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Private
activities eligible for financing with tax-exempt
private activity bonds
Present law includes several exceptions permitting
States or local governments to act as conduits
providing tax-exempt financing for private
activities. Generally, interest on bonds issued to
benefit section 501(c)(3) organizations is
tax-exempt ("qualified 501(c)(3) bonds").
In addition, States or local governments may issue
tax-exempt "exempt-facility bonds" to
finance property for certain private businesses.
Business facilities eligible for this financing
include transportation (airports, ports, local mass
commuting, and high speed intercity rail
facilities); privately owned and/or privately
operated public works facilities (sewage, solid
waste disposal, local district heating or cooling,
hazardous waste disposal facilities and public
educational facilities); privately owned and/or
operated low-income rental housing; and certain
private facilities for the local furnishing of
electricity or gas.
Tax-exempt private activity bonds are subject to
restrictions that generally do not apply to other
bonds issued by State or local governments. In most
cases, the aggregate face amount of tax-exempt
private activity bonds that may be issued is
restricted by annual volume limits. Moreover, most
tax-exempt private activity bonds are subject to a
term-to-maturity rule. Under that rule, the average
maturity of most tax-exempt private activity bond
cannot exceed 120 percent of the economic life of
the property being financed.
Section 501(c)(3) organizations generally may not
obtain the benefits of exempt facility bonds for
debt issued and used to acquire forests and forest
lands. In addition, qualified 501(c)(3) bonds may
not be issued to acquire forests and forest lands to
the extent such lands are used to finance a trade or
business that is unrelated to the exempt purposes of
the organization. Whether income derived by a
section 501(c)(3) organization from timber
harvesting is unrelated trade or business income
depends upon a variety of factors.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides that qualified forest
conservation bonds are treated as exempt facility
bonds. Qualified forest conservation bonds are bonds
issued for a qualified organization if 95 percent or
more of the net proceeds of such bonds are used for
qualified project costs, including acquisition of
forests and forest land, capitalized interest, and
credit enhancement fees that constitute qualified
guarantee fees (within the meaning of section 148 of
the Code). The costs of acquiring forests and forest
land are qualified project costs if such land is
acquired by a qualified organization from an
unrelated party and at the time of acquisition or
immediately thereafter such land is subject to a
conservation restriction. Among other requirements,
a qualified organization must be a nonprofit
organization more than half the value of which
consists of forests and forest land acquired with
the proceeds of qualified forest conservation bonds.
The volume limitation on tax-exempt private activity
bonds does not apply to qualified forest
conservation bonds. Rather, the maximum aggregate
face amount of qualified forest conservation bonds
that may be issued is $1.5 billion, to be allocated
by the Secretary of Treasury among qualified
organizations. For purposes of the term-to-maturity
rule, the land and timber acquired with qualified
forest conservation bonds shall have an economic
life of 35 years.
The Senate amendment provides that certain timber
harvesting income derived by a qualified
organization from forest lands acquired with
proceeds from the qualified forest conservation
bonds is excludable from income to the extent such
income is used to pay debt service on the bonds and
satisfies other conservation restrictions.
Effective date. --The provision is effective
for bonds issued on or after the date that is 180
days after the date of enactment and before
December 31, 2006
.
Conference
Agreement
The conference agreement does not contain the Senate
amendment provision.
4. Qualified tribal school modernization bonds
(sec. 616 of the Senate amendment)
Present
Law
Under present law, the interest on bonds issued by
an Indian tribal government is taxexempt if
substantially all of the proceeds of are to be used
in the exercise of an essential government function.
The term essential government function does not
include any function that is not customarily
performed by State or local governments with general
taxing powers. In addition, Indian tribal
governments are prohibited from issuing private
activity bonds, with the exception of bonds issued
for certain manufacturing facilities.
There is no present law provision that permits
Indian tribal governments to issue tax-credit bonds.
House
Bill
No provision.
Senate
Amendment
The Senate amendment authorizes the Secretary of the
Interior to establish a program under which eligible
Indian tribes may issue qualified tribal school
modernization bonds ("tribal school
bonds"). A tribal school bond means any bond
issued under the program if: (1) 95 percent of the
proceeds of the issue are used for the construction,
rehabilitation, or repair of a school facility
funded by the Bureau of Indian Affairs of the
Department of the Interior or for the acquisition of
land on which such a school facility is to be
constructed; (2) the bond is issued by an Indian
tribe; (3) the issuer designates the bond for
purposes of the program; and (4) the term of each
bond that is part of such an issue does not exceed
15 years. For purposes of the provision, the term
Indian tribe has the same meaning as the term Indian
tribal government under section 7701(a)(40) of the
Code (including the application of section 7871(d))
and any consortium of tribes approved by the
Secretary of the Interior.
Under the provision, the holder of a tribal school
bond receives a nonrefundable tax credit, in lieu of
interest. The amount of the credit allowed is
included in the holder's gross income as interest
income. Unused credits may be carried forward to the
succeeding taxable year.
The Senate amendment authorizes the Secretary of the
Interior to establish an escrow fund to secure
repayment of tribal school bonds. Principal payments
on tribal school bonds may only be made from amounts
in the escrow fund and such bonds are not guaranteed
by the United States, the issuing Indian tribe, or
the tribal school for which the bond was issued.
The Senate amendment establishes a national
limitation of $200 million on the amount of tribal
school bonds that may be designated in each of the
years 2005 and 2006. The authority to issue tribal
school bonds shall be allocated to Indian tribes by
the Secretary of the Interior.
Effective date. --The provision is effective
on the date of enactment with respect to bonds
issued after December 31, 2004.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
C.
Provisions Relating to Depreciation
1. 7-year recovery period for certain track
facilities (sec. 623 of the Senate amendment and
sec. 168 of the Code)
Present
Law
A taxpayer generally must capitalize the cost of
property used in a trade or business and recover
such cost over time through annual deductions for
depreciation or amortization. Tangible property
generally is depreciated under the modified
accelerated cost recovery system ("MACRS"),
which determines depreciation by applying specific
recovery periods, placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property (sec. 168). The cost of
nonresidential real property is recovered using the
straight-line method of depreciation and a recovery
period of 39 years. Nonresidential real property is
subject to the mid-month placed-in-service
convention. Under the mid-month convention, the
depreciation allowance for the first year property
is placed in service is based on the number of
months the property was in service, and property
placed in service at any time during a month is
treated as having been placed in service in the
middle of the month. Land improvements (such as
roads and fences) are recovered over 15 years. An
exception exists for the theme and amusement park
industry, whose assets are assigned a recovery
period of seven years.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides a statutory 7-year
recovery period for permanent motorsports racetrack
complexes. For this purpose, motorsports racetrack
complexes include land improvements and support
facilities but do not include transportation
equipment, warehouses, administrative buildings,
hotels, or motels.
Effective date. --The Senate amendment is
effective for property placed in service after date
of enactment and before
January 1, 2008
. No inference is intended with respect to the
treatment of expenses incurred prior to the
effective date.
Conference
Agreement
The conference agreement follows the Senate
amendment with the following modification to the
effective date provisions.
Effective date. --The conference agreement is
effective for property placed in service after the
date of enactment and before
January 1, 2008
. The conference agreement also excludes racetrack
facilities placed in service after the date of
enactment from the definition of theme and amusement
facilities classified under Asset Class 80.0. The
conferees do not intend for this provision to create
any inference as to the treatment of property placed
in service on or before the date of enactment.
Accordingly, the conferees do not intend for the
provision to affect the interpretation of the scope
of Asset Class 80.0 for assets placed in service
prior to the date of enactment. The conferees
strongly urge the Secretary to resolve expeditiously
any taxpayer disputes with respect to the scope of
Class 80.0.
2. Alternative minimum tax and credits (sec. 624
of the Senate amendment and secs. 38 and 53 of the
Code)
Present
Law
Election to Increase Minimum Tax Credit
Limitation in Lieu of Bonus Depreciation
Under present law, corporations are entitled to a
minimum tax credit for the minimum tax imposed in
prior taxable years. The amount of the credit is
limited to the excess of the taxpayer's regular tax
over the tentative minimum tax ("minimum tax
credit limitation").
Under present law, certain property is allowed an
additional depreciation allowance for the taxable
year placed in service. This additional allowance is
known as "bonus depreciation". Bonus
depreciation is a temporary provision.
Use of General Business Credits Against the
Alternative Minimum Tax
Under present law, the general business credit for
any taxable year is limited to the excess of the
taxpayer's income tax over the tentative minimum tax
(or, if greater, 25 percent of the regular tax
liability in excess of $25,000).338
House
Bill
No provision.
Senate
Amendment
Election to Increase Minimum Tax Credit
Limitation in Lieu of Bonus Depreciation
The Senate amendment provides an election by a
corporation to increase its minimum tax credit
limitation for a taxable year by one half of the
bonus depreciation amount. If a corporation makes an
election for any taxable year, no bonus depreciation
is allowed with respect to any property placed in
service by the corporation for the taxable year. The
bonus depreciation amount for a taxable year is an
amount (not in excess of $25 million) equal to 30
percent of the aggregate bonus depreciation that
would have been allowable but for the election. Any
minimum tax credit allowable by reason of the
election may be refundable to the extent it exceeds
the corporation's tax liability.
Effective date. --Taxable years ending after
December 31, 2003
.
Use of General Business Credits Against the
Alternative Minimum Tax
The Senate amendment provides that the general
business credit for any taxable year beginning in
2004 shall not be less than 50 percent of the lesser
of (1) the amount of credit that would be allowed if
the tentative minimum tax were zero for the taxable
year or (2) the current year business credit. In no
event shall the credit be less than the amount
otherwise allowable under present law.
Effective date. --Taxable years beginning in
2004.
Conference
Agreement
The conference agreement does not include the
provisions in the Senate amendment.
D.
Expansion of Business Credit
1. New markets tax credit for Native American
reservations (sec. 631 of the Senate amendment)
Present
Law
Section 45D provides a new markets tax credit for
qualified equity investments made to acquire stock
in a corporation, or a capital interest in a
partnership, that is a qualified community
development entity ("
CDE
").339
The amount of the credit allowed to the investor
(either the original purchaser or a subsequent
holder) is (1) a five-percent credit for the year in
which the equity interest is purchased from the
CDE
and for each of the following two years, and (2) a
six-percent credit on each anniversary date
thereafter for the following four years. The credit
is determined by applying the applicable percentage
(five or six percent) to the amount paid to the
CDE
for the investment at its original issue, and is
available to the taxpayer who holds the qualified
equity investment on the date of the initial
investment or on the respective anniversary dates.
The credit is recaptured if at any time during the
seven-year period that begins on the date of the
initial issue of the investment the entity ceases to
be a qualified
CDE
, the proceeds of the investment cease to be used as
required, or the interest is redeemed.
A qualified
CDE
is any domestic corporation or partnership: (1)
whose primary mission is serving or providing
investment capital for low-income communities or
low-income persons; (2) that maintains
accountability to residents of low-income
communities by their representation on any governing
board or any advisory board of the
CDE
; and (3) that is certified by the Secretary as
being a qualified
CDE
. A qualified equity investment means stock or a
similar equity interest acquired directly from a
CDE
for cash. Substantially all of the investment
proceeds must be used by the
CDE
to make qualified low-income community investments.
For this purpose, qualified low-income community
investments include: (1) capital or equity
investments in, or loans to, qualified active
businesses located in low-income communities; (2)
certain financial counseling and other services to
businesses and residents in low-income communities;
(3) the purchase from another
CDE
of any loan made by such entity that is a qualified
low-income community investment; or (4) an equity
investment in, or loan to, another
CDE
.
A "low-income community" is defined as a
census tract with either (1) a poverty rate of at
least 20 percent or (2) median family income which
does not exceed 80 percent of the greater of
metropolitan area median family income or statewide
median family income (for a non-metropolitan census
tract, does not exceed 80 percent of statewide
median family income). The Secretary may designate
any area within any census tract as a low-income
community provided that (1) the boundary is
continuous, (2) the area (if it were a census tract)
would otherwise satisfy the poverty rate or median
income requirements, and (3) an inadequate access to
investment capital exists in the area.
A qualified active business is defined as a business
that satisfies, with respect to a taxable year, the
following requirements: (1) at least 50 percent of
the total gross income of the business is derived
from the active conduct of trade or business
activities in low-income communities; (2) a
substantial portion of the tangible property of such
business is used in a low-income community; (3) a
substantial portion of the services performed for
such business by its employees is performed in a
low-income community; and (4) less than five percent
of the average of the aggregate unadjusted bases of
the property of such business is attributable to
certain financial property or to certain
collectibles.
The maximum annual amount of qualified equity
investments is capped at $2.0 billion per year for
calendar years 2004 and 2005, and $3.5 billion per
year for calendar years 2006 and 2007.
No special rules apply to investments in community
development entities that serve or provide
investment capital with respect to low-income Native
American reservations.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides special new markets
tax credit rules for qualified equity investments in
a "reservation development entity." In
general, the present-law requirements applicable to
the new markets tax credit apply for purposes of the
new credit, with special requirements established to
define the qualified investment entity (i.e., for
purposes of this credit, the present-law
"community development entity" is replaced
with "reservation development entity").
Under the Senate amendment, a reservation
development entity is a domestic corporation or
partnership if: (A) the primary mission of the
entity is serving, or providing investment capital
for, low-income reservations; (B) the entity
maintains accountability to residents of low-income
reservations through their representation on any
governing board or any advisory board of the entity;
and (C) the entity is certified by the Secretary as
being a reservation development entity. A low-income
reservation means an Indian reservation (as defined
in section 168(j)(6)) that has a poverty rate of at
least 40 percent.
The maximum annual amount of qualified equity
investments in reservation development entities is
$50 million for each of calendar years 2004 through
2007. The limitation shall be allocated by the
Secretary among reservation development entities
selected by the Secretary, giving priority to any
entity with a record of having successfully provided
capital or technical assistance to disadvantaged
businesses or communities, or that intends to make
qualified low-income reservation investments in one
or more unrelated businesses.
The Senate amendment provides that not later than
January 31 of 2007 and 2010, the Comptroller General
of the United States shall, pursuant to an audit,
report to Congress on the new credit program,
including all reservation development entities that
receive an allocation under the program. In
addition, the Senate amendment authorizes the
Secretary to award a grant of not more than one
million dollars to the First Nations Oweesta
Corporation, and authorizes appropriations of one
million dollars for fiscal years 2004 through 2014.
Effective date. --The provision is effective
for investments made after December 31, 2003.
