Page 14

Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Page 8
Page 9
Page 10
Page 11
Page 12
Page 13
Page 14

¹ Transition rules delayed the repeal of the FSC rules and the effective date of ETI for transactions before January 1, 2002. An election was provided, however, under which taxpayers could adopt ETI at an earlier date for transactions after September 30, 2000. This election allowed the ETI rules to apply to transactions after September 30, 2000, including transactions occurring pursuant to pre-existing binding contracts.

² "Foreign trade income" is the taxable income of the taxpayer (determined without regard to the exclusion of qualifying foreign trade income) attributable to foreign trading gross receipts.

³ "Foreign sale and leasing income" is the amount of the taxpayer's foreign trade income (with respect to a transaction) that is properly allocable to activities that constitute foreign economic processes. Foreign sale and leasing income also includes foreign trade income derived by the taxpayer in connection with the lease or rental of qualifying foreign trade property for use by the lessee outside the United States.

⁴ This rule also applies to a purchase option, renewal option, or replacement option that is included in such contract. For this purpose, a replacement option will be considered enforceable against a lessor notwithstanding the fact that a lessor retained approval of the replacement lessee.

⁵ The deduction also is available to cooperatives engaged in the marketing of agricultural or horticultural products.

⁶ In the case of a short taxable year that ends after the date of enactment and begins before January 1, 2007, the Treasury Secretary shall prescribe guidance for determining the amount of the deduction, including guidance that limits the amount of the deduction for a short taxable year based upon the proportion that the number of days in the short taxable year bears to 365.

⁷ This rule also applies to a purchase option, renewal option, or replacement option that is included in such contract. For this purpose, a replacement option will be considered enforceable against a lessor notwithstanding the fact that a lessor retained approval of the replacement lessee.

⁸ The House bill provides that Secretary shall prescribe rules for the proper allocation of items of income, deduction, expense, and loss for purposes of determining income attributable to domestic production activities. Where appropriate, such rules shall be similar to and consistent with relevant present-law rules (e.g., secs. 263A and 861).

⁹ Domestic production gross receipts under the House bill include gross receipts of a taxpayer derived from any sale, exchange or other disposition of agricultural products with respect to which the taxpayer performs storage, handling or other processing activities (other than transportation activities) within the United States, provided such products are consumed in connection with, or incorporated into, the manufacturing, production, growth or extraction of qualifying production property (whether or not by the taxpayer). Domestic production gross receipts also include gross receipts of a taxpayer derived from any sale, exchange or other disposition of food products with respect to which the taxpayer performs processing activities (in whole or in significant part) within the United States.

¹⁰ It is intended under the House bill that principles similar to those under the presentlaw extraterritorial income regime apply for this purpose. See Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For example, this exclusion generally does not apply to property leased by the taxpayer to a related person if the property is held for sublease, or is subleased, by the related person to an unrelated person for the ultimate use of such unrelated person. Similarly, the license of computer software to a related person for reproduction and sale, exchange, lease, rental or sublicense to an unrelated person for the ultimate use of such unrelated person is not treated as excluded property by reason of the license to the related person.

¹¹ For purposes of the Senate amendment, "wages" include the sum of the aggregate amounts of wages (as defined in section 3401(a) without regard to exclusions for remuneration paid for services performed in possessions of the United States) and elective deferrals that the taxpayer is required to include on statements with respect to the employment of employees of the taxpayer during the taxpayer's taxable year. Elective deferrals include elective deferrals as defined in section 402(g)(3), amounts deferred under section 457, and, for taxable years beginning after December 31, 2005, designated Roth contributions (as defined in section 402A). Any wages taken into account for purposes of determining the wage limitation under the Senate amendment cannot also be taken into account for purposes of determining any credit allowable under sections 30A or 936.

¹² "Modified taxable income" under the Senate amendment is taxable income of the taxpayer computed without regard to the deduction provided by the Senate amendment. Qualified production activities income is limited to the modified taxable income of the taxpayer.

¹³ For purposes of determining such costs under the Senate amendment, any item or service that is imported into the United States without an arm's length transfer price shall be treated as acquired by purchase, and its cost shall be treated as not less than its fair market value when it entered the United States . A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts. With regard to property previously exported by the taxpayer for further manufacture, the increase in cost or adjusted basis shall not exceed the difference between the fair market value of the property when exported and the fair market value of the property when re-imported into the United States after further manufacture.

¹⁴ The Senate amendment provides that the Secretary shall prescribe rules for the proper allocation of items of income, deduction, expense, and loss for purposes of determining income attributable to domestic production activities. Where appropriate, such rules shall be similar to and consistent with relevant present-law rules (e.g., secs. 263A and 861).

¹⁵ For purposes of the domestic/worldwide fraction under the Senate amendment, the value of domestic production is the excess of domestic production gross receipts (as defined below) over the cost of deductible purchased inputs that are allocable to such receipts. Similarly, the value of worldwide production is the excess of worldwide production gross receipts over the cost of deductible purchased inputs that are allocable to such receipts. For purposes of determining the domestic/worldwide fraction, purchased inputs include: purchased services (other than employees) used in manufacture, production, growth, or extraction activities; purchased items consumed in connection with such activities; and purchased items incorporated as part of the property being manufactured, produced, grown, or extracted. In the case of corporate taxpayers that are members of certain affiliated groups, the domestic/worldwide fraction is determined by treating all members of such groups as a single taxpayer.

¹⁶ Under the Senate amendment, domestic production gross receipts include gross receipts of a taxpayer derived from any sale, exchange or other disposition of agricultural products with respect to which the taxpayer performs storage, handling or other processing activities (but not transportation activities) within the United States, provided such products are consumed in connection with, or incorporated into, the manufacturing, production, growth or extraction of qualifying production property (whether or not by the taxpayer).

¹⁷ For taxable years beginning in 2004 through 2008, the applicable percentage is 25%. For taxable years beginning in 2009 through 2012, the applicable percentage is 50%. For taxable years beginning after 2012, the applicable percentage is 100%.

¹⁸ For purposes of the definition of qualified production property under the Senate amendment, property described in section 168(f)(3) or (4) of the Code includes underlying copyrights and trademarks. In addition, gross receipts from the sale, exchange, lease, rental, license or other disposition of property described in section 168(f)(3) or (4) are treated as domestic production gross receipts if more than 50 percent of the aggregate development and production costs of such property are incurred by the taxpayer within the United States. For this purpose, property that is acquired by the taxpayer after development or production has commenced, but before such property generates substantial gross receipts, shall be treated as developed or produced by the taxpayer.

¹⁹ Under the Senate amendment, qualifying production property does not include extracted but unrefined oil or gas, but generally includes primary products of oil and gas that are produced by the taxpayer. Examples of primary products for this purpose include motor fuels, chemical feedstocks and fertilizer. However, primary products do not include the output of a natural gas processing plant. Natural gas processing plants generally are located at or near the producing gas field that supplies the facility, and the facility serves to separate impurities from the natural gas liquids recovered from the field for the purpose of selling the liquids for future production and preparation of the natural gas for pipeline transportation.

²⁰ The topical and transitory exclusion does not apply to the extent of the gross receipts from the use of film and videotape property produced in whole or in significant part by the taxpayer within the United States.

²¹ However, the wage limitation described above is determined at the entity level in computing the deduction with respect to qualified production activities income of a passthrough entity.

²² For purposes of the conference agreement, "wages" include the sum of the aggregate amounts of wages and elective deferrals that the taxpayer is required to include on statements with respect to the employment of employees of the taxpayer during the taxpayer's taxable year. Elective deferrals include elective deferrals as defined in section 402(g)(3), amounts deferred under section 457, and, for taxable years beginning after December 31, 2005, designated Roth contributions (as defined in section 402A).

²³ For purposes of determining such costs, any item or service that is imported into the United States without an arm's length transfer price shall be treated as acquired by purchase, and its cost shall be treated as not less than its value when it entered the United States . A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts. With regard to property previously exported by the taxpayer for further manufacture, the increase in cost or adjusted basis shall not exceed the difference between the value of the property when exported and the value of the property when re-imported into the United States after further manufacture. Except as provided by the Secretary, the value of property for this purpose shall be its customs value (as defined in section 1059A(b)(1)).

²⁴ The Secretary shall prescribe rules for the proper allocation of items of income, deduction, expense, and loss for purposes of determining income attributable to domestic production activities. Where appropriate, such rules shall be similar to and consistent with relevant present-law rules (e.g., sec. 263A, in determining the cost of goods sold, and sec. 861, in determining the source of such items). Other deductions, expenses or losses that are directly allocable to such receipts include, for example, selling and marketing expenses. A proper share of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income include, for example, general and administrative expenses allocable to selling and marketing expenses.

²⁵ Domestic production gross receipts include gross receipts of a taxpayer derived from any sale, exchange or other disposition of agricultural products with respect to which the taxpayer performs storage, handling or other processing activities (other than transportation activities) within the United States, provided such products are consumed in connection with, or incorporated into, the manufacturing, production, growth or extraction of qualifying production property (whether or not by the taxpayer).

²⁶ For this purpose, construction activities include activities that are directly related to the erection or substantial renovation of residential and commercial buildings and infrastructure. Substantial renovation would include structural improvements, but not mere cosmetic changes, such as painting.

²⁷ The conferees intend that food processing, which generally is a qualified production activity under the conference agreement, does not include activities carried out at retail establishment. Thus, under the conference agreement while the gross receipts of a meat packing establishment are qualified domestic production gross receipts, the activities of a master chef who creates a venison sausage for his or her restaurant menu cannot be construed as a qualified production activity.

The conferees recognize that some taxpayers may own facilities at which the predominant activity is domestic production as defined in the conference agreement and other facilities at which they engage in the retail sale of the taxpayer's produced goods and also sell food and beverages. For example, assume that the taxpayer buys coffee beans and roasts those beans at a facility, the primary activity of which is the roasting and packaging of roasted coffee. The taxpayer sells the roasted coffee through a variety of unrelated third-party vendors and also sells roasted coffee at the taxpayer's own retail establishments. In addition, at the taxpayer's retail establishments, the taxpayer prepares brewed coffee and other foods. The conferees intend that to the extent that the gross receipts of the taxpayer's retail establishment represent receipts from the sale of its roasted coffee beans to customers, the receipts are qualified domestic production gross receipts, but to the extent that the gross receipts of the taxpayer's retail establishment represent receipts from the sale of brewed coffee or food prepared at the retail establishment, the receipts are not qualified domestic production gross receipts. However, the conferees intend that, in this case, the taxpayer may allocate part of the receipts from the sale of the brewed coffee as qualified domestic production gross receipts to the extent of the value of the roasted coffee beans used to brew the coffee. The conferees intend that the Secretary provide guidance drawing on the principles of section 482 by which such a taxpayer can allocate gross receipts between qualified and nonqualified gross receipts. The conferees observe that in this example, the taxpayer's sales of roasted coffee beans to unrelated third parties would provide a value for the beans used in brewing a cup of coffee for retail sale.

The conferees intend that the disqualification of gross receipts derived from the sale of food and beverage prepared by the taxpayer at a retail establishment not be construed narrowly to apply only to establishments at which customers dine on premises. The receipts of a facility that prepares food and beverage solely for take out service would not be qualified production gross receipts. Likewise, the conferees intend that the disqualification of gross receipts derived from the sale of food and beverages prepared by the taxpayer need not be limited to retail establishments primarily engaged in the dining trade. For example, if a taxpayer operates a supermarket and as part of the supermarket the taxpayer operates an in-store bakery, the same allocation described above would apply to determine the extent to which the taxpayer's gross receipts represent qualified domestic production gross receipts.

²⁸ The conference agreement provides that domestic production gross receipts include the gross receipts from the production in the United States of electricity, gas, and potable water, but excludes the gross receipts from the transmission or distribution of electricity, gas, and potable water. Thus, in the case of a taxpayer who owns a facility for the production of electricity, whether the taxpayer's facility is part of a regulated utility or an independent power facility, the taxpayer's gross receipts from the production of electricity at that facility are qualified domestic production gross receipts. However, to the extent that the taxpayer is an integrated producer that generates electricity and delivers electricity to end users, any gross receipts properly attributable to the transmission of electricity from the generating facility to a point of local distribution and any gross receipts properly attributable to the distribution of electricity to final customers are not qualified domestic production gross receipts. For example, assume taxpayer A owns a wind turbine that generates electricity and taxpayer B owns a highvoltage transmission line that passes near taxpayer A's wind turbine and ends near the system of local distribution lines of taxpayer C. Taxpayer A sells the electricity produced at the wind turbine to taxpayer C and contracts with taxpayer B to transmit the electricity produced at the wind turbine to taxpayer C who sells the electricity to his or her customers using taxpayer C's distribution network. The gross receipts received by taxpayer A for the sale of electricity produced at the wind turbine constitute qualifying domestic production gross receipts. The gross receipts of taxpayer B from transporting taxpayer A's electricity to taxpayer C are not qualifying domestic production gross receipts. Likewise the gross receipts of taxpayer C from distributing the electricity are not qualifying domestic production gross receipts. Also, if taxpayer A made direct sales of electricity to customers in taxpayer C's service area and taxpayer C receives remuneration for the distribution of electricity, the gross receipts of taxpayer C are not qualifying domestic production gross receipts. If taxpayers A, B, and C are all related taxpayer, then taxpayers A, B, and C must allocate gross receipts to production activities, transmission activities, and distribution activities in a manner consistent with the preceding example.

The conference agreement provides that the same principles apply in the case of the natural gas and water supply industries. In the case of natural gas, production activities generally are all activities involved in extracting natural gas from the ground and processing the gas into pipeline quality gas. Such activities would produce qualifying domestic production gross receipts. However gross receipts of a taxpayer attributable to transmission of pipeline quality gas from a natural gas field (or from a natural gas processing plant) to a local distribution company's citygate (or to another customer) are not qualified domestic production gross receipts. Likewise gas purchased by a local gas distribution company and distributed from the citygate to the local customers does not give rise to domestic production gross receipts.

In the case of the production of potable water the conferees intend that activities involved in the production of potable water include the acquisition, collection, and storage of raw water (untreated water). It also includes the transportation of raw water to a water treatment facility and treatment of raw water at such a facility. However, any gross receipts from the storage of potable water after the water treatment facility or delivery of potable water to customers does not give rise to qualifying domestic production gross receipts. The conferees intend that a taxpayer that both produces potable water and distributes potable water will properly allocate gross receipts across qualifying and non-qualifying activities.

²⁹ It is intended that principles similar to those under the present-law extraterritorial income regime apply for this purpose. See Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For example, this exclusion generally does not apply to property leased by the taxpayer to a related person if the property is held for sublease, or is subleased, by the related person to an unrelated person for the ultimate use of such unrelated person. Similarly, the license of computer software to a related person for reproduction and sale, exchange, lease, rental or sublicense to an unrelated person for the ultimate use of such unrelated person is not treated as excluded property by reason of the license to the related person.

³⁰ The conferees intend that the nature of the material on which properties described in section 168(f)(3) are embodied and the methods and means of distribution of such properties shall not affect their qualification under this provision.

³¹ To the extent that a taxpayer has included an estimate of participations and/or residuals in its income forecast calculation under section 167(g), such taxpayer must use the same estimate of participations and/or residuals for purposes of determining total compensation.

³² It is intended that the Secretary will provide appropriate rules governing the determination of total compensation for services performed in the United States.

³³ For this purpose, agricultural or horticultural products also include fertilizer, diesel fuel and other supplies used in agricultural or horticultural production that are manufactured, produced, grown, or extracted by the cooperative.

³⁴ Organisation of Economic Cooperation and Development, Table 1.5, Tax Data Base Statistics, Tax Policy and Administration, Summary Tables (2003).

³⁵ Pub. L. No. 108-27, sec. 202 (2003).

³⁶ Additional section 179 incentives are provided with respect to a qualified property used by a business in the New York Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal community (sec. 1400J).

³⁷ Sec. 179(c)(1).

³⁸ Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in taxable years ending after Jan. 25, 1993 (but not including property placed in service in taxable years beginning after 2002 and before 2006), a taxpayer may make the election on the original return (whether or not the return is timely), or on an amended return filed by the due date (including extensions) for filing the return for the tax year the property was placed in service. If the taxpayer timely filed an original return without making the election, the taxpayer may still make the election by filing an amended return within six months of the due date of the return (excluding extensions).

³⁹ Sec. 179(c)(2).

⁴⁰ Id. Under Prop. and Temp. Treas. Reg. sec. 179-5T, applicable to property placed in service in taxable years beginning after 2002 and before 2006, 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. 9146, Aug. 3, 2004.

⁴¹ As a result of the reduced phase-out percentage, the deductible amount in the New York Liberty Zone, an enterprise zone or a renewal community is correspondingly increased. See sec. 1400L(f), sec. 1397A and sec. 1400J.

⁴² Sec. 168(i)(8). The Tax Reform Act of 1986 modified the Accelerated Cost Recovery System ("ACRS") to institute MACRS. Prior to the adoption of ACRS by the Economic Recovery Tax Act of 1981, taxpayers were allowed to depreciate the various components of a building as separate assets with separate useful lives. The use of component depreciation was repealed upon the adoption of ACRS. The Tax Reform Act of 1986 also denied the use of component depreciation under MACRS.

⁴³ Former sections 168(f)(6) and 178 provided that, in certain circumstances, a lessee could recover the cost of leasehold improvements made over the remaining term of the lease. The Tax Reform Act of 1986 repealed these provisions.

⁴⁴ Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the improvement is characterized as tangible personal property, ACRS or MACRS depreciation is calculated using the shorter recovery periods, accelerated methods, and conventions applicable to such property. The determination of whether improvements are characterized as tangible personal property or as nonresidential real property often depends on whether or not the improvements constitute a "structural component" of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)). See, e.g., Metro National Corp v. Commissioner, 52 TCM ( CCH ) 1440 (1987); King Radio Corp Inc. v. U.S., 486 F.2d 1091 (10th Cir. 1973); Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402 (8th Cir. 1985) (with respect to various leasehold improvements).

⁴⁵ Pub. L. No. 107-147, sec. 101 (2002), as amended by Pub. L. No. 108-27, sec. 201 (2003).

⁴⁶ Qualified leasehold improvement property continues to be eligible for the additional first-year depreciation deduction under sec. 168(k).

⁴⁷ Sec. 168(k).

⁴⁸ Qualified restaurant property would become eligible for the additional first-year depreciation deduction under sec. 168(k) by virtue of the assigned 15-year recovery period.

⁴⁹ The additional first-year depreciation deduction is subject to the general rules regarding whether an item is deductible under section 162 or subject to capitalization under section 263 or section 263A.

⁵⁰ However, the additional first-year depreciation deduction is not allowed for purposes of computing earnings and profits.

⁵¹ A taxpayer may elect out of the 50-percent additional first-year depreciation (discussed below) for any class of property and still be eligible for the 30-percent additional firstyear depreciation.

⁵² 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.

⁵³ 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).

⁵⁴ In order for property to qualify for the extended placed-in-service date, the property must be subject to section 263A and have an estimated production period exceeding two years or an estimated production period exceeding one year and a cost exceeding $1 million.

⁵⁵ 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 September 11, 2001.

⁵⁶ 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.

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 May 6, 2003. However, no 50-percent additional first-year depreciation is permitted on any such component. No inference is intended as to the proper treatment of components placed in service under the 30-percent additional first-year depreciation provided by the JCWAA.

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 For this purpose, it is intended that the term "purchase" be interpreted as it is defined in sec. 179(d)(2).

⁶⁰ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of technical corrections.

⁶¹ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of technical corrections.

