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American Jobs Creation Act of 2004

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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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