Conference Report Explanation of Tax Provisions in H.R. 2614; Titles V-VIII -- School Construction, Community Renewal

H.R. 2614 incorporates provisions of H.R. 5542, the Taxpayer Relief Act of 2000, introduced by House Majority Leader Richard K. Armey, R-Texas. (For text of H.R. 5542's provisions, see Doc 2000- 27538 (286 original pages), 2000 TNT 209-8 and 2000 TNT 209-9 ; or H&D, Special Supplement, Oct. 27, 2000. For related coverage, see Doc 2000-27773 (7 original pages), 2000 TNT 209-1 , or H&D, Oct. 27, 2000, p. 1059.)

Tax-exempt bonds

In general

[774] Interest on debt incurred by States or local governments is excluded from income if the proceeds of the borrowing are used to carry out governmental functions of those entities or the debt is repaid with governmental funds (sec. 103). Like other activities carried out and paid for by States and local governments, the construction, renovation, and operation of public schools is an activity eligible for financing with the proceeds of tax-exempt bonds.

[775] Interest on bonds that nominally are issued by States or local governments, but the proceeds of which are used (directly or indirectly) by a private person and payment of which is derived from funds of such a private person is taxable unless the purpose of the borrowing is approved specifically in the Code or in a non-Code provision of a revenue Act. These bonds are called "private activity bonds." The term "private person" includes the Federal Government and all other individuals and entities other than States or local governments.

Private activities eligible for financing with tax-exempt private activity bonds

[776] The Code includes several exceptions permitting States or local governments to act as conduits providing tax-exempt financing for private activities. Both capital expenditures and limited working capital expenditures of charitable organizations described in section 501(c)(3) of the Code -- including elementary, secondary, and post- secondary schools -- may be financed with tax-exempt private activity bonds ("qualified 501(c)(3) bonds").

[777] In most cases, the volume of tax-exempt private activity bonds is restricted by aggregate annual limits imposed on bonds issued by issuers within each State. These annual volume limits equal $50 per resident of the State, or $150 million if greater. The annual State private activity bond volume limits are scheduled to increase to the greater of $75 per resident of the State or $225 million in calendar year 2007. The increase will be phased in ratably beginning in calendar year 2003. ¹ This increase was enacted by the Tax and Trade Relief Extension Act of 1998. Qualified 501(c)(3) bonds are among the tax-exempt private activity bonds that are not subject to these volume limits.

[778] Private activity tax-exempt bonds may not be used to finance schools owned or operated by private, for-profit businesses.

Arbitrage restrictions on tax-exempt bonds

[779] The Federal income tax does not apply to income of States and local governments that is derived from the exercise of an essential governmental function. To prevent these tax-exempt entities from issuing more Federally subsidized tax-exempt bonds than is necessary for the activity being financed or from issuing such bonds earlier than necessary, the Code includes arbitrage restrictions limiting the ability to profit from investment of tax-exempt bond proceeds. In general, arbitrage profits may be earned only during specified periods (e.g., defined "temporary periods") before funds are needed for the purpose of the borrowing or on specified types of investments (e.g., "reasonably required reserve or replacement funds"). Subject to limited exceptions, investment profits that are earned during these periods or on such investments must be rebated to the Federal Government.

[780] The Code includes three exceptions applicable to education-related bonds. First, issuers of all types of tax-exempt bonds are not required to rebate arbitrage profits if all of the proceeds of the bonds are spent for the purpose of the borrowing within six months after issuance. In the case of governmental bonds (including bonds to finance public schools) the six-month expenditure exception is treated as satisfied if at least 95 percent of the proceeds is spent within six months and the remaining five percent is spent within 12 months after the bonds are issued.

[781] Second, in the case of bonds to finance certain construction activities, including school construction and renovation, the six-month period is extended to 24 months for construction proceeds. Arbitrage profits earned on construction proceeds are not required to be rebated if all such proceeds (other than certain retainage amounts) are spent by the end of the 24-month period and prescribed intermediate spending percentages are satisfied.

[782] Third, governmental bonds issued by "small" governments are not subject to the rebate requirement. Small governments are defined as general purpose governmental units that issue no more than $5 million of tax-exempt governmental bonds in a calendar year. The $5 million limit is increased to $10 million if at least $5 million of the bonds are used to finance public schools.

[783] Another exception to the arbitrage restriction, enacted as part of the Tax Reform Act of 1984, provides that the pledge of income from investments in a Fund established under a provision of a State constitution adopted in 1876 as security for a limited amount of tax-exempt bonds will not cause interest on those bonds to be taxable. The terms of this exception are limited to State constitutional or statutory restrictions in effect as of October 9, 1969. The Fund consists of certain State lands that were set aside for the benefit of higher education, the income from mineral rights to these lands, and certain other earnings on Fund assets. The State constitution directs that monies held in the Fund are to be invested in interest-bearing obligations and other securities. The State constitution does not permit the expenditure or mortgage of the Fund for any purpose. Income from the Fund is apportioned between two university systems operated by the State. Tax-exempt bonds issued by the two university systems are secured by and payable from the income of the Fund. These bonds are used to finance buildings and other permanent improvements for the universities.

[784] The General Assembly of the State approved proposed constitutional amendments regarding the manner in which amounts in the Fund are paid for the benefit of the two university systems. These amendments were voted on and passed by the State's citizens in November 1999. The State constitutional amendments have the effect of permitting the Fund to make annual distributions similar to standard university endowment funds, rather than the previous practice, which tied distributions to annual income performance, creating a variable pattern of distributions. Since these amendments were not in effect as of October 9, 1969, the amendments eliminate the benefits of the 1984 exception from the tax-exempt bond arbitrage restrictions.

Qualified Zone Academy Bonds ("QZABs")

[785] As an alternative to traditional tax-exempt bonds, certain States and local governments are given the authority to issue "qualified zone academy bonds." Under present law, $400 million of qualified zone academy bonds may be issued per year in 1998, 1999, 2000, and 2001. The $400 million bond authority is allocated each year among the States according to their respective populations of individuals below the poverty line. Each State, in turn, allocates the credit to qualified zone academies within such State. A State may carry over any unused allocation into subsequent years (the first two years following the unused limitation year; three years for carryforwards from 1998 or 1999).

[786] To be a qualified zone academy bond, a bond must satisfy several requirements. First, the bond must be issued pursuant to an allocation of bond authority from the issuer's State educational agency. Second, at least 95 percent of the bond proceeds must be used for an eligible purpose at a qualified zone academy. Eligible purposes include renovating school facilities, acquiring equipment, developing course materials, or training teachers. A qualified zone academy is a public school (or an academic program within a public school) that is designed in cooperation with business and is either (1) located in an empowerment zone or enterprise community or (2) attended by students at least 35 percent of whom are estimated to be eligible for free or reduced-cost lunches under the National School Lunch Act. Finally, private businesses must have promised to contribute to the qualified zone academy certain property or services with a present value equal to at least 10 percent of the bond proceeds.

HOUSE BILL

[787] No provision.

SENATE AMENDMENT

[788] No provision.

CONFERENCE AGREEMENT

Extension of authority to issue present-law QZABs

[789] The conference agreement extends authority to issue QZABs for two additional years, through December 31, 2003. Except as described below, present-law requirements for these bonds are retained.

Extension of modified QZAB authority to school construction

[790] The conference agreement extends authority to issue QZABs, with modifications, to public school construction. The agreement authorizes issuance of up to $5 billion per year of school construction QZABs in 2001, 2002, and 2003. The $5 billion of annual authority will be allocated to the States (including the District of Columbia and U.S. possessions) by the Treasury Department on the following basis: 50 percent of the aggregate annual amount is allocated to the States based on population and 50 percent is allocated based on the portion of the State's population that lives in poverty. These allocations are to be based on the most recently available Census Bureau data. The State allocations are subject to a "small State floor" of $25 million per State.

[791] Unissued tax-credit bond authority may be carried forward for up to two years. As is true under the current QZAB allocation rules, bond authority is treated as allocated on a "FIFO" basis.

[792] Subject to a special rule for certain larger school districts, Governors are granted interim authority to allocate their State's authorized school construction QZAB issuance among school districts in the State unless State legislatures prescribe different allocation rules. For larger local school districts, defined as districts having school age populations in excess of 40,000, the conference agreement provides a minimum allocation (which cannot be overridden by State action) in an amount equal to the percentage of the State's total population that resides in the school district. The term "school age population" is defined as children ages five through seventeen.

[793] In addition to the $5 billion general aggregate annual bond authority, the conference agreement authorizes up to $200 million of school construction QZABs to be issued to finance public schools operated by or for the benefit of Indian tribes. This $200 million of additional authority is a one-time authorization which may be allocated by the Treasury Department among Indian tribes at any time during the five-year period when school construction QZABs and present-law QZABs may be issued. Both the allocation authority and the authority to issue these bonds expires after December 31, 2005.

[794] School construction is defined as capital expenditures for new construction, renovation, or repair or public schools (real property of a character subject to the allowance for depreciation), including charter schools, and the acquisition of functionally related and subordinate land. Unlike present-law QZABs, contributions by private businesses are optional, but not required, for schools receiving school construction QZAB financing. Additionally, the school construction QZABs are not limited to schools within an empowerment zone or enterprise community, or to schools satisfying the free or reduced-cost lunch criteria.

Rules applicable to QZABs issued after December 31, 2000 and to school construction QZABs

[795] The following administrative rules apply to QZABs issued after December 31, 2000, and to the new modified QZABs for school construction:

(1) The maximum term of the bonds is 15 years.

(2) Information reporting requirements similar to the requirements that apply under present law to tax-exempt bonds (sec. 149(e)) are extended to these bonds.

(3) Eligible recipients of the tax credits are expanded to include all C corporations (but not S corporations or individuals).

(4) Credits accrue to holders on a quarterly basis (rather than annually as under the present-law QZAB program).

(5) Credit rates are set by reference to the daily corporate rate index established by the Treasury Department, and the credit rate for each bond issue is set as of the day before the date the bonds are issued (i.e., sold).

(6) As under the present-law QZAB program, credits are includible in the bondholder's gross income, but tax credits may be claimed against both regular income tax and the alternative minimum tax.

(7) All property financed with tax-credit bonds must be owned by a State or local government. Further, all such property must be used for a qualified public school purpose during the entire period that the bonds are outstanding. Failure to use the property for a qualified purpose results in termination of tax credits beginning on the later of (a) the date of bond issuance of (b) three years before the change in use occurs. Issuers are obligated to pay the Federal Government an amount equal to all credits accruing after the stated date (plus interest); bondholders are secondarily liable for this amount.

(8) Tax-credit bonds may not be issued to refinance any outstanding debt except certain "bridge financing," defined as construction period financing that (a) is issued after the date of the conference agreement's enactment; (b) has a term not exceeding one year and (c) is issued for a project identified for tax-credit bond financing before issuance of the bridge financing.

(9) Arbitrage restrictions similar to those that apply to tax- exempt bonds (as modified by the conference agreement) are extended to present-law QZABs and school construction QZABs.

[796] Bond proceeds must be spent for the purpose of the borrowing within 48 months after bonds are issued, with intermediate spending requirements being prescribed:

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[798] Issuers failing to satisfy the 48-month or 60-month expenditure requirements must redeem an amount of bonds having a face amount equal to the unspent proceeds.

[799] A "small governmental unit" exception is provided to these arbitrage restrictions. This exception is coordinated with the present-law tax-exempt bond exception for these units (as that exception is modified by the agreement) to ensure that issuers do not claim double benefits.

[800] Rules similar to the tax-exempt bond sinking fund restrictions are extended to tax-credit bonds. Under these rules, all replacement funds constituting a sinking fund under the tax-exempt bond rules must be invested in non-interest-bearing State and Local Government Series ("SLGS") obligations issued by the Treasury.

(10) A State must allocate its school construction QZAB authority in accordance with a qualified allocation plan. A qualified allocation plan is to contain, among other things: (a) an identification of the State's needs for public school facilities, and (b) a description of how the State will make allocations to address those needs, including how the State will ensure the needs of both rural, suburban, and urban areas will be recognized, ensure that the needs of localities with the greatest needs will be met and give priority to the role of charter schools in achieving State educational objectives. This requirement applies to allocations of tax-credit bond authority made on the date that is six months after the date the conference agreement is enacted.

[801] Effective date. -- These provisions apply to bonds issued in calendar years beginning after December 31, 2000.

Increase in the amount of governmental bonds that may be issued by governments qualifying for the "small governmental unit" arbitrage rebate exception

[802] The additional amount of governmental bonds for public schools that small governmental units may issue without being subject to the arbitrage rebate requirement is increased from $5 million to $10 million. Thus, these governmental units may issue up to $15 million of governmental bonds in a calendar year provided that at least $10 million of the bonds are used to finance public school construction expenditures. This exception is coordinated with the tax-credit bond exception for these units to ensure that issuers do not claim double benefits, i.e., both tax-credit bonds and tax-exempt bonds are taken into account for purposes of this limitation.

[803] Effective date. -- The provision applies to bonds issued in calendar years beginning after December 31, 2000.

Conform provisions relating to arbitrage treatment to reflect state constitutional amendments

[804] The conference agreement conforms the 1984 exception to the State constitutional amendments to permit its continued applicability to bonds of the two university systems. Limitations on the aggregate amount of bonds which may benefit from the exception are not modified. Effective date. -- The provision takes effect on January 1, 2001.

Construction bond expenditure rule for governmental bonds for public schools

[805] The present-law 24-month expenditure exception to the arbitrage rebate requirement is liberalized for certain public school bonds. Under the agreement, no rebate is required with respect to earnings on available construction proceeds of public school bonds if the proceeds are spent within 48 months after the bonds are issued and the following intermediate spending levels are satisfied:

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Issuance of tax-exempt private activity bonds for certain public school facilities

[807] The private activities for which tax-exempt bonds may be issued are expanded to include elementary and secondary public school facilities which are owned by private, for-profit corporations pursuant to public-private partnership agreements with a State or local educational agency. The term school facility includes school buildings and functionally related and subordinate land (including stadiums or other athletic facilities primarily used for school events) and depreciable personal property used in the school facility. The school facilities for which these bonds are issued must be operated by a public educational agency as part of a system of public schools.

[808] A public-private partnership agreement is defined as an arrangement pursuant to which the for-profit corporate party constructs, rehabilitates, refurbishes or equips a school facility. The agreement must provide that, at the end of the contract term, ownership of the bond-financed property is transferred to the public school agency party to the agreement for no additional consideration.