⁶² If a qualified retirement plan (other than an employee stock ownership plan) or a charity holds stock in an S corporation, the interest held is treated as an interest in an unrelated trade or business, and the plan or charity's share of the S corporation's items of income, loss, or deduction, and gain or loss on the disposition of the S corporation stock, are taken into account in computing unrelated business taxable income.

⁶³ If a qualified retirement plan (other than an employee stock ownership plan) or a charity holds stock in an S corporation, the interest held is treated as an interest in an unrelated trade or business, and the plan or charity's share of the S corporation's items of income, loss, or deduction, and gain or loss on the disposition of the S corporation stock, are taken into account in computing unrelated business taxable income.

⁶⁴ Under the bill, the present-law rules treating S corporation stock held by a qualified retirement plan (other than an employee stock ownership plan) or a charity as an interest in an unrelated trade or business apply to an IRA holding S corporation stock of a bank.

⁶⁵ Notice 97-5, 1997-1 C.B. 352, sets forth guidance relating to passive investment income on banking assets.

⁶⁶ Another provision of the bill increases the maximum number of shareholders to 100.

⁶⁷ Sec. 1361(c)(4). Treasury regulations provide that buy-sell and redemption agreements are disregarded in determining whether a corporation's outstanding shares confer identical distribution and liquidation rights unless (1) a principal purpose of the agreement is to circumvent the one class of stock requirement and (2) the agreement establishes a purchase price that, at the time the agreement is entered into, is significantly in excess of, or below, the fair market value of the stock. Treas. Reg. sec. 1.1361-1(l).

⁶⁸ 12 U.S.C. secs. 71-72.

⁶⁹ See Private Letter Ruling 200217048 (January 24, 2002) describing such an agreement and holding that it creates a second class of stock. Nonetheless, the ruling concluded that the election to be an S corporation was inadvertently invalid and that an amended agreement did not create a second class of stock so that the corporation's election was validated.

⁷⁰ Sec. 4975.

⁷¹ Sec. 4975(d)(3). An ESOP that borrows money to purchase employer stock is referred to as a "leveraged" ESOP.

⁷² Treas. Reg. sec. 54.4975-7(b)(5).

⁷³ Sec. 404(k)(5)(B).

⁷⁴ Sec. 404(k)(2)(B).

⁷⁵ Sec. 1361(c)(6).

⁷⁶ The alcohol fuels credit is unavailable when, for any period before January 1, 2008, the tax rates for gasoline and diesel fuels drop to 4.3 cents per gallon.

⁷⁷ A special fuel includes any liquid (other than gasoline) that is suitable for use in an internal combustion engine.

⁷⁸ In the case of any alcohol (other than ethanol) with a proof that is at least 150 but less than 190, the credit is 45 cents per gallon (the "low-proof blender amount"). For ethanol with a proof that is at least 150 but less than 190, the low-proof blender amount is 38.52 cents for sales or uses during calendar year 2004, and 37.78 cents for calendar years 2005, 2006, and 2007.

⁷⁹ These fuels are also subject to an additional 0.1 cent-per-gallon excise tax to fund the Leaking Underground Storage Tank Trust Fund. See secs. 4041(d) and 4081(a)(2)(B). In addition, the basic fuel tax rate will drop to 4.3 cents per gallon beginning on October 1, 2005.

⁸⁰ These rates include the additional 0.1 cent-per-gallon excise tax to fund the Leaking Underground Storage Tank Trust Fund. These special rates will terminate after September 30, 2007 (sec. 4081(c)(8)).

⁸¹ Treas. Reg. sec. 48.4081-6(c). A certificate from the buyer assures that the gasoline will be used to produce gasohol within 24 hours after purchase. A copy of the registrant's letter of registration cannot be used as a gasohol blender's certificate.

⁸² These reduced rates terminate after September 30, 2007. Included in these rates is the 0.05-cent-per-gallon Leaking Underground Storage Tank Trust Fund tax imposed on such fuel. (sec. 4041(b)(2)).

⁸³ These rates include the additional 0.1 cent-per-gallon excise tax to fund the Leaking Underground Storage Tank Trust Fund (sec. 4041(d)(1)).

⁸⁴ These rates include the additional 0.1 cent-per-gallon excise tax to fund the Leaking Underground Storage Tank Trust Fund.

⁸⁵ This rate includes the additional 0.1 cent-per-gallon tax for the Leaking Underground Storage Tank Trust fund.

⁸⁶ Secs. 4041(k)(1) and 4091(c).

⁸⁷ Sec. 4091(c)(1).

⁸⁸ Sec. 9503(b)(4)(E).

⁸⁹ Sec. 9503(b)(4)(F).

⁹⁰ Sec. 4081(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002). "Taxable fuels" are gasoline, diesel and kerosene (sec. 4083). Biodiesel, although suitable for use as a fuel in a diesel-powered highway vehicle or diesel-powered train, contains less than four percent normal paraffins and, therefore, is not treated as diesel fuel under the applicable Treasury regulations. Treas. Reg. secs. 48.4081-1(c)(2)(i) and (ii), and 48.4081-1(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002). As a result, biodiesel alone is not a taxable fuel for purposes of section 4081. As noted above, however, tax is imposed upon the removal or entry of blended taxable fuel made with biodiesel.

⁹¹ Sec. 4041. The tax imposed under section 4041 also will not apply if an exemption from tax applies.

⁹² Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).

⁹³ Sec. 9503(c)(4) and 9503(c)(5).

⁹⁴ The Sport Fish Restoration Account also is funded with receipts from an ad valorem manufacturers excise tax on sport fishing equipment.

⁹⁵ The provision does not change the present-law treatment of fuels blended with alcohol derived from natural gas (under sec. 4041(m)), or alcohol derived from coal or peat (under sec. 4041(b)(2)). The provision does not change the taxes imposed to fund the Leaking Underground Storage Tank Trust Fund.

⁹⁶ Sec. 4083(a)(1). Under present law, dyed fuels are taxable fuels that have been exempted from tax.

⁹⁷ The excise tax credit uses the same definitions as the biodiesel fuels income tax credit.

⁹⁸ Sec. 421. For purposes of the individual alternative minimum tax, the transfer of stock pursuant to an incentive stock option is generally treated as the transfer of stock pursuant to a nonstatutory option. Sec. 56(b)(3).

⁹⁹ Secs. 3101, 3111 and 3301.

¹⁰⁰ Secs. 3121 and 3306.

¹⁰¹ Notice 2002-47, 2002-28 I.R.B. 97.

¹⁰² The provision also provides a similar exclusion under the Railroad Retirement Tax Act.

¹⁰³ Secs. 951-964.

¹⁰⁴ Secs. 1291-1298.

¹⁰⁵ Secs. 901, 902, 960, 1291(g).

¹⁰⁶ If the taxpayer has fewer than 5 taxable years ending on or before December 31, 2002, then the base period consists of all such taxable years, with none disregarded.

¹⁰⁷ The election is to be made on a timely filed return (including extensions) for the taxable year with respect to which the deduction is claimed.

¹⁰⁸ However, to the extent that the taxpayer actually receives cash in an inbound liquidation that is described in Code section 332 and treated as a dividend under Code section 367(b), such amount is treated as a dividend for these purposes. The conferees note that a deemed liquidation effectuated by means of a "check the box" election under the entity classification regulations will not involve an actual receipt of cash that is reinvested in the United States as required for purposes of this provision.

¹⁰⁹ Thus, indebtedness between such controlled foreign corporations is disregarded for purposes of this determination.

¹¹⁰ A corporation that was spun off from another corporation during the five-year period is treated for this purpose as having been in existence for the same period that such other corporation has been in existence. The pre-spin-off dividend history of the two corporations is generally allocated between them on the basis of their interests in the dividend-paying controlled foreign corporations immediately after the spin-off. In other cases involving companies entering and exiting corporate groups, the principles of Code section 41(f)(3)(A) and (B) apply.

¹¹¹ This rule refers to elements of Accounting Principles Board Opinion 23 ("APB 23"), which provides an exception to the general rule of comprehensive recognition of deferred taxes for temporary book-tax differences. The exception is for temporary differences related to undistributed earnings of foreign subsidiaries and foreign corporate joint ventures that meet the indefinite reversal criterion in APB 23.

¹¹² In the absence of such a specification, a pro rata amount of foreign tax credits will be disallowed with respect to every dividend repatriated during the taxable year.

¹¹³ These expenses, losses, and deductions may, however, have the effect of reducing other income of the taxpayer.

¹¹⁴ Treas. Reg. sec. 1.1388-1(a)(1).

¹¹⁵ Sec. 1221(a)(l)

¹¹⁶ Thus, the 100-percent tax on prohibited transactions helps to ensure that the REIT is a passive entity and may not engage in ordinary retailing activities such as sales to customers of condominium units or subdivided lots in a development project.

¹¹⁷ See, e.g., PLR 200052021, PLR 199945055, PLR 19927021, PLR 8838016. A private letter ruling may be relied upon only by the taxpayer to which the ruling is issued. However, such rulings provide an indication of administrative practice.

¹¹⁸ Certain securities that are within a safe-harbor definition of "straight debt" are not taken into account for purposes of the limitation to no more than 10 percent of the value of an issuer's outstanding securities.

¹¹⁹ Certain corporations are not eligible to be a TRS, such as a corporation which directly or indirectly operates or manages a lodging facility or a health care facility or directly or indirectly provides to any other person rights to a brand name under which any lodging facility or health care facility is operated. Sec. 856(l)(3).

¹²⁰ If the excise tax applies, the item is not also reallocated back to the TRS under section 482.

¹²¹ The timberland acquisition expenditures that are excluded for this purpose are those expenditures that are related to timberland other than the specific timberland that is being sold under the safe harbor, but costs of which may be combined with costs of such property in the same "management block" under Treas. Reg. sec. 1.611-3(d). Any specific timberland being sold must meet the requirement that it has been held for at least four years by the REIT in order to qualify for the safe harbor.

¹²² Sec. 852(b).

¹²³ Sec. 851(a).

¹²⁴ Sec. 851(b).

¹²⁵ Sec. 851(b)(2).

¹²⁶ Sec. 851(b).

¹²⁷ Sec. 851(b)(3).

¹²⁸ Sec. 851(d).

¹²⁹ Sec. 7704(a), (c), and (d).

¹³⁰ Sec. 469.

¹³¹ Sec. 469(k).

¹³² A REIT is not treated as providing services that produce impermissible tenant services income if such services are provided by an independent contractor from whom the REIT does not derive or receive any income. An independent contractor is defined as a person who does not own, directly or indirectly, more than 35 percent of the shares of the REIT. Also, no more than 35 percent of the total shares of stock of an independent contractor (or of the interests in net assets or net profits, if not a corporation) can be owned directly or indirectly by persons owning 35 percent or more of the interests in the REIT.

¹³³ Rents for certain personal property leased in connection with the rental of real property are treated as rents from real property if the fair market value of the personal property does not exceed 15 percent of the aggregate fair market values of the real and personal property

¹³⁴ Sec. 856(d)(2)(B).

¹³⁵ Sec. 856(d)(8).

¹³⁶ Prior to 1999, the rule had applied to the amount by which 95 percent of the income exceeded the items subject to the 95 percent test.

¹³⁷ The ratio of the REIT's net to gross income is applied to the excess amount, to determine the amount of tax (disregarding certain items otherwise subject to a 100-percent tax). In effect, the formula seeks to require that all of the REIT net income attributable to the failure of the income tests will be paid as tax. Sec. 857(b)(5).

¹³⁸ Sec. 1361(c)(5), without regard to paragraph (B)(iii) thereof.

¹³⁹ Sec. 856(c)(7).

¹⁴⁰ Certain corporations are not eligible to be a TRS, such as a corporation which directly or indirectly operates or manages a lodging facility or a health care facility, or directly or indirectly provides to any other person rights to a brand name under which any lodging facility or health care facility is operated. Sec. 856(l)(3).

¹⁴¹ If the excise tax applies, then the item is not reallocated back to the TRS under section 482.

¹⁴² Secs. 856(c)(6) and 857(b)(5).

¹⁴³ The present law rules that limit qualified interest income to amounts the determination of which do not depend, in whole or in part, on the income or profits of any person, continue to apply to such contingent interest. See, e.g., secs. 856(c)(2)(G), 856(c)(3)(G) and 856(f).

¹⁴⁴ The provision does not modify any of the standards of section 482 as they apply to REITs and to TRSs.

¹⁴⁵ Although a REIT could itself provide such service and receive the income without receiving any disqualified income, in that case the REIT itself would be bearing the cost of providing the service. Under the present law exception for a TRS providing such service, there is no explicit requirement that the TRS be reimbursed for the full cost of the service.

¹⁴⁶ Sec. 856(c)(4)(B)(iii). These rules do not apply to securities of a TRS, or to securities that qualify for the 75 percent asset test of section 856(c)(4)(A), such as real estate assets, cash items (including receivables), or Government securities.

¹⁴⁷ A REIT might satisfy the requirements without a disposition, for example, by increasing its other assets in the case of the 5 percent rule; or by the issuer modifying the amount or value of its total securities outstanding in the case of the 10 percent rule.

¹⁴⁸ The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") repealed the estate tax for estates of decedents dying after December 31, 2009. However, EGTRRA included a "sunset" provision, pursuant to which EGTRRA's provisions (including estate tax repeal) do not apply to estates of decedents dying after December 31, 2010.

¹⁴⁹ Sec. 4161(b)(1)(A).

¹⁵⁰ Sec. 4161(b)(2).

¹⁵¹ Sec. 4161(b)(1)(B).

¹⁵² Draw weight is the maximum force required to bring the bowstring to a full-draw position not less than 26 1/4-inches, measured from the pressure point of the hand grip to the nocking position on the bowstring.

¹⁵³ A credit or refund may be obtained when an item was taxed and it is used in the manufacture or production of another taxable item. Sec. 6416(b)(3). As arrow components and finished arrows are both taxable, in lieu of a refund of the tax paid on components, the provision suspends the application of sec. 6416(b)(3) and permits the taxpayer to reduce the tax due on the finished arrow by the amount of the previous tax paid on the components used in the manufacture of such arrow.

¹⁵⁴ Sec. 4161(a)(1).

¹⁵⁵ Sec. 4161(a)(2).

¹⁵⁶ Sec. 4162(b).

¹⁵⁷ Distilled spirits that are imported in bulk and then bottled domestically qualify as domestically bottled distilled spirits.

¹⁵⁹ Secs. 5114, 5124.

¹⁶⁰ Sec. 5146.

¹⁶¹ Sec. 5603.

¹⁶² Sec. 5117. For example, purchases from a proprietor of a distilled spirits plant at his principal business office would be covered under item (2) since such a proprietor is not subject to the special occupational tax on account of sales at his principal business office. Sec. 5113(a). Purchases from a State-operated liquor store would be covered under item (3). Sec. 5113(b).

¹⁶³ Sec. 5117(b).

¹⁶⁴ Sec. 5687.

¹⁶⁵ Sec. 7302.

¹⁶⁶ The "corporate income percentage" is the least aggregate share, expressed as a percentage, of any item of income or gain of an electing corporation, or an electing group (i.e., a controlled group of which one or more members is an electing entity) of which such corporation is a member from qualifying shipping activities that would otherwise be required to be reported on the U.S. Federal income tax return of an electing corporation during any taxable period. A "controlled group" is any group of trusts and business entities whose members would be treated as a single employer under the rules of section 52(a) (without regard to paragraphs (1) and (2)) and section 52(b)(1)).

¹⁶⁷ The "daily notional taxable income" from the operation of a qualifying vessel is 40 cents for each 100 tons of the net tonnage of the vessel (up to 25,000 net tons), and 20 cents for each 100 tons of the net tonnage of the vessel, in excess of 25,000 net tons.

¹⁶⁸ " U.S. foreign trade" means the transportation of goods or passengers between a place in the United States and a foreign place or between foreign places. As a general rule, the temporary operation in the U.S. domestic trade (i.e., the transportation of goods or passengers between places in the United States) of any qualifying vessel is disregarded. However, a vessel that is no longer used for operations in U.S. foreign trade (unless such non-use is on a temporary basis) ceases to be a qualifying vessel when such non-use begins.

¹⁶⁹ If there are multiple operators of a vessel, the taxable income of such vessel must be allocated among such persons on the basis of their ownership and charter interests or another basis that Treasury may prescribe in regulations.

¹⁷⁰ "Qualifying shipping assets" means any qualifying vessel and other assets which are used in core qualifying activities.

¹⁷¹ "Corporate loss percentage" means the greatest aggregate share, expressed as a percentage, of any item of loss, deduction or credit of an electing corporation or electing group of which such corporation is a member from qualifying shipping activities that would otherwise be required to be reported on the U.S. Federal income tax return of an electing corporation during any taxable period.

¹⁷² An entity is generally treated as operating any vessel owned by or chartered to the entity. However, an entity is treated as operating a vessel that it has chartered out on bareboat basis only if: (1) the vessel is temporarily surplus to the entity's requirements and the term of the charter does not exceed three years or (2) the vessel is bareboat chartered to a member of a controlled group which includes such entity or to an unrelated third party that sub-bareboats or time charters the vessel to a member of such controlled group (including the owner). Special rules apply in an instance in which an electing entity temporarily ceases to operate a qualifying vessel.

¹⁷³ The daily notional shipping income from the operation of a qualifying vessel is 40 cents for each 100 tons of the net tonnage of the vessel (up to 25,000 net tons), and 20 cents for each 100 tons of the net tonnage of the vessel, in excess of 25,000 net tons.

¹⁷⁴ "United States foreign trade" means the transportation of goods or passengers between a place in the United States and a foreign place or between foreign places. The temporary use in the United States domestic trade (i.e., the transportation of goods or passengers between places in the United States) of any qualifying vessel is deemed to be the use in the United States foreign trade of such vessel, if such use does not exceed 30 days in a taxable year.

¹⁷⁵ Special rules apply in the case of multiple operators of a vessel.

¹⁷⁶ An electing group means any group that would be treated as a single employer under subsection (a) or (b) of section 52 if paragraphs (1) and (2) of section 52(a) did not apply.

¹⁷⁷ It is intended that the operation of a lighter-aboard-ship be treated as the operation of a vessel and not the operation of a barge.

¹⁷⁸ A person is generally treated as operating and using any vessel owned by or chartered to it and that is used as a qualifying vessel during such period. Special rules apply in the case of pass-through entities, and special rules apply in an instance in which an electing entity temporarily ceases to operate a qualifying vessel due to dry-docking, surveying, inspection, repairs and the like.

¹⁷⁹ Treas. Reg. sec. 1.170A-1(g).

¹⁸⁰ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785).

¹⁸¹ Sec. 263A(f).

¹⁸² It is intended that, for purposes of the provision, the natural aging process begin when the distilled spirits are placed in charred barrels to lie for an extended period of time to allow such product to obtain its color, much of its distinctive flavor, and to mellow. The natural aging process concludes when the distilled spirits are removed from the barrel.

¹⁸³ Section 355(b).

¹⁸⁴ Section 355(b)(2)(A).

¹⁸⁵ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.

¹⁸⁶ Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. Proc. 77-37, sec. 3.04, 1977-2 C.B. 568.

¹⁸⁷ For example, a holding company taxpayer that had distributed a controlled corporation in a spin-off prior to the date of enactment, in which spin-off the taxpayer satisfied the "substantially all" active business stock test of present law section 355(b)(2)(A) immediately after the distribution, would not be deemed to have failed to satisfy any requirement that it continue that same qualified structure for any period of time after the distribution, solely because of a restructuring that occurs after the date of enactment and that would satisfy the requirements of new section 355(b)(2)(A).

