31, 2008.



PART 4 --ENERGY RESEARCH INCENTIVES



SEC. 1631. INCREASED RESEARCH CREDIT FOR ENERGY RESEARCH .

(a) IN GENERAL . --Section 41 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection:

"(h) ENERGY RESEARCH CREDIT . --In the case of any taxable year beginning in 2009 or 2010 --
"(1) IN GENERAL . --The credit determined under subsection (a)(1) shall be increased by 20 percent of the qualified energy research expenses for the taxable year.

"(2) QUALIFIED ENERGY RESEARCH EXPENSES . --For purposes of this subsection, the term 'qualified energy research expenses' means so much of the taxpayer's qualified research expenses as are related to the fields of fuel cells and battery technology, renewable energy, energy conservation technology, efficient transmission and distribution of electricity, and carbon capture and sequestration.

"(3) COORDINATION WITH OTHER RESEARCH CREDITS . --

"(A) INCREMENTAL CREDIT . --The amount of qualified energy research expenses taken into account under subsection (a)(1)(A) shall not exceed the base amount.

"(B) ALTERNATIVE SIMPLIFIED CREDIT . --For purposes of subsection (c)(5), the amount of qualified energy research expenses taken into account for the taxable year for which the credit is being determined shall not exceed --

"(i) in the case of subsection (c)(5)(A), 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined, and

"(ii) in the case of subsection (c)(5)(B)(ii), zero.

"(C) BASIC RESEARCH AND ENERGY RESEARCH CONSORTIUM PAYMENTS . --Any amount taken into account under paragraph (1) shall not be taken into account under paragraph (2) or (3) of subsection (a).".

(b) CONFORMING AMENDMENT . --Subparagraph (B) of section 41(i)(1)(B), as redesignated by subsection (a), is amended by inserting "(in the case of the increase in the credit determined under subsection (h), December 31, 2010)" after "December 31, 2009".

(c) EFFECTIVE DATE . --The amendments made by this section shall apply to taxable years beginning after December 31, 2008.


Subtitle H --Other Provisions




PART 1 --APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN TAX-FAVORED BONDS



SEC. 1701. APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN TAX-FAVORED BONDS .

Subchapter IV of chapter 31 of the title 40, United States Code, shall apply to projects financed with the proceeds of --
(1) any qualified clean renewable energy bond (as defined in section 54C of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,

(2) any qualified energy conservation bond (as defined in section 54D of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,

(3) any qualified zone academy bond (as defined in section 54E of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,

(4) any qualified school construction bond (as defined in section 54F of the Internal Revenue Code of 1986), and

(5) any recovery zone economic development bond (as defined in section 1400U-2 of the Internal Revenue Code of 1986).



PART 2 --GRANTS TO PROVIDE FINANCING FOR LOW-INCOME HOUSING



SEC. 1711. GRANTS TO STATES FOR LOW-INCOME HOUSING PROJECTS IN LIEU OF LOW-INCOME HOUSING CREDIT ALLOCATIONS FOR 2009 .

(a) IN GENERAL . --The Secretary of the Treasury shall make a grant to the housing credit agency of each State in an amount equal to such State's low-income housing grant election amount.

(b) LOW-INCOME HOUSING GRANT ELECTION AMOUNT . --For purposes of this section, the term "lowincome housing grant election amount" means, with respect to any State, such amount as the State may elect which does not exceed 85 percent of the product of --
(1) the sum of --

(A) 100 percent of the State housing credit ceiling for 2009 which is attributable to amounts described in clauses (i) and (iii) of section 42(h)(3)(C) of the Internal Revenue Code of 1986, and

(B) 40 percent of the State housing credit ceiling for 2009 which is attributable to amounts described in clauses (ii) and (iv) of such section, multiplied by (2) 10.

(c) SUBAWARDS FOR LOW-INCOME BUILDINGS . --
(1) IN GENERAL . --A State housing credit agency receiving a grant under this section shall use such grant to make subawards to finance the construction or acquisition and rehabilitation of qualified low-income buildings. A subaward under this section may be made to finance a qualified low-income building with or without an allocation under section 42 of the Internal Revenue Code of 1986, except that a State housing credit agency may make subawards to finance qualified low-income buildings without an allocation only if it makes a determination that such use will increase the total funds available to the State to build and rehabilitate affordable housing. In complying with such determination requirement, a State housing credit agency shall establish a process in which applicants that are allocated credits are required to demonstrate good faith efforts to obtain investment commitments for such credits before the agency makes such subawards.