[809] Issuance of these bonds is subject to a separate annual per-State volume limit equal to the greater of $10 per resident ($5 million, if greater) in lieu of the present-law State private activity bond volume limits. As with the present-law State private activity bond volume limits, States decide how to allocate the bond authority to State and local government agencies. Bond authority that is unused in the year in which it arises may be carried forward for up to three years for public school projects under rules similar to the carryforward rules of the present-law private activity bond volume limits.

[810] Effective date. -- These provisions are effective for bonds issued after December 31, 2000.

TITLE VI. COMMUNITY RENEWAL PROVISIONS

A. RENEWAL COMMUNITY PROVISIONS (SECS. 601-602 OF THE BILL AND SECS. 51, 469, AND NEW SECS. 1400E-J OF THE CODE)

PRESENT LAW

[811] In recent years, provisions have been added to the Internal Revenue Code that target specific geographic areas for special Federal income tax treatment. For example, empowerment zones and enterprise communities generally provide tax incentives for businesses that locate within certain geographic areas designated by the Secretaries of Housing and Urban Development ("HUD") and Agriculture.

HOUSE BILL

[812] No provision. However, H.R. 4923, as passed by the House, authorizes the designation of 40 "renewal communities" within which special tax incentives will be available. The following is a description of the designation process and the tax incentives that would be available within the renewal communities.

Designation process

[813] Designation of 40 renewal communities. -- The Secretary of HUD, ² is authorized to designate up to 40 "renewal communities" from areas nominated by States and local governments. At least eight of the designated communities must be in rural areas. The Secretary of HUD is required to publish (within four months after enactment) regulations describing the nomination and selection process. Designations of renewal communities are to be made within 24 months after the regulations are published. The designation of an area as a renewal community generally will be effective on July 1, 2001, and will terminate after December 31, 2009.

[814] Eligibility criteria. -- To be designated as a renewal community, a nominated area must meet the following criteria: (1) each census tract must have a poverty rate of at least 20 percent; ³ (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. Those areas with the highest average ranking of eligibility factors (1), (2), and (3) above would be designated as renewal communities. A nominated area within the District of Columbia becomes a renewal community (without regard to its ranking of eligibility factors) provided that it satisfies the area and eligibility requirements and the required State and local commitments described below. ⁴ The Secretary of HUD shall take into account in selecting areas for designation the extent to which such areas have a high incidence of crime, as well as whether the area has census tracts identified in the May 12, 1998, report of the General Accounting Office regarding the identification of economically distressed areas.

[815] 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.

[816] Required State and local commitments. -- In order for an area to be designated as a renewal community, State and local governments are required to submit a written course of action in which the State and local governments promise to take at least four of the following governmental actions within the nominated area: (1) a reduction of tax rates or fees; (2) an increase in the level of efficiency of local services; (3) crime reduction strategies; (4) actions to remove or streamline governmental requirements; (5) involvement by private entities and community groups, such as to provide jobs and job training and financial assistance; and (6) the gift (or sale at below fair market value) of surplus realty by the State or local government to community organizations or private companies.

[817] In addition, the nominating State and local governments must promise to promote economic growth in the nominated area by repealing or not enforcing four of the following: (1) licensing requirements for occupations that do not ordinarily require a professional degree; (2) zoning restrictions on home-based businesses that do not create a public nuisance; (3) permit requirements for street vendors who do not create a public nuisance; (4) zoning or other restrictions that impede the formation of schools or child care centers; and (5) franchises or other restrictions on competition for businesses providing public services, including but not limited to taxicabs, jitneys, cable television, or trash hauling, unless such regulations are necessary for and well-tailored to the protection of health and safety.

[818] Empowerment zones and enterprise communities seeking designation as renewal communities. -- An empowerment zone or enterprise community can apply for designation as a renewal community. If a renewal community designation is granted, then an area's designation as an empowerment zone or enterprise community ceases as of the date the area's designation as a renewal community takes effect.

Tax incentives for renewal communities

[819] Under H.R. 4923, the following tax incentives are available during the period beginning July 1, 2001, and ending December 31, 2009.

[820] Zero-percent capital gain rate. -- H.R. 4923 provides a zero-percent capital gains rate for gain from the sale of a qualified community asset acquired after June 30, 2001, and before January 1, 2010, and held for more than five years. A "qualified community asset" includes: (1) qualified community stock (meaning original- issue stock purchased for cash in a renewal community business); (2) a qualified community partnership interest (meaning a partnership interest acquired for cash in a renewal community business); and (3) qualified community business property (meaning tangible property originally used in a renewal community business by the taxpayer) that is purchased or substantially improved after June 30, 2001.

[821] A "renewal community business" is similar to the present- law definition of an enterprise zone business. ⁵ Property will continue to be a qualified community asset if sold (or otherwise transferred) to a subsequent purchaser, provided that the property continues to represent an interest in (or tangible property used in) a renewal community business. The termination of an area's status as a renewal community will not affect whether property is a qualified community asset, but any gain attributable to the period before July 1, 2001, or after December 31, 2014, will not be eligible for the exclusion.

[822] Renewal community employment credit. -- Under H.R. 4923, a 15-percent wage credit is available to employers for the first $10,000 of qualified wages paid to each employee who (1) is a resident of the renewal community, and (2) performs substantially all employment services within the renewal community in a trade or business of the employer. The wage credit rate applies to qualifying wages paid after June 30, 2001, and before January 1, 2010.

[823] Wages that qualify for the credit are wages that are considered "qualified zone wages" for purposes of the empowerment zone wage credit (including coordination with the Work Opportunity Tax Credit). In general, any taxable business carrying out activities in the renewal community may claim the wage credit.

[824] Commercial revitalization deduction. -- H.R. 4923 allows each State to allocate up to $12 million of "commercial revitalization expenditures" to each renewal community located within the State for each calendar year after 2001 and before 2010 ($6 million for the period of July 1, 2001 through December 31, 2001). The appropriate State agency will make the allocations pursuant to a qualified allocation plan.

[825] A "commercial revitalization expenditure" means the cost of a new building or the cost of substantially rehabilitating an existing building. The building must be used for commercial purposes and be located in a renewal community. In the case of the rehabilitation of an existing building, the cost of acquiring the building will be treated as qualifying expenditures only to the extent that such costs do not exceed 30 percent of the other rehabilitation expenditures. The qualifying expenditures for any building cannot exceed $10 million.

[826] A taxpayer can elect either to (a) deduct one-half of the commercial revitalization expenditures for the taxable year the building is placed in service or (b) amortize all the expenditures ratably over the 120-month period beginning with the month the building is placed in service. No depreciation is allowed for amounts deducted under this provision. The adjusted basis is reduced by the amount of the commercial revitalization deduction, and the deduction is treated as a depreciation deduction in applying the depreciation recapture rules (e.g., sec. 1250).

[827] The commercial revitalization deduction is treated in the same manner as the low-income housing credit in applying the passive loss rules (sec. 469). Thus, up to $25,000 of deductions (together with the other deductions and credits not subject to the passive loss limitation by reason of section 469(i)) are allowed to an individual taxpayer regardless of the taxpayer's adjusted gross income. The commercial revitalization deduction is allowed in computing a taxpayer's alternative minimum taxable income.

[828] Additional section 179 expensing. -- Under H.R. 4923, a renewal community business is allowed an additional $35,000 of section 179 expensing for qualified renewal property placed in service after June 30, 2001, and before January 1, 2010. The section 179 expensing allowed to a taxpayer is phased out by the amount by which 50 percent of the cost of qualified renewal property placed in service during the year by the taxpayer exceeds $200,000. The term "qualified renewal property" is similar to the definition of "qualified zone property" used in connection with empowerment zones.

[829] Expensing of environmental remediation costs ("brownfields"). -- Under H.R. 4923, a renewal community is treated as a "targeted area" under section 198 (which permits the expensing of environmental remediation costs). Thus, taxpayers can elect to treat certain environmental remediation expenditures that otherwise would be capitalized as deductible in the year paid or incurred. This provision applies to expenditures incurred after June 30, 2001, and before January 1, 2010.

[830] Extension of work opportunity tax credit ("WOTC"). -- H.R. 4923 expands the high-risk youth and qualified summer youth categories in the WOTC to include qualified individuals who live in a renewal community.

[831] Effective date. -- Renewal communities must be designated within 24 months after publication of regulations by HUD. The tax benefits available in renewal communities are effective for the period beginning July 1, 2001, and ending December 31, 2009.

SENATE AMENDMENT

[832] No provision. However, S. 3152 authorizes the Secretaries of HUD and Agriculture to designate up to 30 renewal zones from areas nominated by States and local governments. At least six of the designated renewal zones must be in rural areas. The Secretary of HUD is required to publish (within four months after enactment) regulations describing the nomination and selection process. Designations of renewal zones must be made before January 1, 2002, and the designations are effective for the period beginning on January 1, 2002 through December 31, 2009.

[833] The eligibility criteria (as well as the population and geographic limitations) are similar to those for renewal communities in the House bill, except that S. 3152 provides that any State without any empowerment zone would be given priority in the designation process. Also, the designations of renewal zones must result in (after taking into account existing empowerment zones) each State having at least one zone designation (empowerment or renewal zone). In addition, S. 3152 provides that, in lieu of the poverty, income, and unemployment criteria, outmigration may be taken into account in the designation of one rural renewal zone. Under a separate provision in S. 3152, the designation of the District of Columbia Enterprise Zone would be extended through December 31, 2006.

[834] In order for an area to be designated as a renewal zone, State and local governments are required to submit a written course of action in which the State and local governments promise to take at least four of the governmental actions described in H.R. 4923. However, S. 3152 does not contain any of the economic growth provision requirements described in connection with renewal communities.

[835] Tax incentives for renewal zones. -- Under S. 3152, businesses in renewal zones would be eligible for the following tax incentives during the period beginning January 1, 2002 and ending December 31, 2009: (1) a zero-percent capital gains rate for qualifying assets limited to an aggregate amount not to exceed $25 million of gain per taxpayer; ⁶ (2) a 15-percent wage credit for the first $15,000 of qualifying wages; (3) $35,000 in additional 179 expensing for qualifying property; (4) and the enhanced tax-exempt bond rules that currently apply to businesses in the Round II empowerment zones.

[836] GAO report. -- The General Accounting Office will audit and report to Congress every three years (beginning on January 31, 2004) on the renewal zone program and its effect on poverty, unemployment, and economic growth within the designated renewal zones.

[837] Effective date. -- The 30 new renewal zones must be designated by January 1, 2002, and the resulting tax benefits are available for the period beginning January 1, 2002, and ending December 31, 2009.

CONFERENCE AGREEMENT

[838] The conference agreement follows the provisions of H.R. 4923 with certain modifications to the designation process for renewal communities. The conference agreement authorizes the designation of 40 renewal communities, of which at least 12 must be in rural areas. Of the 12 rural renewal communities, one shall be an area within Mississippi, designated by the State of Mississippi, that includes at least one census tract within Madison County, Mississippi.

[839] The tax incentives are the same as those described in H.R. 4923 -- i.e., (1) a zero-percent capital gains rate for capital gain from the sale of qualifying assets held for more than five years; (2) a 15 percent wage credit to employers for the first $10,000 of qualified wages paid to qualifying employees; (3) a commercial revitalization expenditure; (4) an additional $35,000 of section 179 expensing for qualified renewal property; and (5) an expansion of the Work Opportunity Tax Credit with respect to qualified individuals who live in a renewal community. ⁷ The 40 renewal communities must be designated by January 1, 2002, and the resulting tax benefits are available for the period beginning January 1, 2002, and ending December 31, 2009. ⁸

[840] The conference agreement provides that, with respect to the first 20 designations of nominated areas as renewal communities, preference will be given to nominated areas that are enterprise communities and empowerment zones under present law that otherwise meet the requirements for designation as a renewal community.

[841] The conference agreement includes the priority designation with respect to the District of Columbia Enterprise Zone (as contained in H.R. 4923). The conference agreement also includes the provision from S. 3152 that, in lieu of the poverty, income, and unemployment criteria, outmigration may be taken into account in the designation of one rural renewal community.

[842] The General Accounting Office will audit and report to Congress on January 31, 2004, and again in 2007 and 2010, on the renewal community program and its effect on poverty, unemployment, and economic growth within the designated renewal communities.

[843] Effective date. -- The 40 renewal communities must be designated by January 1, 2002, and the resulting tax benefits will be available for the period beginning January 1, 2002, and ending December 31, 2009.

B. EMPOWERMENT ZONE TAX INCENTIVES

1. Extension and expansion of empowerment zones

Round I empowerment zones

[844] The Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993") authorized the designation of nine empowerment zones ("Round I empowerment zones") to provide tax incentives for businesses to locate within targeted areas designated by the Secretaries of HUD and Agriculture. The Taxpayer Relief Act of 1997 ("1997 Act") authorized the designation of two additional Round I urban empowerment zones.

[845] Businesses in the 11 Round I empowerment zones qualify for the following tax incentives: (1) a 20-percent wage credit for the first $15,000 of wages paid to a zone resident who works in the empowerment zone, ⁹ (2) an additional $20,000 of section 179 expensing for qualifying zone property, and (3) tax-exempt financing for certain qualifying zone facilities. ¹⁰ The tax incentives with respect to the empowerment zones designated by OBRA 1993 generally are available during the 10-year period of 1995 through 2004. The tax incentives with respect to the two additional Round I empowerment zones generally are available during the 10-year period of 2000 through 2009. ¹¹

Round II empowerment zones

[846] The 1997 Act also authorized the designation of 20 additional empowerment zones ("Round II empowerment zones"), of which 15 are located in urban areas and five are located in rural areas. Businesses in the Round II empowerment zones are not eligible for the wage credit, but are eligible to receive up to $20,000 of additional section 179 expensing. Businesses in the Round II empowerment zones also are eligible for more generous tax-exempt financing benefits than those available in the Round I empowerment zones. Specifically, the tax-exempt financing benefits for the Round II empowerment zones are not subject to the State private activity bond volume caps (but are subject to separate per-zone volume limitations), and the per- business size limitations that apply to the Round I empowerment zones and enterprise communities (i.e., $3 million for each qualified enterprise zone business with a maximum of $20 million for each principal user for all zones and communities) do not apply to qualifying bonds issued for Round II empowerment zones. The tax incentives with respect to the Round II empowerment zones generally are available during the 10-year period of 1999 through 2008.