¹⁸⁸ For disputes involving the initial or continuing qualification of an organization described in sections 501(c)(3), 509(a), or 4942(j)(3), declaratory judgment actions may be brought in the U.S. Tax Court, a U.S. district court, or the U.S. Court of Federal Claims. For all other Federal tax declaratory judgment actions, proceedings may be brought only in the U.S. Tax Court.

¹⁸⁹ The 15-percent rate applies to dividends received in taxable years beginning before January 1, 2009. Dividends received on or after that date are scheduled to be taxed at the rates applicable to ordinary income, which range up to 35 percent (39.6 percent for taxable years beginning after December 31, 2010).

¹⁹⁰ If the recipient corporation owns less than 20 percent of the distributing corporation, the dividends-received deduction is 70 percent. If the recipient corporation owns less than 80 percent but at least 20 percent of the distributing corporation, the dividends-received deduction is 80 percent. If the recipient corporation owns 80 percent or more of the distributing corporation, the dividends received deduction is generally 100 percent.

¹⁹¹ This is the 35 percent tax rate, applied to the 30 percent of the dividend that is taxable after a 70 percent dividends-received deduction.

¹⁹² This rate is scheduled to return to the highest individual tax rate when the lower dividend tax rate expires.

¹⁹³ Section 547.

¹⁹⁴ Secs. 141(e) and 142(a).

¹⁹⁵ Residential rental projects must satisfy low-income tenant occupancy requirements for a minimum period of 15 years.

¹⁹⁶ Sec. 146.

¹⁹⁷ The LEED ("Leadership in Energy and Environmental Design) Green Building Rating System is a voluntary, consensus-based national standard for developing highperformance sustainable buildings. Registration is the first step toward LEED certification. Actual certification requires that the applicant project satisfy a number of requirements. Commercial buildings, as defined by standard building codes are eligible for certification. Commercial occupancies include, but are not limited to, offices, retail and service establishments, institutional buildings (e.g. libraries, schools, museums, churches, etc.), hotels, and residential buildings of four or more habitable stories.

¹⁹⁸ For this purpose, a brownfield site is defined by section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. 9601), including a site described in subparagraph (D)(ii)(II)(aa) thereof (relating to a site that is contaminated by petroleum or a petroleum product excluded from the definition of 'hazardous substance' under section 101).

¹⁹⁹ The term "rural State" means any State that has (1) a population of less than 4.5 million according to the 2000 census; (2) a population density of less than 150 people per square mile according to the 2000 census; and (3) increased in population by less than half the rate of the national increase between the 1990 and 2000 censuses.

²⁰⁰ An election to deduct such costs shall be made in such manner as prescribed by the Secretary and by the due date (including extensions of time) for filing the taxpayer's return of tax for the taxable year in which production costs of such property are first incurred. An election may not be revoked without the consent of the Secretary. The Committee intends that, in the absence of specific guidance by the Secretary, deducting qualifying costs on the appropriate tax return shall constitute a valid election.

²⁰¹ Thus, a qualifying film that is co-produced is limited to $15 million of deduction. The benefits of this provision shall be allocated among the owners of a film in a manner that reasonably reflects each owner's proportionate investment in and economic interest in the film.

²⁰² The term compensation does not include participations and residuals.

²⁰³ For this purpose, a production is treated as commencing on the first date of principal photography.

²⁰⁴ Associated Patentees, Inc. v. Commissioner, 4 T.C. 979 (1945).

²⁰⁵ However, exceptions to the fungibility principle are provided in particular cases, some of which are described below.

²⁰⁶ One such exception is that the affiliated group for interest allocation purposes includes section 936 corporations that are excluded from the consolidated group.

²⁰⁷ For purposes of determining the assets of the worldwide affiliated group, neither stock in corporations within the group nor indebtedness (including receivables) between members of the group is taken into account. It is anticipated that the Treasury Secretary will adopt regulations addressing the allocation and apportionment of interest expense on such indebtedness that follow principles analogous to those of existing regulations. Income from holding stock or indebtedness of another group member is taken into account for all purposes under the present-law rules of the Code, including the foreign tax credit provisions.

²⁰⁸ Although the interest expense of a foreign subsidiary is taken into account for purposes of allocating the interest expense of the domestic members of the electing worldwide affiliated group for foreign tax credit limitation purposes, the interest expense incurred by a foreign subsidiary is not deductible on a U.S. return.

²⁰⁹ The provision expands the definition of an affiliated group for interest expense allocation purposes to include certain insurance companies that are generally excluded from an affiliated group under section 1504(b)(2) (without regard to whether such companies are covered by an election under section 1504(c)(2)).

²¹⁰ Indirect ownership is determined under the rules of section 958(a)(2) or through applying rules similar to those of section 958(a)(2) to stock owned directly or indirectly by domestic partnerships, trusts, or estates.

²¹¹ See Treas. Reg. sec. 1.904-4(e)(2).

²¹² Subject to certain exceptions, dividends paid by a 10/50 company in taxable years beginning after December 31, 2002 are subject to either a look-through approach in which the dividend is attributed to a particular limitation category based on the underlying earnings which gave rise to the dividend (for post-2002 earnings and profits), or a single-basket limitation approach for dividends from all 10/50 companies that are not passive foreign investment companies (for pre-2003 earnings and profits). Under the conference agreement, these dividends are subject to a look-through approach, irrespective of when the underlying earnings and profits arose.

²¹³ See, e.g., sec. 56(g)(4)(C)(iii)(IV) (relating to certain dividends from corporations eligible for the sec. 936 credit); sec. 245(a)(10) (relating to certain dividends treated as foreign source under treaties); sec. 865(h)(1)(B) (relating to certain gains from stock and intangibles treated as foreign source under treaties); sec. 901(j)(1)(B) (relating to income from certain specified countries); and sec. 904(g)(10)(A) (relating to interest, dividends, and certain other amounts derived from U.S.-owned foreign corporations and treated as foreign source under treaties).

²¹⁴ Treas. Reg. sec. 1.904-4(e)(3)(i) and (2)(i).

²¹⁵ Treas. Reg. sec. 1.904-4(e)(3)(ii).

²¹⁶ Treas. Reg. sec. 1.904-6.

²¹⁷ Treas. Reg. sec. 1.904-6(a)(1)(iv).

²¹⁸ See Treas. Reg. sec. 1.904-4(e).

²¹⁹ See H.R. Rep. No. 99-841, 99^th Cong., 2d Sess. II-621 (1986); Staff of the Joint Committee on Taxation, 100^th Cong., 1^st Sess., General Explanation of the Tax Reform Act of 1986, at 984 (1987).

²²⁰ Dividends paid by a 10/50 company in taxable years beginning before January 1, 2003 are subject to a separate foreign tax credit limitation for each 10/50 company.

²²¹ This look-through treatment also applies to dividends that a controlled foreign corporation receives from a 10/50 company and then distributes to a U.S. shareholder.

²²² It is anticipated that the Treasury Secretary will reconsider the operation of the foreign tax credit regulations to ensure that the high-tax income rules apply appropriately to dividends treated as passive category income because of inadequate substantiation.

²²³ Under section 901(b)(5), an individual member of a partnership or a beneficiary of an estate or trust generally may claim a direct foreign tax credit with respect to the amount of his or her proportionate share of the foreign taxes paid or accrued by the partnership, estate, or trust. This rule does not specifically apply to corporations that are either members of a partnership or beneficiaries of an estate or trust. However, section 702(a)(6) provides that each partner (including individuals or corporations) of a partnership must take into account separately its distributive share of the partnership's foreign taxes paid or accrued. In addition, under section 703(b)(3), the election under section 901 (whether to credit the foreign taxes) is made by each partner separately.

²²⁴ 1971-1 C.B. 211.

²²⁵ T.D. 8708, 1997-1 C.B. 137.

²²⁶ Secs. 865(d), 862(a).

²²⁷ Sec. 904(d).

²²⁸ Sec. 904(d)(3).

²²⁹ Secs. 951-964.

²³⁰ Sec. 951(a)(1)(B).

²³¹ Sec. 956(a).

²³² Secs. 956 and 959.

²³³ Secs. 951(a)(1)(B) and 959.

²³⁴ Sec. 956(c)(1).

²³⁵ Sec. 956(c)(2).

You have reached the end of Part 02. To reach other parts, please use READ.This document is divided into multiple parts. To reach other parts, please use READ. You have reached Part 03²³⁶ Sec. 986(a)(1).

²³⁷ Sec. 986(a)(2).

²³⁸ Electing taxpayers translate foreign income tax payments pursuant to the same present-law rules that apply to taxpayers that are required to translate foreign income taxes using the exchange rates as of the time such taxes are paid.

²³⁹ Sec. 861(a)(1).

²⁴⁰ Treas. Reg. sec. 1.861-2(a)(2).

²⁴¹ Sec. 884(f)(1).

²⁴² For hedging transactions entered into on or after January 31, 2003, Treasury regulations provide that gains or losses from a commodities hedging transaction generally are excluded from the definition of foreign personal holding company income if the transaction is with respect to the controlled foreign corporation's business as a producer, processor, merchant or handler of commodities, regardless of whether the transaction is a hedge with respect to a sale of commodities in the active conduct of a commodities business by the controlled foreign corporation. The regulations also provide that, for purposes of satisfying the requirements for exclusion from the definition of foreign personal holding company income, a producer, processor, merchant or handler of commodities includes a controlled foreign corporation that regularly uses commodities in a manufacturing, construction, utilities, or transportation business (Treas. Reg. sec. 1.954-2(f)(2)(v)). However, the regulations provide that a controlled foreign corporation is not a producer, processor, merchant or handler of commodities (and therefore would not satisfy the requirements for exclusion) if its business is primarily financial (Treas. Reg. sec. 1.954-2(f)(2)(v)).

²⁴³ Treasury regulations provide that substantially all of a controlled foreign corporation's business is as an active producer, processor, merchant or handler of commodities if: (1) the sum of its gross receipts from all of its active sales of commodities in such capacity and its gross receipts from all of its commodities hedging transactions that qualify for exclusion from the definition of foreign personal holding company income, equals or exceeds (2) 85 percent of its total receipts for the taxable year (computed as though the controlled foreign corporation was a domestic corporation) (Treas. Reg. sec. 1.954-2(f)(2)(iii)(C)).

²⁴⁴ Sec. 1221(a)(7).

²⁴⁵ Sec. 1221(b)(2)(A).

²⁴⁶ Sec. 1221(a)(7) and (b)(2)(B).

²⁴⁷ For purposes of determining whether substantially all of the controlled foreign corporation's commodities are comprised of such property, it is intended that the 85-percent requirement provided in the current Treasury regulations (as modified to reflect the changes made by the House bill) continue to apply.

²⁴⁸ "Active-leasing expenses" are section 162 expenses properly allocable to rental income other than (1) deductions for compensation for personal services rendered by the lessor's shareholders or a related person, (2) deductions for rents, (3) section 167 and 168 expenses, and (4) deductions for payments to independent contractors with respect to leased property. Treas. Reg. sec. 1.954-2(c)(2)(iii).

²⁴⁹ Generally, "adjusted leasing profit" is rental income less the sum of (1) rents paid or incurred by the CFC with respect to such rental income; (2) section 167 and 168 expenses with respect to such rental income; and (3) payments to independent contractors with respect to such rental income. Treas. Reg. sec. 1.954-2(c)(2)(iv).

²⁵⁰ Temporary exceptions from the subpart F provisions for certain active financing income applied only for taxable years beginning in 1998. Those exceptions were modified and extended for one year, applicable only for taxable years beginning in 1999. The Tax Relief Extension Act of 1999 (Pub.L. No. 106-170) clarified and extended the temporary exceptions for two years, applicable only for taxable years beginning after 1999 and before 2002. The Job Creation and Worker Assistance Act of 2002 (Pub.L. No. 107-147) extended the temporary exceptions for five years, applicable only for taxable years beginning after 2001 and before 2007, with a modification relating to insurance reserves.

²⁵¹ Section 904(a).

²⁵² Treas. Prop. Reg. sec. 1.964-1(c)(1)(ii)(B).

²⁵³ Nonresident individuals are subject to the 30-percent gross withholding tax, for example, with respect to gains from the sale or exchange of intangible property if the payments are contingent on the productivity, use, or disposition of the property. Secs. 871(a)(1)(D) and 881(a)(4).

²⁵⁴ See the American Law Institute, Federal Income Tax Project, International Aspects of United States Income Taxation, Proposals of the American Law Institute on United States Taxation of Foreign Persons and of the Foreign Income of United States Persons, at 112-113 (1987) (recommending that sec. 871(a)(2) be eliminated and stating "[u]nder Section 7701(b), enacted in 1984, an individual physically present in the U.S. for 183 days in a calendar year is considered a resident, taxable at net income rates on all of his income; and accordingly the justification for Section 871(a)(2) no longer exists." [footnotes omitted]).

²⁵⁵ It should be noted that there also is a difference with respect to the year over which the 183-day rule is measured for purposes of the substantial presence test and the rule under sec. 871(a)(2). The sec. 871(a)(2) tax applies to 183 days or more of presence in the United States during the taxable year, while the substantial presence test under sec. 7701(b) applies to 183 days or more of presence in the United States during the calendar year. In most cases, however, a nonresident individual's taxable year is the calendar year. Secs. 7701(b)(9) and 871(a)(2).

²⁵⁶ The individual's income also could be treated as U.S.-source income under sec. 865(e)(2) if the individual derives income from the sale of personal property that is attributable to an office or other fixed place of business that the individual maintains in the United States. However, sec. 871(a)(2) would not apply if the income is effectively connected with a U.S. trade or business, or if the sale qualifies for the exception from U.S.-source treatment as a result of a material participation in the sale by a foreign office of the taxpayer.

²⁵⁷ Under Article 13(5) of the U.S. model income tax treaty, subject to certain exceptions, the capital gains of a nonresident individual are exempt from U.S. taxation.

²⁵⁸ In pari-mutuel wagering (common in horse racing), odds and payouts are determined by the aggregate bets placed. The money wagered is placed into a pool, the party maintaining the pool takes a percentage of the total, and the bettors effectively bet against each other. Parimutuel wagering may be contrasted with fixed-odds wagering (common in sports wagering), in which odds (or perhaps a point spread) are agreed to by the bettor and the party taking the bet and are not affected by the bets placed by other bettors.

²⁵⁹ The term "United States" does not include its possessions. Sec. 7701(a)(9).

²⁶⁰ The usual method of effecting a mitigation of the flat 30 percent rate - an income tax treaty providing for a lower rate - is not possible in the case of a possession. See S. Rep. No. 1707, 89^th Cong., 2d Sess. 34 (1966).

²⁶¹ The 10 percent withholding rate may be subject to exemption or elimination if the dividend is paid out of income that is subject to certain tax incentives offered by Puerto Rico. These tax incentives may also reduce the rate of underlying Puerto Rico corporate tax to a flat rate of between two and seven percent.

²⁶² Sec. 901.

²⁶³ Secs. 901, 904.

²⁶⁴ A portion of the child credit may be refundable.

²⁶⁵ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁶⁶ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁶⁷ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁶⁸ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁶⁹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷⁰ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷¹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷² The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷³ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷⁴ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"),which included a number of extensions to expiring provisions.

²⁷⁵ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷⁶ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷⁷ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷⁸ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁷⁹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸⁰ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸¹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸² The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸³ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸⁴ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸⁵ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸⁶ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁸⁷ Self-employed individuals include more than two-percent shareholders of S corporations who are treated as partners for purposes of fringe benefit rules pursuant to section 1372.

²⁸⁸ These dollar amounts are for 2004. These amounts are indexed for inflation, rounded to the nearest $50.

²⁸⁹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁹⁰ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁹¹ Treas. Reg. sec. 1.611-1(b)(1).

²⁹² Secs. 611-613.

²⁹³ Sec. 613A.

²⁹⁴ Sec. 613A(c).

²⁹⁵ Sec. 613(a).

²⁹⁶ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁹⁷ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁹⁸ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

²⁹⁹ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰⁰ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰¹ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰² On July 8, 2002, the IRS issued Notice 2002-42, which provides that bonds issued by the Municipal Assistance Corporation for the City of New York are eligible for the advance refunding provisions of section 1400L(e) if they otherwise satisfy the requirements of that section.

³⁰³ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰⁴ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰⁵ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰⁶ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³⁰⁷ Sec. 6103(i)(7)(A).

³⁰⁸ Sec. 6103(i)(7)(A)(ii).

³⁰⁹ 309 Sec. 6103(i)(7)(B).

³¹⁰ Sec. 6103(i)(3)(C).

³¹¹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³¹² Sec. 6103.

³¹³ Sec. 6103(l)(13).

³¹⁴ Pub. L. No. 108-311 (2004).

³¹⁵ Sec. 6103(c).

³¹⁶ Department of Treasury, Report to the Congress on Scope and Use of Taxpayer Confidentiality and Disclosure Provisions, Volume I: Study of General Provisions (October 2000) at 91.

³¹⁷ Department of Treasury, General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals (February 2003) at 133.

³¹⁸ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311(the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³¹⁹ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³²⁰ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³²¹ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³²² The joint review is required to include two members of the majority and one member of the minority of the Senate Committees on Finance, Appropriations, and Governmental Affairs, and of the House Committees on Ways and Means, Appropriations, and Government Reform and Oversight.

³²³ Sec. 8021(f).

³²⁴ Sec. 8022(3)(C).

³²⁵ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³²⁶ Pub. L. No. 108-311 (2004).

³²⁷ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³²⁸ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³²⁹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³³⁰ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³³¹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³³² The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³³³ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³³⁴ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

³³⁵ Pub. L. No. 108-218

³³⁶ Pub. L. No. 97-218 (1982).

³³⁷ The Senate amendment also repeals a transition rule to the Tax Reform Act of 1986 permitting the taxpayers who own the property described as the Warrior Hotel, Ltd., the first two floors of the Martin Hotel, and the 105,000 square foot warehouse constructed in 1910, all in Sioux City, Iowa, to use ACRS depreciation, in lieu of MACRS depreciation. This change enables such property to qualify for the provision.

³³⁸ Special rules apply to the empowerment zone employment credit and the New York Liberty Zone business credit.

³³⁹ Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).

³⁴⁰ Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).

³⁴¹ 12. U.S.C. 4702(17) (used to define "low-income" for purposes of 12. U.S.C. 4702(20)).

³⁴² Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).

³⁴³ For purposes of the provision, a person is related to another person if (1) such person bears a relationship to such other person that is described in section 267(b) (determined without regard to paragraph (9)), or section 707(b)(1), determined by substituting 25 percent for 50 percent each place it appears therein; or (2) if such other person is a nonprofit organization, if such person controls directly or indirectly more than 25 percent of the governing body of such organization.

³⁴⁴ In general, a person is potentially liable under section 107 of CERCLA if: (1) it is the owner and operator of a vessel or a facility; (2) at the time of disposal of any hazardous substance it owned or operated any facility at which such hazardous substances were disposed of; (3) by contract, agreement, or otherwise it arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances; or (4) it accepts or accepted any hazardous substances for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance. 42 U.S.C. sec. 9607(a) (2004).

³⁴⁵ For this purpose, use of the property as a landfill or other hazardous waste facility shall not be considered more economically productive or environmentally beneficial.

³⁴⁶ For these purposes, substantial completion means any necessary physical construction is complete, all immediate threats have been eliminated, and all long-term threats are under control.

³⁴⁷ Cleanup cost-cap or stop-loss coverage is coverage that places an upper limit on the costs of cleanup that the insured may have to pay. Re-opener or regulatory action coverage is coverage for costs associated with any future government actions that require further site cleanup, including costs associated with the loss of use of site improvements.