Conference
Agreement
The conference agreement does not include the Senate
amendment.
2. Ready Reserve-National Guard employee credit
and Ready Reserve-National Guard replacement
employee credit (sec. 632 of the Senate amendment)
Present
Law
There is no employer tax credit for wages paid to
Ready Reserve and National Guard employees called to
active duty, or for wages paid to their
replacements.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides an employer credit for
wages paid to Ready Reserve-National Guard employees
called to active duty. A Ready Reserve-National
Guard employee means an employee who is a member of
the Ready Reserve of a reserve component of an Armed
Force of the United States as described in sections
10142 and 10101 of title 10, United States Code. The
credit equals 50 percent of the compensation paid
while the employee is called up to active duty up to
a maximum of $30,000 of compensation. Special rules
allowing refundability of the credit, up to the
amount of employer payroll taxes, apply to employers
of first responders called up to active duty.
Qualified first responders are persons employed as a
law enforcement official, a firefighter, or a
paramedic, and who are a Ready Reserve-National
Guard employee.
In addition, for "small business
employers" of Ready Reserve-National Guard
employees called up to active duty, the Senate
amendment creates a replacement employee credit
equal to 50 percent of the wages paid to any
replacement employee up to a maximum credit of
$6,000. Small business employers are employers that
employ an average of 50 or fewer employees on
business days during the taxable year. For small
business manufacturing employers, the credit rate is
increased to 100 percent and the maximum credit is
increased to $20,000.
Self-employed contract workers called to active duty
are eligible for the self employed portion of the
credit, but businesses purchasing the services of
contract workers are not eligible for the
replacement employee credit.
The credits could be carried back 3 years and
carried forward 20 years. Rules similar to section
280C apply to deny a deduction for the amount of the
credits.
Effective date. --The provision is effective
for investments made after September 30, 2004.
Conference
Agreement
The conference agreement does not include the Senate
amendment.
3. Rural investment tax credit (sec. 633 of the
Senate amendment and new sec. 42A of the Code)
COM-
RPT
-
HIST
, HRRepNo 108-755, Conference Committee Report
on the American Jobs Creation Act of 2004, HR
4520, (October 8, 2004), Part 04 of 08
|
This document is divided into multiple parts. To reach other
parts, please use READ. You have reached Part 04
Present
Law
There is no present-law provision specifically
targeted to encourage investment in high-migration
rural areas.
House
Bill
No provision.
Senate
Amendment
The proposal provides a tax credit that may be
claimed by owners of certain rural residential
property (i.e., qualified rural investment
buildings). The credit is claimed annually,
generally for a period of ten years. Taxpayers are
eligible for a maximum present-value tax credit
equal to 70 percent of the eligible basis of a new
building and qualified rehabilitation expenses (30
percent in the case of an existing building).
A qualified rural investment building is defined as
any building that is part of a qualified rural
investment project at all times during the credit
period. A qualified rural investment project is
defined as any investment project of one or more
buildings; (1) located in a qualifying county (and,
if necessary to the project, a contiguous county);
and (2) selected by the State in which the county is
located, according to the State's qualified rural
investment plan. Rehabilitation expenditures are
treated as a separate building for purposes of the
credit. A qualifying county is defined as a county
which: (1) is located outside a metropolitan
statistical area (as defined by the Office of
Management and Budget); and (2) during the 20-year
period ending with the year the most recent census
was conducted, has experienced a net out-migration
of inhabitants of the county of at least 10-percent
of the population of the county. Generally, the
credit and compliance periods are each ten years and
the credit period for an existing building may not
begin before the credit period for the related
rehabilitation expenditures.
For purposes of this credit, the eligible basis of
any qualified rural investment building shall be
determined under rules similar to the rules of
section 42 (the "low income rental housing
credit") except that: (1) the determination of
the adjusted basis of any building shall be made at
the beginning of the credit period; and (2) such
basis shall include development costs properly
attributable to such building. Development costs are
limited to: (1) site preparation costs; (2) State
and local impact fees; (3) reasonable development
fees; (4) professional fees related to basis items;
(5) construction financing costs related to basis
items other than land; and (6) on-site and adjacent
improvements required by State or local governments.
Generally, any building eligible for the credit must
receive an allocation of rural investment credit
authority from the State rural investment credit
agency in whose jurisdiction the building is
located. The aggregate amount of such credits
allocated within a State is limited by the State's
annual rural investment credit ceiling. The ceiling
for each calendar year is the sum of: (1) the unused
State rural investment credit ceiling (if any) of
such State for the preceding calendar year; (2)
$185,000 for each qualifying county of the State;
(3) the amount of State rural investment credit
ceiling returned in the calendar year; and (4) the
amount (if any) allocated to the State by the
Secretary of the Treasury from the pool of
unallocated rural investment credits unused by other
States. The allocation is made by a formula provided
in the statute. The $185,000 amount is indexed for
inflation. At least 10 percent of each State's rural
investment credit ceiling is set aside for projects
in which a qualified non-profit organization is to
materially participate (within the meaning of
section 469(h) of the Code) in the development and
operation of the project throughout the compliance
period. A qualified non-profit organization
generally means any organization if: (1) the
organization is described in section 501(c) and
exempt from tax under 501(a); (2) it is determined
by the State rural investment credit agency not to
be affiliated with or controlled by a for-profit
organization; and (3) one or more of its exempt
purposes includes the fostering of rural investment.
Effective date. --The provision is effective
for expenditures made in taxable years beginning
after the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
Amendment.
4. Qualified small business rural investment tax
credit (sec. 634 of the Senate amendment and new
sec. 42B of the Code)
Present
Law
There is no present-law provision specifically
targeted to encourage rural small business
investment.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides a 30-percent tax
credit for certain qualified expenditures paid or
incurred by qualified rural small businesses. A
qualified taxpayer's maximum credit for any taxable
year may not exceed the lesser of: (1) $5,000; or
(2) $25,000 minus the sum of the taxpayer's previous
qualified rural small business investment credit
claimed for all prior taxable years. For purposes of
this credit, qualified expenditures are defined as
expenditures normally associated with starting or
expanding a business and included in a qualified
business plan, including costs for capital, plant
and equipment, inventory expenses, and wages but not
including interest costs. In the case of a qualified
rural small business with respect to which a small
business rural investment credit was claimed in any
previous years, qualified expenditures for each
taxable year are limited to qualified small business
expenditures for the year only to the extent that
those total expenditures exceed the total
expenditures for the immediately preceding taxable
year. For example, assume Taxpayer A incurs
qualified expenditures of $3000, in year 1, $0 in
year 2, and $4,000 in year 3. Taxpayer A will be
eligible for a qualified rural investment tax credit
of $900 in year 1, $0 in year 2, and $1,200 in year
3.
A qualified rural small business is defined as any
person, if such person; (1) employed not more than
five full-time employees during the taxable year;
(2) materially and substantially participates in
management; (3) is located in a qualifying county;
and (4) submitted a qualified business plan with
respect to which an allocation of a rural investment
tax credit was received. For these purposes, an
employee is considered full-time if such employee is
employed at least 30 hours per week for 20 or more
calendar weeks in the taxable year. A qualifying
county is defined as a county which: (1) is located
outside a metropolitan statistical area (as defined
by the Office of Management and Budget); and (2)
during the 20-year period ending with the year the
most recent census was conducted, has experienced a
net out-migration of inhabitants of the county of at
least 10-percent of the population of the county. A
qualified business plan is a business plan which:
(1) has been approved by the rural investment credit
agency with jurisdiction over the qualifying county
in which the qualified rural small business is
located pursuant to such agency's rural investment
plan; and (2) meets such requirements as the agency
may specify.
Any otherwise allowable deduction or credit is
reduced by the amount of this credit.
Effective date. --The provision is effective
for expenditures made in taxable years beginning
after the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
Amendment.
5. Provide a tax credit for maintenance of
railroad track (sec. 635 of the Senate amendment and
new sec. 45I of the Code)
Present
Law
There is no provision that provides for a railroad
track maintenance tax credit.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides a 30-percent business
tax credit for qualified railroad track maintenance
expenditures paid or incurred in a taxable year by
eligible taxpayers. The credit is limited to the
product of $3,500 times the number of miles of
railroad track owned or leased by an eligible
taxpayer as of the close of its taxable year.
Qualified railroad track maintenance expenditures
are defined as amounts expended (whether or not
chargeable to a capital account) for maintaining
railroad track (including roadbed, bridges, and
related track structures) owned or leased as of
January 1, 2005
, by a Class II or Class
III
railroad. An eligible taxpayer is defined as: (1)
any Class II or Class
III
railroad; and (2) any person who transports property
using the rail facilities of a Class II or Class
III
railroad or who furnishes railroadrelated property
or services to such person. The taxpayer's basis in
railroad track is reduced by the amount of the
credit allowed. No portion of the credit may be
carried back to any taxable year beginning before
January 1, 2005
. Other rules apply.
This credit applies to qualified railroad track
maintenance expenditures paid or incurred during
taxable years beginning after
December 31, 2004
, and before
January 1, 2008
.
Effective date. --The Senate amendment is
effective for taxable years beginning after
December 31, 2004
.
Conference
Agreement
The conference agreement follows the Senate
amendment provision with the following modification.
The conference agreement increases the credit
percentage from 30-percent to 50-percent. In
addition, the conference agreement clarifies that
each mile of railroad track may be taken into
account only once, either by the owner of such mile
or by the owner's assignee, in computing the
per-mile limitation.
6. Railroad revitalization and security
investment credit (sec. 636 of the Senate amendment)
Present
Law
There is no provision in present law for railroad
revitalization.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides a 50-percent business
tax credit for qualified project expenditures paid
or incurred in a taxable year by eligible taxpayers.
Qualified project expenditures generally are defined
as expenditures (whether or not chargeable to a
capital account) for: (1) planning; (2)
environmental review and environmental impact
mitigation; (3) track and track structure
rehabilitation, relocation, improvement and
development; (4) railroad safety and security
improvements; (5) communications and signaling
improvements; (6) intercity passenger rail equipment
acquisition; and (7) rail station and intermodal
facilities development. Such expenditures are
limited to expenditures for a project with respect
to intercity passenger rail transportation (as
defined in 49 U.S.C. 24102) that is included in a
State rail plan.
The railroad revitalization and security investment
credit is subject to a national cap of $165 million
per calendar year. The annual national cap is
allocated pro rata to the States based on the each
State's share of the national total of: (1) railroad
and public road grade crossings on intercity
passenger rail routes; (2) intercity passenger train
miles; and (3) intercity embarkations and
disembarkations for each passenger. Any credit
allocations unused for a calendar year will be
carried-over and allocated between those States that
used their allocation for the calendar year and
requested a share of the carryover. All projects
must have an allocation to claim the credit.
The taxpayer's basis in such property is reduced by
the amount of the credit allowed. No portion of the
credit may be carried back to any taxable year
beginning before
January 1, 2005
. A credit under this section may be transferred
(but no more than once) if the taxpayer is a
tax-exempt entity or if the credit exceeds the
taxpayer's tax liability for the year. Other rules
apply.
Effective date. --The Senate amendment is
effective for taxable years beginning after
December 31, 2004
.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
7. Special allocation of the railroad
revitalization and security investment credit for
New York city rail projects (sec. 636 of the Senate
amendment)
Present
Law
There is no provision in present law that provides a
special allocation of the railroad revitalization
and security investment credit.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides an additional
allocation of $200 million dollars to New York City
for qualified project expenditures within the New
York Liberty Zone (as defined in Code section
1400L(h). This allocation is in addition to the
allocation allowed under the general railroad
revitalization and security investment credit,
described above. Under a special rule, the $200
million will be allocated as follows: (1) $100
million to projects designated by the mayor of New
York City; and (2) $100 million to projects
designated by the Governor of New York. Qualified
project expenditures are limited to expenditures for
improvements to subway systems, for commuter rail
systems, for rail links to airports, and for public
infrastructure improvements in the vicinity of rail
or subway stations. The taxpayer's basis in such
property is reduced by the amount of the credit for
which this credit is allowed. No portion of the
credit may be carried back to any taxable year
beginning before
January 1, 2005
. A credit under this section may be transferred
(but no more than once) if the taxpayer is a
tax-exempt entity or if the credit exceeds the
taxpayer's tax liability for the year. Other rules
apply.
Effective date. --The Senate amendment is
effective for taxable years beginning after
December 31, 2004
.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
8. Modification of targeted areas and low-income
communities designated for new markets tax credit
(sec. 637 of the Senate amendment and sec. 45D of
the Code)
Present
Law
Section 45D provides a new markets tax credit for
qualified equity investments made to acquire stock
in a corporation, or a capital interest in a
partnership, that is a qualified community
development entity ("
CDE
").340
The amount of the credit allowable to the investor
(either the original purchaser or a subsequent
holder) is (1) a five-percent credit for the year in
which the equity interest is purchased from the
CDE
and for each of the following two years, and (2) a
sixpercent credit for each of the following four
years. The credit is determined by applying the
applicable percentage (five or six percent) to the
amount paid to the
CDE
for the investment at its original issue, and is
available for a taxable year to the taxpayer who
holds the qualified equity investment on the date of
the initial investment or on the respective
anniversary date that occurs during the taxable
year. The credit is recaptured if at any time during
the seven-year period that begins on the date of the
original issue of the investment the entity ceases
to be a qualified
CDE
, the proceeds of the investment cease to be used as
required, or the equity investment is redeemed.
A qualified
CDE
is any domestic corporation or partnership: (1)
whose primary mission is serving or providing
investment capital for low-income communities or
low-income persons; (2) that maintains
accountability to residents of low-income
communities by their representation on any governing
board of or any advisory board to the
CDE
; and (3) that is certified by the Secretary as
being a qualified
CDE
. A qualified equity investment means stock (other
than nonqualified preferred stock) in a corporation
or a capital interest in a partnership that is
acquired directly from a
CDE
for cash, and includes an investment of a subsequent
purchaser if such investment was a qualified equity
investment in the hands of the prior holder.
Substantially all of the investment proceeds must be
used by the
CDE
to make qualified low-income community investments.
For this purpose, qualified low-income community
investments include: (1) capital or equity
investments in, or loans to, qualified active
low-income community businesses; (2) certain
financial counseling and other services to
businesses and residents in low-income communities;
(3) the purchase from another
CDE
of any loan made by such entity that is a qualified
low-income community investment; or (4) an equity
investment in, or loan to, another
CDE
.