HOUSE BILL

[847] No provision. However, as described in greater detail below, H.R. 4923 conforms and enhances the tax incentives for the Round I and Round II empowerment zones and extends their designations through December 31, 2009. H.R. 4923 also authorizes the designation of nine new empowerment zones ("Round III empowerment zones").

Extension of tax incentives for Round I and Round II empowerment

[849] In addition, $35,000 (rather than $20,000) of additional section 179 expensing is available for qualified zone property placed in service in taxable years beginning after December 31, 2001, by a qualified business in any of the empowerment zones. ¹³ Businesses in the D.C. Enterprise Zone are entitled to the additional section 179 expensing until the termination of the D.C. zone designation. ¹⁴ The bill also extends an empowerment zone's status as a "targeted area" under section 198 (thus permitting expensing of environmental remediation costs). The bill applies to expenses incurred after December 31, 2001, and before January 1, 2010.

[850] Businesses located in Round I empowerment zones (other than the D.C. Enterprise Zone) ¹⁵ also are eligible for the more generous tax-exempt bond rules that apply under present law to businesses in the Round II empowerment zones (sec. 1394(f)). The bill applies to tax-exempt bonds issued after December 31, 2001. Bonds that have been issued by businesses in Round I zones before January 1, 2002, are not taken into account in applying the limitations on the amount of new empowerment zone facility bonds that can be issued under the bill.

Nine new empowerment zones

[851] The Secretaries of HUD and Agriculture are authorized to designate nine additional empowerment zones ("Round III empowerment zones"). Seven of the Round III empowerment zones will be located in urban areas, and two will be located in rural areas.

[852] The eligibility and selection criteria for the Round III empowerment zones are the same as the criteria that applied to the Round II empowerment zones. The Round III empowerment zones must be designated by January 1, 2002, and the tax incentives with respect to the Round III empowerment zones generally are available during the period beginning on January 1, 2002, and ending on December 31, 2009.

[853] Businesses in the Round III empowerment zones are eligible for the same tax incentives that, under the bill, are available to Round I and Round II empowerment zones (i.e., a 20-percent wage credit, an additional $35,000 of section 179 expensing, and the enhanced tax-exempt financing benefits presently available to Round II empowerment zones). The Round III empowerment zones also are considered "targeted areas" for purposes of permitting expensing of certain environmental remediation costs under section 198.

Effective date

[854] The extension of the existing empowerment zone designations is effective after the date of enactment. The extension of the tax benefits to existing empowerment zones (i.e., the expanded wage credit, the additional section 179 expensing, the brownfields designation, and the more generous tax-exempt bond rules) generally is effective after December 31, 2001.

[855] The new Round III empowerment zones must be designated by January 1, 2002, and the tax incentives with respect to the Round III empowerment zones generally are available during the period beginning on January 1, 2002, and ending on December 31, 2009.

SENATE AMENDMENT

[856] No provision. However, S. 3152 contains a provision that conforms and enhances incentives for existing empowerment zones. Specifically, the provision extends the designation of empowerment zone status for Round I and II empowerment zones through December 31, 2009. In addition, a 15-percent wage credit is made available in all Round I and II empowerment zones, effective in 2002 (except in the case of the two additional Round I empowerment zones added by the 1997 Act, for which the 15-percent wage credit takes effect in 2005 as scheduled under present law). For all the empowerment zones, the 15-percent wage credit expires on December 31, 2009.

[857] In addition, $35,000 (rather than $20,000) of additional section 179 expensing is available for qualified zone property placed in service in taxable years beginning after December 31, 2001, by a qualified business in any of the empowerment zones. ¹⁶

[858] Under S. 3152, businesses located in Round I empowerment zones are eligible for the more generous tax-exempt bond rules that apply under present law to businesses in the Round II empowerment zones (sec. 1394(f)). The proposal applies to tax-exempt bonds issued after December 31, 2001. Bonds that have been issued by businesses in Round I zones before January 1, 2002, are not taken into account in applying the limitations on the amount of new empowerment zone facility bonds that can be issued under the provision.

[859] Businesses located in any empowerment zone also qualify for a zero-percent capital gains rate for gain from the sale of a qualifying zone assets acquired after date of enactment and before January 1, 2010, and held for more than five years. Assets that qualify for this incentive are similar to the types of assets that qualify for the present-law zero percent capital gains rate for qualifying D.C. Zone assets. The zero-percent capital gains rate is limited to an aggregate amount not to exceed $25 million of gain per taxpayer. Gain attributable to the period before the date of enactment or after December 31, 2014, is not eligible for the zero- percent rate.

[860] Effective date. -- The extension of the existing empowerment zone designations is effective after the date of enactment. The additional section 179 expensing and the more generous tax-exempt bond rules for the existing empowerment zones is effective after December 31, 2001. The zero-percent capital gains rate applies to qualifying property purchased after the date of enactment. The 15- percent wage credit generally is effective for qualifying wages paid after December 31, 2001. With respect to the two additional Round I empowerment zones, however, the wage credit is effective for qualifying wages paid after December 31, 2004.

CONFERENCE AGREEMENT

[861] The conference agreement follows the provisions in H.R. 4923 with the following modifications. The conference agreement does not extend the empowerment zones' status as a "targeted area" for purposes of permitting expensing of certain environmental remediation costs under section 198. ¹⁷ In addition, the conference agreement provides that the General Accounting Office will audit and report to Congress on January 31, 2004, and again in 2007 and 2010, on the empowerment zone and enterprise community program and its effect on poverty, unemployment, and economic growth within the designated areas.

2. Rollover of gain from the sale of qualified empowerment zone

[862] In general, gain or loss is recognized on any sale, exchange, or other disposition of property. A taxpayer (other than a corporation) may elect to roll over without payment of tax any capital gain realized upon the sale of qualified small business stock held for more than six months where the taxpayer uses the proceeds to purchase other qualified small business stock within 60 days of the sale of the original stock.

HOUSE BILL

[863] No provision. However, under H.R. 4923, a taxpayer can elect to roll over capital gain from the sale or exchange of any qualified empowerment zone asset purchased after the date of enactment and held for more than one year ("original zone asset") where the taxpayer uses the proceeds to purchase other qualifying empowerment zone assets in the same zone ("replacement zone asset") within 60 days of the sale of the original zone asset. The holding period of the replacement zone asset includes the holding period of the original zone asset, except that the replacement asset must actually be held for more than one year to qualify for another tax- free rollover. The basis of the replacement zone asset is reduced by the gain not recognized on the rollover. However, if the replacement zone asset is qualified small business stock (as defined in sec. 1202), the exclusion under section 1202 would not apply to gain accrued on the original zone asset. ¹⁸ A "qualified empowerment zone asset" means an asset that would be a qualified community asset if the empowerment zone were a renewal community (and the asset is acquired after the date of enactment of the bill). Assets in the D.C. Enterprise Zone are not eligible for the tax-free rollover treatment. ¹⁹

[864] Effective date. -- The provision is effective for qualifying assets purchased after the date of enactment.

SENATE AMENDMENT

[865] No provision.

CONFERENCE AGREEMENT

[866] The conference agreement follows the provision in H.R. 4923.

3. Increased exclusion of gain from the sale of qualifying

[867] Under present law, an individual, subject to limitations, may exclude 50 percent of the gain ²⁰ from the sale of qualifying small business stock held more than five years (sec. 1202).

HOUSE BILL

[868] No provision. However, H.R. 4923 includes a provision that would increase the exclusion for small business stock to 60 percent for stock purchased after the date of enactment in a corporation that is a qualified business entity and that is held for more than five years. A "qualified business entity" means a corporation that satisfies the requirements of a qualifying business under the empowerment zone rules during substantially all the taxpayer's holding period.

[869] Effective date. -- The provision is effective for qualified stock purchased after the date of enactment.

SENATE AMENDMENT

[870] No provision.

CONFERENCE AGREEMENT

[871] The conference agreement follows the provision in H.R. 4923.

C. NEW MARKETS TAX CREDIT

[872] Some tax incentives are available to taxpayers making investments and loans in low-income communities. For example, tax incentives are available to taxpayers that invest in specialized small business investment companies licensed by the Small Business Administration to make loans to, or equity investments in, small businesses owned by persons who are socially or economically disadvantaged.

HOUSE BILL

[873] No provision. However, H.R. 4923 includes a provision that creates a new tax credit for qualified equity investments made to acquire stock in a selected community development entity ("CDE"). The maximum annual amount of qualifying equity investments is capped as follows:

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[875] A 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 through representation on governing or advisory boards, or otherwise and (3) is certified by the Treasury Department as an eligible CDE. ²² No later than 60 days after enactment, the Treasury Department shall issue regulations that specify objective criteria to be used by the Treasury to allocate the credits among eligible CDEs. In allocating the credits, the Treasury Department will give priority to entities with records of having successfully provided capital or technical assistance to disadvantaged businesses or communities.

[876] If a CDE fails to sell equity interests to investors up to the amount authorized within five years of the authorization, then the remaining authorization is canceled. The Treasury Department can authorize another CDE to issue equity interests for the unused portion. No authorization can be made after 2014.

[877] A "qualified equity investment" is defined as stock or a similar equity interest acquired directly from a CDE in exchange for cash. Substantially all of the investment proceeds must be used by the CDE to make "qualified low-income community investments," meaning equity investments in, or loans to, qualified active businesses located in low-income communities, certain financial counseling and other services specified in regulations to businesses and residents in low-income communities. ²³

[878] The stock or equity interest cannot be redeemed (or otherwise cashed out) by the CDE for at least seven years. If an entity fails to be a CDE during the seven-year period following the taxpayer's investment, or if the equity interest is redeemed by the issuing CDE during that seven-year period, then any credits claimed with respect to the equity interest are recaptured (with interest) and no further credits are allowed.

[879] A "low-income community" is defined as census tracts with either (1) poverty rates of at least 20 percent (based on the most recent census data), or (2) median family income which does not exceed 80 percent of the greater of metropolitan area income or statewide median family income (for a non-metropolitan census tract, 80 percent of non-metropolitan statewide median family income).

[880] A "qualified active business" is defined as a business which satisfies 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 use of the tangible property of such business is used within low-income communities; (3) a substantial portion of the services performed for such business by its employees is performed in low-income communities; and (4) less than 5 percent of the average aggregate of unadjusted bases of the property of such business is attributable to certain financial property or to collectibles (other than collectibles held for sale to customers). There is no requirement that employees of the business be residents of the low-income community.

[881] Rental of improved commercial real estate located in a low-income community is a qualified active business, regardless of the characteristics of the commercial tenants of the property. The purchase and holding of unimproved real estate is not a qualified active business. In addition, a qualified active business does not include (a) any business consisting predominantly of the development or holding of intangibles for sale or license; (b) operation of any facility described in sec. 144(c)(6)(B); or (c) any business if a significant equity interest in such business is held by a person who also holds a significant equity interest in the CDE. A qualified active business can include an organization that is organized on a non-profit basis.

[882] Effective date. -- The provision is effective for qualified investments made after December 31, 2000.

SENATE AMENDMENT

[883] No provision. However, S. 3152 includes a provision that creates a new markets tax credit that is similar to the provision in H.R. 4923. Under S. 3152, the maximum annual amount of qualifying equity investments is capped as follows:

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[885] Under S. 3152, if a CDE fails to sell equity interests to investors up to the amount authorized within five years of the authorization, then the remaining authorization is canceled. The Treasury Department can authorize another CDE to issue equity interests for the unused portion. No authorization can be made after 2013.

[886] Substantially all of the investment proceeds must be used by the CDE to make "qualified low-income community investments." Qualified low-income community investments include: (1) capital or equity investments in, or loans to, qualified active businesses located in low-income communities, ²⁵ (2) certain financial counseling and other services specified in regulations 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 loans to, another CDE. ²⁶ Treasury Department regulations will provide guidance with respect to the "substantially all" standard.

[887] The definition of a "low-income community" is the same as in H.R. 4923, except that under S. 3152, the Secretary may designate any area within any census tract as a "low income community" provided that (1) the boundary of the area is continuous, ²⁷ (2) the area (if it were a census tract) would satisfy the poverty rate or median income requirements set forth above ²⁸ within the targeted area, and (3) an inadequate access to investment capital exists in the area.

[888] The definition of a "qualified active business" is the same as in H.R. 4923, except that S. 3152 clarifies that a qualified active business can include an organization that is organized on a non-profit basis.

[889] The General Accounting Office will audit and report to Congress by January 31, 2004 (and again by January 31, 2007) on the new markets tax credit program, including on all qualified community development entities that receive an allocation under the new markets tax credit.

[890] Effective date. -- The provision is effective for qualified investments made after December 31, 2001.

CONFERENCE AGREEMENT

[891] The conference agreement follows H.R. 4923 with some modifications.

[892] The definition of a CDE includes the clarification in S. 3152 regarding the accountability requirement, as well as the priority allocation to CDEs with records of having successfully provided capital or technical assistance to disadvantaged businesses or communities, ²⁹ as well as to entities that intend to invest substantially all of their investment proceeds in businesses in which persons unrelated to the CDE hold the majority equity interest.

[893] The conference agreement adopts S. 3152's definitions of "qualified low-income community investment" (which permits investments in related businesses) and "low-income community" (which provides discretion to designate targeted population areas). In addition, the definition of a "qualified active business" includes an organization that is organized on a non-profit basis.

[894] Under the conference agreement, the General Accounting Office will audit and report to Congress by January 31, 2004, and again in 2007 and 2010, on the new markets tax credit program, including on all qualified community development entities that receive an allocation under the new markets tax credit program.

D. INCREASE THE LOW-INCOME HOUSING TAX CREDIT CAP AND MAKE OTHER

In general

[895] The low-income housing tax credit may be claimed over a 10-year period for the cost of rental housing occupied by tenants having incomes below specified levels. The credit percentage for newly constructed or substantially rehabilitated housing that is not Federally subsidized is adjusted monthly by the Internal Revenue Service so that the 10 annual installments have a present value of 70 percent of the total qualified expenditures. The credit percentage for new substantially rehabilitated housing that is Federally subsidized and for existing housing that is substantially rehabilitated is calculated to have a present value of 30 percent qualified expenditures.