³⁴⁸ For this purpose, professional liability insurance is coverage for errors and omissions by public and private parties dealing with or managing contaminated land issues, and includes coverage under policies referred to as owner-controlled insurance. Owner/operator liability coverage is coverage for those parties that own the site or conduct business or engage in cleanup operations on the site. Legal defense coverage is coverage for lawsuits associated with liability claims against the insured made by enforcement agencies or third parties, including by private parties.

³⁴⁹ The provision authorizes the Secretary of the Treasury to issue guidance regarding the treatment of government-provided funds for purposes of determining eligible remediation expenditures.

³⁵⁰ For example, rent income from leasing the property does not qualify under the proposal.

³⁵¹ Depreciation or section 198 amounts that the taxpayer had not used to determine its unrelated business taxable income are not treated as gain that is ordinary income under sections 1245 or 1250 (secs. 1.1245-2(a)(8) and 1.1250-2(d)(6)), and are not recognized as gain or ordinary income upon the sale, exchange, or disposition of the property. Thus, an exempt organization would not be entitled to a double benefit resulting from a section 198 expense deduction and the proposed exclusion from gain with respect to any amounts it deducts under section 198.

³⁵² The provision's exclusions do not apply to a tax-exempt partner's gain or loss from the tax-exempt partner's sale, exchange, or other disposition of its partnership interest. Such transactions continue to be governed by present-law.

³⁵³ The provision subjects a tax-exempt partner to tax on gain previously excluded by the partner (plus interest) if a property subsequently becomes ineligible for exclusion under the qualifying partnership's multiple-property election.

³⁵⁴ If the taxpayer fails to satisfy the averaging test for the properties subject to the election, then the taxpayer may not apply the exclusion on a separate property basis with respect to any of such properties.

³⁵⁵ The provision subjects a taxpayer to tax on gain previously excluded (plus interest) in the event a site subsequently becomes ineligible for gain exclusion under the multiple-property election.

³⁵⁶ Sec. 104(a)(2).

³⁵⁷ Sec. 265(a)(1).

³⁵⁸ Sec. 212.

³⁵⁹ Sec. 67.

³⁶⁰ Sec. 68.

³⁶¹ Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd 259 F.3d 881 (7^th Cir. 2001); Coady v. Commissioner, 213 F.3d 1187 (9^th Cir. 2000); Benci-Woodward v. Commissioner, 219 F.3d 941 (9^th Cir. 2000); Baylin v. United States, 43 F.3d 1451 (Fed. Cir. 1995).

³⁶² Cotnam v. Commissioner, 263 F.2d 119 (5^th Cir. 1959); Estate of Arthur Clarks v. United States, 202 F.3d 854 (6^th Cir. 2000); Srivastava v. Commissioner, 220 F.3d 353 (5^th Cir. 2000). In some of these cases, such as Cotnam, State law has been an important consideration in determining that the claimant has no claim of right to the recovery.

³⁶³ Section 162(o).

³⁶⁴ Sec. 460(a).

³⁶⁵ Pub. Law No. 100-203 (1987).

³⁶⁶ Treas. Reg. 1.460-4(c)(1).

³⁶⁷ Sec. 1031(a)(1).

³⁶⁸ Section 1400E was added by section 101(a) of the Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).

³⁶⁹ Under present law, corporate income is taxed at graduated rates ranging from 15 percent to 35 percent. A corporation is also entitled to a dividends-received deduction of at least 70 percent for dividends received from other corporations. Thus, the maximum corporate rate on dividends received from other corporations is 10.5 percent. Individual income is generally taxed at graduated rates up to 35 percent. However, dividends are taxed at a maximum rate of 15 percent. The maximum individual rates are scheduled to return to 39.6 percent on dividends as well as on other ordinary income after the year 2009.

³⁷⁰ Sec. 533.

³⁷¹ Treas. Reg. sec. 1.533-1(a).

³⁷² Treas. Reg. secs. 1. 537-1, 1.537-2 and 1.537-3.

³⁷³ See, e.g., Bardahl Manufacturing Corp., 24 TCM 1030 (1965); Bardahl International Corp., 25 TCM 935 (1966); Empire Steel Castings, Inc., 33 TCM 155 (1974); Alma- Piston Co. v. Commissioner, 579 F.2d 1000 (6^th Cir. 1978); C.E. Hooper, Inc. 76-1 USTC par. 9185(Ct. Cl. 1976).

³⁷⁴ Sec. 115.

³⁷⁵ Sec. 103.

³⁷⁶ Secs. 141-150.

³⁷⁷ Sec. 7872.

³⁷⁸ A "qualified continuing care facility" is defined as one or more facilities (1) which are designed to provide services under continuing care contracts, and (2) substantially all of the residents of which are covered by continuing care contracts. However, a facility is not a qualified continuing care facility unless substantially all facilities which are used to provide services that are required to be provided under a continuing care contract are owned or operated by the borrower. In addition, nursing homes do not constitute continuing care facilities (sec. 7872(g)(4)).

³⁷⁹ A "continuing care contract" is defined as a written contract between an individual and a qualified continuing care facility under which (1) the individual or individual's spouse may use a qualified continuing care facility for their life or lives, (2) the individual or individual's spouse (a) will first reside in a separate, independent living unit with additional facilities outside such unit for the providing of meals and other personal care, and (b) then will be provided longterm and skilled nursing care as the health of such individual or individual's spouse requires, and (3) no additional substantial payment is required if such individual or individual's spouse requires increased personal care services or long-term and skilled nursing care.

³⁸⁰ Rev. Rul. 2003-118, 2003-47 I.R.B. 1095.

³⁸¹ Tech. Adv. Mem. 9521001 (Dec. 7, 1994).

³⁸² See, sections 6, 7, and 13 of the FLSA, 29 U.S.C. sections 206, 207, and 213 (2004).

³⁸³ 69 Fed. Reg. 22,122 (April 23, 2004).

³⁸⁴ Sec. 420.

³⁸⁵ The value of plan assets for this purpose is the lesser of fair market value or actuarial value.

³⁸⁶ In the case of plan years beginning before January 1, 2004, excess assets generally means the excess, if any, of the value of the plan's assets over the greater of (1) the lesser of (a) the accrued liability under the plan (including normal cost) or (b) 170 percent of the plan's current liability (for 2003), or (2) 125 percent of the plan's current liability. The current liability full funding limit was repealed for years beginning after 2003. Under the general sunset provision of EGTRRA, the limit is reinstated for years after 2010.

³⁸⁷ Treas. Reg. sec. 1.420-1(a).

³⁸⁸ Treas. Reg. sec. 1.420-1(b)(1).

³⁸⁹ Treas. Reg. sec. 1.420-1(b)(2).

³⁹⁰ If a geothermal facility or solar facility claims credit for any year under section 45 of the Code, the facility is precluded from claiming any investment credit under section 48 of the Code in the future.

³⁹¹ A hybrid-electric vehicle may qualify as a clean-fuel vehicle under present law.

³⁹² Each 3,413 Btu of heat content of the fuel or chemical is treated as equivalent to one kilowatt-hour of electricity.

³⁹³ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785).

³⁹⁴ Duke Energy v. Commissioner, 172 F.3d 1255 (10^th Cir. 1999), rev'g 109 T.C. 416 (1997). Saginaw Bay Pipeline Co. v. United States, 2003 FED App. 0259P (6th Cir.) rev'g 124 F. Supp. 2d 465 (E.D. Mich. 2001). See also True v. United States, 97-2 U.S. Tax Cas. ( CCH ) par. 50,946 (D. Wyo. 1997).

³⁹⁵ Clajon Gas Co., L.P. v. Commissioner, 119 T.C. 197 (2002).

³⁹⁶ Treas. Reg. sec. 1.611-1(b)(1).

³⁹⁷ Secs. 611-613.

³⁹⁸ Sec. 613A.

³⁹⁹ Sec. 613A(c).

⁴⁰⁰ Sec. 613(a).

⁴⁰¹ The House bill predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

⁴⁰² The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a number of extensions to expiring provisions.

⁴⁰³ The value of the section 29 credit for production in 2003 was $6.40 per barrel of oil equivalent. The $3.00 credit for gas from a tight formation is not adjusted for inflation.

⁴⁰⁴ The daily average is computed as total production divided by the total number of days the well or facility was in production during the year. Days before the date the project is placed in service are not taken into account in determining the daily average.

⁴⁰⁵ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785).

⁴⁰⁶ Natural gas entering a gas processing facility is not considered to have entered a pipeline. Rather, the credit applies only to pipeline quality gas at the time of entry into the pipeline.

⁴⁰⁷ In practice, the $1.35-figure also is indexed for inflation, as $1.35 is the sum of the 52-cent credit and the 83-cent price.

The bill provides that the Secretary can compute the inflation adjustment factor for a calendar year in the fourth quarter of the preceding year. For example, the adjustment for 2006 is calculated as the 2005 GDP deflator over the 2004 GDP deflator, where the 2004 GDP deflator is the value of the GDP deflator on June 30, 2004 (as determined by the latest available revision from the Department of Commerce prior to October 1, 2004). Likewise, the 2005 deflator is the value of the GDP deflator on June 30, 2005.

⁴⁰⁸ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785).

⁴⁰⁹ Treas. Reg. sec. 1.148-1(e)(2)(iii).

⁴¹⁰ As originally enacted in 1984, a qualified fund paid tax on its earnings at the top corporate rate and, as a result, there was no present-value tax benefit of making deductible contributions to a qualified fund. Also, as originally enacted, the funds in the trust could be invested only in certain low risk investments. Subsequent amendments to the provision have reduced the rate of tax on a qualified fund to 20 percent and removed the restrictions on the types of permitted investments that a qualified fund can make.

⁴¹¹ Taxpayers are required to include in gross income customer charges for decommissioning costs (sec. 88).

⁴¹² Treas. reg. sec. 1.468A-6.

⁴¹³ Treas. reg. sec. 1.468A-6(f).

⁴¹⁴ These funds are generally referred to as "nonqualified funds."

⁴¹⁵ The ability to transfer property into a qualified fund under this special rule is available only to the extent the taxpayer has not obtained a new ruling amount incorporating the repeal of the limitation that a qualified fund only accumulate an amount sufficient to pay for decommissioning costs of a nuclear powerplant incurred during the period that the fund is in existence (generally post-1984 decommissioning costs).

⁴¹⁶ A taxpayer recognizes no gain or loss on the contribution of property to a qualified fund under this special rule. The qualified fund will take a transferred (carryover) basis in such property. Correspondingly, a taxpayer's deduction (over the estimated life of the nuclear powerplant) is to be based on the adjusted tax basis of the property contributed rather than the fair market value of such property.

⁴¹⁷ Announcement 96-24, "Proposed Examination Guidelines Regarding Rural Electric Cooperatives," 1996-16 I.R.B. 35.

⁴¹⁸ See Rev. Rul. 83-135, 1983-2 C.B. 149.

⁴¹⁹ Rev. Rul. 72-36, 1972-1 C.B. 151.

⁴²⁰ Under the Senate amendment, references to FERC are treated as including references to the Public Utility Commission of Texas or the Rural Utilities Service.

⁴²¹ Under the conference agreement, references to FERC are treated as including references to the Public Utility Commission of Texas.

⁴²² The applicable period for a taxpayer to reinvest the proceeds is four years after the close of the taxable year in which the qualifying electric transmission transaction occurs.

⁴²³ For example, a regional transmission organization, an independent system operator, or and independent transmission company.

⁴²⁴ The provision also provides that the installment sale rules shall not apply to any qualifying electric transmission transaction for which a taxpayer elects the application of this provision.

⁴²⁵ 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. It is intended that, when evaluating whether property qualifies as "original use," the factors used to determine whether property qualified as "new section 38 property" for purposes of the investment tax credit would apply. See Treasury Regulation 1.48-2. Thus, it is intended that additional capital expenditures incurred to recondition or rebuild acquired property (or owned property) would satisfy the "original use" requirement. However, the cost of reconditioned or rebuilt property acquired by the taxpayer would not satisfy the "original use" requirement. For example, if on August 11, 2005, a taxpayer buys from RCM for $200,000 transmission lines that have been previously used by RCM. Subsequent to the purchase, the taxpayer makes an expenditure on the property of $50,000 of the type that must be capitalized. Regardless of whether the $50,000 is added to the basis of such property or is capitalized as a separate asset, such amount would be treated as satisfying the "original use" requirement and would be eligible for the reduced recovery period. No part of the $200,000 purchase price qualifies for the reduced recovery period.

⁴²⁶ Sec. 46.

⁴²⁷ Sec. 38(b)(1).

⁴²⁸ 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 enactment of the Revenue Reconciliation Act of 1990) apply.

⁴²⁹ It is expected that the Treasury Secretary will issue regulations applying the term "substantially all" in this context and will not be bound in this regard by interpretations of the term in other contexts under the Code.

⁴³⁰ Since the top-tier foreign corporation is treated for all purposes of the Code as domestic, the shareholder-level "toll charge" of sec. 367(a) does not apply to these inversion transactions. However, with respect to inversion transactions completed before 2004, regulated investment companies and certain similar entities are allowed to elect to recognize gain as if sec. 367(a) did apply.

⁴³¹ Acquisitions with respect to a domestic corporation or partnership are deemed to be "pursuant to a plan" if they occur within the four-year period beginning on the date which is two years before the ownership threshold under the provision is met with respect to such corporation or partnership.

⁴³² Since the top-tier foreign corporation is treated for all purposes of the Code as domestic, the shareholder-level "toll charge" of sec. 367(a) does not apply to these inversion transactions.

⁴³³ Nonstatutory stock options refer to stock options other than incentive stock options and employee stock purchase plans, the taxation of which is determined under sections 421-424.

⁴³⁴ If an individual receives a grant of a nonstatutory option that has a readily ascertainable fair market value at the time the option is granted, the excess of the fair market value of the option over the amount paid for the option is included in the recipient's gross income as ordinary income in the first taxable year in which the option is either transferable or not subject to a substantial risk of forfeiture.

⁴³⁵ Under section 83, such amount is includable in gross income in the first taxable year in which the rights to the stock are transferable or are not subject to substantial risk of forfeiture.

⁴³⁶ An expanded affiliated group is an affiliated group (under section 1504) except that such group is determined without regard to the exceptions for certain corporations and is determined applying a greater than 50 percent threshold, in lieu of the 80-percent test.

⁴³⁷ An officer is defined as the president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions.

⁴³⁸ Under the provision, any transfer of property is treated as a payment and any right to a transfer of property is treated as a right to a payment.

⁴³⁹ Sec. 845(a).

⁴⁴⁰ See S. Rep. No. 97-494, 97th Cong., 2d Sess., 337 (1982) (describing provisions relating to the repeal of modified coinsurance provisions).

⁴⁴¹ The authority to allocate, recharacterize or make other adjustments was granted in connection with the repeal of provisions relating to modified coinsurance transactions.

⁴⁴² Under present law, an individual's U.S. residency is considered terminated for U.S. Federal tax purposes when the individual ceases to be a lawful permanent resident under the immigration law (or is treated as a resident of another country under a tax treaty and does not waive the benefits of such treaty).

⁴⁴³ For this purpose, however, U.S.-source income has a broader scope than it does typically in the Code.

⁴⁴⁴ The income tax liability and net worth thresholds under section 877(a)(2) for 2004 are $124,000 and $622,000, respectively. See Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.

⁴⁴⁵ These provisions reflect recommendations contained in Joint Committee on Taxation, Review of the Present Law Tax and Immigration Treatment of Relinquishment of Citizenship and Termination of Long-Term Residency, (JCS-2-03), February 2003.

⁴⁴⁶ Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).

⁴⁴⁷ An individual has such a relationship to a foreign country if the individual becomes a citizen or resident of the country in which (1) the individual becomes fully liable for income tax or (2) the individual was born, such individual's spouse was born, or either of the individual's parents was born.

⁴⁴⁸ An individual has a minimal prior physical presence in the United States if the individual was physically present for no more than 30 days during each year in the ten-year period ending on the date of loss of United States citizenship or termination of residency. However, an individual is not treated as being present in the United States on a day if (1) the individual is a teacher or trainee, a student, a professional athlete in certain circumstances, or a foreign government-related individual or (2) the individual remained in the United States because of a medical condition that arose while the individual was in the United States. Sec. 7701(b)(3)(D)(ii).

⁴⁴⁹ Application of the provision is not limited to an interest that meets the definition of property under section 83 (relating to property transferred in connection with the performance of services).

⁴⁵⁰ Recently issued temporary regulations under section 6043 (relating to information reporting with respect to liquidations, recapitalizations, and changes in control) impose information reporting requirements with respect to certain taxable inversion transactions, and proposed regulations would expand these requirements more generally to taxable transactions occurring after the proposed regulations are finalized.

⁴⁵¹ In the case of a nominee, the nominee must furnish the information to the shareholder in the manner prescribed by the Treasury Secretary.

⁴⁵² On February 27, 2003, the Treasury Department and the IRS released final regulations regarding the disclosure of reportable transactions. In general, the regulations are effective for transactions entered into on or after February 28, 2003.

The discussion of present law refers to the new regulations. The rules that apply with respect to transactions entered into on or before February 28, 2003, are contained in Treas. Reg. sec. 1.6011-4T in effect on the date the transaction was entered into.

⁴⁵³ The regulations clarify that the term "substantially similar" includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Further, the term must be broadly construed in favor of disclosure. Treas. Reg. sec. 1.6011-4(c)(4).

⁴⁵⁴ Treas. Reg. sec. 1.6011-4(b)(2).

⁴⁵⁵ Treas. Reg. sec. 1.6011-4(b)(3).

⁴⁵⁶ Treas. Reg. sec. 1.6011-4(b)(4).

⁴⁵⁷ Treas. Reg. sec. 1.6011-4(b)(5). Rev. Proc. 2003-24, 2003-11 I.R.B. 599, exempts certain types of losses from this reportable transaction category.

⁴⁵⁸ The significant book-tax category applies only to taxpayers that are reporting companies under the Securities Exchange Act of 1934 or business entities that have $250 million or more in gross assets.

⁴⁵⁹ Treas. Reg. sec. 1.6011-4(b)(6). Rev. Proc. 2003-25, 2003-11 I.R.B. 601, exempts certain types of transactions from this reportable transaction category.

⁴⁶⁰ Treas. Reg. sec. 1.6011-4(b)(7).

⁴⁶¹ Section 6664(c) provides that a taxpayer can avoid the imposition of a section 6662 accuracy-related penalty in cases where the taxpayer can demonstrate that there was reasonable cause for the underpayment and that the taxpayer acted in good faith. Regulations under sections 6662 and 6664 provide that a taxpayer's failure to disclose a reportable transaction is a strong indication that the taxpayer failed to act in good faith, which would bar relief under section 6664(c).

⁴⁶² The House bill provides that, except as provided in regulations, a listed transaction means a reportable transaction, which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011. For this purpose, it is expected that the definition of "substantially similar" will be the definition used in Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may modify this definition (as well as the definitions of "listed transaction" and "reportable transactions") as appropriate.

⁴⁶³ This does not limit the ability of a taxpayer to challenge whether a penalty is appropriate (e.g., a taxpayer may litigate the issue of whether a transaction is a reportable transaction (and thus subject to the penalty if not disclosed) or not a reportable transaction (and thus not subject to the penalty)).

⁴⁶⁴ A reportable avoidance transaction is a reportable transaction with a significant tax avoidance purpose.

⁴⁶⁵ Sec. 6662.

⁴⁶⁶ Sec. 6662(d)(2)(B).

⁴⁶⁷ Sec. 6662(d)(2)(C).

⁴⁶⁸ Sec. 6664(c).

⁴⁶⁹ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 1.6664-4(c).

⁴⁷⁰ The terms "reportable transaction" and "listed transaction" have the same meanings as used for purposes of the penalty for failing to disclose reportable transactions.