A "low-income community" is defined as a
population census tract with either (1) a poverty
rate of at least 20 percent or (2) median family
income which does not exceed 80 percent of the
greater of metropolitan area median family income or
statewide median family income (for a
non-metropolitan census tract, does not exceed 80
percent of statewide median family income). The
Secretary may designate any area within any census
tract as a low-income community provided that (1)
the boundary is continuous, (2) the area (if it were
a census tract) would otherwise satisfy the poverty
rate or median income requirements, and (3) an
inadequate access to investment capital exists in
the area.
A qualified active low-income community business is
defined as a business that satisfies, with respect
to a taxable year, the following requirements: (1)
at least 50 percent of the total gross income of the
business is derived from the active conduct of trade
or business activities in any low-income community;
(2) a substantial portion of the tangible property
of such business is used in a low-income community;
(3) a substantial portion of the services performed
for such business by its employees is performed in a
low-income community; and (4) less than five percent
of the average of the aggregate unadjusted bases of
the property of such business is attributable to
certain financial property or to certain
collectibles.
The maximum annual amount of qualified equity
investments is capped at $2.0 billion per year for
calendar years 2004 and 2005, and at $3.5 billion
per year for calendar years 2006 and 2007.
House
Bill
No provision.
Senate
Amendment
The Senate amendment modifies the Secretary's
authority to designate certain areas as low-income
communities to provide that the Secretary shall
prescribe regulations to designate "targeted
populations" as low-income communities for
purposes of the new markets tax credit. For this
purpose, a "targeted population" is
defined by reference to section 103(20) of the
Riegle Community Development and Regulatory
Improvement Act of 1994 (12 U.S.C. 4702(20)) to mean
individuals, or an identifiable group of
individuals, including an Indian tribe, who (A) are
low-income persons; or (B) otherwise lack adequate
access to loans or equity investments. Under the
Senate amendment, "low-income" means (1)
for a targeted population within a metropolitan
area, less than 80 percent of the area median family
income; and (2) for a targeted population within a
non-metropolitan area, less than the greater of 80
percent of the area median family income or 80
percent of the statewide non-metropolitan area
median family income.341
Under the Senate amendment, a targeted population is
not required to be within any census tract.
Effective date. --The provision is effective
for designations made after the date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment with respect to targeted population
designations, modified to provide that a population
census tract with a population of less than 2,000
shall be treated as a low-income community for
purposes of the credit if such tract is within an
empowerment zone, the designation of which is in
effect under section 1391, and is contiguous to one
or more low-income communities.
Effective date. --The targeted population
provision is effective for designations made after
the date of enactment. The low-population provision
is effective for investments made after the date of
enactment.
9. Modification of income requirement for census
tracts within high migration rural counties for new
markets tax credit (sec. 638 of the Senate amendment
and sec. 45D of the Code)
Present
Law
Section 45D provides a new markets tax credit for
qualified equity investments made to acquire stock
in a corporation, or a capital interest in a
partnership, that is a qualified community
development entity ("
CDE
").342
The amount of the credit allowable to the investor
(either the original purchaser or a subsequent
holder) is (1) a five-percent credit for the year in
which the equity interest is purchased from the
CDE
and for each of the following two years, and (2) a
sixpercent credit for each of the following four
years. The credit is determined by applying the
applicable percentage (five or six percent) to the
amount paid to the
CDE
for the investment at its original issue, and is
available for the taxable year to the taxpayer who
holds the qualified equity investment on the date of
the initial investment or on the respective
anniversary date that occurs during the taxable
year. The credit is recaptured if at any time during
the seven-year period that begins on the date of the
original issue of the investment the entity ceases
to be a qualified
CDE
, the proceeds of the investment cease to be used as
required, or the equity investment is redeemed.
A qualified
CDE
is any domestic corporation or partnership: (1)
whose primary mission is serving or providing
investment capital for low-income communities or
low-income persons; (2) that maintains
accountability to residents of low-income
communities by their representation on any governing
board of or any advisory board to the
CDE
; and (3) that is certified by the Secretary as
being a qualified
CDE
. A qualified equity investment means stock (other
than nonqualified preferred stock) in a corporation
or a capital interest in a partnership that is
acquired directly from a
CDE
for cash, and includes an investment of a subsequent
purchaser if such investment was a qualified equity
investment in the hands of the prior holder.
Substantially all of the investment proceeds must be
used by the
CDE
to make qualified low-income community investments.
For this purpose, qualified low-income community
investments include: (1) capital or equity
investments in, or loans to, qualified active
low-income community businesses; (2) certain
financial counseling and other services to
businesses and residents in low-income communities;
(3) the purchase from another
CDE
of any loan made by such entity that is a qualified
low-income community investment; or (4) an equity
investment in, or loan to, another
CDE
.
A "low-income community" is defined as a
population census tract with either (1) a poverty
rate of at least 20 percent or (2) median family
income which does not exceed 80 percent of the
greater of metropolitan area median family income or
statewide median family income (for a
non-metropolitan census tract, does not exceed 80
percent of statewide median family income). The
Secretary may designate any area within any census
tract as a low-income community provided that (1)
the boundary is continuous, (2) the area (if it were
a census tract) would otherwise satisfy the poverty
rate or median income requirements, and (3) an
inadequate access to investment capital exists in
the area.
A qualified active low-income community business is
defined as a business that satisfies, with respect
to a taxable year, the following requirements: (1)
at least 50 percent of the total gross income of the
business is derived from the active conduct of trade
or business activities in any low-income community;
(2) a substantial portion of the tangible property
of such business is used in a low-income community;
(3) a substantial portion of the services performed
for such business by its employees is performed in a
low-income community; and (4) less than five percent
of the average of the aggregate unadjusted bases of
the property of such business is attributable to
certain financial property or to certain
collectibles.
The maximum annual amount of qualified equity
investments is capped at $2.0 billion per year for
calendar years 2004 and 2005, and at $3.5 billion
per year for calendar years 2006 and 2007.
House
Bill
No provision.
Senate
Amendment
The Senate amendment modifies the low-income test
for high migration rural counties. Under the Senate
amendment, in the case of a population census tract
located within a high migration rural county,
low-income is defined by reference to 85 percent
(rather than 80 percent) of statewide median family
income. For this purpose, a high migration rural
county is any county that, during the 20-year period
ending with the year in which the most recent census
was conducted, has a net out-migration of
inhabitants from the county of at least 10 percent
of the population of the county at the beginning of
such period.
Effective date. --The provision is effective
as if included in the amendment made by section
121(a) of the Community Renewal Tax Relief Act of
2000.
Conference
Agreement
The conference agreement follows the Senate
amendment.
10. Provide a tax credit for expenditures on
closed captioning technology in movies (sec. 639 of
the Senate amendment and new sec. 45T of the Code)
Present
Law
There is no provision that allows a tax credit for
expenditures made for closed captioning technology
in motion pictures.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides a 50-percent business
tax credit (the "motion picture accessibility
credit") for certain qualified expenditures
made in a taxable year by an eligible taxpayer.
Qualified expenditures are defined as amounts paid
or incurred for making motion pictures accessible to
deaf or hard-of-hearing individuals through the use
of captioning technology. An eligible taxpayer is
defined as a taxpayer who is in the business of
showing motion pictures to the public in theaters or
producing or distributing those motion pictures. The
taxpayer's basis in property with respect to which
the credit is allowed is reduced by the amount of
the credit allowed. No deduction or credit is
permitted under any other provision of Chapter 1
(Normal Taxes and Surtaxes) of Subtitle A (Income
Taxes) of the Code for the amount of any motion
picture accessibility credit allowed. No portion of
the credit may be carried back to any taxable year
beginning before
January 1, 2004
. Other rules apply.
Effective date. --The Senate amendment is
effective for taxable years beginning after
December 31, 2003
.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
E.
Miscellaneous Provisions
1. Exclusion of gain or loss on sale or exchange
of certain brownfield sites from unrelated business
taxable income (sec. 641 of the Senate amendment and
secs. 512 and 514 of the Code)
Present
Law
In general, an organization that is otherwise exempt
from Federal income tax is taxed on income from a
trade or business regularly carried on that is not
substantially related to the organization's exempt
purposes. Gains or losses from the sale, exchange,
or other disposition of property, other than stock
in trade, inventory, or property held primarily for
sale to customers in the ordinary course of a trade
or business, generally are excluded from unrelated
business taxable income. Gains or losses are treated
as unrelated business taxable income, however, if
derived from "debt-financed property."
Debt-financed property generally means any property
that is held to produce income and with respect to
which there is acquisition indebtedness at any time
during the taxable year.
In general, income of a tax-exempt organization that
is produced by debt-financed property is treated as
unrelated business income in proportion to the
acquisition indebtedness on the income-producing
property. Acquisition indebtedness generally means
the amount of unpaid indebtedness incurred by an
organization to acquire or improve the property and
indebtedness that would not have been incurred but
for the acquisition or improvement of the property.
Acquisition indebtedness does not include: (1)
certain indebtedness incurred in the performance or
exercise of a purpose or function constituting the
basis of the organization's exemption; (2)
obligations to pay certain types of annuities; (3)
an obligation, to the extent it is insured by the
Federal Housing Administration, to finance the
purchase, rehabilitation, or construction of housing
for low and moderate income persons; or (4)
indebtedness incurred by certain qualified
organizations to acquire or improve real property.
Special rules apply in the case of an exempt
organization that owns a partnership interest in a
partnership that holds debt-financed property. An
exempt organization's share of partnership income
that is derived from debt-financed property
generally is taxed as debtfinanced income unless an
exception provides otherwise.
House
Bill
No provision.
Senate
Amendment
In general
The Senate amendment provides an exclusion from
unrelated business taxable income for the gain or
loss from the qualified sale, exchange, or other
disposition of a qualifying brownfield property by
an eligible taxpayer. The exclusion from unrelated
business taxable income generally is available to an
exempt organization that acquires, remediates, and
disposes of the qualifying brownfield property. In
addition, the Senate amendment provides an exception
from the debt-financed property rules for such
properties.
In order to qualify for the exclusions from
unrelated business income and the debtfinanced
property rules, the eligible taxpayer is required
to: (a) acquire from an unrelated person real
property that constitutes a qualifying brownfield
property; (b) pay or incur a minimum level of
eligible remediation expenditures with respect to
the property; and (c) transfer the remediated site
to an unrelated person in a transaction that
constitutes a sale, exchange, or other disposition
for purposes of Federal income tax law.343
Qualifying brownfield properties
Under the Senate amendment, the exclusion from
unrelated business taxable income applies only to
real property that constitutes a qualifying
brownfield property. A qualifying brownfield
property means real property that is certified,
before the taxpayer incurs any eligible remediation
expenditures (other than to obtain a Phase I
environmental site assessment), by an appropriate
State agency (within the meaning of section
198(c)(4)) in the State in which the property is
located as a brownfield site within the meaning of
section 101(39) of the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (CERCLA)
(as in effect on the date of enactment of the
proposal). The Senate amendment provision requires
that the taxpayer's request for certification
include a sworn statement of the taxpayer and
supporting documentation of the presence of a
hazardous substance, pollutant, or contaminant on
the property that is complicating the expansion,
redevelopment, or reuse of the property given the
property's reasonably anticipated future land uses
or capacity for uses of the property (including a
Phase I environmental site assessment and, if
applicable, evidence of the property's presence on a
local, State, or Federal list of brownfields or
contaminated property) and other environmental
assessments prepared or obtained by the taxpayer.
Eligible taxpayer
An eligible taxpayer with respect to a qualifying
brownfield property is an organization exempt from
tax under section 501(a) that acquired such property
from an unrelated person and paid or incurred a
minimum amount of eligible remediation expenditures
with respect to such property. The exempt
organization (or the qualifying partnership of which
it is a partner) is required to pay or incur
eligible remediation expenditures with respect to a
qualifying brownfield property in an amount that
exceeds the greater of: (a) $550,000; or (b) 12
percent of the fair market value of the property at
the time such property is acquired by the taxpayer,
determined as if the property were not contaminated.
An eligible taxpayer does not include an
organization that is: (1) potentially liable under
section 107 of CERCLA with respect to the property;
(2) affiliated with any other person that is
potentially liable thereunder through any direct or
indirect familial relationship or any contractual,
corporate, or financial relationship (other than a
contractual, corporate, or financial relationship
that is created by the instruments by which title to
a qualifying brownfield property is conveyed or
financed by a contract of sale of goods or
services); or (3) the result of a reorganization of
a business entity which was so potentially liable.344
Qualified sale, exchange, or other disposition
Under the Senate amendment, a sale, exchange, or
other disposition of a qualifying brownfield
property shall be considered as qualified if such
property is transferred by the eligible taxpayer to
an unrelated person, and within one year of such
transfer the taxpayer has received a certification
(a "remediation certification") from the
Environmental Protection Agency or an appropriate
State agency (within the meaning of section
198(c)(4)) in the State in which the property is
located that, as a result of the taxpayer's
remediation actions, such property would not be
treated as a qualifying brownfield property in the
hands of the transferee. A taxpayer's request for a
remediation certification shall be made no later
than the date of the transfer and shall include a
sworn statement by the taxpayer certifying that: (1)
remedial actions that comply with all applicable or
relevant and appropriate requirements (consistent
with section 121(d) of CERCLA) have been
substantially completed, such that there are no
hazardous substances, pollutants or contaminants
that complicate the expansion, redevelopment, or
reuse of the property given the property's
reasonably anticipated future land uses or capacity
for uses of the property; (2) the reasonably
anticipated future land uses or capacity for uses of
the property are more economically productive or
environmentally beneficial than the uses of the
property in existence on the date the property was
certified as a qualifying brownfield property;345
(3) a remediation plan has been implemented to bring
the property in compliance with all applicable
local, State, and Federal environmental laws,
regulations, and standards and to ensure that
remediation protects human health and the
environment; (4) the remediation plan, including any
physical improvements required to remediate the
property, is either complete or substantially
complete, and if substantially complete,346
sufficient monitoring, funding, institutional
controls, and financial assurances have been put in
place to ensure the complete remediation of the site
in accordance with the remediation plan as soon as
is reasonably practicable after the disposition of
the property by the taxpayer; and (5) public notice
and the opportunity for comment on the request for
certification (in the same form and manner as
required for public participation required under
section 117(a) of CERCLA (as in effect on the date
of enactment of the provision)) was completed before
the date of such request. Public notice shall
include, at a minimum, publication in a major local
newspaper of general circulation.