Credit cap

[896] The aggregate credit authority provided annually to each State is $1.25 per resident, except in the case of projects that also receive financing with proceeds of tax-exempt bonds issued subject to the private activity bond volume limit and certain carry-over amounts,

Expenditure test

[897] Generally, the building must be placed in service in the year in which it receives an allocation to qualify for the credit. An exception is provided in the case where the taxpayer has expended an amount equal to 10-percent or more of the taxpayer's reasonably expected basis in the building by the end of the calendar year in which the allocation is received and certain other requirements are met.

Basis of building eligible for the credit

[898] Buildings receiving assistance under the HOME investment partnerships act ("HOME") are not eligible for the enhanced credit for buildings located in high cost areas (i.e., qualified census tracts and difficult development areas). Under the enhanced credit, the 70-percent and 30-percent credit are increased to a 91-percent and 39-percent credit, respectfully.

[899] Eligible basis is generally limited to the portion of the building used by qualified low-income tenants for residential living and some common areas.

State allocation plans

[900] Each State must develop a plan for allocating credits and such plan must include certain allocation criteria including: (1) project location; (2) housing needs characteristics; (3) project characteristics; (4) sponsor characteristics; (5) participation of local tax-exempts; (6) tenant populations with special needs; and (7) public housing waiting lists. The State allocation plan must also give preference to housing projects: (1) that serve the lowest income tenants; and (2) that are obligated to serve qualified tenants for the longest periods.

Credit administration

[901] There are no explicit requirements that housing credit agencies perform a comprehensive market study of the housing needs of the low-income individuals in the area to be served by the project, nor that such agency conduct site visits to monitor for compliance with habitability standards.

Stacking rule

[902] Authority to allocate credits remains at the State (as opposed to local) government level unless State law provides otherwise. ³⁰ Generally, credits may be allocated only from volume authority arising during the calendar year in which the building is placed in service, except in the case of: (1) credits claimed on additions to qualified basis; (2) credits allocated in a later year pursuant to an earlier binding commitment made no later than the year in which the building is placed in service; and (3) carryover allocations.

[903] Each State annually receives low-income housing credit authority equal to $1.25 per State resident for allocation to qualified low-income projects. ³¹ In addition to this $1.25 per resident amount, each State's "housing credit ceiling" includes the following amounts: (1) the unused State housing credit ceiling (if any) of such State for the preceding calendar year; ³² (2) the amount of the State housing credit ceiling (if any) returned in the calendar year; ³³ and (3) the amount of the national pool (if any) allocated to such State by the Treasury Department.

[904] The national pool consists of States' unused housing credit carryovers. For each State, the unused housing credit carryover for a calendar year consists of the excess (if any) of the unused State housing credit ceiling for such year over the excess (if any) of the aggregate housing credit dollar amount allocated for such year over the sum of $1.25 per resident and the credit returns for such year. The amounts in the national pool are allocated only to a State which allocated its entire housing credit ceiling for the preceding calendar year, and requested a share in the national pool not later than May 1 of the calendar year. The national pool allocation to qualified States is made on a pro rata basis equivalent to the fraction that a State's population enjoys relative to the total population of all qualified States for that year.

[905] The present-law stacking rule provides that a State is treated as using its annual allocation of credit authority ($1.25 per State resident) and any returns during the calendar year followed by any unused credits carried forward from the preceding year's credit ceiling and finally any applicable allocations from the National pool.

HOUSE BILL

Credit cap

[906] No provision. However, H.R. 4923 increases the $1.25 per capita cap to $1.75 per capita. This increase is phased-in over six years. Also, beginning in 2001 the per capita cap for each State is modified so that small population State are given a minimum of $2 million of annual credit cap. Therefore the credit cap would be the greater of: $1.35 per capita or $2 million in calendar year 2001; $1.45 per capita or $2 million in calendar 2002; $1.55 per capita or $2 million in calendar year 2003; $1.65 per capita or $2 million in calendar year 2004; $1.70 per capita or $2 million in calendar year 2005; and $1.75 per capita or $2 million in calendar year 2006. The $1.75 per capita credit cap and $2 million amount are indexed for inflation beginning in 2007.

Expenditure test

[907] The provisions of H.R. 4923 allow a building which receives an allocation in the second half of a calendar to qualify under the 10-percent test if the taxpayer expends an amount equal to 10-percent or more of the taxpayer's reasonably expected basis in the building within six months of receiving the allocation regardless of whether the 10-percent test is met by the end of the calendar year.

Basis of building eligible for the credit

[908] The provisions of H.R. 4923 make three changes to the basis rules of the credit. First, the definition of qualified census tracts for purposes of the enhanced credit is expanded to include any census tracts with a poverty rate of 25 percent or more. Second, H.R. 4923 extends the credit to a portion of the building used as a community service facility not in excess of 10 percent of the total eligible basis in the building. A community service facility is defined as any facility designed to serve primarily individuals whose income is 60 percent or less of area median income. Third, H.R. 4923 provides that assistance received under the Native American Housing Assistance and Self-Determination Act of 1996 is not taken into account in determining whether a building is Federally subsidized for purposes of the credit. This allows such buildings to qualify for something other than the 30-percent credit generally applicable to Federally subsidized buildings.

State allocation plans

[909] The provisions of H.R. 4923 strikes the plan criteria relating to participation of local tax-exempts, replacing it with two other criteria: tenant populations of individuals with children and projects intended for eventual tenant ownership. It also provides that the present-law criteria relating to sponsor characteristics include whether the project involves the use of existing housing as part of a community revitalization plan. Also, H.R. 4923 adds a third category of housing projects to the preferential list. That third category is for projects located in qualified census tracts which contribute to a concerted community revitalization plan.

Credit administration

[910] The provisions of H.R. 4923 require a comprehensive market study of the housing needs of the low-income individuals in the area to be served by the project and a written explanation available to the general public for any allocation not made in accordance with the established priorities and selection criteria of the housing credit agency. They also require site inspections by the housing credit agency to monitor compliance with habitability standards applicable to the project.

Stacking rule

[911] The provisions of H.R. 4923 modify the stacking rule so that each State would be treated as using its allocation of the unused State housing credit ceiling (if any) from the preceding calendar before the current year's allocation of credit (including any credits returned to the State) and then finally any National pool allocations.

Effective date

[912] In general, H.R. 4923 is effective for calendar years beginning after December 31, 2000, and buildings placed-in-service after such date in the case of projects that also receive financing with proceeds of tax-exempt bonds subject to the private activity bond volume limit which are issued after such date. The increase and indexing of the credit cap is effective for calendar years after December 31, 2000.

SENATE AMENDMENT

Credit cap

[913] No provision. However, S. 3152 increases the annual State credit caps from $1.25 to $1.75 per resident beginning in 2001. Also, beginning in 2001 the per capita cap for each State is modified so that small population State are given a minimum of $2 million of annual credit cap. The $1.75 per capita cap and the $2 million amount are indexed for inflation beginning in calendar 2002.

Expenditure test

[914] No provision.

Basis of building eligible for the credit

[915] The provision in S. 3152 relating to the treatment of buildings receiving assistance under the Native American Housing Assistance and Self-Determination Act of 1996 is the same as one of the provisions in H.R. 4923. The other provisions in H.R. 4923 relating to the basis of building eligible for the credit are not part of S. 3152.

State allocation plans

[916] No provision.

Credit administration

[917] No provision.

Stacking rule

[918] The provision of H.R. 4923 is included in S. 3152.

Effective date

[919] The provisions are effective for calendar years beginning after December 31, 2000 and buildings placed-in-service after such date in the case of projects that also receive financing with proceeds of tax-exempt bonds which are issued after such date subject to the private activity bond volume limit.

CONFERENCE AGREEMENT

Credit cap

[920] The conference agreement follows the provisions of H.R. 4923 and S. 3152 with a modification increasing the per-capita low- income housing credit cap from $1.25 per capita to $1.50 per capita in calendar year 2001 and to $1.75 per capita in calendar year 2002. Beginning in calendar year 2003, the per-capita portion of the credit cap will be adjusted annually for inflation. For small States, a minimum annual cap of $2 million is provided for calendar years 2001 and 2002. Beginning in calendar year 2003, the small State minimum is adjusted for inflation.

Expenditure test

[921] The conference agreement follows the provision of H.R. 4923.

Basis of building eligible for the credit

[922] The conference agreement includes all three of the changes to the credit basis rules included in H.R. 4923.

State allocation plans

[923] The conference agreement includes the provision of H.R. 4923.

Credit administration

[924] The conference agreement includes the provision of H.R. 4923.

Stacking rule

[925] The conference agreement follows the provisions of H.R. 4923 and the S. 3152.

Effective date

[926] The provision is generally effective for calendar years beginning after December 31, 2000, and buildings placed-in-service after such date in the case of projects that also receive financing with proceeds of tax-exempt bonds subject to the private activity bond volume limit which are issued after such date.

E. ACCELERATE SCHEDULED INCREASE IN STATE VOLUME LIMITS ON TAX-EXEMPT

[927] Interest on bonds issued by States and local governments is excluded from income if the proceeds of the bonds are used to finance activities conducted and paid for by the governmental units (sec. 103). Interest on bonds issued by these governmental units to finance activities carried out and paid for by private persons ("private activity bonds") is taxable unless the activities are specified in the Internal Revenue Code. Private activity bonds on which interest may be tax-exempt include bonds for privately operated transportation facilities (airports, docks and wharves, mass transit, and high speed rail facilities), privately owned and/or provided municipal services (water, sewer, solid waste disposal, and certain electric and heating facilities), economic development (small manufacturing facilities and redevelopment in economically depressed areas), and certain social programs (low-income rental housing, qualified mortgage bonds, student loan bonds, and exempt activities of charitable organizations described in sec. 501(c)(3)).

[928] The volume of tax-exempt private activity bonds that States and local governments may issue for most of these purposes in each calendar year is limited by State-wide volume limits. The current annual volume limits are $50 per resident of the State or $150 million if greater. The volume limits do not apply to private activity bonds to finance airports, docks and wharves, certain governmentally owned, but privately operated solid waste disposal facilities, certain high speed rail facilities, and to certain types of private activity tax-exempt bonds that are subject to other limits on their volume (qualified veterans' mortgage bonds and certain "new" empowerment zone and enterprise community bonds).

[929] The current annual volume limits that apply to private activity tax-exempt bonds increase to $75 per resident of each State or $225 million, if greater, beginning in calendar year 2007. The increase is, ratably phased in, beginning with $55 per capita or $165 million, if greater, in calendar year 2003.

HOUSE BILL

[930] No provision. However, H.R. 4923 accelerates the scheduled increase in the present-law annual State private activity bond volume limits to $75 per resident of each State, or $225 million (if greater) beginning in calendar year 2007. The increase is phased in as follows, beginning in calendar year 2001:

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SENATE AMENDMENT

[932] No provision. However, S. 3152 increases the present-law annual State private activity bond volume limits to $75 per resident of each State or $225 million (if greater) beginning in calendar year 2001. In addition, the $75 per resident and the $225 million State limit will be indexed for inflation beginning in calendar year 2002.

[933] Effective date. -- The provisions are effective in calender years beginning after December 31, 2000.

CONFERENCE AGREEMENT

[934] The conference agreement follows the provisions of H.R. 4923 and S. 3152 with a modification increasing the State volume limits from the greater of $50 per resident or $150 million to the greater of $62.50 per resident or $187.5 million in calendar year 2001. The volume limit will increase further, to the greater of $75 per resident or $225 million in calendar year 2002. Beginning in calendar year 2003, the volume limit will be adjusted annually for inflation.

F. EXTENSION AND MODIFICATION TO EXPENSING OF ENVIRONMENTAL

[935] Taxpayers can elect to treat certain environmental remediation expenditures that would otherwise be chargeable to capital account as deductible in the year paid or incurred (sec. 198). The deduction applies for both regular and alternative minimum tax purposes. The expenditure must be incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site.

[936] A "qualified contaminated site" generally is any property that (1) is held for use in a trade or business, for the production of income, or as inventory; (2) is certified by the appropriate State environmental agency to be located within a targeted area; and (3) contains (or potentially contains) a hazardous substance (so-called "brownfields"). Targeted areas are defined as: (1) empowerment zones and enterprise communities as designated under present law; (2) sites announced before February 1997, as being subject to one of the 76 Environmental Protection Agency ("EPA") Brownfields Pilots; (3) any population census tract with a poverty rate of 20 percent or more; and (4) certain industrial and commercial areas that are adjacent to tracts described in (3) above. However, sites that are identified on the national priorities list under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 cannot qualify as targeted areas.

[937] Eligible expenditures are those paid or incurred before January 1, 2002.

HOUSE BILL

[938] No provision. However, H.R. 4923 as passed by the House extends an empowerment zone's status as a "targeted area" under section 198. In addition, H.R. 4923 provides that renewal communities (as defined in H.R. 4923) also constitute a "targeted area" under section 198. ³⁴

[939] Effective date. -- The provision is effective for expenditures incurred after June 30, 2001, and before January 1, 2010.

SENATE AMENDMENT

[940] No provision. However, S. 3152 extends the expiration date for eligible expenditures to include those paid or incurred before January 1, 2004.

[941] In addition, S. 3152 eliminates the targeted area requirement, thereby, expanding eligible sites to include any site containing (or potentially containing) a hazardous substance that is certified by the appropriate State environmental agency. However, expenditures undertaken at sites that are identified on the national priorities list under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 would continue to not qualify as eligible expenditures.

[942] Effective date. -- The provision to extend the expiration date is effective upon the date of enactment. The provision to expand the class of eligible sites is effective for expenditures paid or incurred after the date of enactment.

CONFERENCE AGREEMENT

[943] The conference agreement follows S. 3152. By extending and expanding section 198, the conferees do not intend to displace the general tax law principle regarding expensing versus capitalization of expenditures which continues to apply to environmental remediation efforts not specifically covered under section 198.

G. EXTENSION OF DISTRICT OF COLUMBIA HOMEBUYER TAX CREDIT (sec. 653 of the bill and sec. 1400C of the Code)

PRESENT LAW

[944] First-time homebuyers of a principal residence in the District of Columbia are eligible for a nonrefundable tax credit of up to $5,000 of the amount of the purchase price. The $5,000 maximum credit applies both to individuals and married couples. Married individuals filing separately can claim a maximum credit of $2,500 each. The credit phases out for individual taxpayers with adjusted gross income between $70,000 and $90,000 ($110,000 $130,000 for joint filers). For purposes of eligibility, "first-time homebuyer" means any individual if such individual did not have a present ownership interest in a principal residence in the District of Columbia in the one year period ending on the date of the purchase of the residence to which the credit applies. The credit is scheduled to expire for residences purchased after December 31, 2001.