⁴⁷¹ For this purpose, any reduction in the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable income.

⁴⁷² See the previous discussion regarding the penalty for failing to disclose a reportable transaction.

⁴⁷³ Under the House bill, the term "material advisor" (defined below in connection with the new information filing requirements for material advisors) means any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, or carrying out any reportable transaction, and who derives gross income in excess of $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons ($250,000 in any other case).

⁴⁷⁴ This situation could arise, for example, when an advisor has an arrangement or understanding (oral or written) with an organizer, manager, or promoter of a reportable transaction that such party will recommend or refer potential participants to the advisor for an opinion regarding the tax treatment of the transaction.

⁴⁷⁵ An advisor should not be treated as participating in the organization of a transaction if the advisor's only involvement with respect to the organization of the transaction is the rendering of an opinion regarding the tax consequences of such transaction. However, such an advisor may be a "disqualified tax advisor" with respect to the transaction if the advisor participates in the management, promotion or sale of the transaction (or if the advisor is compensated by a material advisor, has a fee arrangement that is contingent on the tax benefits of the transaction, or as determined by the Secretary, has a continuing financial interest with respect to the transaction).

⁴⁷⁶ Under the Senate amendment, the term "material advisor" (defined below in connection with the new information filing requirements for material advisors) means any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring or carrying out any reportable transaction, and who derives gross income in excess of $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons ($250,000 in any other case).

⁴⁷⁷ Sec. 6501(a).

⁴⁷⁸ For this purpose, a return that is filed before the date on which it is due is considered to be filed on the required due date (sec. 6501(b)(1)).

⁴⁷⁹ Sec. 6501(e).

⁴⁸⁰ Sec. 6501(c).

⁴⁸¹ The term "listed transaction" has the same meaning as described in a previous provision regarding the penalty for failure to disclose reportable transactions.

⁴⁸² If the Treasury Department lists a transaction in a year subsequent to the year in which a taxpayer entered into such transaction and the taxpayer's tax return for the year the transaction was entered into is closed by the statute of limitations prior to the date the transaction became a listed transaction, this provision does not re-open the statute of limitations with respect to such transaction for such year. However, if the purported tax benefits of the transaction are recognized over multiple tax years, the provision's extension of the statute of limitations shall apply to such tax benefits in any subsequent tax year in which the statute of limitations had not closed prior to the date the transaction became a listed transaction.

⁴⁸³ Sec. 6111(a).

⁴⁸⁴ The tax shelter ratio is, with respect to any year, the ratio that the aggregate amount of the deductions and 350 percent of the credits, which are represented to be potentially allowable to any investor, bears to the investment base (money plus basis of assets contributed) as of the close of the tax year.

⁴⁸⁵ Sec. 6111(c).

⁴⁸⁶ Sec. 6111(d).

⁴⁸⁷ Treas. Reg. sec. 301.6111-2(b)(2).

⁴⁸⁸ Treas. Reg. sec. 301.6111-2(b)(3).

⁴⁸⁹ Treas. Reg. sec. 301.6111-2(b)(4).

⁴⁹⁰ The regulations provide that the determination of whether an arrangement is offered under conditions of confidentiality is based on all the facts and circumstances surrounding the offer. If an offeree's disclosure of the structure or tax aspects of the transaction are limited in any way by an express or implied understanding or agreement with or for the benefit of a tax shelter promoter, an offer is considered made under conditions of confidentiality, whether or not such understanding or agreement is legally binding. Treas. Reg. sec. 301.6111-2(c)(1).

⁴⁹¹ Sec. 6707.

⁴⁹² The terms "reportable transaction" and "listed transaction" have the same meaning as previously described in connection with the taxpayer-related provisions.

⁴⁹³ See the previous discussion regarding the disclosure requirements under new section 6707A.

⁴⁹⁴ The terms "reportable transaction" and "listed transaction" have the same meaning as previously described in connection with the taxpayer-related provisions.

⁴⁹⁵ The Secretary's present-law authority to postpone certain tax-related deadlines because of Presidentially-declared disasters (sec. 7508A) will also encompass the authority to postpone the reporting deadlines established by the provision.

⁴⁹⁶ Sec. 6112.

⁴⁹⁷ Treas. Reg. sec. 301.6112-1.

⁴⁹⁸ A special rule applies the list maintenance requirements to transactions entered into after February 28, 2000 if the transaction becomes a listed transaction (as defined in Treas. Reg. 1.6011-4) after February 28, 2003.

⁴⁹⁹ Treas. Reg. sec. 301.6112-1(c)(1).

⁵⁰⁰ Treas. Reg. sec. 301.6112-1(c)(2) and (3).

⁵⁰¹ Treas. Reg. sec. 301.6112-1(b).

⁵⁰² Sec. 6112(c)(2).

⁵⁰³ The term "material advisor" has the same meaning as when used in connection with the requirement to file an information return under section 6111.

⁵⁰⁴ The terms "reportable transaction" and "listed transaction" have the same meaning as previously described in connection with the taxpayer-related provisions.

⁵⁰⁵ In no event will failure to maintain a list be considered reasonable cause for failing to make a list available to the Secretary.

⁵⁰⁶ Sec. 6700.

⁵⁰⁷ Sec. 6662(a) and (d)(1)(A).

⁵⁰⁸ Sec. 7408.

⁵⁰⁹ Sec. 6707, as amended by other provisions of this bill.

⁵¹⁰ Sec. 6708, as amended by other provisions of this bill.

⁵¹¹ 31 U.S.C. sec. 5314.

⁵¹² 31 U.S.C. sec. 5321(a)(5).

⁵¹³ 31 U.S.C. sec. 5322.

⁵¹⁴ A Report to Congress in Accordance with Sec. 361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, April 26, 2002.

⁵¹⁵ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 107-56).

⁵¹⁶ 31 U.S.C. sec. 330.

⁵¹⁷ Helvering v. Horst, 311 U.S. 112 (1940).

⁵¹⁸ Depending on the facts, the IRS also could determine that a variety of other Codebased and common law-based authorities could apply to income stripping transactions, including: (1) sections 269, 382, 446(b), 482, 701, or 704 and the regulations thereunder; (2) authorities that recharacterize certain assignments or accelerations of future payments as financings; (3) business purpose, economic substance, and sham transaction doctrines; (4) the step transaction doctrine; and (5) the substance-over-form doctrine. See Notice 95-53, 1995-2 C.B. 334 (accounting for lease strips and other stripping transactions).

⁵¹⁹ However, in Estate of Stranahan v. Commissioner, 472 F.2d 867 (6th Cir. 1973), the court held that where a taxpayer sold a carved-out interest of stock dividends, with no personal obligation to produce the income, the transaction was treated as a sale of an income interest.

⁵²⁰ Sec. 1286.

⁵²¹ Sec. 1286(e).

⁵²² Sec. 1286(a).

⁵²³ Sec. 1286(b). Similar rules apply in the case of any person whose basis in any bond or coupon is determined by reference to the basis in the hands of a person who strips the bond.

⁵²⁴ Special rules are provided with respect to stripping transactions involving tax-exempt obligations that treat OID (computed under the stripping rules) in excess of OID computed on the basis of the bond's coupon rate (or higher rate if originally issued at a discount) as income from a non-tax-exempt debt instrument (sec. 1286(d)).

⁵²⁵ Sec. 305(e)(5).

⁵²⁶ Sec. 305(e)(1).

⁵²⁷ Sec. 305(e)(3).

⁵²⁸ 2002-43 I.R.B. 753.

⁵²⁹ 2002-9 I.R.B. 572.

⁵³⁰ Sec. 721.

⁵³¹ Sec. 723.

⁵³² Sec. 722.

⁵³³ Sec. 704(c)(1)(A).

⁵³⁴ If there is an insufficient amount of an item to allocate to the noncontributing partners, Treasury regulations allow for curative or remedial allocations to remedy this insufficiency. Treas. Reg. sec. 1.704-3(c) and (d).

⁵³⁵ Treas. Reg. sec. 1.704-3(a)(7).

⁵³⁶ Sec. 743(a).

⁵³⁷ Sec. 743(b).

⁵³⁸ Sec. 731(a) and (b).

⁵³⁹ Sec. 732(b).

⁵⁴⁰ Sec. 732(a).

⁵⁴¹ Sec. 732 (a)(1) and (c).

⁵⁴² Sec. 732(d).

⁵⁴³ Treas. Reg. sec. 1.732-1(d)(4).

⁵⁴⁴ Sec. 734(a).

⁵⁴⁵ Sec. 734(b).

⁵⁴⁶ It is intended that a corporation succeeding to attributes of the contributing corporate partner under section 381 shall be treated in the same manner as the contributing partner.

⁵⁴⁷ Section 3(a)(1)(A) of the Act provides, "when used in this title, 'investment company' means any issuer which is or hold itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities."

⁵⁴⁸ See Treas. Reg. sec. 1.860G-2(a)(3), providing that a sponsor's belief is not reasonable if the sponsor actually knows or has reason to know that the requirement is not met, or if the requirement is later discovered not to have been met.

⁵⁴⁹ See Rev. Proc. 2001-36, 2001-1 C.B. 1326. Definitional requirements of a masterfeeder structure include that there is a portfolio of assets that is treated as a partnership for Federal tax purposes and that is registered as an investment company under the Investment Company Act of 1940, each partner of which is a feeder fund that is a registered investment company ( RIC ) for Federal tax purposes, or is an investment advisor, principal underwriter, or manager of the portfolio. The conferees believe that these restrictions (and other applicable restrictions) serve to limit potential avoidance of the section 704(c) provision of the conference agreement through use of the aggregate method in the case of master-feeder structures.

⁵⁵⁰ Sec. 721(a).

⁵⁵¹ Sec. 731(a) and (b).

⁵⁵² Sec. 732(b).

⁵⁵³ Sec. 754.

⁵⁵⁴ Sec. 755(a).

⁵⁵⁵ Sec. 755(b).

⁵⁵⁶ Sections 860H through 860L.

⁵⁵⁷ Once an election to be a FASIT is made, the election applies from the date specified in the election and all subsequent years until the entity ceases to be a FASIT. If an election to be a FASIT is made after the initial year of an entity, all of the assets in the entity at the time of the FASIT election are deemed contributed to the FASIT at that time and, accordingly, any gain (but not loss) on such assets will be recognized at that time.

⁵⁵⁸ Sec. 351.

⁵⁵⁹ Sec. 358.

⁵⁶⁰ Secs. 334(b) and 362(a) and (b).

⁵⁶¹ The Senate amendment also applies to transfers from a tax-exempt organization where gain or loss would not be subject to tax if the property were sold by the organization.

⁵⁶² Secs. 951-964.

⁵⁶³ Sec. 951(a)(1)(B).

⁵⁶⁴ Sec. 956(a).

⁵⁶⁵ Secs. 956 and 959.

⁵⁶⁶ Secs. 951(a)(1)(B) and 959.

⁵⁶⁷ Sec. 956(c)(1).

⁵⁶⁸ Sec. 956(c)(2).

⁵⁶⁹ 286 F.3d 324 (6th Cir. 2002), rev'g 113 T.C. 169 (1999).

⁵⁷⁰ A special rule provides that a mutual property and casualty insurance company is eligible to be exempt from Federal income tax under the provision if (a) its gross receipts for the taxable year do not exceed $150,000, and (b) the premiums received for the taxable year are greater than 35 percent of its gross receipts, provided certain requirements are met. The requirements are that no employee of the company or member of the employee's family is an employee of another company that is exempt from tax under section 501(c)(15) (or would be, but for this rule).

⁵⁷¹ The provision preserves the transition rule that was provided under section 206(e) of the Pension Funding Equity Act of 2004 (Pub. L. No. 108-218) relating to companies in receivership or liquidation.

⁵⁷² Sec. 163(a).

⁵⁷³ The definitions of these transactions are the same as those previously described in connection with the provision elsewhere in this bill to modify the accuracy-related penalty for listed and certain reportable transactions.

⁵⁷⁴ Sec. 163(e)(1).

⁵⁷⁵ Sec. 163(e)(3).

⁵⁷⁶ Treas. Reg. sec. 1.163-12(b)(3). In the case of a PFIC, the regulations further require that the person owing the amount at issue have in effect a qualified electing fund election pursuant to section 1295 with respect to the PFIC.

⁵⁷⁷ Sec. 267(a)(2).

⁵⁷⁸ Treas. Reg. sec. 1.267(a)-3(b)(1), -3(c).

⁵⁷⁹ Treas. Reg. sec. 1.267(a)-3(c)(4).

⁵⁸⁰ Section 413 of the conference agreement repeals the foreign personal holding company regime, effective for taxable years of foreign corporations beginning after December 31, 2004, and taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end.

⁵⁸¹ Sec. 1501.

⁵⁸² Sec. 1502.

⁵⁸³ Regulations issued under the authority of section 1502 are considered to be "legislative" regulations rather than "interpretative" regulations, and as such are usually given greater deference by courts in case of a taxpayer challenge to such a regulation. See, S. Rep. No. 960, 70^th Cong., 1^st Sess. at 15 (1928), describing the consolidated return regulations as "legislative in character". The Supreme Court has stated that "... legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984) (involving an environmental protection regulation). For examples involving consolidated return regulations, see, e.g., Wolter Construction Company v. Commissioner, 634 F.2d 1029 (6^th Cir. 1980); Garvey, Inc. v. United States, 1 Ct. Cl. 108 (1983), aff'd 726 F.2d 1569 (Fed. Cir. 1984), cert. denied, 469 U.S. 823 (1984). Compare, e.g., Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), describing different standards of review. The case did not involve a consolidated return regulation.

⁵⁸⁴ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. App. LEXIS 23207 (Fed. Cir. Oct. 3, 2001).

⁵⁸⁵ Prior to this decision, there had been a few instances involving prior laws in which certain consolidated return regulations were held to be invalid. See, e.g., American Standard, Inc. v. United States, 602 F.2d 256 (Ct. Cl. 1979), discussed in the text infra. See also Union Carbide Corp. v. United States, 612 F.2d 558 (Ct. Cl. 1979), and Allied Corporation v. United States, 685 F. 2d 396 (Ct. Cl. 1982), all three cases involving the allocation of income and loss within a consolidated group for purposes of computation of a deduction allowed under prior law by the Code for Western Hemisphere Trading Corporations. See also Joseph Weidenhoff v. Commissioner, 32 T.C. 1222, 1242-1244 (1959), involving the application of certain regulations to the excess profits tax credit allowed under prior law, and concluding that the Commissioner had applied a particular regulation in an arbitrary manner inconsistent with the wording of the regulation and inconsistent with even a consolidated group computation. Cf. Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685 (1954), concluding that the substance of a transaction was an acquisition of assets rather than stock. Thus, a regulation governing basis of the assets of consolidated subsidiaries did not apply to the case. See also General Machinery Corporation v. Commissioner, 33 B.T.A. 1215 (1936); Lefcourt Realty Corporation, 31 B.T.A. 978 (1935); Helvering v. Morgans, Inc., 293 U.S. 121 (1934), interpreting the term "taxable year."

⁵⁸⁶ Treas. Reg. sec. 1.1502-20(c)(1)(iii).

⁵⁸⁷ Treasury Regulation section 1.1502-20, generally imposing certain "loss disallowance" rules on the disposition of subsidiary stock, contained other limitations besides the "duplicated loss" rule that could limit the loss available to the group on a disposition of a subsidiary's stock. Treasury Regulation section 1.1502-20 as a whole was promulgated in connection with regulations issued under section 337(d), principally in connection with the socalled General Utilities repeal of 1986 (referring to the case of General Utilities & Operating Company v. Helvering, 296 U.S. 200 (1935)). Such repeal generally required a liquidating corporation, or a corporation acquired in a stock acquisition treated as a sale of assets, to pay corporate level tax on the excess of the value of its assets over the basis. Treasury regulation section 1.1502-20 principally reflected an attempt to prevent corporations filing consolidated returns from offsetting income with a loss on the sale of subsidiary stock. Such a loss could result from the unique upward adjustment of a subsidiary's stock basis required under the consolidated return regulations for subsidiary income earned in consolidation, an adjustment intended to prevent taxation of both the subsidiary and the parent on the same income or gain. As one example, absent a denial of certain losses on a sale of subsidiary stock, a consolidated group could obtain a loss deduction with respect to subsidiary stock, the basis of which originally reflected the subsidiary's value at the time of the purchase of the stock, and that had then been adjusted upward on recognition of any built-in income or gain of the subsidiary reflected in that value. The regulations also contained the duplicated loss factor addressed by the court in Rite Aid. The preamble to the regulations stated: "it is not administratively feasible to differentiate between loss attributable to built-in gain and duplicated loss." T.D. 8364, 1991-2 C.B. 43, 46 (Sept. 13, 1991). The government also argued in the Rite Aid case that duplicated loss was a separate concern of the regulations. 255 F.3d at 1360.

⁵⁸⁸ For example, the court stated: "The duplicated loss factor ... addresses a situation that arises from the sale of stock regardless of whether corporations file separate or consolidated returns. With I.R.C. secs. 382 and 383, Congress has addressed this situation by limiting the subsidiary's potential future deduction, not the parent's loss on the sale of stock under I.R.C. sec. 165." 255 F.3d 1357, 1360 (Fed. Cir. 2001).

⁵⁸⁹ S. Rep. No. 960, 70^th Cong., 1^st Sess. 15 (1928). Though not quoted by the court in Rite Aid, the same Senate report also indicated that one purpose of the consolidated return authority was to permit treatment of the separate corporations as if they were a single unit, stating "The mere fact that by legal fiction several corporations owned by the same shareholders are separate entities should not obscure the fact that they are in reality one and the same business owned by the same individuals and operated as a unit." S. Rep. No. 960, 70^th Cong., 1^st Sess. 29 (1928).

⁵⁹⁰ American Standard, Inc. v. United States, 602 F.2d 256, 261 (Ct. Cl. 1979). That case did not involve the question of separate returns as compared to a single return approach. It involved the computation of a Western Hemisphere Trade Corporation ("WHTC") deduction under prior law (which deduction would have been computed as a percentage of each WHTC's taxable income if the corporations had filed separate returns), in a case where a consolidated group included several WHTCs as well as other corporations. The question was how to apportion income and losses of the admittedly consolidated WHTCs and how to combine that computation with the rest of the group's consolidated income or losses. The court noted that the new, changed regulations approach varied from the approach taken to a similar problem involving public utilities within a group and previously allowed for WHTCs. The court objected that the allocation method adopted by the regulation allowed non-WHTC losses to reduce WHTC income. However, the court did not disallow a method that would net WHTC income of one WHTC with losses of another WHTC, a result that would not have occurred under separate returns. Nor did the court expressly disallow a different fractional method that would net both income and losses of the WHTCs with those of other corporations in the consolidated group. The court also found that the regulation had been adopted without proper notice.

⁵⁹¹ Rite Aid, 255 F.3d at 1360.

⁵⁹² See Temp. Reg. Sec. 1.1502-20T(i)(2), Temp. Reg. Sec. 1.337(d)-2T, and Temp. Reg. Sec. 1.1502-35T. The Treasury Department has also indicated its intention to continue to study all the issues that the original loss disallowance regulations addressed (including issues of furthering single entity principles) and possibly issue different regulations (not including the particular approach of Treas. Reg. Sec. 1.1502-20(c)(1)(iii)) on the issues in the future. See, e.g. Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 11034 (March 12, 2002); REG -102740-02, 67 F.R. 11070 (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644 (March 25, 2002); REG -131478-02, 67 F.R. 65060 (October 18, 2002); T.D. 9048, 68 F.R. 12287 (March 14, 2003); and T.D. 9118, REG -153172-03 (March 17, 2004).