A copy of each of the requests for certification
that the property was a brownfield site, and that it
would no longer be a qualifying brownfield property
in the hands of the transferee, shall be included in
the tax return of the eligible taxpayer (and, where
applicable, of the qualifying partnership) for the
taxable year during which the transfer occurs.
Eligible remediation expenditures
Under the Senate amendment, eligible remediation
expenditures means, with respect to any qualifying
brownfield property: (1) expenditures that are paid
or incurred by the taxpayer to an unrelated person
to obtain a Phase I environmental site assessment of
the property; (2) amounts paid or incurred by the
taxpayer after receipt of the certification that the
property is a qualifying brownfield property for
goods and services necessary to obtain the
remediation certification; and (3) expenditures to
obtain remediation cost-cap or stop-loss coverage,
reopener or regulatory action coverage, or similar
coverage under environmental insurance policies,347
or to obtain financial guarantees required to manage
the remediation and monitoring of the property.
Eligible remediation expenditures include
expenditures to (1) manage, remove, control,
contain, abate, or otherwise remediate a hazardous
substance, pollutant, or contaminant on the
property; (2) obtain a Phase II environmental site
assessment of the property, including any
expenditure to monitor, sample, study, assess, or
otherwise evaluate the release, threat of release,
or presence of a hazardous substance, pollutant, or
contaminant on the property, or (3) obtain
environmental regulatory certifications and
approvals required to manage the remediation and
monitoring of the hazardous substance, pollutant, or
contaminant on the property. Eligible remediation
expenditures do not include (1) any portion of the
purchase price paid or incurred by the eligible
taxpayer to acquire the qualifying brownfield
property; (2) environmental insurance costs paid or
incurred to obtain legal defense coverage,
owner/operator liability coverage, lender liability
coverage, professional liability coverage, or
similar types of coverage;348
(3) any amount paid or incurred to the extent such
amount is reimbursed, funded or otherwise subsidized
by: (a) grants provided by the United States, a
State, or a political subdivision of a State for use
in connection with the property; (b) proceeds of an
issue of State or local government obligations used
to provide financing for the property, the interest
of which is exempt from tax under section 103; or
(c) subsidized financing provided (directly or
indirectly) under a Federal, State, or local program
in connection with the property; or (4) any
expenditure paid or incurred before the date of
enactment of the proposal.349
Qualified gain or loss
The Senate amendment generally excludes from
unrelated business taxable income the exempt
organization's gain or loss from the sale, exchange,
or other disposition of a qualifying brownfield
property. Income, gain, or loss from other transfers
does not qualify under the provision.350
The amount of gain or loss excluded from unrelated
business taxable income is not limited to or based
upon the increase or decrease in value of the
property that is attributable to the taxpayer's
expenditure of eligible remediation expenditures.
Further, the exclusion does not apply to an amount
treated as gain that is ordinary income with respect
to section 1245 or section 1250 property, including
any amount deducted as a section 198 expense that is
subject to the recapture rules of section 198(e), if
the taxpayer had deducted such amount in the
computation of its unrelated business taxable
income.351
Special rules for qualifying partnerships
In general
In the case of a tax-exempt organization that is a
partner of a qualifying partnership that acquires,
remediates, and disposes of a qualifying brownfield
property, the Senate amendment provision applies to
the tax-exempt partner's distributive share of the
qualifying partnership's gain or loss from the
disposition of the property.352
A qualifying partnership is a partnership that (1)
has a partnership agreement that satisfies the
requirements of section 514(c)(9)(B)(vi) at all
times beginning on the date of the first
certification received by the partnership that one
of its properties is a qualifying brownfield
property; (2) satisfies the requirements of the
proposal if such requirements are applied to the
partnership (rather than to the eligible taxpayer
that is a partner of the partnership); and (3) is
not an organization that would be prevented from
constituting an eligible taxpayer by reason of it or
an affiliate being potentially liable under CERCLA
with respect to the property.
The exclusion is available to a tax-exempt
organization with respect to a particular property
acquired, remediated, and disposed of by a
qualifying partnership only if the exempt
organization is a partner of the partnership at all
times during the period beginning on the date of the
first certification received by the partnership that
one of its properties is a qualifying brownfield
property, and ending on the date of the disposition
of the property by the partnership.353
Under the Senate amendment, the Secretary shall
prescribe such regulations as are necessary to
prevent abuse of the requirements of the provision,
including abuse through the use of special
allocations of gains or losses, or changes in
ownership of partnership interests held by eligible
taxpayers.
Certifications and multiple property elections
If the property is acquired and remediated by a
qualifying partnership of which the exempt
organization is a partner, it is intended that the
certification as to status as a qualified brownfield
property and the remediation certification will be
obtained by the qualifying partnership, rather than
by the tax-exempt partner, and that both the
eligible taxpayer and the qualifying partnership
will be required to make available such copies of
the certifications to the
IRS
. Any elections or revocations regarding the
application of the eligible remediation expenditure
rules to multiple properties (as described below)
acquired, remediated, and disposed of by a
qualifying partnership must be made by the
partnership. A tax-exempt partner is bound by an
election made by the qualifying partnership of which
it is a partner.
Special rules for multiple properties
The eligible remediation expenditure determinations
generally are made on a property-by-property basis.
An exempt organization (or a qualifying partnership
of which the exempt organization is a partner) that
acquires, remediates, and disposes of multiple
qualifying brownfield properties, however, may elect
to make the eligible remediation expenditure
determinations on a multiple-property basis. In the
case of such an election, the taxpayer satisfies the
eligible remediation expenditures test with respect
to all qualifying brownfield properties acquired
during the election period if the average of the
eligible remediation expenditures for all such
properties exceeds the greater of: (a) $550,000; or
(b) 12 percent of the average of the fair market
value of the properties, determined as of the dates
they were acquired by the taxpayer and as if they
were not contaminated. If the eligible taxpayer
elects to make the eligible remediation expenditure
determination on a multiple property basis, then the
election shall apply to all qualifying sales,
exchanges, or other dispositions of qualifying
brownfield properties the acquisition and transfer
of which occur during the period for which the
election remains in effect.354
An acquiring taxpayer makes a multiple-property
election with its timely filed tax return (including
extensions) for the first taxable year for which it
intends to have the election apply. A timely filed
election is effective as of the first day of the
taxable year of the return in which the election is
included or a later day in such taxable year
selected by the taxpayer. An election remains
effective until the earliest of a date selected by
the taxpayer, the date which is eight years after
the effective date of the election, the effective
date of a revocation of the election, or, in the
case of a partnership, the date of the termination
of the partnership.
A taxpayer may revoke a multiple-property election
by filing a statement of revocation with a timely
filed tax return (including extensions). A
revocation is effective as of the first day of the
taxable year of the return in which the revocation
is included or a later day in such taxable year
selected by the eligible taxpayer or qualifying
partnership. Once a taxpayer revokes the election,
the taxpayer is ineligible to make another
multiple-property election with respect to any
qualifying brownfield property subject to the
revoked election.355
Debt-financed property
The Senate amendment provides that debt-financed
property, as defined by section 514(b), does not
include any property the gain or loss from the sale,
exchange, or other disposition of which is excluded
by reason of the provisions of the proposal that
exclude such gain or loss from computing the gross
income of any unrelated trade or business of the
taxpayer. Thus, gain or loss from the sale,
exchange, or other disposition of a qualifying
brownfield property that otherwise satisfies the
requirements of the provision is not taxed as
unrelated business taxable income merely because the
taxpayer incurred debt to acquire or improve the
site.
Effective date. --The Senate amendment
provision applies to gain or loss on the sale,
exchange, or other disposition of a property
acquired by the taxpayer after December 31, 2004.
Conference
Agreement
The conference agreement follows the Senate
amendment, modified to provide a termination date of
December 31, 2009
. The conference agreement provision applies to gain
or loss on the sale, exchange, or other disposition
of property that is acquired by the eligible
taxpayer or qualifying partnership during the period
beginning
January 1, 2005
, and ending
December 31, 2009
. Property acquired during the five-year acquisition
period need not be disposed of by the termination
date in order to qualify for the exclusion. For
purposes of the multiple property election, gain or
loss on property acquired after
December 31, 2009
, is not eligible for the exclusion from unrelated
business taxable income, although properties
acquired after the termination date (but during the
election period) are included for purposes of
determining average eligible remediation
expenditures.
Effective date. --The conference agreement
provision applies to gain or loss on property that
is acquired after
December 31, 2004
.
2. Civil rights tax relief (sec. 643 of the
Senate amendment and sec. 62 of the Code)
Present
Law
Under present law, gross income generally does not
include the amount of any damages (other than
punitive damages) received (whether by suit or
agreement and whether as lump sums or as periodic
payments) by individuals on account of personal
physical injuries (including death) or physical
sickness.356
Expenses relating to recovering such damages are
generally not deductible.357
Other damages are generally included in gross
income. The related expenses to recover the damages,
including attorneys' fees, are generally deductible
as expenses for the production of income,358
subject to the two-percent floor on itemized
deductions.359
Thus, such expenses are deductible only to the
extent the taxpayer's total miscellaneous itemized
deductions exceed two percent of adjusted gross
income. Any amount allowable as a deduction is
subject to reduction under the overall limitation of
itemized deductions if the taxpayer's adjusted gross
income exceeds a threshold amount.360
For purposes of the alternative minimum tax, no
deduction is allowed for any miscellaneous itemized
deduction.
In some cases, claimants will engage an attorney to
represent them on a contingent fee basis. That is,
if the claimant recovers damages, a prearranged
percentage of the damages will be paid to the
attorney; if no damages are recovered, the attorney
is not paid a fee. The proper tax treatment of
contingent fee arrangements with attorneys has been
litigated in recent years. Some courts361
have held that the entire amount of damages is
income and that the claimant is entitled to a
miscellaneous itemized deduction subject to both the
two-percent floor as an expense for the production
of income for the portion paid to the attorney and
to the overall limitation on itemized deductions.
Other courts have held that the portion of the
recovery that is paid directly to the attorney is
not income to the claimant, holding that the
claimant has no claim of right to that portion of
the recovery.362
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides an above-the-line
deduction for attorneys' fees and costs paid by, or
on behalf of, the taxpayer in connection with any
action involving a claim of unlawful discrimination,
certain claims against the Federal Government, or a
private cause of action under the Medicare Secondary
Payer statute. The amount that may be deducted
above-the-line may not exceed the amount includible
in the taxpayer's gross income for the taxable year
on account of a judgment or settlement (whether by
suit or agreement and whether as lump sum or
periodic payments) resulting from such claim.
Under the proposal, "unlawful
discrimination" means an act that is unlawful
under certain provisions of any of the following:
the Civil Rights Act of 1991; the Congressional
Accountability Act of 1995; the National Labor
Relations Act; the Fair Labor Standards Act of 1938;
the Age Discrimination in Employment Act of 1967;
the Rehabilitation Act of 1973; the Employee
Retirement Income Security Act of 1974; the
Education Amendments of 1972; the Employee Polygraph
Protection Act of 1988; the Worker Adjustment and
Retraining Notification Act; the Family and Medical
Leave Act of 1993; chapter 43 of Title 38 of the
United States Code; the Revised Statutes; the Civil
Rights Act of 1964; the Fair Housing Act; the
Americans with Disabilities Act of 1990; any
provision of Federal law (popularly known as
whistleblower protection provisions) prohibiting the
discharge of an employee, discrimination against an
employee, or any other form of retaliation or
reprisal against an employee for asserting rights or
taking other actions permitted under Federal law; or
any provision of Federal, State or local law, or
common law claims permitted under Federal, State, or
local law providing for the enforcement of civil
rights or regulating any aspect of the employment
relationship, including claims for wages,
compensation, or benefits, or prohibiting the
discharge of an employee, discrimination against an
employee, or any other form of retaliation or
reprisal against an employee for asserting rights or
taking other actions permitted by law.
Effective date. --The Senate amendment
provision applies to fees and costs paid after
December 31, 2002, with respect to any judgment or
settlement occurring after such date.
Conference
Agreement
The conference agreement follows the Senate
amendment except for the effective date.
Effective date. --The conference agreement
applies to fees and costs paid after the date of
enactment with respect to any judgment or settlement
occurring after such date.
3. Exclusion from gross income for amounts paid
under National Health Service Corps loan repayment
program (sec. 644 of the Senate amendment and sec.
108 of the Code)
Present
Law
The National Health Service Corps Loan Repayment
Program (the "NHSC Loan Repayment
Program") provides education loan repayments to
participants on condition that the participants
provide certain services. In the case of the NHSC
Loan Repayment Program, the recipient of the loan
repayment is obligated to provide medical services
in a geographic area identified by the Public Health
Service as having a shortage of health-care
professionals. Loan repayments may be as much as
$35,000 per year of service plus a tax assistance
payment of 39 percent of the repayment amount.
States may also provide for education loan repayment
programs for persons who agree to provide primary
health services in health professional shortage
areas. Under the Public Health Service Act, such
programs may receive Federal grants with respect to
such repayment programs if certain requirements are
satisfied.
Generally, gross income means all income from
whatever source derived including income for the
discharge of indebtedness. However, gross income
does not include discharge of indebtedness income
if: (1) the discharge occurs in a Title 11 case; (2)
the discharge occurs when the taxpayer is insolvent;
(3) the indebtedness discharged is qualified farm
indebtedness; or (4) except in the case of a C
corporation, the indebtedness discharged is
qualified real property business indebtedness.
Because the loan repayments provided under the NHSC
Loan Repayment Program or similar State programs
under the Public Health Service Act are not
specifically excluded from gross income, they are
gross income to the recipient. There is also no
exception from employment taxes (FICA and FUTA) for
such loan repayments.
House
Bill
No provision.
Senate
Amendment
The provision excludes from gross income and
employment taxes education loan repayments provided
under the NHSC Loan Repayment Program and State
programs eligible for funds under the Public Health
Service Act. The provision also provides that such
repayments are not taken into account as wages in
determining benefits under the Social Security Act.
Effective date. --The provision is effective
with respect to amounts received in taxable years
beginning after
December 31, 2003
.
Conference
Agreement
The conference agreement follows the Senate
amendment.
4. Certain expenses of rural letter carriers
(sec. 645 of the Senate amendment and sec. 162(o) of
the Code)
Present
Law
The deductible automobile expenses of rural letter
carriers equal the reimbursements that such carriers
receive from the U.S. Postal Service. Carriers are
not allowed to document their actual costs and claim
itemized deductions for costs in excess of
reimbursements,363
nor are carriers required to include in income
reimbursements in excess of their actual costs.