HOUSE BILL

[945] No provision.

SENATE AMENDMENT

[946] No provision. However, S. 3152 includes a provision that extends the first-time homebuyer credit for two years, through December 31, 2003. The provision also extends the phase-out range for married individuals filing a joint return so that it is twice that of individuals. Thus, under the provision, the District of Columbia homebuyer credit is phased out for joint filers with adjusted gross income between $140,000 and $180,000.

[947] Effective date. -- The provision is effective for taxable years beginning after December 31, 2000.

CONFERENCE AGREEMENT

[948] The conference agreement follows the provision in S. 3152 with respect to the extension of the first-time homebuyer credit for two years (through December 31, 2003). The conference agreement does not include the provision regarding the phase-out range.

TITLE VII. ADMINISTRATIVE, MISCELLANEOUS, AND TECHNICAL CORRECTIONS PROVISIONS

SUBTITLE A. ADMINISTRATIVE PROVISIONS

[949] Section 303 of the Federal Reports Elimination and Sunset Act of 1995 eliminates many periodic Federal reporting requirements, effective May 15, 2000.

HOUSE BILL

[950] No provision.

SENATE AMENDMENT

[951] No provision.

CONFERENCE AGREEMENT

[952] The conference agreement exempts certain reports from elimination and sunset pursuant to the Federal Reports Elimination and Sunset Act of 1995.

B. EXTENSION OF DEADLINES FOR IRS COMPLIANCE WITH CERTAIN NOTICE

[953] The Internal Revenue Service Restructuring and Reform Act of 1998 ("IRS Restructuring Act of 1998") imposed several notice requirements relating to penalties, interest and installment agreements. Section 6715 of the Code, added by section 3306 of the IRS Restructuring Act of 1998, requires that each notice imposing a penalty include the name of the penalty, the Code section under which the penalty is imposed, and a computation of the penalty. ³⁵ This requirement applies to notices issued, and penalties assessed, after December 31, 2000. ³⁶

[954] Section 6631 of the Code, added by section 3308 of the IRS Restructuring Act of 1998, requires that every IRS notice sent to an individual taxpayer that includes an amount of interest required to be paid by the taxpayer also include a detailed computation of the interest charged and a citation to the Code section under which such interest is imposed. The provision is effective for notices issued after December 31, 2000.

[955] Section 3506 of the IRS Restructuring Act of 1998 requires the IRS to send every taxpayer in an installment agreement an annual statement of the initial balance owed, the payments made during the year, and the remaining balance. The provision became effective on July 1, 2000.

HOUSE BILL

[956] No provision.

SENATE AMENDMENT

[957] No provision.

CONFERENCE AGREEMENT

[958] It is the understanding of the conferees that due to the need for substantial systems modifications, and Year 2000 programming priorities, the IRS will be unable to fully comply with certain notice requirements in accordance with deadlines imposed by the IRS Restructuring Act of 1998. The conference agreement extends the deadlines for complying with the penalty, interest, and installment agreement notice requirements. Specifically, the annual installment agreement notice requirement is extended from July 1, 2000, to September 1, 2001. The deadlines for complying with the notice requirements relating to the computation of penalties and interest ³⁷ are both extended to June 30, 2001. In addition, for penalty notices issued after June 30, 2001, and before July 1, 2003, the notice requirements will be treated as met if the notice contains a telephone number at which the taxpayer can request a copy of the taxpayer's assessment and payment history with respect to such penalty. Similarly, for interest notices issued after June 30, 2001, and before July 1, 2003, the notice requirements will be treated as met if such notice contains a telephone number at which the taxpayer can request a copy of the taxpayer's payment history relating to interest amounts included in such notice.

[959] Effective date. -- The provision is effective on the date of enactment.

C. EXTENSION OF AUTHORITY FOR UNDERCOVER OPERATIONS

[960] The Anti-Drug Abuse Act of 1988 exempted IRS undercover operations from the otherwise applicable statutory restrictions controlling the use of Government funds (which generally provide that all receipts must be deposited in the general fund of the Treasury and all expenses be paid out of appropriated funds). In general, the exemption permits the IRS to "churn" the income earned by an undercover operation to pay additional expenses incurred in the undercover operation. The IRS is required to conduct a detailed financial audit of large undercover operations in which the IRS is churning funds and to provide an annual audit report to the Congress on all such large undercover operations. The exemption originally expired on December 31, 1989, and was extended by the Comprehensive Crime Control Act of 1990 to December 31, 1991. In the Taxpayer Bill of Rights II (Public Law 104 168), the authority to churn funds from undercover operations was extended for five years, through 2000.

HOUSE BILL

[961] No provision.

SENATE AMENDMENT

[962] No provision.

CONFERENCE AGREEMENT

[963] The conference agreement extends the authority of the IRS to "churn" the income earned from undercover operations for an additional five years, through 2005. Effective date. -- The provision is effective on the date of enactment.

D. COMPETENT AUTHORITY AND PRE-FILING AGREEMENTS

Section 6103

[964] Section 6103 of the Code sets forth the general rule that returns and return information are confidential. A return is any tax return, information return, declaration of estimated tax, or claim for refund filed under the Code on behalf of or with respect to any person. The term return also includes any amendment or supplement, including supporting schedules or attachments or lists, which are supplemental to or are part of a filed return. Return information is defined broadly. It includes the following information:

A taxpayer's identity, the nature, source or amount of

Secrecy of information exchanged under tax treaties

[966] U.S. tax treaties typically contain articles governing the exchange of information. These articles generally provide for the exchange of information between the tax authorities of the two countries when such information is necessary for carrying out provisions of the treaty or of the countries' domestic tax laws. Individuals referred to as "competent authorities" are designated by each country to make written requests for information and to receive information. ⁴⁰

[967] The exchange of information articles typically cover information relating to taxes to which the treaty applies, but can also apply to other taxes (e.g., excise taxes) not covered by the treaty. Many of the treaties permit the exchange of information even if the taxpayer involved is not a resident of one of the treaty countries. The exchange of information articles may be similar to, or represent a variation on, Article 26 of the 1996 U.S. model income tax treaty.

[968] Information that is received under the exchange of information articles is subject to secrecy clauses contained in the treaties. In this regard, the country requesting information under the treaties typically is required to treat any information received as secret in the same manner as information obtained under its domestic laws. In general, disclosure is not permitted other than to persons or authorities involved in the administration, assessment, collection or enforcement of taxes to which the treaty applies. For example, disclosure generally can be made to legislative bodies, such as the tax-writing committees of the Congress, and the General Accounting Office for purposes of overseeing the administration of U.S. tax laws.

[969] In addition to the exchange of information articles in U.S. tax treaties, exchange of information provisions are contained in tax information exchange agreements entered into between the United States and another country. ⁴¹ In addition, information may be exchanged pursuant to the Convention on Mutual Administrative Assistance in Tax Matters developed by the Council of Europe and the Organization for Economic Cooperation and Development (the "Multilateral Mutual Assistance Convention"), which limits the use of exchanged information and permits disclosure of such information only with the prior authorization of the competent authority of the country providing the information. ⁴² The United States has also entered into a number of implementation and coordination agreements with possessions that provide for the exchange of tax information. Moreover, the United States has entered into various mutual legal assistance treaties with other countries, some of which can be used to obtain tax information in criminal investigations.

[970] Both the confidentiality provisions of section 6103, as well as treaty secrecy provisions can cover return information.

Section 6110 and section 7121

[971] Section 6110 of the Code provides for disclosure of written determinations. With certain exceptions, section 6110 makes the text of any written determination the Internal Revenue Service ("IRS") issues available for public inspection. A written determination is any ruling, determination letter, technical advice memorandum, or Chief Counsel advice. The IRS is required to redact certain material before making these documents publicly available. ⁴³ Among the information to be redacted is information specifically exempted from disclosure by any statute (other than Title 26) that is applicable to the IRS. Once the IRS makes the written determination publicly available, the background file documents associated with such written determination are available for public inspection upon written request. Section 6110 defines "background file documents" as any written material submitted by the taxpayer or other requester in support of the request. Background file documents also include any communications between the IRS and persons outside the IRS concerning such written determination that occur before the IRS issues the determination.

[972] Section 6110 was added to the Code in 1976. The legislative history provided that a written determination would not be considered a ruling, technical advice memorandum, or determination letter, unless the document satisfies three criteria:

(1) The document recites the relevant facts;

(2) The document explains the applicable provisions of law; and

(3) The document shows the application of law to the facts. ⁴⁴

[973] The legislative history further provided that section 6110 "does not require public disclosure of a closing agreement entered into between the IRS and a taxpayer which finally determines the taxpayer's tax liability with respect to a taxable year * * * Your committee understands that a closing agreement is generally the result of a negotiated settlement and, as such, does not necessarily represent the IRS view of the law. Your committee intends, however, that the closing agreement exception is not to be used as a means of avoiding public disclosure of determinations which, under present practice, would be issued in a form which would be open to public inspection [under the bill]" ⁴⁵

[974] Closing agreements are entered into under the authority of section 7121. Closing agreements finally and conclusively settle a tax issue between the IRS and a taxpayer. Closing agreements may: (1) determine a taxpayer's entire tax liability for a previous tax period; or (2) fix the tax treatment of one or more specific items affecting tax liability for any tax period. Thus, closing agreements may settle the treatment of a specific item for periods ending after the execution of the agreement. A single closing agreement may cover both the determination of a taxpayer's entire tax liability for a previous tax period and fix the tax treatment of specific items for any tax period.

Freedom of Information Act

[975] The Freedom of Information Act ("FOIA"), enacted in 1966, established a statutory right to access government information. While the purpose of section 6103 is to restrict access to returns and return information, the basic purpose of the FOIA is to ensure that the public has access to government documents. In general, the FOIA provides that any person has a right of access to Federal agency records, except to the extent that such records (or portions thereof) are protected from disclosure by one of nine exemptions or by one of three special law enforcement record exclusions. Exemption 3 of the FOIA allows the withholding of information prohibited from disclosure by another statute if certain requirements are met. ⁴⁶ The right of access is enforceable in court.

Pending FOIA requests and litigation involving IRS records

Records covered by treaty secrecy clauses

[976] A publisher of tax related material and commentary has made a FOIA request for the disclosure of competent authority agreements. The request has been pending since March 14, 2000. ⁴⁷ The IRS has not denied the request, nor has it produced any documents responsive to the request. At this time, no suit has been filed to compel disclosure of these documents, although such a suit may be brought in the future.

[977] In connection with a separate request, the IRS was sued under the FOIA to compel disclosure of Field Service Advice memoranda ("FSAs"). ⁴⁸ FSAs are prepared by attorneys in the IRS National Office of the Office of Chief Counsel. They are prepared in response to requests from IRS field personnel for legal guidance, usually with respect to issues relating to a particular taxpayer. FSAs usually contain a statement of issues, facts, legal analysis and conclusions. The primary purpose of FSAs is to ensure that IRS field personnel apply the law correctly and uniformly. The D.C. Circuit determined that FSAs are subject to disclosure. However, the court remanded the case to district court to address assertions of privilege, including those based on treaty secrecy. A decision on this issue by the district court is still pending. ⁴⁹

Pre-filing agreements

[978] On February 11, 2000, the IRS issued Notice 2000 12, in which the IRS established a pilot program for "Pre-filing Agreements." Under this program, large businesses may request a review and resolution of specific issues relating to tax returns they expect to file between September and December of 2000. The purpose of the program is to enable taxpayers and the IRS to resolve issues that are likely to be disputed in post-filing audits. Examples of such issues include: (1) asset valuation and the allocation of a business's purchase or sale price among the assets acquired or sold; (2) the identification and documentation of hedging transactions; and (3) the determination of "market" for taxpayers using the lower of cost or market method of inventory valuation in situations involving inactive markets. The program is intended to address issues for which the law is settled.

[979] In Notice 2000-12, the IRS stated that pre-filing agreements are closing agreements entered into pursuant to section 7121. As such, the notice provides that the information generated or received by the IRS during the pre-filing agreement process constitutes return information. The notice further provides that pre- filing agreements are not written determinations as defined in section 6110, nor are they subject to disclosure under the FOIA.

[980] Several pre-filing agreements have been completed. A FOIA request for these agreements has not been made.

HOUSE BILL

[981] No provision.

SENATE AMENDMENT

[982] No provision.

CONFERENCE AGREEMENT

[983] The provision affirms that closing and similar agreements, and information exchanged and agreements reached pursuant to a tax treaty, are confidential. Further, the provision clarifies that such protected documents are not to be disclosed under the FOIA or section 6110.

Clarification that return information includes closing agreements and

[985] It is intended that pre-filing agreements be covered by this provision. It is the understanding of the conferees that pre- filing agreements do not explain the applicable provisions of law or otherwise contain any exposition of the tax law or the position of the IRS. In addition, it is not intended that the closing and similar agreement exception be used as a means of avoiding public disclosure of determinations that, under present law, would be issued in a form that would be open to public inspection. Thus, technical advice memoranda, chief counsel advice or other material clearly available to the public under present law section 6110, would not be exempt from disclosure by virtue of the fact that such material is contained in a background file for a closing agreement. For example, if a revenue agent seeks technical advice in connection with a pre-filing agreement, such technical advice would remain subject to the requirements of section 6110. Since the pre-filing agreement program involves only settled issues of law, it is the understanding of the conferees that documents of this nature generally would not be generated in the pre-filing agreement process.

[986] The provision is not intended to foreclose the disclosure of tax-exempt organization closing agreements to the extent such disclosure is authorized under section 6104. ⁵⁰ Since section 6103 permits the disclosure of return information as authorized by Title 26, a disclosure authorized by section 6104 is permissible, notwithstanding the fact that a closing agreement is return information.