(2) SUBAWARDS SUBJECT TO SAME REQUIREMENTS AS LOW-INCOME HOUSING CREDIT ALLOCATIONS . --Any such subaward with respect to any qualified low-income building shall be made in the same manner and shall be subject to the same limitations (including rent, income, and use restrictions on such building) as an allocation of housing credit dollar amount allocated by such State housing credit agency under section 42 of the Internal Revenue Code of 1986, except that such subawards shall not be limited by, or otherwise affect (except as provided in subsection (h)(3)(J) of such section), the State housing credit ceiling applicable to such agency.

(3) COMPLIANCE AND ASSET MANAGEMENT . --The State housing credit agency shall perform asset management functions to ensure compliance with section 42 of the Internal Revenue Code of 1986 and the long-term viability of buildings funded by any subaward under this section. The State housing credit agency may collect reasonable fees from a subaward recipient to cover expenses associated with the performance of its duties under this paragraph. The State housing credit agency may retain an agent or other private contractor to satisfy the requirements of this paragraph.

(4) RECAPTURE . --The State housing credit agency shall impose conditions or restrictions, including a requirement providing for recapture, on any subaward under this section so as to assure that the building with respect to which such subaward is made remains a qualified low-income building during the compliance period. Any such recapture shall be payable to the Secretary of the Treasury for deposit in the general fund of the Treasury and may be enforced by means of liens or such other methods as the Secretary of the Treasury determines appropriate.

(d) RETURN OF UNUSED GRANT FUNDS . --Any grant funds not used to make subawards under this section before January 1, 2011, shall be returned to the Secretary of the Treasury on such date. Any subawards returned to the State housing credit agency on or after such date shall be promptly returned to the Secretary of the Treasury. Any amounts returned to the Secretary of the Treasury under this subsection shall be deposited in the general fund of the Treasury.

(e) DEFINITIONS . --Any term used in this section which is also used in section 42 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 42. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary's delegate.

(f) APPROPRIATIONS . --There is hereby appropriated to the Secretary of the Treasury such sums as may be necessary to carry out this section.


PART 3 --GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS




SEC. 1721. GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS .

(a) IN GENERAL . --Upon application, the Secretary of Energy shall, within 60 days of the application and subject to the requirements of this section, provide a grant to each person who places in service specified energy property during 2009 or 2010 to reimburse such person for a portion of the expense of such facility as provided in subsection (b).

(b) GRANT AMOUNT . --
(1) IN GENERAL . --The amount of the grant under subsection (a) with respect to any specified energy property shall be the applicable percentage of the basis of such facility.

(2) APPLICABLE PERCENTAGE . --For purposes of paragraph (1), the term "applicable percentage" means --

(A) 30 percent in the case of any property described in paragraphs (1) through (4) of subsection (c), and

(B) 10 percent in the case of any other property.

(3) DOLLAR LIMITATIONS . --In the case of property described in paragraph (2), (6), or (7) of subsection (c), the amount of any grant under this section with respect to such property shall not exceed the limitation described in section 48(c)(1)(B), 48(c)(2)(B), or 48(c)(3)(B) of the Internal Revenue Code of 1986, respectively, with respect to such property.

(c) SPECIFIED ENERGY PROPERTY . --For purposes of this section, the term "specified energy property" means any of the following:
(1) QUALIFIED FACILITIES . --Any facility described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) of the Internal Revenue Code of 1986.

(2) QUALIFIED FUEL CELL PROPERTY . --Any qualified fuel cell property (as defined in section 48(c)(1) of such Code).

(3) SOLAR PROPERTY . --Any property described in clause (i) or (ii) of section 48(a)(3)(A) of such Code.

(4) QUALIFIED SMALL WIND ENERGY PROPERTY . --Any qualified small wind energy property (as defined in section 48(c)(4) of such Code).

(5) GEOTHERMAL PROPERTY . --Any property described in clause (iii) of section 48(a)(3)(A) of such Code.

(6) QUALIFIED MICROTURBINE PROPERTY . --Any qualified microturbine property (as defined in section 48(c)(2) of such Code).

(7) COMBINED HEAT AND POWER SYSTEM PROPERTY . --Any combined heat and power system property (as defined in section 48(c)(3) of such Code).

(8) GEOTHERMAL HEATPUMP PROPERTY . --Any property described in clause (vii) of section 48(a)(3)(A) of such Code.

(d) APPLICATION OF CERTAIN RULES . --In making grants under this section, the Secretary of Energy shall apply rules similar to the rules of section 50 of the Internal Revenue Code of 1986. In applying such rules, if the facility is disposed of, or otherwise ceases to be a qualified renewable energy facility, the Secretary of Energy shall provide for the recapture of the appropriate percentage of the grant amount in such manner as the Secretary of Energy determines appropriate.