⁵⁹³ Treas. Reg. Sec. 1.1502-20(c)(1)(iii).

⁵⁹⁴ The provision is not intended to overrule the current Treasury Department regulations, which allow taxpayers in certain circumstances for the past to follow Treasury Regulations Section 1.1502-20(c)(1)(iii), if they choose to do so. Temp. Reg. Sec. 1.1502-20T(i)(2).

⁵⁹⁵ See, e.g., Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); Temp. Reg. Sec. 1.337(d)-2T, (T.D. 8984, 67 F.R. 11034 (March 12, 2002) and T.D. 8998, 67 F.R. 37998 (May 31, 2002)); REG -102740-02, 67 F.R. 11070 (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644 (March 25, 2002); REG -131478-02, 67 F.R. 65060 (October 18, 2002); Temp. Reg. Sec. 1.1502-35T (T.D. 9048, 68 F.R. 12287 (March 14, 2003)); and T.D. 9118, REG -153172-03 (March 17, 2004). In exercising its authority under section 1502, the Secretary is also authorized to prescribe rules that protect the purpose of General Utilities repeal using presumptions and other simplifying conventions.

⁵⁹⁶ Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978).

⁵⁹⁷ Sec. 168(g)(3)(A). Under present law, section 168(g)(3)(C) states that the recovery period of "qualified technological equipment" is five years.

⁵⁹⁸ Sec. 168(h)(1).

⁵⁹⁹ Sec. 168(h)(2).

⁶⁰⁰ Sec. 7701(e) provides that a service contract will not be respected, and instead will be treated as a lease of property, if such contract is properly treated as a lease taking into account all relevant factors. The relevant factors include, among others, the service recipient controls the property, the service recipient is in physical possession of the property, the service provider does not bear significant risk of diminished receipts or increased costs if there is nonperformance, the property is not used to concurrently provide services to other entities, and the contract price does not substantially exceed the rental value of the property.

⁶⁰¹ Sec. 168(h)(1)(C).

⁶⁰² Sec. 168(h)(3). However, the exception does not apply if part or all of the qualified technological equipment is financed by a tax-exempt obligation, is sold by the tax-exempt entity (or related party) and leased back to the tax-exempt entity (or related party), or the tax-exempt entity is the United States or any agency or instrumentality of the United States.

⁶⁰³ Sec. 168(g)(3)(C).

⁶⁰⁴ Sec. 168(i)(2).

⁶⁰⁵ The House bill defines a tax-exempt entity as under present law. Thus, it includes Federal, State, local, and foreign governmental units, charities, foreign entities or persons.

⁶⁰⁶ A service contract involving property that previously was leased to the tax-exempt entity is not part of the same transaction as the preceding leasing arrangement (and, thus, is not included in the lease term of such arrangement) if the service contract was not included in the terms and conditions, or contemplated at the inception, of the preceding leasing arrangement.

⁶⁰⁷ For purposes of the House bill, a service contract does not include an arrangement for the provision of services if the leased property or substantially similar property is not utilized to provide such services. For example, if at the conclusion of a lease term, a tax-exempt lessee purchases property from the taxpayer and enters into an agreement pursuant to which the taxpayer maintains the property, the maintenance agreement will not be included in the lease term for purposes of the 125-percent computation.

⁶⁰⁸ Deductions related to a lease of tax-exempt use property include any depreciation or amortization expense, maintenance expense, taxes or the cost of acquiring an interest in, or lease of, property. In addition, this provision applies to interest that is properly allocable to tax-exempt use property, including interest on any borrowing by a related person, the proceeds of which were used to acquire an interest in the property, whether or not the borrowing is secured by the leased property or any other property.

⁶⁰⁹ See Sec. 469(g).

⁶¹⁰ Even if a transaction satisfies each of the following requirements, the taxpayer will be treated as the owner of the leased property only if the taxpayer acquires and retains significant and genuine attributes of an owner of the property under the present-law tax rules, including the benefits and burdens of ownership.

⁶¹¹ For purposes of this requirement, the adjusted basis of property acquired by the taxpayer in a like-kind exchange or involuntary conversion to which section 1031 or section 1033 applies is equal to the lesser of (1) the fair market value of the property as of the beginning of the lease term, or (2) the amount that would be the taxpayer's adjusted basis if section 1031 or section 1033 did not apply to such acquisition.

⁶¹² Arrangements to monetize lease obligations include defeasance arrangements, loans by the tax-exempt entity (or an affiliate) to the taxpayer (or an affiliate) or any lender, deposit agreements, letters of credit collateralized with cash or cash equivalents, payment undertaking agreements, prepaid rent (within the meaning of the regulations under section 467), sinking fund arrangements, guaranteed investment contracts, financial guaranty insurance, or any similar arrangements.

⁶¹³ It is anticipated under the House bill that the customary and budgeted funding by taxexempt entities of current obligations under a lease through unrestricted accounts or funds for general working capital needs will not be considered arrangements, set-asides, or expected setasides under this requirement.

⁶¹⁴ For purposes of this requirement, the adjusted basis of property acquired by the taxpayer in a like-kind exchange or involuntary conversion to which section 1031 or section 1033 applies is equal to the lesser of (1) the fair market value of the property as of the beginning of the lease term, or (2) the amount that would be the taxpayer's adjusted basis if section 1031 or section 1033 did not apply to such acquisition.

⁶¹⁵ The taxpayer's at-risk equity investment shall include only consideration paid, and personal liability incurred, by the taxpayer to acquire the property. Cf. Rev. Proc. 2001-28, 2001-2 C.B. 1156.

⁶¹⁶ Cf. Rev. Proc. 2001-28, sec. 4.01(2), 2001-1 C.B. 1156. The fair market value of the property must be determined without regard to inflation or deflation during the lease term and after subtracting the cost of removing the property.

⁶¹⁷ Examples of arrangements by which a tax-exempt lessee might assume or retain a risk of loss include put options, residual value guarantees, residual value insurance, and service contracts. However, leases do not fail to satisfy this requirement solely by reason of lease provisions that require the tax-exempt lessee to pay a contractually stipulated loss value to the taxpayer in the event of an early termination due to a casualty loss, a material default by the taxexempt lessee (excluding the failure by the tax-exempt lessee to enter into an arrangement described above), or other similar extraordinary events that are not reasonably expected to occur at lease inception.

⁶¹⁸ For purposes of this requirement, residual value protection provided to the taxpayer by a manufacturer or dealer of the leased property is not treated as borne by the tax-exempt lessee if the manufacturer or dealer provides such residual value protection to customers in the ordinary course of its business.

⁶¹⁹ Conversely, however, a lease of property that is not tax-exempt use property does not become subject to this provision solely by reason of requisition or seizure by the Federal government in national emergency circumstances.

⁶²⁰ If a lease entered into on or before March 12, 2004, is transferred in a transaction that does not materially alter the terms of such lease, the bill shall not apply to the lease as a result of such transfer.

⁶²¹ In the case of computer software and intangible assets, this rule is applied by substituting useful life and amortization period, respectively, for class life.

⁶²² See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), aff'g 73 T.C.M. ( CCH ) 2189 (1997), cert. denied 526 U.S. 1017 (1999).

⁶²³ Closely related doctrines also applied by the courts (sometimes interchangeable with the economic substance doctrine) include the "sham transaction doctrine" and the "business purpose doctrine". See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) (denying interest deductions on a "sham transaction" whose only purpose was to create the deductions).

⁶²⁴ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.

⁶²⁵ ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.

⁶²⁶ "The casebooks are glutted with [economic substance] tests. Many such tests proliferate because they give the comforting illusion of consistency and precision. They often obscure rather than clarify." Collins v. Commissioner, 857 F.2d 1383, 1386 (9^th Cir. 1988).

⁶²⁷ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6^th Cir. 1993) ("The threshold question is whether the transaction has economic substance. If the answer is yes, the question becomes whether the taxpayer was motivated by profit to participate in the transaction.")

⁶²⁸ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 91-92 (4^th Cir. 1985) ("To treat a transaction as a sham, the court must find that the taxpayer was motivated by no business purposes other than obtaining tax benefits in entering the transaction, and, second, that the transaction has no economic substance because no reasonable possibility of a profit exists."); IES Industries v. United States, 253 F.3d 350, 358 (8^th Cir. 2001) ("In determining whether a transaction is a sham for tax purposes [under the Eighth Circuit test], a transaction will be characterized as a sham if it is not motivated by any economic purpose out of tax considerations (the business purpose test), and if it is without economic substance because no real potential for profit exists" (the economic substance test).") As noted earlier, the economic substance doctrine and the sham transaction doctrine are similar and sometimes are applied interchangeably. For a more detailed discussion of the sham transaction doctrine, see, e.g., Joint Committee on Taxation, Study of Present-Law Penalty and Interest Provisions as Required by Section 3801 of the Internal Revenue Service Restructuring and Reform Act of 1998 (including Provisions Relating to Corporate Tax Shelters) (JCS-3-99) at 182.

⁶²⁹ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; James v. Commissioner, 899 F.2d 905, 908 (10^th Cir. 1995); Sacks v. Commissioner, 69 F.3d 982, 985 (9^th Cir. 1995) ("Instead, the consideration of business purpose and economic substance are simply more precise factors to consider .... We have repeatedly and carefully noted that this formulation cannot be used as a 'rigid two-step analysis'.").

⁶³⁰ 293 U.S. 465 (1935).

⁶³¹ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an unprofitable, leveraged acquisition of Treasury bills, and accompanying prepaid interest deduction, lacked economic substance); Ginsburg v. Commissioner, 35 T.C.M. ( CCH ) 860 (1976) (holding that a leveraged cattle-breeding program lacked economic substance).

⁶³² See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 (disallowing deduction even though taxpayer had a possibility of small gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 T.C. 738, 768 (1990) (stating, "potential for gain ... is infinitesimally nominal and vastly insignificant when considered in comparison with the claimed deductions").

⁶³³ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at 94 (the economic substance inquiry requires an objective determination of whether a reasonable possibility of profit from the transaction existed apart from tax benefits); Compaq Computer Corp. v. Commissioner, 277 F.3d at 781 (applied the same test, citing Rice's Toyota World); IES Industries v. United States, 253 F.3d at 354 (the application of the objective economic substance test involves determining whether there was a "reasonable possibility of profit ... apart from tax benefits.").

⁶³⁴ If the tax benefits are clearly contemplated and expected by the language and purpose of the relevant authority, it is not intended that such tax benefits be disallowed if the only reason for such disallowance is that the transaction fails the economic substance doctrine as defined in this provision.

⁶³⁵ See, e.g., Treas. Reg. 1.269-2, stating that characteristic of circumstances in which a deduction otherwise allowed will be disallowed are those in which the effect of the deduction, credit, or other allowance would be to distort the liability of the particular taxpayer when the essential nature of the transaction or situation is examined in the light of the basic purpose or plan which the deduction, credit, or other allowance was designed by the Congress to effectuate.

⁶³⁶ See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938) ("A given result at the end of a straight path is not made a different result because reached by following a devious path.").

⁶³⁷ See, e.g., Treas. reg. sec. 1.269-2(b) (stating that a distortion of tax liability indicating the principal purpose of tax evasion or avoidance might be evidenced by the fact that "the transaction was not undertaken for reasons germane to the conduct of the business of the taxpayer"). Similarly, in ACM Partnership v. Commissioner, 73 T.C.M. ( CCH ) 2189 (1997), the court stated:

Key to [the determination of whether a transaction has economic substance] is that the transaction must be rationally related to a useful nontax purpose that is plausible in light of the taxpayer's conduct and useful in light of the taxpayer's economic situation and intentions. Both the utility of the stated purpose and the rationality of the means chosen to effectuate it must be evaluated in accordance with commercial practices in the relevant industry. A rational relationship between purpose and means ordinarily will not be found unless there was a reasonable expectation that the nontax benefits would be at least commensurate with the transaction costs. [citations omitted]

See also Martin McMahon Jr., Economic Substance, Purposive Activity, and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 (Feb. 25, 2002) (advocates "confining the most rigorous application of business purpose, economic substance, and purposive activity tests to transactions outside the ordinary course of the taxpayer's business --those transactions that do not appear to contribute to any business activity or objective that the taxpayer may have had apart from tax planning but are merely loss generators."); Mark P. Gergen, The Common Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 (Winter 2001) ("The message is that you can pick up tax gold if you find it in the street while going about your business, but you cannot go hunting for it.").

⁶³⁸ However, if the tax benefits are clearly contemplated and expected by the language and purpose of the relevant authority, such tax benefits should not be disallowed solely because the transaction results in a favorable accounting treatment. An example is the repealed foreign sales corporation rules.

⁶³⁹ This includes tax deductions or losses that are anticipated to be recognized in a period subsequent to the period the financial accounting benefit is recognized. For example, FAS 109 in some cases permits the recognition of financial accounting benefits prior to the period in which the tax benefits are recognized for income tax purposes.

⁶⁴⁰ Claiming that a financial accounting benefit constitutes a substantial non-tax purpose fails to consider the origin of the accounting benefit (i.e., reduction of taxes) and significantly diminishes the purpose for having a substantial non-tax purpose requirement. See, e.g., American Electric Power, Inc. v. U.S., 136 F. Supp. 2d 762, 791-92 (S.D. Ohio, 2001) (" AEP 's intended use of the cash flows generated by the [corporate-owned life insurance] plan is irrelevant to the subjective prong of the economic substance analysis. If a legitimate business purpose for the use of the tax savings 'were sufficient to breathe substance into a transaction whose only purpose was to reduce taxes, [then] every sham tax-shelter device might succeed,'" citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287 (1999)).

⁶⁴¹ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.

⁶⁴² Thus, a "reasonable possibility of profit" will not be sufficient to establish that a transaction has economic substance.

⁶⁴³ Sec. 6662.

⁶⁴⁴ Sec. 6662(d)(2)(C).

⁶⁴⁵ Sec. 6664(c).

⁶⁴⁶ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 1.6664-4(c).

⁶⁴⁷ Thus, unlike the new accuracy-related penalty under section 6662A (which applies only to listed and reportable avoidance transactions), the new penalty under this provision applies to any transaction that lacks economic substance.

⁶⁴⁸ The provision provides that a transaction has economic substance only if: (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and (2) the transaction has a substantial non-tax purpose for entering into such transaction and is a reasonable means of accomplishing such purpose.

⁶⁴⁹ The provision provides that the form of a transaction that involves a tax-indifferent party will not be respected in certain circumstances.

⁶⁵⁰ For this purpose, any reduction in the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses that would (without regard to section 1211) be allowed for such year, would be treated as an increase in taxable income.

⁶⁵¹ Because in general the Tax Court is the only pre-payment forum available to taxpayers, it deals with most of the frivolous, groundless, or dilatory arguments raised in tax cases.

⁶⁵² Sec. 6062.

⁶⁵³ Sec. 7206.

⁶⁵⁴ Pursuant to 18 U.S.C. 3571, the maximum fine for an individual convicted of a felony is $250,000.

⁶⁵⁵ With respect to foreign corporations, it is intended that the rules for signing this declaration generally parallel the present-law rules for signing the return. See Treas. Reg. sec. 1.6062-1(a)(3).

⁶⁵⁶ The provision does, however, apply to the income tax returns of mutual fund management companies and advisors.

⁶⁵⁷ S. Rep. 91-552, 91^st Cong, 1^st Sess., 273-74 (1969), referring to Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 (1958).

⁶⁵⁸ The bill does not affect amounts paid or incurred in performing routine audits or reviews such as annual audits that are required of all organizations or individuals in a similar business sector, or profession, as a requirement for being allowed to conduct business. However, if the government or regulator raised an issue of compliance and a payment is required in settlement of such issue, the bill would affect that payment.

⁶⁵⁹ The bill provides that such amounts are nondeductible under chapter 1 of the Internal Revenue Code.

⁶⁶⁰ The bill does not affect the treatment of antitrust payments made under section 4 of the Clayton Act, which will continue to be governed by the provisions of section 162(g).

⁶⁶¹ Thus, for example, the bill would not apply to payments made by one private party to another in a lawsuit between private parties, merely because a judge or jury acting in the capacity as a court directs the payment to be made. The mere fact that a court enters a judgement or directs a result in a private dispute does not cause a payment to be made "at the direction of a government" for purposes of the provision.

⁶⁶² Similarly, a payment to a charitable organization benefitting a broader class than the persons or property actually harmed, or to be paid out without a substantial quantitative relationship to the harm caused, would not qualify as restitution. Under the provision, such a payment not deductible under section 162 would also not be deductible under section 170.

⁶⁶³ Sec. 162(a).

⁶⁶⁴ Sec. 162(c).

⁶⁶⁵ Sec. 162(f).

⁶⁶⁶ Sec. 162(g).

⁶⁶⁷ Sec. 104(a).

⁶⁶⁸ Sec. 104(a)(2).

⁶⁶⁹ Section 7206 states that making fraudulent or false statements under the Code is a felony. In addition, this offense is a felony pursuant to the classification guidelines of 18 U.S.C. 3559(a)(5).

⁶⁷⁰ Sec. 163(l), enacted in the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 1005(a).

⁶⁷¹ Sec. 163(l)(3)(B).

⁶⁷² Sec. 163(l)(3)(C).

⁶⁷³ Sec. 269(a)(1).

⁶⁷⁴ Sec. 269(a)(2).

⁶⁷⁵ Secs. 951-964.

⁶⁷⁶ Secs. 1291-1298.

⁶⁷⁷ Secs. 901, 902, 960, 1291(g).

⁶⁷⁸ Secs. 951-964.

⁶⁷⁹ Secs. 951(b), 957, 958.

⁶⁸⁰ Sec. 951(a).

⁶⁸¹ Sec. 954.

⁶⁸² Sec. 953.

⁶⁸³ Sec. 952(a)(3)-(5).

⁶⁸⁴ Sec. 954.

⁶⁸⁵ Secs. 951(a)(1)(B), 956.

⁶⁸⁶ Sec. 1297.

⁶⁸⁷ Sec. 1293-1295.

You have reached the end of Part 06. To reach other parts, please use READ.This document is divided into multiple parts. To reach other parts, please use READ. You have reached Part 07⁶⁸⁸ Sec. 1291.

⁶⁸⁹ Sec. 1296.

⁶⁹⁰ Secs. 4051, 4071, 4481, 4041 and 4081.

⁶⁹¹ See Treas. Reg. sec. 48.4061-1(d)).

⁶⁹² Prop. Treas. Reg. sec. 48.4051-1(a), 67 Fed. Reg. 38913, 38914-38915 (2002).

⁶⁹³ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(i).

⁶⁹⁴ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(ii).

⁶⁹⁵ Prop. Treas. Reg. sec. 48.4051-1(c), Example (3).

⁶⁹⁶ Sec. 4093(a).

⁶⁹⁷ A rack is a mechanism capable of delivering taxable fuel into a means of transport other than a pipeline or vessel. Treas. Reg. sec. 48.4081-1(b).

⁶⁹⁸ Sec. 4091(a)(1).

⁶⁹⁹ Sec. 4091(a)(2).

⁷⁰⁰ Sec. 4091(b). This rate includes a 0.1 cent per gallon Leaking Underground Storage Tank ("LUST") Trust Fund tax. The LUST Trust Fund tax is set to expire after March 31, 2005, with the result that on April 1, 2005, the tax rate is scheduled to be 21.8 cents per gallon. Secs. 4091(b)(3)(B) and 4081(d)(3). Beginning on October 1, 2007, the rate of tax is reduced to 4.3 cents per gallon. Sec. 4091(b)(3)(A).