Report on pre-filing agreement program

[987] It is intended that the Secretary make publicly available an annual report relating to the pre-filing agreement program operations for the preceding calendar year. The annual reporting requirement is for five years, or the duration of the program, whichever is shorter. The report is to include (1) the number of pre- filing agreements completed, (2) the number of applications received, (3) the number of applications withdrawn, (4) the types of issues which are resolved by completed agreements, (5) whether the program is being utilized by taxpayers who were previously subject to audit by the IRS, (6) the average length of time required to complete an agreement, (7) the number, if any, and subject of technical advice and chief counsel advice memoranda issued to address issues arising in connection with any pre-filing agreement, (8) any model agreements, ⁵¹ and (9) any other information the Secretary deems appropriate. The first report, covering the calendar year 2000, is to be issued no later than March 30, 2001. The information required for the annual report is subject to the restrictions of section 6103. Therefore, the Secretary will disclose information only in a form that cannot be associated with or otherwise identify, directly or indirectly, a particular taxpayer. The Joint Committee on Taxation periodically may review pre-filing agreements to determine whether they contain legal interpretations that should be disclosed to the public.

Clarification that information protected by treaty is confidential

[989] Under the provision, a tax convention is defined to include any income tax or gift and estate tax convention, or any other convention or bilateral agreement (including multilateral conventions and agreements and any agreement with a possession of the United States) providing for the avoidance of double taxation, the prevention of fiscal evasion, nondiscrimination with respect to taxes, the exchange of tax relevant information with the United States, or mutual assistance in tax matters.

[990] It is the understanding of the conferees that competent authority agreements (also referred to as mutual agreements) generally do not contain an explanation of the law or application of law to facts. Instead, such agreements are negotiated arrangements to resolve issues of double taxation. Thus, the term tax convention information for purposes of the provision includes: (1) any agreement entered into with the competent authority of one or more foreign governments pursuant to a tax convention; (2) an application for relief under a tax convention (sought by either a taxpayer or another competent authority); (3) any background information related to such agreement or application; (4) documents implementing such agreement; and (5) any other information exchanged pursuant to a tax convention that is treated as confidential or secret under such tax convention. The conferees intend that tax convention information would include documents and any other information that reflects tax convention information, including the association of a particular treaty partner with a specific issue or matter.

[991] The general rule that tax convention information cannot be disclosed does not apply to the disclosure of tax convention information to persons or authorities (including courts and administrative bodies) that are entitled to disclosure under the tax convention. It also does not apply to any generally applicable procedural rules regarding applications for relief under a tax convention. This exception is intended to ensure that there is no restriction on the release by the Secretary of publicly available procedural rules concerning matters such as how or when to make a request for competent authority assistance. Thus, certain material generated by IRS, i.e., its Competent Authority procedures (primarily reflected in Rev. Proc. 96 13), or similar material produced by a treaty partner (for example, an Information Circular produced and published by the Canadian tax authority) may be made available to the public. The general rule does not apply to the disclosure of information not relating to a particular taxpayer if, after consultation with the parties to a tax convention, the Secretary determines that such disclosure would not impair tax administration. This is consistent with current practice. An example of a general agreement that could be disclosed under this provision is the agreement between the competent authorities of Mexico and the United States regarding the maquiladora industry. That agreement, which was not taxpayer specific, was publicized by press release IR INT 1999 13. The conferees intend that the "impairment of tax administration" for purposes of this provision include, but not be limited to, the release of documents that would adversely affect the working relationship of the treaty partners. Under the provision, except as otherwise provided, taxpayer-specific tax convention information could not be publicly disclosed, even if it would not impair tax administration.

[992] A taxpayer-specific competent authority agreement that relates to the existence or possible existence of liability (or amount thereof) of any person for any tax, penalty, interest, fine, forfeiture, or other imposition or offense under the Code is return information under section 6103. It is also an agreement pursuant to a tax convention under section 6105. Return information, including taxpayer-specific competent authority agreements, remains subject to the confidentiality provisions of section 6103. Thus, civil and criminal penalties for the unauthorized disclosure of returns and return information continue to apply to return information that is also covered by section 6105. However, tax convention information that is return information may only be disclosed to the extent provided in, and subject to the terms and conditions of, the relevant tax convention.

Interaction with FOIA and section 6110

[993] Under the provision, closing agreements and similar agreements would not be considered written determinations for purposes of section 6110 and, thus, would not be subject to public disclosure. Such agreements would be defined as return information under section 6103 and, therefore, such documents would be protected from disclosure pursuant to Exemption 3 of the FOIA in conjunction with section 6103.

[994] In addition, under the provision, section 6110 would not apply to material covered by section 6105. In the litigation over FSAs, there has been some dispute as to whether treaties qualify as statutes for purposes of withholding information pursuant to Exemption 3 of the FOIA. The conferees believe that treaties are the equivalent of statutes for purposes of Exemption 3 of the FOIA. Section 6105 satisfies Exemption 3 of the FOIA. Taxpayer-specific tax convention information concerning a taxpayer's tax liability, such as taxpayer-specific competent authority agreements, would be exempt from the FOIA as both return information under section 6103 and information protected from disclosure by tax convention under section 6105. Agreements not relating to a particular taxpayer, and other tax convention information related to such agreements, could be disclosed under FOIA if it is determined that the disclosure would not impair tax administration.

EFFECTIVE DATE

[995] The provision applies to disclosures on, or after, the date of enactment, and thus, applies to all documents in existence on, or created after, the date of enactment.

E. INCREASE JOINT COMMITTEE ON TAXATION REFUND REVIEW THRESHOLD TO

[996] No refund or credit in excess of $1,000,000 of any income tax, estate or gift tax, or certain other specified taxes, may be made until 30 days after the date a report on the refund is provided to the Joint Committee on Taxation (sec. 6405). A report is also required in the case of certain tentative refunds. Additionally, the staff of the Joint Committee on Taxation conducts post-audit reviews of large deficiency cases and other select issues.

HOUSE BILL

[997] No provision.

SENATE AMENDMENT

[998] No provision.

CONFERENCE AGREEMENT

[999] The conference agreement increases the threshold above which refunds must be submitted to the Joint Committee on Taxation for review from $1,000,000 to $2,000,000. The staff of the Joint Committee on Taxation would continue to exercise its existing statutory authority to conduct a program of expanded post-audit reviews of large deficiency cases and other select issues, and the IRS is expected to cooperate fully in this expanded program.

[1,000] Effective date. -- The provision is effective on the date of enactment, except that the higher threshold does not apply to a refund or credit with respect to which a report was made before the date of enactment.

F. CLARIFYING THE ALLOWANCE OF CERTAIN TAX BENEFITS WITH RESPECT TO

[1,001] The Code generally requires that a taxpayer provide over one-half of the support for each individual claimed as that taxpayer's dependent. Similarly, the child credit, the surviving spouse filing status, and the head of household filing status require that a taxpayer satisfy certain requirements with regard to individuals that qualify as the taxpayer's dependent(s). Finally, the earned income credit for taxpayers with qualifying children generally is available only if the taxpayer has the same principal place of abode for more than one-half the taxable year with an otherwise qualifying child.

[1,002] Recently published IRS guidance first denied a dependency exemption to certain taxpayers with kidnapped children (TAM 200034029), then allowed such tax benefits to such taxpayers (TAM 200038059).

HOUSE BILL

[1,003] No provision. However, H.R. 5117 clarifies that the dependency exemption, the child credit, the surviving spouse filing status, the head of household filing status, and the earned income credit are available to an otherwise qualifying taxpayer with respect to a child who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer. Generally, this treatment continues for all taxable years ending during the period that the child is kidnapped. However, this treatment ends for the taxable year ending after the calender year in which it is determined that the child is dead (or, if earlier, in which the child would have attained age 18).

[1,004] Effective date. -- The provision is effective for taxable years ending after the date of enactment.

SENATE AMENDMENT

[1,005] No provision.

CONFERENCE AGREEMENT

[1,006] The conference agreement follows the provision of H.R. 5117.

G. CONFORMING CHANGES TO ACCOMMODATE REDUCED ISSUANCES OF CERTAIN

[1,007] Code section 995(f)(4) dealing with the interest charge on the deferred tax liability of the shareholders of a domestic international sales corporation provides that the interest rate be determined by reference to the average investment yield on United States Treasury bills with maturities of 52 weeks. In addition, provisions of Federal law relating to interest on monetary judgments in civil cases recovered in Federal district court and on a judgment against the United States affirmed by the Supreme Court (Title 28), interest on certain unpaid criminal fines and penalties (Title 18), and interest on compensation for certain takings of property (Title 40) determine the applicable interest rate by reference to 52-week Treasury bills.

HOUSE BILL

[1,008] No provision.

SENATE AMENDMENT

[1,009] No provision.

CONFERENCE AGREEMENT

[1,010] The conferees understand that, as a result of prior Congressional efforts at budgetary control, current and projected Federal budget surpluses are reducing the need of the Treasury Department to issue certain securities. The Treasury Department has informed the Congress that on grounds of efficient debt management, and predictability and liquidity for the financial markets, the Treasury Department has announced it is likely to cease issuing 52- week Treasury bills. The conference agreement modifies the Code (sec. 995(f)(4)) and certain other parts of Federal law relating to interest on monetary judgments in civil cases recovered in Federal district court and on a judgment against the United States affirmed by the Supreme Court (Title 28), interest on certain unpaid criminal fines and penalties (Title 18), and interest on compensation for certain takings of property (Title 40) that make specific reference to yields on 52-week Treasury bills. The conference agreement generally replaces the reference to 52-week Treasury bills with a reference to the weekly average one-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System.

[1,011] Effective date. -- The provision is effective upon the date of enactment.

H. AUTHORIZATION OF AGENCIES TO USE CORRECTED CONSUMER PRICE INDEX

[1,012] Code section 1(f) provides for adjustments in the tax tables so that inflation will not result in tax increases. Numerous other provisions of the Code are indexed as well. Section 1(f) provides that inflation is measured by changes in the consumer price index ("CPI") for the preceding year as published by the Department of Labor compared to the CPI for the calendar year 1992. Section 1(f) directs the Secretary to publish tables with applicable tax rates based upon calculated inflation adjustments by December 15 of the year before the year to which the tables are to apply.

[1,013] In addition, payments made under Social Security, certain Federal employee retirement programs, and certain payments to individuals under various welfare and income support programs are adjusted annually by changes in the CPI.

[1,014] On September 28, 2000, the Bureau of Labor Statistics ("BLS") announced that the agency had discovered a computational error in quality adjustments of air conditioning as a part of the cost of housing resulting in errors in the reported CPI between January 1999 and August 2000. The BLS reported that the CPI levels starting in January 1999 have been either 0.0, 0.1, or 0.2 index points lower than the levels that would have been published without the error. Consistent with agency guidelines and past practice, the BLS announced that it is revising the reported CPI back to January 2000 to the fully correct levels. The BLS will make no change to reported levels for January through December 1999. However, the BLS will make the corrected levels of the CPI for 1999 available upon request.

HOUSE BILL

[1,015] No provision.

SENATE BILL

[1,016] No provision.

CONFERENCE AGREEMENT

[1,017] The conference agreement authorizes the Secretary of the Treasury to use the corrected levels of the CPI for 1999 and 2000 for all purposes of the Code to which they might apply. The conference agreement directs the Secretary to prescribe new tables reflecting the correct levels of the 1999 CPI for the 2000 tax year.

[1,018] In addition, the conference agreement provides that the Director of the Office of Management and Budget ("OMB") shall assess Federal benefit programs to ascertain the extent to which the CPI error has or will result in a shortfall in program payments to individuals for 2000 and future years. The conference agreement directs the Director to issue guidelines to agency administrators to determine the extent, if any, of such shortfalls in payments to individuals. The agency administrators are to report their findings to the Director and to Congress within 30 days. The conference agreement provides that, within 60 days of the date of enactment, the Director instruct the head of any Federal agency which administers an affected program to make a payment or payments to compensate for the shortfall and that such payments are targeted to the amount of the shortfall experienced by individual beneficiaries. Applicable Federal benefit programs include the old-age and survivors insurance program, the disability insurance program and the supplemental security income program under the Social Security Act and other programs as determined by the Director. The conference agreement directs the Director to report to the Congress on the activities performed pursuant to this provision by April 1, 2001.

[1,019] The conferees recognize that the error in the CPI was computational in nature. The conferees support the BLS's policy to incorporate methodological changes only on a prospective basis. The conferees also understand that BLS policy provides that published indices generally not be revised except for those found to be in error for the year in which the error was discovered or within the past twelve months. The conferees recognize that the errors in the CPI date to as long as 20 months prior to the announcement of the error. The conferees recognize that the BLS's policy of not publishing corrected index numbers, beyond those provided as described above, has been applied in those rare cases where an error has been discovered in the past. However, the conferees understand that in the past 25 years the few errors that have been discovered have involved sub-indices and have not affected the level of the CPI itself. The last time the U.S. City Average All Items CPI was revised was in December 1974, when the values for the months of April through October 1974 were recalculated and released with issuance of the November CPI. Therefore, past precedent does not strictly apply to the present situation.

[1,020] The conferees believe that integrity of official government data is vital to policymakers and private individuals and businesses throughout the country. The conferees emphasize that the CPI plays an important role in economic planning. For this reason the conferees are concerned that, while the BLS has published corrected CPI numbers for 2000, the BLS does not intend to publish corrected CPI numbers for 1999 as part of the official CPI series. To its credit, the BLS announced the error publicly. The national press reported the error. ⁵² In the absence of a correction to the official CPI series, the Federal government will be left in the position of maintaining, as an official data series, index numbers that the Federal government has admitted are incorrect. The conferees believe that the public's trust in the integrity of official government data is a paramount goal and the conferees strongly encourage the Commissioner of the Bureau of Labor Statistics to review carefully the agency's current policy with respect to publishing as part of an official series corrections to data found to be in error for reasons of computational error. The conferees believe such a review should be made both with respect to the error announced on September 28, 2000, and as a matter for the future for those rare circumstances where such a similar computational error might once again arise.

[1,021] Effective date. -- The provision is effective on the date of enactment.

I. PREVENT DUPLICATION OR ACCELERATION OF LOSS THROUGH ASSUMPTION OF

[1,022] Generally, no gain or loss is recognized when one or more persons transfer property to a corporation in exchange for stock and immediately after the exchange such person or persons control the corporation. However, a transferor recognizes gain to the extent it receives money or other property ("boot") as part of the exchange (sec. 351).

[1,023] The assumption of liabilities by the controlled corporation generally is not treated as boot received by the transferor, ⁵³ except that the transferor recognizes gain to the extent that the liabilities assumed exceed the total of the adjusted basis of the property transferred to the controlled corporation pursuant to the exchange (sec. 357(c)).