(e) EXCEPTION FOR CERTAIN NON-TAXPAYERS . --The Secretary of Energy shall not make any grant under this section to any Federal, State, or local government (or any political subdivision, agency, or instrumentality thereof) or any organization described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code.

(f) DEFINITIONS . --Terms used in this section which are also used in section 45 or 48 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 45 or 48. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary's delegate.

(g) COORDINATION BETWEEN DEPARTMENTS OF TREASURY AND ENERGY . --The Secretary of the Treasury shall provide the Secretary of Energy with such technical assistance as the Secretary of Energy may require in carrying out this section. The Secretary of Energy shall provide the Secretary of the Treasury with such information as the Secretary of the Treasury may require in carrying out the amendment made by section 1604.

(h) APPROPRIATIONS . --There is hereby appropriated to the Secretary of Energy such sums as may be necessary to carry out this section.

(i) TERMINATION . --The Secretary of Energy shall not make any grant to any person under this section unless the application of such person for such grant is received before October 1, 2011.



TITLE II --ASSISTANCE FOR UNEMPLOYED WORKERS AND STRUGGLING FAMILIES



SEC. 2000. SHORT TITLE .

This title may be cited as the "Assistance for Unemployed Workers and Struggling Families Act".


Subtitle A --Unemployment Insurance




SEC. 2001. EXTENSION OF EMERGENCY UNEMPLOYMENT COMPENSATION PROGRAM .

(a) IN GENERAL . --Section 4007 of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 26 U.S.C. 3304 note), as amended by section 4 of the Unemployment Compensation Extension Act of 2008 (Public Law 110-449; 122 Stat. 5015), is amended --
(1) by striking "March 31, 2009" each place it appears and inserting "December 31, 2009";

(2) in the heading for subsection (b)(2), by striking "MARCH 31, 2009" and inserting "DECEMBER 31, 2009"; and

(3) in subsection (b)(3), by striking "August 27, 2009" and inserting "May 31, 2010".

(b) FINANCING PROVISIONS . --Section 4004 of such Act is amended by adding at the end the following:

"(e) TRANSFER OF FUNDS . --Notwithstanding any other provision of law, the Secretary of the Treasury shall transfer from the general fund of the Treasury (from funds not otherwise appropriated) --
"(1) to the extended unemployment compensation account (as established by section 905 of the Social Security Act) such sums as the Secretary of Labor estimates to be necessary to make payments to States under this title by reason of the amendments made by section 2001(a) of the Assistance for Unemployed Workers and Struggling Families Act; and

"(2) to the employment security administration account (as established by section 901 of the Social Security Act) such sums as the Secretary of Labor estimates to be necessary for purposes of assisting States in meeting administrative costs by reason of the amendments referred to in paragraph (1).

There are appropriated from the general fund of the Treasury, without fiscal year limitation, the sums referred to in the preceding sentence and such sums shall not be required to be repaid.".



SEC. 2002. INCREASE IN UNEMPLOYMENT COMPENSATION BENEFITS .

(a) FEDERAL-STATE AGREEMENTS . --Any State which desires to do so may enter into and participate in an agreement under this section with the Secretary of Labor (hereinafter in this section referred to as the "Secretary"). Any State which is a party to an agreement under this section may, upon providing 30 days' written notice to the Secretary, terminate such agreement.

(b) PROVISIONS OF AGREEMENT . --
(1) ADDITIONAL COMPENSATION . --Any agreement under this section shall provide that the State agency of the State will make payments of regular compensation to individuals in amounts and to the extent that they would be determined if the State law of the State were applied, with respect to any week for which the individual is (disregarding this section) otherwise entitled under the State law to receive regular compensation, as if such State law had been modified in a manner such that the amount of regular compensation (including dependents' allowances) payable for any week shall be equal to the amount determined under the State law (before the application of this paragraph) plus an additional $25.

(2) ALLOWABLE METHODS OF PAYMENT . --Any additional compensation provided for in accordance with paragraph (1) shall be payable either --

(A) as an amount which is paid at the same time and in the same manner as any regular compensation otherwise payable for the week involved; or

(B) at the option of the State, by payments which are made separately from, but on the same weekly basis as, any regular compensation otherwise payable.

(c) NONREDUCTION RULE . --An agreement under this section shall not apply (or shall cease to apply) with respect to a State upon a determination by the Secretary that the method governing the computation of regular compensation under the State law of that State has been modified in a manner such that --
(1) the average weekly benefit amount of regular compensation which will be payable during the period of the agreement (determined disregarding any additional amounts attributable to the modification described in subsection (b)(1)) will be less than

(2) the average weekly benefit amount of regular compensation which would otherwise have been payable during such period under the State law, as in e