House
Bill
No provision.
Senate
Amendment
Under the Senate amendment, if the reimbursements a
rural letter carrier receives from the U.S. Postal
Service fall short of the carrier's actual costs,
the costs in excess of reimbursements qualify as a
miscellaneous itemized deduction subject to the
two-percent floor. Reimbursements in excess of their
actual costs continue not to be required to be
included in gross income.
Effective date. --The provisions is effective
for taxable years beginning after
December 31, 2003
.
Conference
Agreement
The conference agreement follows the Senate
amendment.
5. Method of accounting for naval shipbuilders
(sec. 646 of the Senate amendment)
Present
Law
Generally, taxpayers must use the
percentage-of-completion method to determine taxable
income from long-term contracts.364
Under sec. 10203(b)(2)(B) of the Revenue Act of
1987,365
an exception exists for certain ship construction
contracts, which may be accounted for using the
40/60 percentage-of-completion/capitalized cost
method ("PCCM"). Under the 40/60 PCCM, 60
percent of a taxpayer's long-term contract income is
exempt from the requirement to use the
percentage-of-completion method while 40 percent
remains subject to the requirement. The exempt 60
percent of long-term contract income must be
reported by consistently using the taxpayer's exempt
contract method. Permissible exempt contract methods
include the percentage of completion method, the
exempt-contract percentage-of-completion method, and
the completed contract method.366
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides that qualified naval
ship contracts may be accounted for using the 40/60
PCCM during the first five taxable years of the
contract. The cumulative reduction in tax resulting
from the provision over the five-year period is
recaptured and included in the taxpayer's tax
liability in the sixth year. Qualified naval ship
contracts are defined as any contract or portion
thereof that is for the construction in the United
States of one ship or submarine for the Federal
Government if the taxpayer reasonably expects the
acceptance date will occur no later than nine years
after the construction commencement date.
Effective date. --The Senate amendment is
effective for contracts with respect to which the
construction commencement date occurs after date of
enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment with the following modification. The
provision specifies that the construction
commencement date is the date on which the physical
fabrication of any section or component of the ship
or submarine begins in the taxpayer's shipyard.
Effective date. --The provision is effective
for contracts with respect to which the construction
commencement date occurs after date of enactment.
6. Distributions to shareholders from
policyholders surplus account of life insurance
companies (sec. 647 of the Senate amendment and sec.
815 of the Code)
Prior
and Present Law
Under the law in effect from 1959 through 1983, a
life insurance company was subject to a three-phase
taxable income computation under Federal tax law.
Under the three-phase system, a company was taxed on
the lesser of its gain from operations or its
taxable investment income (Phase I) and, if its gain
from operations exceeded its taxable investment
income, 50 percent of such excess (Phase II).
Federal income tax on the other 50 percent of the
gain from operations was deferred, and was accounted
for as part of a policyholder's surplus account and,
subject to certain limitations, taxed only when
distributed to stockholders or upon corporate
dissolution (Phase
III
). To determine whether amounts had been
distributed, a company maintained a shareholders
surplus account, which generally included the
company's previously taxed income that would be
available for distribution to shareholders.
Distributions to shareholders were treated as being
first out of the shareholders surplus account, then
out of the policyholders surplus account, and
finally out of other accounts.
The Deficit Reduction Act of 1984 included
provisions that, for 1984 and later years,
eliminated further deferral of tax on amounts
(described above) that previously would have been
deferred under the three-phase system. Although for
taxable years after 1983, life insurance companies
may not enlarge their policyholders surplus account,
the companies are not taxed on previously deferred
amounts unless the amounts are treated as
distributed to shareholders or subtracted from the
policyholders surplus account (sec. 815).
Under present law, any direct or indirect
distribution to shareholders from an existing
policyholders surplus account of a stock life
insurance company is subject to tax at the corporate
rate in the taxable year of the distribution.
Present law (like prior law) provides that any
distribution to shareholders is treated as made (1)
first out of the shareholders surplus account, to
the extent thereof, (2) then out of the
policyholders surplus account, to the extent
thereof, and (3) finally, out of other accounts.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provision suspends for a stock
life insurance company's taxable years beginning
after
December 31, 2003
, and before
January 1, 2006
, the application of the rules imposing income tax
on distributions to shareholders from the
policyholders surplus account of a life insurance
company (sec. 815). The provision also reverses the
order in which distributions reduce the various
accounts, so that distributions would be treated as
first made out of the policyholders surplus account,
to the extent thereof, and then out of the
shareholders surplus account, and lastly out of
other accounts.
Effective date. --The Senate amendment
provision is effective for taxable years beginning
after
December 31, 2003
.
Conference
Agreement
The conference agreement follows the Senate
amendment, with a modification.
The conference agreement provision suspends for a
stock life insurance company's taxable years
beginning after
December 31, 2004
, and before
January 1, 2007
, the application of the rules imposing income tax
on distributions to shareholders from the
policyholders surplus account of a life insurance
company (sec. 815). The conference agreement
includes the Senate amendment provision reversing
the order in which distributions reduce the various
accounts, so that distributions would be treated as
first made out of the policyholders surplus account,
to the extent thereof, and then out of the
shareholders surplus account, and lastly out of
other accounts.
Effective date. --The conference agreement
provision is effective for taxable years beginning
after
December 31, 2004
.
7. Motor vehicle dealer transitional assistance
(sec. 650 of the Senate amendment)
Present
Law
Under present law, no gain or loss is recognized on
the exchange of property used in a trade or business
or held for investment if the property is exchanged
solely for property of like kind.367
To qualify for nonrecognition treatment, the
replacement property must be identified within 45
days and the exchange must be completed within 180
days after the transfer of the exchanged property.
The basis of the replacement property is determined
by reference to the basis of the exchanged property.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides an election (on either
an original or amended return) to defer the gain on
termination payments received by a taxpayer from a
motor vehicle manufacturer on account of the
termination of a motor vehicle sales and service
agreement, provided the proceeds are reinvested
within two years in property used in a domestic
motor vehicle dealership. Under the provision, a
dealership in which the proceeds are reinvested
within two years is treated as like kind replacement
property under sec. 1031, without regard to the time
limitations on identification of and acquisition of
such replacement property under present law. The
provision extends the statute of limitations for
assessment of any deficiency attributable to gain on
termination payments until three years after the
taxpayer notifies the Secretary of the like-kind
replacement property or an intention not to replace.
The Senate amendment applies only with respect to
termination payments from a motor vehicle
manufacturer who announced in December 2000 that it
would phase out the motor vehicle brand to which the
agreement relates.
Effective date. --The Senate amendment is
effective for amounts received after
December 12, 2000
, in taxable years ending after that date.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
8. Expansion of designated renewal community area
based on 2000 census data (sec. 651 of the Senate
amendment and sec. 1400E of the Code)
Present
Law
Section 1400E provides for the designation of
certain communities as renewal communities.368
An area designated as a renewal community is
eligible for the following tax incentives: (1) a
zero-percent rate for capital gain from the sale of
qualifying assets; (2) a 15-percent wage credit to
employers for the first $10,000 of qualified wages;
(3) a "commercial revitalization
deduction" that allows taxpayers (to the extent
allocated by the appropriate State agency) to deduct
either (a) 50 percent of qualifying expenditures for
the taxable year in which a qualified building is
placed in service, or (b) all of the qualifying
expenditures ratably over a 10-year period beginning
with the month in which such building is placed in
service; (4) an additional $35,000 of section 179
expensing for qualified property; and (5) an
expansion of the work opportunity tax credit with
respect to individuals who live in a renewal
community.
To be designated as a renewal community, a nominated
area was required to meet the following criteria:
(1) each census tract must have a poverty rate of at
least 20 percent; (2) in the case of an urban area,
at least 70 percent of the households have incomes
below 80 percent of the median income of households
within the local government jurisdiction; (3) the
unemployment rate is at least 1.5 times the national
unemployment rate; and (4) the area is one of
pervasive poverty, unemployment, and general
distress. There are no geographic size limitations
placed on renewal communities. Instead, the boundary
of a renewal community must be continuous. In
addition, the renewal community must have a minimum
population of 4,000 if the community is located
within a metropolitan statistical area (at least
1,000 in all other cases), and a maximum population
of not more than 200,000. The population limitations
do not apply to any renewal community that is
entirely within an Indian reservation.
The designations of renewal communities were
required to be made by December 31, 2001, using 1990
census data to determine relevant populations and
poverty rates.
House
Bill
No provision.
Senate
Amendment
The Senate amendment permits the Secretary of
Housing and Urban Development to expand a renewal
community to include: (1) any census tract that at
the time such community was nominated, satisfied the
requirements for inclusion in such community but for
the failure of such tract to satisfy one or more of
the population and poverty rate requirements using
1990 census data, and that satisfies all failed
population and poverty rate requirements using 2000
census data; or (2) an area that is adjacent to at
least one other area designated as a renewal
community and that has a population less than the
generally applicable population requirement, if the
area is one of pervasive poverty, unemployment, and
general distress that is within the jurisdiction of
one or more local governments and the boundary of
the area is continuous, or the area contains a
population of less than 100 people.
Effective date. --The provision is effective
as if included in the amendments made by section 101
of the Community Renewal Tax Relief Act of 2000.
Conference
Agreement
The conference agreement modifies the Senate
amendment to authorize the Secretary of Housing and
Urban Development, at the request of all of the
governments that nominated a renewal community, to
add a contiguous census tract to a renewal community
in the following circumstances. First, the renewal
community, including any tract to be added, would
have met the renewal community eligibility
requirements at the time of the community's original
nomination, and any tract to be added has a poverty
rate using 2000 census data that exceeds the poverty
rate of such tract using 1990 census data. Second, a
tract may be added to a renewal community even if
the addition of such tract to such community would
have caused the community to fail one or more
eligibility requirements when originally nominated
using 1990 census data, provided that: (1) the
renewal community after the inclusion of such tract
does not have a population that exceeds 200,000
using either 1990 or 2000 census data; (2) such
tract has a poverty rate of at least 20 percent
using 2000 census data; and (3) such tract has a
poverty rate using 2000 census data that exceeds the
poverty rate of such tract using 1990 census data.
Census tracts that did not have a poverty rate
determined by the Bureau of the Census using 1990
data may be added to an existing renewal community
without satisfying requirement (3) above. Third, a
tract may be added to an existing renewal community
if such tract: (1) has no population using 2000
census data or no poverty rate for such tract is
determined by the Bureau of the Census using 2000
census data; (2) such tract is one of general
distress; and (3) the renewal community, including
such tract, is within the jurisdiction of one or
more local governments and has a continuous
boundary.
Effective date. --The conference agreement
provision is effective as if included in the
amendments made by section 101 of the Community
Renewal Tax Relief Act of 2000.
9. Reduction of holding period to 12 months for
purposes of determining whether horses are section
1231 assets (sec. 652 of the Senate amendment and
sec. 1231 of the Code)
Present
Law
Under present law, gain from the sale or exchange of
horses held for draft, breeding, or sporting
purposes qualify for long-term capital gain if the
horse has been held for 24 months or more.
House
Bill
No provision.
Senate
Amendment
The Senate amendment reduces the holding period for
horses to 12 months or more.
Effective date. --The Senate amendment is
effective for taxable years beginning after
December 31, 2003
.
Conference
Agreement
The conference agreement does not include the
provision in the Senate amendment.
10. Blue ribbon commission on comprehensive tax
reform (sec. 653 of the Senate amendment)
Present
Law
Under present law, there is no specially-appointed
commission designated to study and report on
comprehensive tax reform.
House
Bill
No provision.
Senate
Amendment
The Senate amendment establishes a commission to
study and report on comprehensive tax reform.
Members of the commission are to be appointed by
Congressional leadership and the President.
Effective date. --Members must be appointed
by
October 30, 2004
. The report is due no later than 18 months after
all members are appointed.
Conference
Agreement
The conference agreement does not include the Senate
amendment.
11. Temporary accumulated earnings tax safe
harbor (sec. 655 of the Senate amendment and sec.
537 of the Code)
Present
Law
Present law imposes an accumulated earnings tax on
the accumulated taxable income of a corporation that
is formed or availed of for the purpose of avoiding
the income tax with respect to its shareholders or
the shareholders of any other corporation, by
permitting earnings and profits to accumulate
instead of being distributed.369
The accumulated earnings tax is in addition to the
regular corporate level tax and is imposed at the
maximum rate that would be imposed on a dividend to
an individual shareholder. A corporation is
generally permitted to accumulate an exempted amount
of $250,000 ($150,000 in the case of certain service
corporations); the tax is then imposed on
accumulated taxable income above that amount.
The fact that earnings and profits are permitted to
accumulate beyond the reasonable needs of the
business is determinative of the purpose to avoid
tax with respect to shareholders, unless the
corporation by the preponderance of the evidence
shall prove to the contrary. If a corporation is a
"mere holding or investment company," that
fact is prima facie evidence of the prohibited
purpose.370
Treasury regulations provide that even in cases of
accumulation of earnings beyond the reasonable needs
of the business or where a corporation is a mere
holding or investment company, such facts are not
absolutely conclusive against the taxpayer if the
taxpayer satisfies the Commissioner that the
corporation was neither formed not availed of for
the purpose of avoiding income tax with respect to
shareholders.371
The determination whether earnings and profits have
been accumulated beyond the reasonable needs of the
business is based on facts and circumstances. The
reasonable needs of the business include
"reasonably anticipated" needs of the
business.372
Some courts have applied a business cycle approach
in determining the basic working capital needs of a
business, to which additional reasonably anticipated
future needs may be added. Disputes have arisen
regarding the choice of business cycle and the
proper addition of future needs.373
House
Bill
No provision.
Senate
Amendment
The bill provides that the reasonably anticipated
needs of a business for any taxable year shall
include working capital for the business in an
amount which is not less than the sum of the cost of
goods, operating expenses, and interest expense
which the business incurred during the preceding
taxable year. Any amounts incurred as part of a plan
a principal purpose of which is to increase the
limitation under this provision is not taken into
account.
Effective date. --The provision applies to
taxable years beginning after
December 31, 2003
and before
January 1, 2009
.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
12. Tax Treatment of State Ownership of Railroad
REIT (sec. 656 of the Senate amendment and secs.
103, 115, 336 and 337 of the Code)
Present
Law
A real estate investment trust ("REIT") is
an electing entity that is engaged primarily in
passive real estate activities (as specifically
defined) and that, among other requirements, must
have at least 100 shareholders. If a qualified
entity elects REIT status, it can be taxed
essentially as a pass-through entity, since it can
obtain a deduction for amounts distributed to its
shareholders and it is required to distribute at
least 90 percent of its income to shareholders
annually.