[1,024] The assumption of liabilities by the controlled corporation generally reduces the transferor's basis in the stock of the controlled corporation that assumed the liabilities. The transferor's basis in the stock of the controlled corporation is the same as the basis of the property contributed to the controlled corporation, increased by the amount of any gain (or dividend) recognized by the transferor on the exchange, and reduced by the amount of any money or property received, and by the amount of any loss recognized by the transferor (sec. 358). For this purpose, the assumption of a liability is treated as money received by the transferor.

[1,025] An exception to the general treatment of assumptions of liabilities applies to assumptions of liabilities that would give rise to a deduction, provided the incurrence of such liabilities did not result in the creation or increase of basis of any property. The assumption of such liabilities is not treated as money received by the transferor in determining whether the transferor has gain on the exchange. Similarly, the transferor's basis in the stock of the controlled corporation is not reduced by the assumption of such liabilities. The Internal Revenue Service has ruled that the assumption by an accrual basis corporation of certain contingent liabilities for soil and groundwater remediation would be covered by this exception. ⁵⁴

HOUSE BILL

[1,026] No provision. However, the conference agreement to the Taxpayer Refund and Relief Act of 1999 (H.R. 2488) included an earlier version of the legislation, effective for assumptions of liabilities after July 14, 1999.

SENATE AMENDMENT

[1,027] No provision. However, the conference agreement to the Taxpayer Refund and Relief Act of 1999 (H.R. 2488) included an earlier version of the legislation, effective for assumptions of liabilities after July 14, 1999. In addition, on October 20, 1999, the Senate Finance Committee reported a bill (S. 1792) that contains a provision that limits the acceleration or duplication of losses through assumptions of liabilities. On April 4, 2000, Senators Roth and Moynihan introduced a bill that contains the same provision (S. 2354).

[1,028] Effective date. -- The provision in S. 2354 is effective for assumptions of liabilities on or after October 19, 1999. Except as provided by the Secretary, the rules addressing transactions involving partnerships are effective with the same effective date. Any rules addressing transactions involving S corporations may likewise be effective for assumptions of liabilities on or after October 19, 1999 or such later date as may be prescribed in such rules.

CONFERENCE AGREEMENT

[1,029] The conference agreement adopts the provision in S. 2354.

[1,030] Under the conference agreement, if the basis of stock (determined without regard to this provision) received by a transferor as part of a tax-free exchange with a controlled corporation exceeds the fair market value of the stock, then the basis of the stock received is reduced (but not below the fair market value) by the amount (determined as of the date of the exchange) of any liability that (1) is assumed in exchange for such stock, and (2) did not otherwise reduce the transferor's basis of the stock by reason of the assumption. Except as provided by the Secretary of the Treasury, this provision does not apply where the trade or business with which the liability is associated is transferred to the corporation as part of the exchange, or where substantially all the assets with which the liability is associated are transferred to the corporation as part of the exchange.

[1,031] The exceptions for transfers of a trade or business, or of substantially all the assets, with which a liability is associated, are intended to obviate the need for valuation or basis reduction in such cases. The exceptions are not intended to apply to situations involving the selective transfer of assets that may bear some relationship to the liability, but that do not represent the full scope of the trade or business, (or substantially all the assets) with which the liability is associated.

[1,032] For purposes of the provision, the term "liability" includes any fixed or contingent obligation to make payment, without regard to whether such obligation or potential obligation is otherwise taken into account under the Code. The determination whether a liability (as more broadly defined for purposes of this provision) has been assumed is made in accordance with the provisions of section 357(d)(1) of the Code. Under the standard of 357(d)(1), a recourse liability is treated as assumed if, based on all the facts and circumstances, the transferee has agreed to and is expected to satisfy such liability (or portion thereof), whether or not the transferor has been relieved of the liability. For example, if a transferee corporation does not formally assume a recourse obligation or potential obligation of the transferor, but instead agrees and is expected to indemnify the transferor with respect to all or a portion of a such an obligation, then the amount that is agreed to be indemnified is treated as assumed for purposes of the provision, whether or not the transferor has been relieved of such liability. Similarly, a nonrecourse liability is treated as assumed by the transferee of any asset subject to such liability. ⁵⁵

[1,033] The application of the provision is illustrated in the following example: Assume a taxpayer transfers assets with an adjusted basis and fair market value of $100 to its wholly-owned corporation and the corporation assumes $40 of liabilities (the payment of which would give rise to a deduction). Thus, the value of the stock received by the transferor is $60. Under present law, the basis of the stock would be $100. The provision requires that the basis of the stock be reduced to $60 (i.e., a reduction of $40). Except as provided by the Secretary, no basis reduction is required if the transferred assets consisted of the trade or business, or substantially all the assets, with which the liability is associated.

[1,034] The provision does not change the tax treatment with respect to the transferee corporation.

[1,035] The Secretary of the Treasury is directed to prescribe rules providing appropriate adjustments to prevent the acceleration or duplication of losses through the assumption of liabilities (as defined in the provision) in transactions involving partnerships. The Secretary may also provide appropriate adjustments in the case of transactions involving S corporations. In the case of S corporations, such rules may be applied instead of the otherwise applicable basis reduction rules.

[1,036] Effective date. -- The provision is effective for assumptions of liabilities on or after October 19, 1999. Except as provided by the Secretary, the rules addressing transactions involving partnerships are effective with the same effective date any rules addressing transactions involving S corporations may likewise be effective for assumptions of liabilities on or after October 19, 1999, or such later date as may be prescribed in such rules.

SUBTITLE B. MISCELLANEOUS PROVISIONS

A. REPEAL CERTAIN EXCISE TAXES ON RAIL DIESEL FUEL AND INLAND

[1,037] Under present law, diesel fuel used in trains is subject to a 4.3-cents-per gallon General Fund excise tax. Similarly, fuels used in barges operating on the designated inland waterways system is subject to a 4.3-cents-per-gallon General Fund excise tax. In both cases, the 4.3-cents- per-gallon excise tax rates are permanent.

HOUSE BILL

[1,038] No provision.

SENATE AMENDMENT

[1,039] No provision.

CONFERENCE AGREEMENT

[1,040] The 4.3-cents-per-gallon General Fund excise tax rates on diesel fuel used in trains and fuels used in barges operating on the designated inland waterways system is repealed. Effective date. -- The provision takes effect on January 1, 2001.

B. REPEAL OF REDUCTION OF DEDUCTIONS FOR MUTUAL LIFE INSURANCE

Reduction in deductions for policyholder dividends and reserves of

[1,042] Under the provision, section 809, a mutual life insurance company is required to reduce its deduction for policyholder dividends by the company's differential earnings amount. If the company's differential earnings amount exceeds the amount of its deductible policyholder dividends, the company is required to reduce its deduction for changes in its reserves by the excess of its differential earnings amount over the amount of its deductible policyholder dividends. The differential earnings amount is the product of the differential earnings rate and the average equity base of a mutual life insurance company.

[1,043] The differential earnings rate is based on the difference between the average earnings rate of the 50 largest stock life insurance companies and the earnings rate of all mutual life insurance companies. The mutual earnings rate applied under the provision is the rate for the second calendar year preceding the calendar year in which the taxable year begins. Under present law, the differential earnings rate cannot be a negative number.

[1,044] A company's equity base equals the sum of: (1) its surplus and capital increased by 50 percent of the amount of any provision for policyholder dividends payable in the following taxable year; (2) the amount of its nonadmitted financial assets; (3) the excess of its statutory reserves over its tax reserves; and (4) the amount of any mandatory security valuation reserves, deficiency reserves, and voluntary reserves. A company's average equity base is the average of the company's equity base at the end of the taxable year and its equity base at the end of the preceding taxable year.

[1,045] A recomputation or "true-up" in a subsequent year is required if the differential earnings amount for the taxable year either exceeds, or is less than, the recomputed differential earnings amount. The recomputed differential earnings amount is calculated taking into account the average mutual earnings rate for the calendar year (rather than the second preceding calendar year, as above). The amount of the true-up for any taxable year is added to, or deducted from, the mutual company's income for the succeeding taxable year.

Distributions to shareholders from policyholders surplus account

[1,047] 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).

[1,048] 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. ⁵⁸ 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. ⁵⁹

HOUSE BILL

[1,049] No provision.

SENATE AMENDMENT

[1,050] No provision.

CONFERENCE AGREEMENT

Reduction in deductions for policyholder dividends and reserves of

[1,052] Effective date. -- The repeal is effective for taxable years beginning after December 31, 2000.

Distributions to shareholders from policyholders surplus account

[1,054] Effective date. -- The repeal is effective for taxable years beginning after December 31, 2000.

C. TAX-CREDIT BONDS FOR THE NATIONAL RAILROAD PASSENGER CORPORATION

[1,055] Present law does not authorize the issuance by any private, for-profit corporation of bonds the interest on which is tax-exempt or eligible for an income tax credit. Tax-exempt bonds may be issued by States or local governments to finance their governmental activities or to finance certain capital expenditures of private businesses or loans to individuals. Additionally, States or local governments may issue tax-credit bonds to finance the operation of "qualified zone academies."

Tax-exempt bonds

[1,056] Interest on bonds issued by States or local governments to finance direct activities of those governmental units is excluded from tax (sec. 103). In addition, interest on certain bonds ("private activity bonds") issued by States or local governments acting as conduits to provide financing for private businesses or individuals is excluded from income if the purpose of the borrowing is specifically approved in the Code (sec. 141). Examples of approved private activities for which States or local governments may provide tax-exempt financing include transportation facilities (airports, ports, mass commuting facilities, and certain high speed intercity rail facilities); public works facilities such as water, sewer, and solid waste disposal; and certain social welfare programs such as low-income rental housing, student loans, and mortgage loans to certain first-time homebuyers. High speed intercity rail facilities eligible for tax-exempt financing include land, rail, and stations (but not rolling stock) for fixed guideway rail transportation of passengers and their baggage using vehicles that are reasonably expected to operate at speeds in excess of 150 miles per hour between scheduled stops.

[1,057] Issuance of most private activity bonds is subject to annual State volume limits of $50 per resident ($150 million if greater). These volume limits are scheduled to increase to $75 per resident ($225 million if greater) over the period 2003 through 2007.

[1,058] Investment earnings on all tax-exempt bonds, including earnings on invested sinking funds associated with such bonds is restricted by the Code to prevent the issuance of bonds earlier or in a greater amount than necessary for the purpose of the borrowing. In general, all profits on investment of such proceeds must be rebated to the Federal Government. Interest on bonds associated with invested sinking funds is taxable.

Tax-credit bonds for qualified zone academies

[1,059] As an alternative to traditional tax-exempt bonds, certain States or local governments are given authority to issue "qualified zone academy bonds." A total of $400 million of qualified zone academy bonds is authorized to be issued in each year of 1998 through 2001. The $400 million is allocated to States according to their respective populations of individuals below the poverty line.

[1,060] Qualified zone academy bonds are taxable bonds with respect to which the investor receives an income tax credit equal to an assumed interest rate set by the Treasury Department to allow issuance of the bonds without discount and without interest cost to the issuer. The bonds may be used for renovating, providing equipment to, developing course materials for, or training teachers in eligible schools. Eligible schools are elementary and secondary schools with respect to which private entities make contributions equaling at least 10 percent of the bond proceeds.

[1,061] Only financial institutions are eligible to claim the credits on qualified zone academy bonds. The amount of the credit is taken into income. The credit may be claimed against both regular income tax and AMT liability.

[1,062] There are no arbitrage restrictions applicable to investment earnings on qualified zone academy bond proceeds.

HOUSE BILL

[1,063] No provision.

SENATE AMENDMENT

[1,064] No provision, but S. 3152, authorizes the National Railroad Passenger Corporation ("Amtrak") and the Alaska Railroad to issue an aggregate amount of $10 billion of tax-credit bonds to finance its capital projects. Annual issuance of the bonds may not exceed $1 billion per year (plus any authorized amount that was not issued in previous years) during the ten Fiscal Year period, 2001 2010. Unused bond authority could be carried forward to succeeding years until used, subject to a limitation that no tax-credit bonds could be issued after fiscal year 2015.

[1,065] Projects eligible for tax-credit bond financing are defined as the acquisition, construction of equipment, rolling stock, and other capital improvements for (1) the northeast rail corridor between Washington, D.C. and Boston, Massachusetts; ⁶⁰ (2) high- speed rail corridors designated under section 104(d)(2) of Title 23 of the United States Code; and (3) other intercity passenger rail corridors, including station rehabilitation or construction, track or signal improvements, or grade crossing elimination. Item 3 is limited to a maximum of 10 percent of the proceeds of any bond issue. At least 70 percent of the authorized tax-credit bonds must be issued for projects described in (2) and (3). No more than $3 billion of the bonds may be designated for any one high-speed rail corridor.

[1,066] As with qualified zone academy bonds, the interest rate on Amtrak/Alaska Railroad tax-credit bonds will be set to allow issuance of the bonds at par, i.e., without any interest cost to Amtrak or the Alaska Railroad. In general, proceeds of Amtrak/Alaska Railroad tax- credit bonds would have to be spent within 36 months after the bonds are issued. As of the date the bonds were issued, Amtrak or the Alaska Railroad must certify that it reasonably expects --

(1) to incur a binding obligation with a third party to spend at least 10 percent of the bond proceeds within six months (or in the case of self-constructed property, to have commenced construction or preliminary engineering studies within six months);

(2) to spend the bond proceeds with due diligence; and

(3) to spend at least 95 percent of the proceeds for qualifying capital costs within three years.

[1,067] Amtrak/Alaska Railroad tax-credit bonds may only be issued for projects that are approved by the Department of Transportation and, in the case of Amtrak, with respect to which there are binding commitments from one or more States to make matching contributions of at least 20 percent of the project cost. Projects having State matching contributions in excess of 20 percent are given a preference. The State matching contributions, along with earnings on investment of the tax-credit bond proceeds must be invested in a trust account (i.e., a sinking fund) and used along with earnings on the trust account for repayment of the principal amount of the bonds.

[1,068] Amtrak/Alaska Railroad tax-credit bonds can be owned (and income tax credits claimed) by any taxpayer. The amount of the credit will be included in the bondholder's income. Additionally, provisions are included in the proposal to allow the credits to be stripped and sold to different investors than the investors in the bond principal.

[1,069] The required State matching contribution may not be derived from Federal monies. Any Federal Highway Trust Fund monies transferred to the States are treated as Federal monies for this purpose. During the period when tax-credit bonds are authorized, Amtrak and the Alaska Railroad are not allowed to receive any Highway Trust Fund monies other than those authorized on the date of the provision's enactment.