⁷⁰¹ Sec. 4092(b). The 4.4 cent rate includes 0.1 cent per gallon that is attributable to the LUST Trust Fund financing rate. A full exemption, discussed below, applies to aviation fuel that is sold for use in commercial aviation as fuel supplies for vessels or aircraft, which includes use by certain foreign air carriers and for the international flights of domestic carriers. Secs. 4092(a), 4092(b), and 4221(d)(3).

⁷⁰² Secs. 4092(b) and 4041(c)(2).

⁷⁰³ Notice 88-132, sec. III (D). See also, Form 637 - Application for Registration (For Certain Excise Tax Activities). A bond may be required as a condition of registration.

⁷⁰⁴ Sec. 4092(a).

⁷⁰⁵ "Trade" includes the transportation of persons or property for hire. Treas. Reg. sec. 48.4221-4(b)(8).

⁷⁰⁶ Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 4092.

⁷⁰⁷ Sec. 4092(c).

⁷⁰⁸ Sec. 4091(d).

⁷⁰⁹ Treas. Reg. sec. 48.4091-3(b).

⁷¹⁰ Treas. Reg. sec. 48.4091-3(d)(1).

⁷¹¹ Sec. 6427(l)(1).

⁷¹² Treas. Reg. sec. 40.6302(c)-1(a)(3).

⁷¹³ Sec. 34.

⁷¹⁴ See sec. 4081(a)(1)(B).

⁷¹⁵ The provision requires that if such delivery of information is provided to a terminal operator (or if a terminal operator collects such information), that the terminal operator provide such information to the Secretary.

⁷¹⁶ For example, X is a commercial airline subsidiary of airline Y. If Y sells fuel to X, X can waive its right to a refund to Y as the ultimate vendor. Y would then be entitled to file for a refund or net the refund against its excise tax liability.

⁷¹⁷ Alternatively, if the aviation fuel in the example is for use in noncommercial aviation, the fuel is taxed at 21.9 cents per gallon upon delivery into the wing. Self-assessment of the tax would not apply in such case.

⁷¹⁸ The conferees intend that the following airports, subject to verification by the Secretary, be included on the Secretary's initial list of airports that include a secured area in which a terminal is located. The airports are listed by airport name, and the terminal with respect to the airport is identified by terminal control number. In maintaining the list of qualified airports, the Secretary has the discretion to add or remove airports from the list. Ted Stevens International Airport, T-91-AK-4520; William B. Hartsfield Atlanta International Airport, T-58-GA-2512; William B. Hartsfield Atlanta International Airport, T-58-GA-2513; William B. Hartsfield Atlanta International Airport, T-58-GA-2536; Bradley International Airport, T-06-CT-1271; Nashville Metropolitan Airport, T-62-TN-2222; Logan International Airport, T-04-MA-1171; Baltimore/Washington International Airport, T-52-MD-1569; Cleveland Hopkins International Airport, T-31-OH-3109; Charlotte/Douglas International Airport, T-56-NC-2032; Colorado Springs Airport, T-84-CO-4108; Cincinnati/Northern Kentucky International Airport, T-61-KY-3277; Dallas Love Field Airport, T-75-TX-2663; Ronald Reagan National Airport, T-54-VA-1686; Denver International Airport, T-84-CO-4111; Dallas Fort Worth International Airport, T-75-TX-2673; Wayne County Metropolitan Airport, T-38-MI-3018; Newark Liberty International Airport, T-22-NJ-1532; Fort Lauderdale/Hollywood International Airport; T-65-FL-2158; Piedmont Triad International Airport, T-56-NC-2038; Honolulu International Airport, T-91-HI-4570; Dulles International Airport, T-54-VA-1676; George Bush Intercontinental Airport, T-76-TX-2818; Mid Continent Airport, T-43-KS-3653; John F. Kennedy International Airport, T-11-NY-1334; McCarren International Airport, T-86-NV-4355; Kansas City International Airport, T-43-MO-3723; Orlando International Airport, T-59-FL-2111; Midway Airport, T-36-IL-3376; Memphis International Airport, T-62-TN-2212; General Mitchell International Airport, T-39-WI-3092; Minneapolis-St. Paul International Airport, T-41-MN-3419; Minneapolis-St. Paul International Airport, T-41-MN-3420; Minneapolis-St. Paul International Airport, T-41-MN-3421; Louis Armstrong New Orleans International Airport, T-72-LA-2356; Oakland International Airport, T-94-CA-4702; Eppley Airfield, T-47-NE-3608; Ontario International Airport, T-33-CA-4792; O'Hare International Airport, T-36-IL-3325; Portland International Airport, T-91-OR-4450; Philadelphia International Airport, T-23-PA-1770; Sky Harbor International Airport, T-86-AZ-4302; Pittsburgh International Airport, T-23-PA-1766; Raleigh/Durham International, T-56-NC-2045; Reno Cannon International Airport, T-86-NV-4352; San Diego International Airport, T-33-CA-4788; San Antonio International Airport, pending; Seattle Tacoma International Airport, T-91-WA-4425; San Francisco International Airport, T-94-CA-4701; San Jose Municipal Airport, T-77-CA-4650; Salt Lake City International Airport, T-84-UT-4207; John Wayne Airport/Orange County, T-33-CA-4772; Lambert International Airport, T-43-MO-3722; Tampa/St. Petersburg International Airport, T-59-FL-2110.

⁷¹⁹ Sec. 4093(a).

⁷²⁰ Sec. 4091(b). This rate includes a 0.1 cent per gallon Leaking Underground Storage Tank ("LUST") Trust Fund tax. The LUST Trust Fund tax is set to expire after March 31, 2005, with the result that on April 1, 2005, the tax rate is scheduled to be 21.8 cents per gallon. Secs. 4091(b)(3)(B) & 4081(d)(3). Beginning on October 1, 2007, the rate of tax is reduced to 4.3 cents per gallon. Sec. 4091(b)(3)(A).

⁷²¹ Sec. 4092(b). The 4.4 cent rate includes 0.1 cent per gallon that is attributable to the LUST Trust Fund financing rate. A full exemption, discussed below, applies to aviation fuel that is sold for use in commercial aviation as fuel supplies for vessels or aircraft, which includes use by certain foreign air carriers and for the international flights of domestic carriers. Secs. 4092(a), 4092(b), & 4221(d)(3).

⁷²² Sec. 4092.

⁷²³ Sec. 9502(b).

⁷²⁴ Sec. 9503(b).

⁷²⁵ Sec. 4081(a)(1)(A). If such fuel is used for a nontaxable purpose, the purchaser is entitled to a refund of tax paid, or in some cases, an income tax credit. See sec. 6427.

⁷²⁶ Dyeing is not a requirement, however, for certain fuels under certain conditions, i.e., diesel fuel or kerosene exempted from dyeing in certain States by the EPA under the Clean Air Act, aviation-grade kerosene as determined under regulations prescribed by the Secretary, kerosene received by pipeline or vessel and used by a registered recipient to produce substances (other than gasoline, diesel fuel or special fuels), kerosene removed or entered by a registrant to produce such substances or for resale, and (under regulations) kerosene sold by a registered distributor who sells kerosene exclusively to ultimate vendors that resell it (1) from a pump that is not suitable for fueling any diesel-powered highway vehicle or train, or (2) for blending with heating oil to be used during periods of extreme or unseasonable cold. Sec. 4082(c), (d).

⁷²⁷ Sec. 4082(a).

⁷²⁸ Sec. 4082(b).

⁷²⁹ Sec. 4082(e).

⁷³⁰ Sec. 6715(a).

⁷³¹ Sec. 6715(a).

⁷³² Sec. 6715(b).

⁷³³ Sec. 6715(d).

⁷³⁴ Sec. 6715(c)(1).

⁷³⁵ Treas. Reg. secs. 48.4082-1, -2.

⁷³⁶ In March 2000, the IRS withdrew its Notice of Proposed Rulemaking PS-6-95 (61 F.R. 10490 (1996)) relating to dye injection systems. Announcement 2000-42, 2000-1 C.B. 949. The proposed regulation established standards for mechanical dye injection equipment and required terminal operators to report nonconforming dyeing to the IRS . See also Treas. Reg. sec. 48.4082-1(c), (d).

⁷³⁷ Treas. Reg. sec. 48.4081-2(c).

⁷³⁸ The operator remains liable under current Treas. Reg. sec. 48.4081-2(c) for any unpaid tax on removed undyed fuel.

⁷³⁹ Sec. 4081.

^739a Sec. 4041(a)(1)(B) and sec. 4041(a)(1)(C)( III )(i). Under present law, intercity bus operators also may buy fully taxed undyed diesel and seek a refund of the difference between the 24.4 cents per gallon rate and the 7.3 cents per gallon rate.

⁷⁴⁰ "Taxable fuel" means gasoline, diesel fuel, and kerosene. Sec. 4083(a).

⁷⁴¹ Sec. 4083(c)(1)(A).

⁷⁴² Treas. Reg. sec. 48.4083-1(c)(1).

⁷⁴³ Sec. 4083(c)(1)(A).

⁷⁴⁴ Treas. Reg. sec. 48.4083-1(b)(2).

⁷⁴⁵ Sec. 4083(c); Treas. Reg. sec. 48.4083-1(b)(1).

⁷⁴⁶ Sec. 4083(c)(3) and 7342.

⁷⁴⁷ Sec. 6671.

⁷⁴⁸ Sec. 4081(a)(1)(A).

⁷⁴⁹ Sec. 4081(a)(1)(B). The sale of a taxable fuel to an unregistered person prior to a taxable removal or entry of the fuel is subject to tax. Sec. 4081(a)(1)(A).

⁷⁵⁰ Treas. Reg. sec. 48.4081-3(e)(2).

⁷⁵¹ Treas. Reg. sec. 48.4081-3(b).

⁷⁵² Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).

⁷⁵³ Sec. 7272(a).

⁷⁵⁴ Sec. 7232.

⁷⁵⁵ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) & (c)(1).

⁷⁵⁶ Sec. 4010(d); Treas. Reg. sec. 48.4101-2. The reports are required to be filed by the end of the month following the month to which the report relates.

⁷⁵⁷ An approved terminal is a terminal that is operated by a taxable fuel registrant that is a terminal operator. Treas. Reg. sec. 48.4081-1(b).

⁷⁵⁸ Sec. 6721(a).

⁷⁵⁹ Sec. 4101(d); Treas. Reg. sec. 48.4101-2. The reports are required to be filed by the end of the month following the month to which the report relates.

⁷⁶⁰ An approved terminal is a terminal that is operated by a taxable fuel registrant that is a terminal operator. Treas. Reg. sec. 48.4081-1(b).

⁷⁶¹ The 52-cents-per-gallon credit is scheduled to decline to 51 cents per gallon beginning in calendar year 2005. The credit is scheduled to expire after the earlier of (1) expiration of the Highway Trust Fund excise taxes or (2) December 31, 2007.

⁷⁶² Ethanol produced by certain "small producers" is eligible for an additional producer tax credit of 10 cents per gallon. Eligible small producers are defined as persons whose production capacity does not exceed 30 million gallons and whose annual production does not exceed 15 million gallons.

⁷⁶³ Sec. 4081(a)(1)(A)(iii).

⁷⁶⁴ 19 C.F.R. sec. 141.3 (2004).

⁷⁶⁵ Sec. 343(a) of Pub. L. No. 107-210 (2002).

⁷⁶⁶ 19 CFR sec. 4.7(b)(2).

⁷⁶⁷ 19 CFR sec. 4.7(b)(4)(i)(A).

⁷⁶⁸ Sec. 4481.

⁷⁶⁹ Sec. 6156.

⁷⁷⁰ See generally, sec. 4483.

⁷⁷¹ Sec. 4483(f): Treas. Reg. sec. 41.4483-7(a).

⁷⁷² Sec. 6416(b)(2)(C) or (D).

⁷⁷³ A "terminal" is a storage and distribution facility that is supplied by pipeline or vessel, and from which fuel may be removed at a rack. A "rack" is a mechanism capable of delivering taxable fuel into a means of transport other than a pipeline or vessel.

⁷⁷⁴ Such person has a contractual agreement with the terminal operator to store and provide services with respect to the fuel. A "terminal operator" is any person who owns, operates, or otherwise controls a terminal. A terminal operator can also be a position holder if that person owns fuel in its terminal.

⁷⁷⁵ In the provision, this person is referred to as the "delivering person."

⁷⁷⁶ Sec. 4083(a)(3).

⁷⁷⁷ Sec. 4081(b).

⁷⁷⁸ Treas. Reg. sec. 48.4081-3(g)(1).

⁷⁷⁹ Treas. Reg. sec. 48.4081-1(c)(1)(i).

⁷⁸⁰ Treas. Reg. sec. 48.4081-3(g)(2).

⁷⁸¹ Sec. 4081(a)(1).

⁷⁸² Secs. 6421(c) and 4221(a)(2).

⁷⁸³ Rev. Rul. 69-150.

⁷⁸⁴ See, Ammex Inc. v. United States, 52 Fed. Cl. 303 (2002) (on cross-motions for summary judgment, the court found that plaintiff established standing to proceed to trial pursuant to sec. 6421(c) respecting its gasoline purchases only); and Ammex Inc. v. United States, 2002 U.S. Dist. LEXIS 25771 (E.D. Mich. July 31, 2002) (granting defendant's motion for summary judgment), reconsideration denied, Ammex, Inc. v. United States, 2002 U.S. Dist. LEXIS 22893 (E.D. Mich. Oct. 22, 2002). Although the Claims Court ruled that Ammex had standing to challenge the excise tax on gasoline, it subsequently held that Ammex was not entitled to a payment pursuant to sec. 6421(c) because it failed to prove at trial that it did not pass the tax on to its customers. Ammex Inc. v. United States, 2003 U.S. Claims LEXIS 63 (Fed. Cl. Mar. 26, 2003).

⁷⁸⁵ Sec. 4083(a).

⁷⁸⁶ Treas. Reg. sec. 48.4081-1(c)(3)(ii). The term "gasoline blendstocks" means alkylate; butane; catalytically cracked gasoline; coker gasoline; ethyl tertiary butyl ether (ETBE); hexane; hydrocrackate; isomerate; methyl tertiary butyl ether (MTBE); mixed xylene (not including any separated isomer of xylene); natural gasoline; pentane; pentane mixture; polymer gasoline; raffinate; reformate; straight-run gasoline; straight-run naphtha; tertiary amyl methyl ether (TAME); tertiary butyl alcohol (gasoline grade) (TBA); thermally cracked gasoline; toluene; and transmix containing gasoline. Treas. Reg. sec. 48.4081-1(c)(3)(i).

⁷⁸⁷ Sec. 4083(a)(3).

⁷⁸⁸ Treas. Reg. sec. 48.4081-1(c)(2)(ii).

⁷⁸⁹ Treas. Reg. sec. 48.4081-1(b).

⁷⁹⁰ Sec. 4081(a)(1).

⁷⁹¹ Sec. 4081(a)(1)(B).

⁷⁹² Treas. Reg. sec. 406011(a)-1(a); Form 720, Quarterly Federal Excise Tax Return.

⁷⁹³ Treas. Reg. 40.6302(c)-1(a).

⁷⁹⁴ Treas. Reg. 40.6011(a)-1(b).

⁷⁹⁵ Persons not liable for tax, will make their reports in the same manner as taxpayers who file fuel excise tax returns as described above.

⁷⁹⁶ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, 1960-1 C.B. 174.

⁷⁹⁷ Treas. Reg. sec. 1.83-3(e). This definition in part reflects previous IRS rulings on nonqualified deferred compensation.

⁷⁹⁸ Treas. Reg. secs. 1.451-1 and 1.451-2.

⁷⁹⁹ This conclusion was first provided in a 1980 private ruling issued by the IRS with respect to an arrangement covering a rabbi; hence the popular name "rabbi trust." Priv. Ltr. Rul. 8113107 (Dec. 31, 1980).

⁸⁰⁰ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice 2000-56, 2000-2 C.B. 393.

⁸⁰¹ A plan includes an agreement or arrangement, including an agreement or arrangement that includes one person.

⁸⁰² As under section 83, the rights of a person to compensation are subject to a substantial risk of forfeiture if the person's rights to such compensation are conditioned upon the performance of substantial services by any individual.

⁸⁰³ Key employees are defined in section 416(i) and generally include officers having annual compensation greater than $130,000 (adjusted for inflation and limited to 50 employees), five percent owners, and one percent owners having annual compensation from the employer greater than $150,000.

⁸⁰⁴ A qualified employer plan also includes a section 501(c)(18) trust.

⁸⁰⁵ A governmental deferred compensation plan that is not an eligible deferred compensation plan is not a qualified employer plan.

⁸⁰⁶ It is intended that the exception be similar to that under Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).

⁸⁰⁷ An officer is defined as the president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions.

⁸⁰⁸ A plan includes an agreement or arrangement, including an agreement or arrangement that includes one person. Amounts deferred also include actual or notional earnings.

⁸⁰⁹ As under section 83, the rights of a person to compensation are subject to a substantial risk of forfeiture if the person's rights to such compensation are conditioned upon the performance of substantial services by any individual.

⁸¹⁰ It is intended that Treasury regulations will provide guidance regarding when an amount is deferred. It is intended that timing of an election to defer is not determinative of when the deferral is made.

⁸¹¹ These consequences apply under the provision to amounts deferred after the effective date of the provision.

⁸¹² Key employees are defined in section 416(i) and generally include officers having annual compensation greater than $130,000 (adjusted for inflation and limited to 50 employees), five percent owners, and one percent owners having annual compensation from the employer greater than $150,000.

⁸¹³ Under the provision, in the first year that an employee becomes eligible for participation in a nonqualified deferred compensation plan, the election may be made within 30 days after the date that the employee is initially eligible.

⁸¹⁴ The provision does not apply to a plan meeting the requirements of section 457(e)(12) if the plan was in existence as of May 1, 2004, was providing nonelective deferred compensation described in section 457(e)(12) on such date, and is established or maintained by an organization incorporated on July 2, 1974. If the plan has a material change in the class of individuals eligible to participate in the plan after May 1, 2004, the provision applies to compensation provided under the plan after the date of such change.

⁸¹⁵ A qualified employer plan also includes a section 501(c)(18) trust.

⁸¹⁶ It is intended that the exception be similar to that under Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).

⁸¹⁷ There is no inference that all subsequent deferral elections under plans that are not materially modified are permissible under present law.

⁸¹⁸ Sec. 7801(a).

⁸¹⁹ GAO/GGD-97-129R Issues Affecting IRS ' Collection Pilot (July 18, 1997).

⁸²⁰ TIRNO-03-H-0001 (February 14, 2003), at www.procurement.irs.treas.gov. The basic request for information is 104 pages, and there are 16 additional attachments.

⁸²¹ GAO-04-492 Tax Debt Collection: IRS Is Addressing Critical Success Factors for Contracting Out but Will Need to Study the Best Use of Resources (May 2004).

⁸²² Private collection agencies.

⁸²³ Page 19 of the May 2004 GAO report.

⁸²⁴ 31 U.S.C. sec. 3718.

⁸²⁵ 31 U.S.C. sec. 3718(f).

⁸²⁶ The provision generally applies to any type of tax imposed under the Internal Revenue Code. It is anticipated that the focus in implementing the provision will be: (a) taxpayers who have filed a return showing a balance due but who have failed to pay that balance in full; and (b) taxpayers who have been assessed additional tax by the IRS and who have made several voluntary payments toward satisfying their obligation but have not paid in full.

⁸²⁷ An amount of tax reported as due on the taxpayer's tax return is considered to be self-assessed. If the IRS determines that the assessment or collection of tax will be jeopardized by delay, it has the authority to assess the amount immediately (sec. 6861), subject to several procedural safeguards.