If an entity does not qualify to be treated as a
REIT, it would generally be treated as a regular C
corporation subject to tax under subchapter C of the
Code and section 11 at the corporate entity level,
unless it elected to be taxed as a partnership or
disregarded entity under Treasury regulations. Even
if it made such an election, the C corporation would
be treated as if it had liquidated and distributed
its assets to shareholders, with a resulting
corporate tax on the excess of fair market value
over basis of any corporate assets. A C corporation
that becomes a tax-exempt entity also must pay
corporate tax on the excess of the fair market value
over the basis of its assets.
A State or local government is not subject to
Federal income tax on income from an activity that
is an essential governmental function.374
Interest on a State or local bond is excluded from
gross income, with certain exceptions.375
Special rules are also provided as requirements for
tax exemption for State and local bonds.376
House
Bill
No provision.
Senate
Amendment
The bill provides that a qualified railroad
corporation that is a REIT that meets certain
qualified activity requirements (described further
below) and that becomes 100 percent owned by a State
after
December 31, 2003
and before
December 31, 2005
, will not be treated as a taxable C corporation,
but will be taxed as if its income from the
qualified activities accrued directly to the State.
To the extent its described railroad activities
qualify under present law as essential governmental
functions, income from such activities shall be tax
exempt under section 115 of the Code.
Under the bill, no gain or loss shall be recognized
from the deemed conversion of such a REIT to a C
corporation which is tax-exempt, and no change in
the basis of the property of the entity shall occur.
Also, any obligation issued by an entity described
above is treated as an obligation of a State for
purposes of applying the tax exempt bond provisions.
A qualified railroad corporation that is a REIT must
be a non-operating Class
III
railroad, and substantially all of its activities
must consist of the ownership, leasing, and
operation by such corporation of facilities,
equipment, and other property used by the
corporation or other persons in railroad
transportation.
Effective date. --The bill applies on and
after the date a State becomes the owner of all the
outstanding stock of a qualified corporation,
provided that the State becomes the owner of all the
voting stock of the corporation on or before
December 31, 2003
and becomes the owner of all the outstanding stock
of the corporation on or before
December 31, 2005
.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
13. Contribution in aid of construction (sec. 657
of the Senate amendment and sec. 118 of the Code)
Present
Law
Section 118(a) provides that gross income of a
corporation does not include a contribution to its
capital. In general, section 118(b) provides that a
contribution to the capital of a corporation does
not include any contribution in aid of construction
or any other contribution as a customer or potential
customer and, as such, is includible in gross income
of the corporation. However, for any amount of money
or property received by a regulated public utility
that provides water or sewerage disposal services,
such amount shall be considered a contribution to
capital (excludible from gross income) so long as
such amount: (1) is a contribution in aid of
construction, and (2) is not included in the
taxpayer's rate base for rate-making purposes. If
the contribution is in property other than water or
sewerage disposal facilities, the amount is
generally excludible from gross income only if the
amount is expended to acquire or construct water or
sewerage disposal facilities within a specified time
period. A contribution in aid of construction does
not include a customer connection fee or amounts
paid as service charges for starting or stopping
services.
House
Bill
No provision.
Senate
Amendment
The Senate amendment clarifies that water and sewer
service laterals (amounts paid to connect the
customer's water service line or sewer lateral line
to the utility's distribution or collection system,
or to extend a main water or sewer line to provide
service to a customer) received by a regulated
public utility that provides water or sewerage
disposal services is considered a contribution to
capital and excludible from gross income of such
utility.
Effective date. --The Senate amendment
provision is effective for contributions made after
the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
14. Credit for purchase and installation of
agricultural water conservation systems (sec. 658 of
the Senate amendment)
Present
Law
There is no provision that provides for a credit for
agricultural water systems.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides a 30-percent credit
(not to exceed $500 per acre) for water conservation
system expenses for taxpayers who normally derive at
least 50 percent of their gross income from land.
The term 'water conservation system expenses' means
expenses for the purchase and installation of a
water conservation system but only if (1) the land
served by the water conservation system is entirely
in a county or county-equivalent area which has
received, in the taxable year the expenses were paid
or incurred or in any of the three preceding taxable
years, a primary-county designation due to drought
by the Secretary of Agriculture, and (2) such system
is certified as saving at least 5 percent more
irrigation water than the irrigation system which
was used on such land immediately prior to the
installation of such water conservation system.
The term 'water conservation system' means (1) new
or replacement irrigation equipment and machinery,
including sprinklers, pipes, siphons, nozzles,
pumps, motors, and engines, and (2) computer systems
for irrigation and water management.
The irrigation water savings shall be determined and
certified under regulations prescribed jointly by
the Natural Resources Conservation Service of the
Department of Agriculture and the Bureau of
Reclamation of the Department of the Interior. Such
regulations shall include a list of individuals or
organizations qualified to make such certification.
No deduction is allowed with respect to any expenses
taken into account in determining the credit, and
any increase in the basis of any property which
would result from such expense shall be reduced by
the amount of credit allowed for such expense.
Effective date. --The credit is available for
expenses occurred after date of enactment with
respect to systems completed after
December 31, 2004
and prior to
January 1, 2006
.
Conference
Agreement
The conference agreement does not include the Senate
amendment.
15. Modification of involuntary conversion rules
for businesses affected by the September 11th
terrorist attacks (sec. 659 of the Senate amendment
and sec. 1400L of the Code)
Present
Law
Generally, a taxpayer realizes gain to the extent
the sales price (and any other consideration
received) exceeds the taxpayer's basis in the
property. The realized gain is subject to current
income tax unless the gain is deferred or not
recognized under a special tax provision.
Under section 1033, gain realized by a taxpayer from
an involuntary conversion of property is deferred to
the extent the taxpayer purchases property similar
or related in service or use to the converted
property within the applicable period. The
taxpayer's basis in the replacement property
generally is the same as the taxpayer's basis in the
converted property, decreased by the amount of any
money or loss recognized on the conversion, and
increased by the amount of any gain recognized on
the conversion.
The applicable period for the taxpayer to replace
the converted property begins with the date of the
disposition of the converted property (or if
earlier, the earliest date of the threat or
imminence of requisition or condemnation of the
converted property) and ends two years after the
close of the first taxable year in which any part of
the gain upon conversion is realized (the
"replacement period"). Special rules
extend the replacement period for certain real
property and principle residences damaged by a
Presidentially declared disaster to three years and
four years, respectively, after the close of the
first taxable year in which gain is realized.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides special rules for
property which is compulsorily or involuntarily
converted as a result of the terrorist attacks on
September 11, 2001
, in the New York Liberty Zone. The special rules
provide that a corporation which is a member of an
affiliated group filing a consolidated tax return
shall be treated as satisfying the repurchase
requirement of section 1033 with respect to such
property to the extent the requirement is satisfied
by another member of the corporation's affiliated
group. In addition, the provision extends the
replacement period for such property to five years
after the close of the first taxable year in which
gain is realized, if substantially all the use of
the replacement property is in New York City.
Effective date. --The Senate amendment is
effective for involuntary conversions occurring on
or after
September 11, 2001
.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
16. Repeal of application of below-market loan
rules to amounts paid to certain continuing care
facilities (sec. 660 of the Senate amendment and
sec. 7872 of the Code)
Present
Law
Certain loans that bear interest at a below-market
interest rate are treated as loans bearing interest
at the market rate accompanied by a payment or
payments from the lender to the borrower which are
characterized in accordance with the substance of
the particular transaction (e.g., gift,
compensation, dividend, etc.).377
The market rate of interest for purposes of the
below-market loan rules is assumed to be 100 percent
of the applicable Federal rate ("AFR") at
the time the loan is made in the case of a term loan
or, in the case of a demand loan, 100 percent of the
AFR in effect over the time that the loan is
outstanding.
In general, the below-market loan rules apply to (1)
loans where the foregone (i.e., below-market)
interest is in the nature of a gift, (2) loans
between an employee and an employer or between an
independent contractor and one for whom the
independent contractor provides services, (3) loans
between a corporation and a shareholder of the
corporation, (4) loans of which one of the principal
purposes of the interest arrangement is the
avoidance of Federal tax, (5) to the extent provided
in Treasury regulations, any other below-market
loans if the interest arrangement of such loan has a
significant effect on any Federal tax liability of
either the lender or borrower, and (6) loans to any
qualified continuing care facility pursuant to a
continuing care contract.
In the case of loans made to qualified continuing
care facilities,378
an exception from the below-market loan rules is
provided for any loan as of the calendar year in
which the lender has attained age 65, provided the
loan is made by the lender to the qualified
continuing care facility pursuant to a continuing
care contract.379
However, the exception applies only to the extent
that the principal amount of the loan, when added to
the aggregate outstanding amount of all other
previous loans between the lender (or the lender's
spouse) and any qualified continuing care facility,
does not exceed $90,000. This amount is indexed for
inflation, and the amount for calendar year 2004 is
$154,500.380
With regard to continuing care facilities that are
not qualified continuing care facilities, the
IRS
takes the position that loans made to such
facilities by residents are not subject to the
below-market loan rules until and unless Treasury
regulations are issued that treat such loans as
having a significant effect on any Federal tax
liability of either the facility or the resident.381
House
Bill
No provision.
Senate
Amendment
The Senate amendment repeals the application of the
below-market loan rules to loans that are made to
any qualified continuing care facility pursuant to a
continuing care contract, without regard to the
principal amount of the loan (including the
aggregate outstanding amount of any other previous
loans between the resident or resident's spouse and
any qualified continuing care facility). The Senate
amendment also clarifies that the determination of
whether a facility is a qualified continuing care
facility is to be made on an annual basis at the end
of each calendar year, rather than only when the
continuing care contract is entered into. In
addition, the Senate amendment modifies the
definition of a continuing care contract to (1) not
exclude contracts that require additional
substantial payment for increased personal care
services required by the resident or resident's
spouse, and (2) provide authority for the Treasury
to issue guidance that limits such definition to
contracts that provide to the resident or resident's
spouse only facilities, care and services that are
customarily offered by continuing care facilities.
The Senate amendment also clarifies that the
definition of a qualified continuing care facility
requires substantially all of the independent living
unit residents of the facility to be covered by
continuing care contracts.
The Senate amendment does not affect the present-law
application of the below-market loan rules to loans
made to any continuing care facility that is not a
qualified continuing care facility.
Effective date. --The Senate amendment
provision applies to calendar years beginning after
December 31, 2004
.
Conference
Agreement
The conference agreement does not include the Senate
amendment.
17. Maximum capital gain rates of individuals for
gold, silver, platinum, and palladium (sec. 661 of
the Senate amendment and sec. 1(h) of the Code)
Present
Law
Under present law, the net capital gain of an
individual is generally taxed at a maximum rate of
15 percent (five percent for gain otherwise taxed at
the 10- or 15-percent rate). However, the maximum
tax rate for individuals from the sale or exchange
of a collectible is 28 percent. Gold, silver,
platinum or palladium bullion is defined as a
collectible for this purpose.
House
Bill
No provision.
Senate
Amendment
Under the Senate amendment, gold, silver, platinum
and palladium bullion is not treated as a
"collectible" for purposes of applying the
individual capital gain rates. Thus, gain or loss
from the sale of the bullion will qualify for the
lower five- and 15-percent capital gain rates.
Effective date. --Taxable years beginning
after
December 31, 2003
.
Conference
Agreement
The conference agreement does not include the
provision in the Senate amendment.
18. Inclusion of primary and secondary medical
strategies for children and adults with sickle cell
disease as medical assistance under the medicaid
program (sec. 662 of the Senate amendment)
Present
Law
Medicaid programs are generally operated by the
States, in part with funds received from the Federal
government. Within broad Federal guidelines, States
can design the scope and availability of Medicaid
benefits. Medicaid law requires States to provide
certain services including, for example, hospital
and physician services. Federal funds are available
for additional optional services if States choose to
include them in their Medicaid plans. Within Federal
guidelines, States may limit the amount, duration of
any Medicaid service. Under present law, States may
have covered some of the primary and secondary
medical strategies, treatments, and services for
Sickle Cell Disease, however such services are not
specifically listed in the Medicaid statute as
either mandatory or optional services.
The Federal government shares in States' Medicaid
service costs by means of a statutory formula
designed to provide a higher Federal matching rate
to States with lower per capita incomes. The Federal
share is referred to as the Federal Medical
Assistance Percentage ("FMAP"). For some
Medicaid services and activities, such as costs
associated with program administration, the FMAP
rate is set in statute. Because Medicaid is an
individual entitlement, there is no annual ceiling
on Federal expenditures; however, in order to
continue receiving Federal payments, States must
contribute their share of the matching funds.
House
Bill
No provision.
Senate
Amendment
The Senate amendment amends Title XIX of the Social
Security Act to add primary and secondary medical
strategies, treatment and services for individuals
who have Sickle Cell Disease as a new optional
medical assistance category under the Medicaid
program. Such strategies, treatment, and services
include: (1) chronic blood transfusion (with
deferoxamine chelation) to prevent stroke in
individuals with Sickle Cell Disease who have been
identified as being at high risk for stroke; (2)
genetic counseling, testing, and treatment for
individuals with Sickle Cell Disease or the Sickle
Cell trait; and (3) other treatment and services to
prevent individuals who have Sickle Cell Disease and
who have had a stroke having another stroke. The
amendment sets the FMAP rate at 50 percent for costs
attributable to providing: (1) services to identify
and educate likely Medicaid enrollees who have or
are carriers of Sickle Cell Disease; or (2)
education regarding the risks of stroke and other
complications, as well as the prevention of stroke
and complications for likely Medicaid enrollees with
Sickle Cell Disease.
The Senate amendment also authorizes an
appropriation in the amount of $10,000,000 for each
of fiscal years 2005 through 2009 for a
demonstration program under which the Administrator
of the Health Resources and Services Administration
(through the Bureau of Primary Health Care and the
Maternal Child Health Bureau) would make grants up
to 40 eligible entities in each such fiscal year for
the development and establishment of systemic
mechanisms for the prevention and treatment of the
Sickle Cell Disease. Eligible entities include
Federallyqualified health centers as defined in the
Medicaid statute; nonprofit hospitals or clinics, or
university health centers that provide primary
health care that: (1) have a collaborative agreement
with a community-based Sickle Cell Disease
organization or a nonprofit entity with experience
in working with individuals who have the Sickle Cell
Disease; and (2) demonstrate that they have at least
five years of experience in working with individuals
who have the Sickle Cell Disease. Systematic
mechanisms for the prevention and treatment of the
Sickle Cell Disease include: (1) coordination of
service delivery for individuals with the disease;
(2) genetic counseling and testing; (3) bundling of
technical services related to the prevention and
treatment of the disease; (4) training health
professionals; and (5) identifying and establishing
efforts related to the expansion and coordination of
education, treatment, and continuity of care
programs for individuals with the disease.