⁸²⁸ Several portions of the provision require that the IRS disclose confidential taxpayer information to the private debt collection company. Section 6103(n) permits disclosure for "the providing of other services ... for purposes of tax administration." Accordingly, no amendment to section 6103 is necessary to implement the provision. It is intended, however, that the IRS vigorously protect the privacy of confidential taxpayer information by disclosing the least amount of information possible to contractors consistent with the effective operation of the provision.

⁸²⁹ The private debt collection company is not permitted to accept payment directly. Payments are required to be processed by IRS employees.

⁸³⁰ It is assumed that there will be competitive bidding for these contracts by private sector tax collection agencies and that vigorous bidding will drive the overhead costs down.

⁸³¹ Charitable deductions are provided for income, estate, and gift tax purposes. Secs. 170, 2055, and 2522, respectively.

⁸³² See sec. 1221(a)(3), 1231(b)(1)(C).

⁸³³ Sec. 170(f)(3).

⁸³⁴ Sec. 1011(b) and Treas. Reg. sec. 1.1011-2.

⁸³⁵ Sec. 170(f)(8).

⁸³⁶ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) (providing that not later than December 31, 1984, the Secretary shall prescribe regulations requiring an individual, a closely held corporation, or a personal service corporation claiming a charitable deduction for property (other than publicly traded securities) to obtain a qualified appraisal of the property contributed and attach an appraisal summary to the taxpayer's return if the claimed value of such property (plus the claimed value of all similar items of property donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-369, a qualified appraisal means an appraisal prepared by a qualified appraiser that includes, among other things, (1) a description of the property appraised; (2) the fair market value of such property on the date of contribution and the specific basis for the valuation; (3) a statement that such appraisal was prepared for income tax purposes; (4) the qualifications of the qualified appraiser; (5) the signature and TIN of such appraiser; and (6) such additional information as the Secretary prescribes in such regulations.

⁸³⁷ In the case of a deduction first claimed or reported on an amended return, the deadline is the date on which the amended return is filed.

⁸³⁸ Treas. Reg. sec. 1.170A-13(c)(3).

⁸³⁹ The net income taken into account by the taxpayer may not exceed the amount of qualified donee income reported by the donee to the taxpayer and the IRS under the provision's substantiation and reporting requirements.

⁸⁴⁰ Charitable deductions are provided for income, estate, and gift tax purposes. Secs. 170, 2055, and 2522, respectively.

⁸⁴¹ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) (providing that not later than December 31, 1984, the Secretary shall prescribe regulations requiring an individual, a closely held corporation, or a personal service corporation claiming a charitable deduction for property (other than publicly traded securities) to obtain a qualified appraisal of the property contributed and attach an appraisal summary to the taxpayer's return if the claimed value of such property (plus the claimed value of all similar items of property donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-369, a qualified appraisal means an appraisal prepared by a qualified appraiser that includes, among other things, (1) a description of the property appraised; (2) the fair market value of such property on the date of contribution and the specific basis for the valuation; (3) a statement that such appraisal was prepared for income tax purposes; (4) the qualifications of the qualified appraiser; (5) the signature and taxpayer identification number of such appraiser; and (6) such additional information as the Secretary prescribes in such regulations.

⁸⁴² In the case of a deduction first claimed or reported on an amended return, the deadline is the date on which the amended return is filed.

⁸⁴³ Treas. Reg. sec. 1.170A-13(c)(3).

⁸⁴⁴ Charitable deductions are provided for income, estate, and gift tax purposes. Secs. 170, 2055, and 2522, respectively.

⁸⁴⁵ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) (providing that not later than December 31, 1984, the Secretary shall prescribe regulations requiring an individual, a closely held corporation, or a personal service corporation claiming a charitable deduction for property (other than publicly traded securities) to obtain a qualified appraisal of the property contributed and attach an appraisal summary to the taxpayer's return if the claimed value of such property (plus the claimed value of all similar items of property donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-369, a qualified appraisal means an appraisal prepared by a qualified appraiser that includes, among other things, (1) a description of the property appraised; (2) the fair market value of such property on the date of contribution and the specific basis for the valuation; (3) a statement that such appraisal was prepared for income tax purposes; (4) the qualifications of the qualified appraiser; (5) the signature and TIN of such appraiser; and (6) such additional information as the Secretary prescribes in such regulations.

⁸⁴⁶ In the case of a deduction first claimed or reported on an amended return, the deadline is the date on which the amended return is filed.

⁸⁴⁷ Treas. Reg. sec. 1.170A-13(c)(3).

⁸⁴⁸ Rev. Rul. 67-461, 1967-2 C.B. 125.

⁸⁴⁹ Sec. 197.

⁸⁵⁰ Sec. 197(e)(6).

⁸⁵¹ P.D.B. Sports, Ltd. v. Comm., 109 T.C. 423 (1997).

⁸⁵² Notice and demand is the notice given to a person liable for tax stating that the tax has been assessed and demanding that payment be made. The notice and demand must be mailed to the person's last known address or left at the person's dwelling or usual place of business (Code sec. 6303).

⁸⁵³ Code sec. 6331.

⁸⁵⁴ Code secs. 6335-6343.

⁸⁵⁵ Code sec. 6331(h).

⁸⁵⁶ Sec. 1092.

⁸⁵⁷ However, if the option written by the taxpayer is a qualified covered call option that is in-the-money, then (1) any loss with respect to such option is treated as long-term capital loss if, at the time such loss is realized, gain on the sale or exchange of the offsetting stock held by the taxpayer would be treated as long-term capital gain, and (2) the holding period of such stock does not include any period during which the taxpayer is the grantor of the option (sec. 1092(f)).

⁸⁵⁸ Prop. Treas. Reg. sec. 1.1092(d)-2(c).

⁸⁵⁹ Sec. 1092(c)(2)(B).

⁸⁶⁰ Priv. Ltr. Rul. 199925044 (Feb. 3, 1999).

⁸⁶¹ A costless collar generally is comprised of the purchase of a put option and the sale of a call option with the same trade dates and maturity dates and set such that the premium paid substantially equals the premium received. The collar can be considered as economically similar to a short position in the stock.

⁸⁶² Sec. 243. The amount of the deduction is 70 percent of dividends received if the recipient owns less than 20 percent (by vote and value) of stock of the payor. If the recipient owns 20 percent or more of the stock, the deduction is increased to 80 percent. If the recipient owns 80 percent or more of the stock, the deduction is further increased to 100 percent for qualifying dividends.

⁸⁶³ Sec. 246(c).

⁸⁶⁴ Sec. 246(c)(4).

⁸⁶⁵ However, to the extent provided by Treasury regulations, taxpayers are not permitted to identify offsetting positions of a straddle if the fair market value of the straddle position already held by the taxpayer at the creation of the straddle is less than its adjusted basis in the hands of the taxpayer.

⁸⁶⁶ For this purpose, "unrecognized gain" is the excess of the fair market value of an identified position that is part of an identified straddle at the time the taxpayer incurs a loss with respect to another identified position in the identified straddle, over the fair market value of such position when the taxpayer identified the position as a position in the identified straddle.

⁸⁶⁷ For example, although the provision does not require taxpayers to identify any positions of a straddle as an identified straddle, it may be necessary to provide rules requiring all balanced offsetting positions to be included in an identified straddle if a taxpayer elects to identify any of the offsetting positions as an identified straddle.

⁸⁶⁸ It is intended that Treasury regulations defining substantially similar or related property for this purpose will continue to apply subsequent to repeal of the stock exception and generally will constitute the exclusive definition of a straddle with respect to offsetting positions involving stock. See Prop. Treas. Reg. sec. 1.1092(d)-2(b). However, the general straddles rules regarding substantial diminution in risk of loss will continue to apply to stock of corporations formed or availed of to take positions in personal property that offset positions taken by the shareholder.

⁸⁶⁹ Sec. 4131

⁸⁷⁰ Sec. 4131

⁸⁷¹ Sec. 7528.

⁸⁷² Pub.L. No. 99-272.

⁸⁷³ Pub.L No. 107-296.

⁸⁷⁴ Sec. 201, 117 Stat. 1335.

⁸⁷⁵ Secs. 871(b) and 882.

⁸⁷⁶ Sec. 864(c).

⁸⁷⁷ Sec. 864(c)(4).

⁸⁷⁸ Sec. 864(c)(4)(B).

⁸⁷⁹ Sec. 864(c)(5).

⁸⁸⁰ Sec. 864(c)(4)(B)(i).

⁸⁸¹ Sec. 864(c)(4)(B)(ii).

⁸⁸² Sec. 864(c)(4)(D)(i).

⁸⁸³ Sec. 864(c)(4)(B)(iii).

⁸⁸⁴ Secs. 861 - 865.

⁸⁸⁵ See Bank of America v. United States, 680 F.2d 142 (Ct. Cl. 1982).

⁸⁸⁶ Treas. Reg. sec. 1.864-5(b)(2)(ii).

⁸⁸⁷ Treas. Reg. sec. 1.863-7(b)(3).

⁸⁸⁸ Sec. 904(a).

⁸⁸⁹ Sec. 904(f).

⁸⁹⁰ Sec. 904(f)(1).

⁸⁹¹ Sec. 904(f)(3).

⁸⁹² Coordination rules apply in the case of losses recaptured under the branch loss recapture rules. Sec. 367(a)(3)(C).

⁸⁹³ Sec. 864(e) and Temp. Treas. Reg. sec. 1.861-9T.

⁸⁹⁴ This interest also may include interest paid to unrelated parties in certain cases in which a related party guarantees the debt.

⁸⁹⁵ Prop. Treas. reg. sec. 1.163(j)-3(b)(3).

⁸⁹⁶ Prop. Treas. reg. sec. 1.163(j)-2(c)(5).

⁸⁹⁷ Prop. Treas. reg. sec. 1.163(j)-1(a)(i).

⁸⁹⁸ This rule currently is contained in Prop. Treas. reg. sec. 1.163(j)-2(c)(5).

⁸⁹⁹ Sec. 108(e)(8).

⁹⁰⁰ E.g., Motor Mart Trust v. Commissioner, 4 T.C. 931 (1945), aff'd, 156 F.2d 122 (1st Cir. 1946), acq. 1947-1 C.B. 3; Capento Sec. Corp. v. Commissioner, 47 B.T.A. 691 (1942), nonacq. 1943 C.B. 28, aff'd, 140 F.2d 382 (1st Cir. 1944); Tower Bldg. Corp. v. Commissioner, 6 T.C. 125 (1946), acq. 1947-1 C.B. 4; Alcazar Hotel, Inc. v. Commissioner, 1 T.C. 872 (1943), acq. 1943 C.B. 1.

⁹⁰¹ Sec. 108(a).

⁹⁰² See, e.g., Fulton Gold Corp. v. Commissioner, 31 B.T.A. 519 (1934); American Seating Co. v. Commissioner, 14 B.T.A. 328, aff'd in part and rev'd in part, 50 F.2d 681 (7th Cir. 1931); Hiatt v. Commissioner, 35 B.T.A. 292 (1937); Hotel Astoria, Inc. v. Commissioner, 42 B.T.A. 759 (1940); Rev. Rul. 91-31, 1991-1 C.B. 19.

⁹⁰³ Sec. 453.

⁹⁰⁴ Sec. 453(f)(3). Instead, the receipt of such indebtedness is treated as a receipt of payment.

⁹⁰⁵ Component members are also limited to one alternative minimum tax exemption and one accumulated earnings credit.

⁹⁰⁶ Sec. 1563(a)(2). The Supreme Court held in United States v. Vogel Fertilizer, 455 US 16 (1982), that Treas. Reg. Sec. 1.1563-1(a)(3), as it was then written, was invalid insofar as it would require an individual's stock to be taken into account, for purposes of the 80-percent brother-sister corporation ownership test, where that individual did not own stock in each of the corporations in the asserted controlled group. In that case, one corporation was owned 77.49 percent by one shareholder and 22.51 by an unrelated shareholder. The 77.49 percent shareholder of that first corporation also owned 87.5 percent of the voting stock and more than 90 percent of the value of the stock of a second corporation. The Supreme Court held the corporations were not a controlled group, even though they would have been one had the then applicable Treasury regulations been considered valid in their application to the case. The Treasury regulations were subsequently changed to conform to the Supreme Court decision. T.D. 8179, 53 F.R. 6603 (March 2, 1988).

⁹⁰⁷ As one example, the provision does not change the present law standards relating to deferred compensation, contained in subchapter D of the Code, that refer to section 1563.

⁹⁰⁸ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785).

⁹⁰⁹ The limitation is commonly referred to as the "luxury automobile depreciation limitation." For passenger automobiles (subject to the such limitation) placed in service in 2002, the maximum amount of allowable depreciation is $7,660 for the year in which the vehicle was placed in service, $4,900 for the second year, $2,950 for the third year, and $1,775 for the fourth and later years. This limitation applies to the combined depreciation deduction provided under present law for depreciation, including section 179 expensing and the temporary 30 percent additional first year depreciation allowance. For luxury automobiles eligible for the 50% additional first depreciation allowance, the first year limitation is increased by an additional $3,050.

⁹¹⁰ Sec. 280F(d)(5). Exceptions are provided for any ambulance, hearse, or any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire.

⁹¹¹ Pub. L. No. 108-27, sec. 202 (2003).

⁹¹² Additional section 179 incentives are provided with respect to a qualified property used by a business in the New York Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal community (sec. 1400J).

⁹¹³ Sec. 195

⁹¹⁴ Secs. 248 and 709.

⁹¹⁵ Treas. Reg. sec. 1.195-1.

⁹¹⁶ Sec. 6012(a)(1)(C). Other filing requirements apply to dependents who are married, elderly, or blind. See, Internal Revenue Service, Publication 929, Tax Rules for Children and Dependents, at 3, Table 1 (2003).

⁹¹⁷ A taxpayer generally need not file a return if he or she has gross income in an amount less than the standard deduction (and, if allowable to the taxpayer, the personal exemption amount). An individual who may be claimed as a dependent of another taxpayer is not eligible to claim the dependency exemption relating to that individual. Sec. 151(d)(2). For taxable years beginning in 2004, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $800 or the sum of $250 and the individual's earned income.

⁹¹⁸ Sec. 1(g).

⁹¹⁹ Sec. 1(g)(4) and sec. 911(d)(2).

⁹²⁰ Sec. 1(h).

⁹²¹ Sec. 1(g)(4).

⁹²² Sec. 1(g)(5); Internal Revenue Service, Publication 929, Tax Rules for Children and Dependents, at 6 (2003).

⁹²³ The child must attach to the return Form 8615, Tax for Children Under Age 14 With Investment Income of More Than $1,500 (2003).

⁹²⁴ Internal Revenue Service, Publication 929, Tax Rules for Children and Dependents, at 7 (2003).

⁹²⁵ Internal Revenue Service, Publication 929, Tax Rules for Children and Dependents, at 7 (2003).

⁹²⁶ Internal Revenue Service, Publication 929, Tax Rules for Children and Dependents, at 7 (2003).

⁹²⁷ Sec. 1(g)(7)(B).

⁹²⁸ Sec. 73(a).

⁹²⁹ Sec. 6201(c).

⁹³⁰ Sec. 1(h)(1)(C).

⁹³¹ Secs. 1(h)(11)(B)(iii)(I), 246(c)(1)(A).

⁹³² Secs. 1(h)(11)(B)(iii)(I), 246(c)(2).

⁹³³ The Senate amendment predated the enactment of H.R. 1308, Pub. L. No. 108-311 (the "Working Families Tax Relief Act of 2004"), which included a technical correction to the holding period requirements under sections 1(h)(11) and 246(c) (increasing from 120 to 121 days and from 180 to 181 days the periods during which the stock holding requirements are tested).

⁹³⁴ 1998-1 C.B. 334.

⁹³⁵ Notice 2004-19, 2004-11 I.R.B. 606.

⁹³⁶ If the return is filed before the due date, for this purpose it is considered to have been filed on the due date.

⁹³⁷ Sec. 6404(g). This provision was added to the Code by sec. 3305 of the IRS Restructuring and Reform Act of 1998 (Pub. L. No. 105-206, July 22,1998).

⁹³⁸ This includes any substantial omission of items to which the six-year statute of limitations applies (sec. 6051(e)), gross valuation misstatements (sec. 6662(h)), and similar provisions.

⁹³⁹ It is intended that this provision apply retroactively to the period beginning January 1, 2004 and ending on the date of enactment. The due date for returns for the taxable period beginning January 1, 2004 is generally April 15, 2005; April 15, 2005 is therefore the date from which the 12-month period that must pass under present-law prior to the commencement of suspension is calculated. Consequently, suspension of interest would generally not begin until April 15, 2006. Accordingly, the provision has no actual retroactive effect.

⁹⁴⁰ A reportable avoidance transaction is a reportable transaction with a significant tax avoidance purpose.

⁹⁴¹ Sec. 13273 of the Revenue Reconciliation Act of 1993.

⁹⁴² Sec. 101(c)(11) of the Economic Growth and Tax Relief Reconciliation Act of 2001.

⁹⁴³ Sec. 421.

⁹⁴⁴ Sec. 1043.

⁹⁴⁵ Secs. 72 and 402.

⁹⁴⁶ Sec. 72(f).

⁹⁴⁷ Rev. Rul. 58-236, 1958-1 C.B. 37.

⁹⁴⁸ Sec. 402(b)(2).

⁹⁴⁹ Sec. 402(b)(4).

⁹⁵⁰ Sec. 83(a).

⁹⁵¹ Treas. Reg. sec. 1.61-2(d)(i).

⁹⁵² Sec. 872.

⁹⁵³ Section 7701(a)(30) defines a citizen or resident of the United States as "U.S. persons."

⁹⁵⁴ Treas. Reg. sec. 1.871-2(b).

⁹⁵⁵ A U.S. possession with a mirror income tax code is "a United States possession ... that administers income tax laws that are identical (except for the substitution of the name of the possession or territory for the term 'United States' where appropriate) to those in the United States." Treas. Reg. sec. 7701(b)-1(d)(1).

⁹⁵⁶ Treas. Reg. sec. 1.863-6.

⁹⁵⁷ Only U.S. citizens may qualify under the bona fide residence test. However, resident aliens of the United States who are citizens of foreign countries that have a treaty with the United States may qualify for section 911 exclusions under the bona fide residence test by application of a nondiscrimination provision.

⁹⁵⁸ Sec. 274(a).

⁹⁵⁹ Sec. 274(e)(2).

⁹⁶⁰ Sec. 274(e)(9).

⁹⁶¹ Treas. Reg. sec. 1.61-21.

⁹⁶² Treas. Reg. sec. 1.61-21(g).

⁹⁶³ Treas. Reg. sec. 1.61-21(b)(6).

⁹⁶⁴ Sutherland Lumber-Southwest, Inc. v. Comm., 114 T.C. 197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., AOD 2002-02 (Feb. 11, 2002).

⁹⁶⁵ An officer is defined as the president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions.

⁹⁶⁶ Treas. reg. sec. 1.1275-4.

⁹⁶⁷ Treas. reg. sec. 1.1275-4(a)(4).

⁹⁶⁸ Treas. reg. sec. 1.1275-4(a)(5).

⁹⁶⁹ Treas. reg. sec. 1.1275-4(b).

⁹⁷⁰ Treas. reg. sec. 1.1275-4(b)(4)(i)(A).

⁹⁷¹ Rev. Rul. 2002-31, 2002-1 C.B. 1023.

⁹⁷² Under the bill, a contingent convertible debt instrument is defined as a debt instrument that: (1) is convertible into stock of the issuing corporation, or a corporation in control of, or controlled by, the issuing corporation; and (2) provides for contingent payments.