In awarding such grants to eligible entities, the
Administrator of Health Resources and Services
Administration is to take into consideration
geographic diversity and to give priority to: (1)
Federally-qualified health centers that have a
partnership or other arrangement with a
comprehensive Sickle Cell Disease treatment center
and does not receive funds from the National
Institutes of Health; or (2) Federally-qualified
health centers that intend to develop a partnership
or other arrangement with a comprehensive Sickle
Cell Disease treatment center, and that does not
receive funds from the National Institutes of
Health. Eligible entities that are awarded grants
are required to use the funds for the following
activities: (1) to facilitate and coordinate the
delivery of education, treatment, and continuity of
care under: (a) the entity's collaborative agreement
with a community-based Sickle Cell Disease
organization or a nonprofit entity that works with
individuals who have Sickle Cell Disease; (b) the
Sickle Cell Disease newborn screening program for
the State in which the entity is located; and (c)
the Maternal and Child Health program for the State
in which the entity is located; (2) to train nursing
and other health staff who provide care for
individuals with Sickle Cell Disease; (3) to enter
into a partnership with adult or pediatric
hematologists in the region and other regional
experts in the Sickle Cell Disease at tertiary or
academic health centers and State and county health
offices; and (4) to identify and secure resources
for ensuring reimbursement under the Medicaid
program, State children's health insurance program,
and other health programs for the prevention and
treatment of Sickle Cell Disease.
The Senate amendment also requires the Administrator
of Health Resources and Services Administration to
enter into a contract with an entity and to serve as
a National Coordinating Center for the demonstration
program. The center is to: (1) collect, coordinate,
monitor and distribute data, best practices, and
findings regarding the activities funded under
grants made to eligible entities under the
demonstration program; (2) develop a model protocol
for eligible entities with respect to prevention and
treatment of the disease; (3) develop educational
materials regarding the prevention and treatment of
the disease; and (4) submit a written report to
Congress. The written report to Congress should
include recommendations on the effectiveness of the
demonstration program direct outcome measures, such
as the number and type of health care resources
utilized (such as emergency room visits, hospital
visits, length of stay, and physician visits for
individuals with Sickle Cell Disease) and the number
of individuals that were tested and subsequently
received genetic counseling for the sickle cell
trait.
Effective date. --The Senate amendment is
effective on the date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment provision.
19. Mortgage payment assistance (secs. 901 and
902 of the Senate amendment)
Present
Law
There is no provision in present law that authorizes
the Secretary of Housing and Urban Development to
award low-interest loans to individuals adversely
affected by international economic activity to
enable such individuals to make mortgage payments
with respect to their primary residences.
House
Bill
No provision.
Senate
Amendment
The Senate amendment requires the Secretary of
Housing and Urban Development (the
"Secretary") to establish a program for
awarding low-interest loans to eligible individuals
to enable such individuals to continue making
mortgage payments with respect to their primary
residences. The provision provides that the
Secretary shall issue regulations no later than six
weeks after the date of enactment to implement this
program.
An individual eligible to receive a loan under the
program must be: (1) a worker that is adversely
affected by international economic activity, as
determined by the Secretary; (2) a borrower on a
loan that requires monthly mortgage payments with
respect to the primary residence of the individual;
and (3) enrolled in a training or assistance
program. The amount of a loan provided under the
program cannot exceed the aggregate amount of
monthly mortgage payments the borrower would owe
during a 12-month period. In addition, a loan
provided under the program must have an applicable
interest rate of four percent and must provide for
monthly repayments over a five-year period.
The provision authorizes appropriations of $10
million for each of the years 2005 through 2009 to
carry out the purposes of the provision.
Effective date. --The provision is effective
on the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
20. Protection of overtime pay (secs. 489-490 of
the Senate amendment and sec. 13 of the Fair Labor
Standards Act of 1938)
Present
Law
The Fair Labor Standards Act of 1938 ("FLSA")
establishes minimum wage and overtime pay
requirements that apply to employees, subject to
certain exemptions.382
On
April 23, 2004
, the Department of Labor issued revised regulations
implementing exemptions from the FLSA minimum wage
and overtime pay requirements.383
Among other changes, the regulations increased the
salary threshold for employees to be exempt from
these requirements.
House
Bill
No provision.
Senate
Amendment
The Senate amendment contains provisions relating to
the authority of the Secretary of Labor to issue
regulations implementing the overtime pay
requirement and the effect of recently issued
regulations.
Under the Senate amendment, the Secretary of Labor
may not issue any regulation that exempts from the
overtime pay requirement any employee who earns less
than $23,660 per year. In addition, the Secretary of
Labor may not issue any regulation concerning the
right to overtime pay that is not as protective, or
more protective, of the overtime pay rights of
employees in certain specified occupations or job
classifications (as listed in the provision) as the
protections provided for such employees under the
regulations in effect on
March 31, 2003
. Any portion of a regulation issued after
March 31, 2003
, that modifies the overtime pay requirement in a
manner that is inconsistent with the provisions of
the Senate amendment will have no force or effect as
it relates to the occupation or job classification
involved.
The Senate amendment also provides that,
notwithstanding the Administrative Procedures Act or
any other provision of law, any portion of the Labor
regulations issued on
April 23, 2004
, that exempts from the overtime pay requirement any
employee who would not otherwise be exempt if the
regulations in effect on
March 31, 2003
, remained in effect, will have no force or effect.
In addition, the portion of the regulations (as in
effect on
March 31, 2003
) that would prevent any employee from being exempt
shall remain in effect. Nonetheless, the increased
salary requirements provided for in the regulations
issued on
April 23, 2004
, will remain in effect.
Effective date. --The provision is effective
on the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provisions.
21. Report on acquisitions of goods from foreign
sources (sec. 1001 of the Senate amendment and sec.
43 of the Office of Federal Procurement Policy Act)
Present
Law
Public Law 93-400, "The Office of Federal
Procurement Policy Act", as amended, created
the Office of Federal Procurement Policy ("OFPP")
in 1974 and placed it in the Office of Management
and Budget ("OMB"). The OFPP was created,
among other purposes, to provide Government-wide
procurement policies which are to be followed by
Executive agencies in procurement activities.
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides that, not later than
60 days after the end of each fiscal year, each
executive agency is to submit to the Congress a
report on the acquisitions that were made of
articles, materials, or supplies by the agency in
that fiscal year from sources outside the United
States. The report is to separately include the
following information: (1) the dollar value of any
articles, materials, or supplies that were
manufactured outside the United States; (2) an
itemized list of all waivers granted with respect to
such articles, materials, or supplies under the Buy
American Act; and (2) a summary of the (a) the total
procurement funds expended on articles, materials
and supplies manufactured outside the United States
and (b) the total procurement funds expended on
articles, materials, and supplies manufactured
outside the Untied States. The agency is to make the
report publicly available by posting the report on
the Internet.
The reporting requirement does not apply to any
procurement for national security purposes entered
into by: (1) the Department of Defense or any agency
or entity thereof; (2) the Departments of the Army,
Navy, and Air Force or any agency or entity of any
of the military departments; (3) the Department of
Homeland Security; (4) the Department of Energy or
any agency or entity thereof, with respect to the
national security programs of the Department of
Energy; or (5) any element of the intelligence
community.
The Senate amendment also provides that, not later
than 60 days after the end of each fiscal year
ending after the date of enactment, the Secretary of
Commerce is to submit to Congress a report on the
acquisitions by foreign governments of articles,
materials, or supplies that were manufactured or
extracted in the United States in that fiscal year.
The report is to indicate the dollar value of such
articles, materials, or supplies and is to be made
publicly available by posting on the Internet.
Effective date. --The provision is effective
on the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
22. Minimum cost requirement for excess asset
transfers (sec. 719 of the Senate amendment and sec.
420 of the Code)
Present
Law
Defined benefit plan assets generally may not revert
to an employer prior to termination of the plan and
satisfaction of all plan liabilities. In addition, a
reversion may occur only if the plan so provides. A
reversion prior to plan termination may constitute a
prohibited transaction and may result in plan
disqualification. Any assets that revert to the
employer upon plan termination are includible in the
gross income of the employer and subject to an
excise tax. The excise tax rate is 20 percent if the
employer maintains a replacement plan or makes
certain benefit increases in connection with the
termination; if not, the excise tax rate is 50
percent. Upon plan termination, the accrued benefits
of all plan participants are required to be
100-percent vested.
A pension plan may provide medical benefits to
retired employees through a separate account that is
part of such plan. A qualified transfer of excess
assets of a defined benefit plan to such a separate
account within the plan may be made in order to fund
retiree health benefits.384
A qualified transfer does not result in plan
disqualification, is not a prohibited transaction,
and is not treated as a reversion. Thus, transferred
assets are not includible in the gross income of the
employer and are not subject to the excise tax on
reversions. No more than one qualified transfer may
be made in any taxable year. No qualified transfer
may be made after December 31, 2013.
Excess assets generally means the excess, if any, of
the value of the plan's assets385
over the greater of (1) the accrued liability under
the plan (including normal cost) or (2) 125 percent
of the plan's current liability.386
In addition, excess assets transferred in a
qualified transfer may not exceed the amount
reasonably estimated to be the amount that the
employer will pay out of such account during the
taxable year of the transfer for qualified current
retiree health liabilities. No deduction is allowed
to the employer for (1) a qualified transfer or (2)
the payment of qualified current retiree health
liabilities out of transferred funds (and any income
thereon).
Transferred assets (and any income thereon) must be
used to pay qualified current retiree health
liabilities for the taxable year of the transfer.
Transferred amounts generally must benefit pension
plan participants, other than key employees, who are
entitled upon retirement to receive retiree medical
benefits through the separate account. Retiree
health benefits of key employees may not be paid out
of transferred assets.
Amounts not used to pay qualified current retiree
health liabilities for the taxable year of the
transfer are to be returned to the general assets of
the plan. These amounts are not includible in the
gross income of the employer, but are treated as an
employer reversion and are subject to a 20-percent
excise tax.
In order for a transfer to be qualified, accrued
retirement benefits under the pension plan generally
must be 100-percent vested as if the plan terminated
immediately before the transfer (or in the case of a
participant who separated in the one-year period
ending on the date of the transfer, immediately
before the separation).
In order for a transfer to be qualified, the
transfer must meet the minimum cost requirement. To
satisfy the minimum cost requirement, an employer
generally must maintain retiree health benefits at
the same level for the taxable year of the transfer
and the following four years (referred to as the
cost maintance period). The applicable employer cost
during the cost maintenance period cannot be less
than the higher of the applicable employer costs for
each of the two taxable years preceding the taxable
year of the transfer. The applicable employer cost
is generally determined by dividing the current
retiree health liabilities by the number of
individuals provided coverage for applicable health
benefits during the year. The Secretary is directed
to prescribe regulations as may be necessary to
prevent an employer who significantly reduces
retiree health coverage during the period from being
treated as satisfying the minimum cost requirement.
Under Treasury regulations,387
the minimum cost requirement is not satisfied if the
employer significantly reduces retiree health
coverage during the cost maintenance period. Under
the regulations, an employer significantly reduces
retiree health coverage for a year (beginning after
2001) during the cost maintenance period if either
(1) the employer-initiated reduction percentage for
that taxable year exceeds 10 percent, or (2) the sum
of the employer-initiated reduction percentages for
that taxable year and all prior taxable years during
the cost maintenance period exceeds 20 percent.388
The employer-initiated reduction percentage is
percentage of the number of individuals receiving
coverage for applicable health benefits as of the
day before the first day of the taxable year over
the total number of such individuals whose coverage
for applicable health benefits ended during the
taxable year by reason of employer action.389
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides that an eligible
employer does not fail the minimum cost requirement
if, in lieu of any reduction of health coverage
permitted by Treasury regulations, the employer
reduces applicable employer cost by an amount not in
excess of the reduction in costs which would have
occurred if the employer had made the maximum
permissible reduction in retiree health coverage
under such regulations. An employer is an eligible
employer if, for the preceding taxable year, the
qualified current retiree health liabilities of the
employer were at least five percent of gross
receipts.
In applying such regulations to any subsequent
taxable year, any reduction in applicable employer
cost under the proposal is treated as if it were an
equivalent reduction in retiree health coverage.
Effective date. --The provision is effective
for taxable years ending after the date of
enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment.
TITLE
IX --ENERGY TAX INCENTIVES
A.
Credit for Electricity Produced from Certain Sources
(sec. 801 of the Senate amendment and sec. 45 of the
Code)
Present
Law
An income tax credit is allowed for the production
of electricity from either qualified wind energy,
qualified "closed-loop" biomass, or
qualified poultry waste facilities (sec. 45). The
amount of the credit is 1.5 cents per kilowatt-hour
(indexed for inflation) of electricity produced. The
amount of the credit is 1.8 cents per kilowatt-hour
for 2004. The credit is reduced for grants,
tax-exempt bonds, subsidized energy financing, and
other credits.
The credit applies to electricity produced by a wind
energy facility placed in service after
December 31, 1993
, and before
January 1, 2006
, to electricity produced by a closed-loop biomass
facility placed in service after
December 31, 1992
, and before
January 1, 2006
, and to a poultry waste facility placed in service
after
December 31, 1999
, and before
January 1, 2006
. The credit is allowable for production during the
10-year period after a facility is originally placed
in service. In order to claim the credit, a taxpayer
must own the facility and sell the electricity
produced by the facility to an unrelated party. In
the case of a poultry waste facility, the taxpayer
may claim the credit as a lessee/operator of a
facility owned by a governmental unit.
House
Bill
No provision.
Senate
Amendment
Extension of placed in service date for
existing facilities
The Senate amendment extends the placed in service
date for wind facilities, closed-loop biomass
facilities, and poultry waste facilities to
facilities placed in service after December 31, 1993
(December 31, 1992, in the case of closed-loop
biomass facilities and December 31, 1999, in the
case of poultry waste facilities) and before January
1, 2007.
Modification of credit amount
The Senate amendment modifies the credit rate
applicable to electricity produced from after
December 31, 2004 from facilities placed in service
after December 31, 2004 to be 1.8 cents per kilowatt
hour and repeals the indexing of the credit amount.
Additional qualifying facilities
The Senate amendment also defines six new qualifying
energy resources: open-loop biomass including
agricultural livestock waste nutrients, geothermal
energy, solar energy, municipal biosolids and
sludge, small irrigation, and municipal solid waste.
Open-loop biomass is defined as any solid,
nonhazardous, cellulosic waste material which is
segregated from other waste materials and which is
derived from any of forest-related resources, solid
wood waste materials, or agricultural sources.
Eligible forest-related resources are mill residues,
other than spent chemicals from pulp manufacturing,
precommercial thinnings, slash, and brush. Solid
wood waste materials include waste pallets, crates,
dunnage, manufacturing and construction wood wastes
(other than pressure-treated, chemically-treated, or
painted wood wastes), and landscape or right-of-way
tree trimmings. Agricultural sources include orchard
tree crops, vineyard, grain, legumes, sugar, and
other crop by-products or residues. However,
qualifying open-loop biomass does not include
municipal solid waste (garbage), gas derived from
biodegradation of solid waste, or paper that is
commonly recycled. In addition, open-loop biomass
does not include closed-loop biomass or any biomass
burned in conjunction with fossil fuel (cofiring)
beyond such fossil fuel required for start up and
flame stabilization.
Agricultural livestock waste nutrients are defined
as agricultural livestock manure and litter,
including bedding material for the disposition of
manure.
Geothermal energy is energy derived from a
geothermal deposit which is a geothermal reservoir
consisting of natural heat which is stored in rocks
or in an aqueous liquid or vapor (whether or not
under pressure).
Municipal biosolids and sludge are the residue or
solids removed by a municipal wastewater treatment
facility. Sludge is the recycled residue byproduct
created in the treatment of commercial, industrial,
municipal, or navigational wastewater, but not
including residues from incineration.
A small irrigation power facility is a facility that
generates electric power through an irrigation
system canal or ditch without any dam or impoundment
of water. The installed capacity of a qualified
facility is less than five megawatts.
Qualifying open-loop biomass facilities, other than
qualifying agricultural livestock waste nutrient
facilities are facilities using open-loop biomass to
produce electricity that are placed in service prior
to January 1, 2005. Qualifying agricultural
livestock waste nutrient facilities are facilities
using agricultural livestock waste nutrients to
produce electricity that are placed in service after
December 31, 2004 and before January 1, 2007.
Qualifying geothermal energy facilities are
facilities using geothermal deposits to produce
electricity that are placed in service after
December 31, 2004 and before January 1, 2007.
Qualifying solar energy facilities are facilities
using solar energy to generate electricity that are
placed in service December 31, 2004 and before
January 1, 2007. Qualifying municipal biosolids and
sludge facilities are facilities using municipal
biosolids or sludge to generate electricity that are
originally placed in service after December 31,
2004, and before January 1, 2007. Qualifying small
irrigation power facilities are facilities using
small irrigation power systems to generate
electricity that are originally placed in service
after December 31, 2004 and before January 1, 2007.
Qualifying municipal solid waste facilities are
facilities or units incinerating municipal solid
waste placed in service after December 31, 2004 and
before January 1, 2007.
In the case of qualifying open-loop biomass
facilities placed in service prior to January 1,
2005, taxpayers may claim a credit of 1.2 cents per
kilowatt hour, rather than 1.8 cents per kilowatt
hour for the five-year period beginning on January
1, 2005. the otherwise allowable credit for a
three-year period. For a facility placed in service
after the date of enactment, the three-year period
commences when the facility is placed in service.
In addition, the Senate amendment modifies present
law to provide that qualifying closed-loop biomass
facilities include any facility originally placed in
service before December 31, 1992 and modified to use
closed-loop biomass to co-fire with coal, with other
biomass, or both, before January 1, 2007. The amount
of credit the taxpayer may claim credit is adjusted
for the thermal value of the qualifying closed-loop
biomass relative to the thermal value of the
closed-loop biomass and the coal. The ten-year
credit period for such a qualifying facility
commences no earlier than January 1, 2005.
Credit claimants and treatment of other
subsidies
In the case of qualifying open-loop biomass
facilities and qualifying closed-loop biomass
facilities modified to use closed-loop biomass to
co-fire with coal, the Senate amendment permits a
lessee operator to claim the credit in lieu of the
owner of the facilities.
The Senate amendment provides that certain persons
(public utilities, electric cooperatives, rural
electric cooperatives, and Indian tribes) may sell,
trade, or assign to any taxpayer any credits that
would otherwise be allowable to that person, if that
person were a taxpayer, for production of
electricity from a qualified facility owned by such
person. However, any credit sold, traded, or
assigned may only be sold, traded, or assigned once.
Subsequent trades are not permitted. In addition,
any credits that would otherwise be allowable to
such person, to the extent provided by the
Administrator of the Rural Electrification
Administration, may be applied as a prepayment to
certain loans or obligations undertaken by such
person under the Rural Electrification Act of 1936.
The Senate amendment repeals the present-law
reduction in allowable credit for facilities
financed with tax-exempt bonds or with certain loans
received under the Rural Electrification Act of
1936.
Effective date. --The Senate amendment is
generally is effective for electricity sold from
qualifying facilities after December 31, 2004. For
electricity produced from qualifying open-loop
biomass facilities originally placed in service
prior to the date of enactment, the provision is
effective January 1, 2005.
Conference
Agreement
The conference agreement follows the Senate
amendment with modifications.
Extension of placed in service date for
existing facilities
The conference agreement does not include the
provisions of the Senate amendment with respect to
the extension of placed in service dates for
qualifying wind, closed-loop, and poultry waste
facilities.
Modification of placed in service date for
existing facilities
The conference agreement includes the Senate
amendment provision with respect to qualifying
closed-loop biomass facilities modified to use
closed-loop biomass to co-fire with coal, to co-fire
with other biomass, or to co-fire with coal and
other biomass, with the modification that the
10-year credit period begin no earlier than the date
of enactment of the provision.
Additional qualifying resource and facilities
The conference agreement also defines five new
qualifying resources for the production of
electricity: open-loop biomass (including
agricultural livestock waste nutrients), geothermal
energy, solar energy, small irrigation power, and
municipal solid waste. Two different qualifying
facilities use municipal solid waste as a qualifying
resource: landfill gas facilities and trash
combustion facilities. In addition, the conference
agreement defines refined coal as a qualifying
resource.
Qualifying open-loop biomass facilities are
facilities using biomass to produce electricity that
are placed in service prior to January 1, 2006.
Qualifying agricultural livestock waste nutrient
facilities are facilities using agricultural
livestock waste nutrients to produce electricity
that are placed in service after the date of
enactment and before January 1, 2006. The installed
capacity of a qualified agricultural livestock waste
nutrient facility is not less than 150 kilowatts.
Qualifying geothermal energy facilities are
facilities using geothermal deposits to produce
electricity that are placed in service after the
date of enactment and before January 1, 2006.
Qualifying solar energy facilities are facilities
using solar energy to generate electricity that are
placed in service after the date of enactment and
before January 1, 2006. A qualifying geothermal
energy facility or solar energy facility may not
have claimed any credit under sec. 48 of the Code.390
A qualified small irrigation power facility is a
facility originally placed in service after the date
of enactment and before January 1, 2006. A small
irrigation power facility is a facility that
generates electric power through an irrigation
system canal or ditch without any dam or impoundment
of water. The installed capacity of a qualified
facility is not less than 150 kilowatts and less
than five megawatts.
Landfill gas is defined as methane gas derived from
the biodegradation of municipal solid waste. Trash
combustion facilities are facilities that burn
municipal solid waste (garbage) to produce steam to
drive a turbine for the production of electricity.
Qualifying landfill gas facilities and qualifying
trash combustion facilities include facilities used
to produce electricity placed in service after the
date of enactment and before January 1, 2006.
Refined coal is a qualifying liquid, gaseous, or
solid synthetic fuel produced from coal (including
lignite) or high-carbon fly ash, including such fuel
used as a feedstock. A qualifying fuel is a fuel
that when burned emits 20 percent less SO2 and
nitrogen oxides than the burning of feedstock coal
or comparable coal predominantly available in the
marketplace as of January 1, 2003, and if the fuel
sells at prices at least 50 percent greater than the
prices of the feedstock coal or comparable coal. In
addition, to be qualified refined coal the fuel must
be sold by the taxpayer with the reasonable
expectation that it will be used for the primary
purpose of producing steam. A qualifying refined
coal facility is a facility producing refined coal
that is placed in service after the date of
enactment and before January 1, 2009.
Credit period and credit rates
In general, as under present law, taxpayers may
claim the credit at a rate of 1.5 cents per
kilowatt-hour (indexed for inflation and currently
1.8 cents per kilowatt-hour) for 10 years of
production commencing on the date the facility is
placed in service. In the case of open-loop biomass
facilities, (including agricultural livestock waste
nutrients), geothermal energy, solar energy, small
irrigation power, landfill gas facilities, and trash
combustion facilities the 10-year credit period is
reduced to five years commencing on the date the
facility is placed in service. In general, for
facilities placed in service prior to January 1,
2005, the credit period commences on January 1,
2005. In the case of a closed-loop biomass
facilities modified to co-fire with coal, to co-fire
with other biomass, or to co-fire with coal and
other biomass, the credit period shall begin no
earlier than the date of enactment.
In the case of open-loop biomass facilities
(including agricultural livestock waste nutrients),
small irrigation power, landfill gas facilities, and
trash combustion facilities, the otherwise allowable
credit amount is reduced by one half.
An alternative credit applies for the production of
refined coal. A qualified refined coal facility may
claim credit at a rate of $4.375 per ton (indexed
for inflation after 1992) of refined coal sold to a
unrelated person. As is the case for facilities that
produce electricity, the credit a taxpayer may claim
for the production of refined coal is phased out as
the market price of refined coal exceeds certain
threshold levels. The threshold is defined by
reference to the price of feedstock fuel used to
produce refined coal. Thus if a producer of refined
coal uses Powder River Basin coal as a feedstock,
the threshold price is determined by reference to
prices of Powder River Basin coal. If the producer
uses Appalachian coal, the threshold price is
determined by reference to prices of Appalachian
coal.
Credit claimants and treatment of other
subsidies
A lessee or operator may claim the credit in lieu of
the owner of the qualifying facility in the case of
qualifying open-loop biomass facilities originally
placed in service on or before the date of enactment
and in the case of a closed-loop biomass facilities
modified to co-fire with coal, to co-fire with other
biomass, or to co-fire with coal and other biomass.
In addition, for all qualifying facilities, other
than closed-loop biomass facilities modified to
co-fire with coal, to co-fire with other biomass, or
to co-fire with coal and other biomass, any
reduction in credit by reason of grants, tax-exempt
bonds, subsidized energy financing, and other
credits cannot exceed 50 percent. In the case of
closed-loop biomass facilities modified to co-fire
with coal, to co-fire with other biomass, or to
co-fire with coal and other biomass, there is no
reduction in credit by reason of grants, tax-exempt
bonds, subsidized energy financing, and other
credits.
The amendments made by the conference report do not
apply with respect to any poultry waste facility
placed in service prior to January 1, 2005. Such
facilities placed in service after December 31, 2004
generally may qualify for credit as animal livestock
waste nutrient facilities.
No facility that previously claimed or currently
claims credit under section 29 of the Code is a
qualifying facility for purposes of section 45.
Effective date. --The provision is effective
for electricity produced and sold from qualifying
facilities after the date of enactment in taxable
years ending after the date of enactment. With
respect to open-loop biomass facilities placed in
service prior to January 1, 2005, the provisions are
effective for electricity produced and sold after
December 31, 2004.
B.
Alternative Motor Vehicles and Fuels Incentives
1. Alternative motor vehicle credit (sec. 811 of
Senate amendment)
Present
Law
Certain costs of qualified clean-fuel vehicle may be
expensed and deducted when such property is placed
in service (sec. 179A). Qualified clean-fuel vehicle
property includes motor vehicles that use certain
clean-burning fuels (natural gas, liquefied natural
gas, liquefied petroleum gas, hydrogen, electricity
and any other fuel at least 85 percent of which is
methanol, ethanol, any other alcohol or ether).391
The maximum amount of the deduction is $50,000 for a
truck or van with a gross vehicle weight over 26,000
pounds or a bus with seating capacities of at least
20 adults; $5,000 in the case of a truck or van with
a gross vehicle weight between 10,000 and 26,000
pounds; and $2,000 in the case of any other motor
vehicle. Qualified electric vehicles do not qualify
for the clean-fuel vehicle deduction. The deduction
allowed is 25 percent of the otherwise allowable
amount in 2006, and is unavailable for purchases
after
December 31, 2006
.
House
Bill
No provision.
Senate
Amendment
Fuel cell motor vehicles
The Senate amendment provides a credit for the
purchase of qualified fuel cell motor vehicles. The
base credit for the purchase of new qualified fuel
cell motor vehicles ranges between $4,000 and
$40,000 depending upon the weight class of the
vehicle. For automobiles and light trucks, the
otherwise allowable credit amount ($4,000) is
increased by an amount from $1,000 to $4,000 if the
vehicle meets certain fuel economy increases
compared to a stated standard. Credit may not be
claimed for qualified fuel cell motor vehicles
purchased after December 31, 2011.
Hybrid motor vehicles
The Senate amendment provides a credit for the
purchase of qualified hybrid motor vehicles. The
base credit for the purchase of a new qualified
hybrid motor vehicle ranges from $250 to $10,000
depending upon the weight of the vehicle and the
maximum power available from the vehicle's
rechargeable energy storage system. For automobiles
and light trucks, the otherwise allowable credit
amount ($250 to $1,000) is increased by an amount
from $500 to $3,000 if the vehicle meets certain
fuel economy increases. For heavy duty hybrid motor
vehicles, the otherwise allowable credit ($1,000 to
$10,000) is increased depending upon the vehicle's
weight and provided the vehicle meets certain 2007
(and beyond) emissions standards. The amount of
credit is increased by between $2,500 and $10,000
for vehicles placed in service in 2004; is increased
by between $2,500 and $10,000 for vehicles placed in
service in 2004, is increased by between $2,000 and
$8,000 for vehicles placed in service in 2005, and
is increased by between $1,500 and $6,000 for
vehicles placed in service in 2006. Credit may not
be claimed for qualified hybrid motor vehicles
purchased after December 31, 2006.
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