[1,070] Amtrak is required annually to submit a five-year capital plan to Congress, and to satisfy independent oversight requirements with respect to the management of tax-credit-bond- financed projects. Finally, the Treasury Department is required to certify annually that funds deposited in the escrow accounts for repayment of tax-credit bonds issued by Amtrak (with actual and projected earnings thereon) are sufficient to ensure full repayment of the bond principal.

[1,071] Effective date. -- The provision is effective for tax credit bonds issued by Amtrak or the Alaska Railroad after September 30, 2000.

CONFERENCE AGREEMENT

[1,072] The conference agreement follows the Senate amendment, with several modifications and clarifications.

[1,073] First, the expenditure requirements applicable to these tax credit bonds are modified to add an actual expenditure requirement to the Senate amendment's reasonable expectations test. Under the actual expenditure requirement, unless at least 95 percent of the bond proceeds is spent within 3 years after the bonds are issued, unspent proceeds must be used to redeem bonds within 90 days after the end of the period. An exception allows the expenditure period to be extended to four years if (1) at least 75 percent of the proceeds are spent within the initial three year period, (2) the issuer has proceeded with due diligence to spend the proceeds within the initial three-year period, and (3) the issuer pays to the Federal Government all earnings on unspent proceeds that accrue after the end of the initial three-year period. If the issuer qualifies for the exception, but fails to satisfy its spending requirements, unspent proceeds must be used to redeem bonds within 90 days after the end of the four-year period.

[1,074] Second, the definition of qualified expenditures is modified to preclude the use of bond proceeds to refinance outstanding debt except for "bridge" and similar financing incurred for a qualified project pending issuance of tax-credit bonds. Qualified bridge financing is defined as financing that (1) is issued after the date of enactment of the provision, (2) has a term of not more than three years, (3) is used to finance or acquire capital improvements that qualify for tax-credit bond financing, and (4) is issued in anticipation of being refinanced with proceeds of tax- credit bonds.

[1,075] Third, provisions are added requiring that tax-credit- bond-financed property be continuously used for a qualified purpose throughout the term of the bonds.

[1,076] Fourth, clarification is provided that the use of tax- credit bond proceeds to redeem bonds (except as required above and except with regard to not more than five percent of the bond proceeds) is not a qualified expenditure. A further modification allows Amtrak to treat as a qualified project expenditure, expenditure of not more than 0.5 percent of bond proceeds for costs of complying with the oversight requirements imposed on that railroad by the conference agreement.

[1,077] Fifth, clarification is provided that the tax credit rate is determined on the date the bonds are sold (rather than the actual issuance date, if different).

[1,078] Sixth, the Senate amendment is modified to require actual deposit in to the Trust Account securing repayment of the bonds of the required State contributions before any tax-credit bonds are issued.

[1,079] Seventh, for bonds issued by Amtrak, the Senate amendment is modified to require (in addition to approval by the Secretary of Transportation) a finding by the Inspector General of the Department of Transportation that there is "a reasonable likelihood" that the proposed projects will result "in a positive incremental financial contribution" to Amtrak and to specify criteria to be used in making this determination.

[1,080] Return on investment. -- The measurements used to evaluate the amount of return on investment shall include (1) the positive incremental financial contribution to Amtrak, including all system- wide impacts and (2) the value of the net cash flow to Amtrak produced over the life of the program, discounted to current dollars. Such net cash flow should take into consideration operating efficiencies produced as a result of the total capital investment as well as incremental passenger related, mail and express, State and other revenue as a result of the total capital investment.

[1,081] Leveraging of funds. -- The measurements used to evaluate the leveraging of funds shall include (1) the amount of public and private match provided for the program, (2) the percentage of public and private match provided for the program relative to Amtrak's contribution and (3) the stability or reliability of state and local capital and operating support.

[1,082] Cost effectiveness. -- The measurement used to evaluate cost effectiveness is the incremental cost to Amtrak per incremental passenger or the incremental cost to Amtrak per incremental revenue generated as a result of the capital investment.

[1,083] Safety improvement. -- The measurements used to evaluate safety improvement shall include (1) the prevention or reduction of customer or third party injuries and (2) the prevention or reduction of employee injuries.

[1,084] Mobility improvement. -- The measurements used to evaluate the level of mobility improvement shall include (1) travel time savings and (2) low income households served.

[1,085] Feasibility. -- The measurements used to evaluate feasibility shall include (1) timing of program implementation, (2) technical feasibility and (3) likelihood of public and private participation.

[1,086] Eighth, clarification is provided that the tax-credit bonds are the obligation of the issuing railroad notwithstanding the existence of the Trust Account securing their repayment. As in the case of other tax-preferred debt, no implied Federal Guarantee arises by virtue of the availability of tax credits on these bonds.

[1,087] Ninth, the Senate amendment is modified to provide that funds in the Trust Account that are not required to redeem bonds may be used for additional qualified projects.

D. FARM, FISH, AND RANCH RISK MANAGEMENT ACCOUNTS ("FFARRM ACCOUNTS")

[1,088] There is no provision in present law allowing the elective deferral of farm or fishing income.

HOUSE BILL

[1,089] No provision.

SENATE AMENDMENT

[1,090] No provision. However, S. 3152 allows taxpayers engaged in an eligible business to establish FFARRM accounts. An eligible business is any trade or business of farming in which the taxpayer actively participates, including the operation of a nursery or sod farm or the raising or harvesting of crop-bearing or ornamental trees. An eligible business also is the trade or business of commercial fishing as that term is defined under section (3) of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1802) and includes the trade or business of catching, taking or harvesting fish that are intended to enter commerce through sale, barter or trade.

[1,091] Contributions to a FFARRM account are deductible and are limited to 20 percent of the taxable income that is attributable to the eligible business. The deduction is taken into account in determining adjusted gross income and reduces the income attributable to the eligible business for all income tax purposes other than the determination of the 20 percent of eligible income limitation on contributions to a FFARRM account. Contributions to a FFARRM account do not reduce earnings from self-employment. Accordingly, distributions are not included in self-employment income.

[1,092] A FFARRM account is taxed as a grantor trust and any earnings are required to be distributed currently. Thus, any income earned in the FFARRM account is taxed currently to the farmer or fisherman who established the account. Amounts can remain on deposit in a FFARRM account for up to five years. Any amount that has not been distributed by the close of the fourth year following the year of deposit is deemed to be distributed and includible in the gross income of the account owner.

[1,093] Effective date. -- The provision is effective for taxable years beginning after December 31, 2000.

CONFERENCE AGREEMENT

[1,094] The conference agreement follows the provision of S. 3152.

E. EXTENSION AND MODIFICATION OF ENHANCED DEDUCTION FOR CORPORATE

[1,095] The maximum charitable contribution deduction that may be claimed by a corporation for any one taxable year is limited to 10 percent of the corporation's taxable income for that year (disregarding charitable contributions and with certain other modifications) (sec. 170(b)(2)). Corporations also are subject to certain limitations based on the type of property contributed. In the case of a charitable contribution of short-term gain property, inventory, or other ordinary income property, the amount of the deduction generally is limited to the taxpayer's basis (generally, cost) in the property. However, special rules in the Code provide an augmented deduction for certain corporate contributions. Under these special rules, the amount of the augmented deduction is equal to the lesser of (1) the basis of the donated property plus one-half of the amount of ordinary income that would have been realized if the property had been sold, or (2) twice the basis of the donated property.

[1,096] Section 170(e)(6) allows corporate taxpayers an augmented deduction for qualified contributions of computer technology and equipment (i.e., computer software, computer or peripheral equipment, and fiber optic cable related to computer use) to be used within the United States for educational purposes in grades K 12. Eligible donees are: (1) any educational organization that normally maintains a regular faculty and curriculum and has a regularly enrolled body of pupils in attendance at the place where its educational activities are regularly carried on; and (2) tax- exempt charitable organizations that are organized primarily for purposes of supporting elementary and secondary education. A private foundation also is an eligible donee, provided that, within 30 days after receipt of the contribution, the private foundation contributes the property to an eligible donee described above.

[1,097] Qualified contributions are limited to gifts made no later than two years after the date the taxpayer acquired or substantially completed the construction of the donated property. In addition, the original use of the donated property must commence with the donor or the donee. Accordingly, qualified contributions generally are limited to property that is no more than two years old. Such donated property could be computer technology or equipment that is inventory or depreciable trade or business property in the hands of the donor.

[1,098] Donee organizations are not permitted to transfer the donated property for money or services (e.g., a donee organization cannot sell the computers). However, a donee organization may transfer the donated property in furtherance of its exempt purposes and be reimbursed for shipping, installation, and transfer costs. For example, if a corporation contributes computers to a charity that subsequently distributes the computers to several elementary schools in a given area, the charity could be reimbursed by the elementary schools for shipping, transfer, and installation costs.

[1,099] The special treatment applies only to donations made by C corporations. S corporations, personal holding companies, and service organizations are not eligible donors.

[1,100] The provision is scheduled to expire for contributions made in taxable years beginning after December 31, 2000.

HOUSE BILL

[1,101] No provision.

SENATE AMENDMENT

[1,102] No provision. However, S. 3152 includes a provision that extends the current enhanced deduction for donations of computer technology and equipment through December 31, 2003. In addition, S. 3152 expands the enhanced deduction to include donations to public libraries.

[1,103] Effective date. -- The provision is effective upon the date of enactment.

CONFERENCE AGREEMENT

[1,104] The conference agreement follows S. 3152 with a modification that qualified contributions include gifts made no later than three years after the date the taxpayer acquired or substantially completed the construction of the donated property.

[1,105] Effective date. -- The provision is effective for contributions made after December 31, 2000.

F. SETTLEMENT OF CERTAIN DISCRIMINATION CLAIMS BROUGHT BY FARMERS

Income tax

[1,106] Gross income means "income from whatever source derived" except for certain items specifically excluded by statute. ⁶¹ Sources of income include compensation for services, interest, dividends, capital gains, rents, royalties, gross profits from a trade or business, income from the discharge of indebtedness, and income from S corporations, partnerships, trusts, and estates. In determining taxable income, a taxpayer's gross income is reduced by exemptions and deductions. Absent any applicable exemption or exclusion, an amount received by an individual in the settlement of a lawsuit generally is includible in gross income.

HOUSE BILL

[1,107] No provision. However, H.R. 2233 excludes from gross income any cash received or cancellation of indebtedness income as a result of the settlement of certain claims brought by certain farmers against the Department of Agriculture for discrimination in farm credit and benefit programs. The bill further provides that such amounts are not included in the gross estate of any qualified person for estate tax purposes. Finally, the bill provides that these amounts are not to be (1) considered income or resources in determining eligibility for, (2) used to deny or reduce funds under, or (3) used as a basis for determining the amount of assistance under, any program funded in whole or in part with Federal funds. The bill is limited to certified members of the plaintiff class in the settlement of two consolidated class action suits. The two suits are Pigford, et al. v. Glickman No. 97 1978 (D.D.C.)(PLF) and Brewington, et al. v. Glickman No. 98 1693 (D.D.C.)(PLF).

[1,108] Effective date. -- The provision is effective after the date of enactment.

SENATE AMENDMENT

[1,109] No provision.

CONFERENCE AGREEMENT

[1,110] The conference agreement follows the provision of H.R. 2233, with modifications. The conference agreement provision provides an exclusion of certain amounts from gross income for purposes of Subtitle A of the Internal Revenue Code. This exclusion applies to any (1) cash payment received before, on, or after the date of enactment by or made on behalf of, a person under the settlement of these two claims or (2) cancellation of indebtedness income pursuant to the settlement of these two claims. The conference agreement does not include the provision of H.R. 2233 that provides an exclusion of amounts from the gross estate of any qualified person, for estate tax purposes. Further, the conference agreement does not include the provision of H.R. 2233 providing that amounts are not to be (1) considered income or resources in determining eligibility for, (2) used to deny or reduce funds under, or (3) used as a basis for determining the amount of assistance under, any program funded in whole or in part with Federal funds.

G. EXTENSION OF THE ADOPTION TAX CREDIT

[1,111] Taxpayers are entitled to a maximum nonrefundable credit against income tax liability of $5,000 per child for qualified adoption expenses paid or incurred by the taxpayer (sec. 23). In the case of a special needs adoption, the maximum credit amount is $6,000. A special needs child is a child who is a citizen or resident of the United States and who the State has determined: (1) cannot or should not be returned to the home of the birth parents, and (2) has a specific factor or condition because of which the child cannot be placed with adoptive parents without adoption assistance. The adoption of a child who is not a citizen or a resident of the United States is a foreign adoption.

[1,112] Qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorneys' fees, and other expenses that are directly related to the legal adoption of an eligible child. All reasonable and necessary expenses required by a State as a condition of adoption are qualified adoption expenses. Otherwise qualified adoption expenses paid or incurred in one taxable year are not taken into account for purposes of the credit until the next taxable year unless the expenses are paid or incurred in the year the adoption becomes final.

[1,113] An eligible child is an individual (1) who has not attained age 18 or (2) who is physically or mentally incapable of caring for himself or herself. After December 31, 2001, the credit will be available only for special needs adoptions.

[1,114] No credit is allowed for expenses incurred (1) in violation of State or Federal law, (2) in carrying out any surrogate parenting arrangement, (3) in connection with the adoption of a child of the taxpayer's spouse, (4) that are reimbursed under an employer adoption assistance program or otherwise, or (5) for a foreign adoption that is not finalized.

[1,115] The credit is phased out ratably for taxpayers with modified AGI above $75,000, and is fully phased out at $115,000 of modified AGI. For these purposes modified AGI is computed by increasing the taxpayer's AGI by the amount otherwise excluded from gross income under Code sections 911, 931, or 933.

HOUSE BILL

[1,116] No provision.

SENATE AMENDMENT

[1,117] No provision. However, S. 3152 extends the adoption credit for the adoption of nonspecial needs children for two years through December 31, 2003. Effective date. -- The provision is effective on the date of enactment.

CONFERENCE AGREEMENT

[1,118] The conference agreement extends the credit for nonspecial needs adoptions to include qualified adoption expenses paid or incurred prior to December 31, 2005, and increases the maximum credit by $1,000 per year beginning for taxable years beginning after December 31, 2000 and until the maximum credit reaches $10,000 per year for taxable years beginning after December 31, 2004. In the case of special needs adoptions, the maximum credit is increased by $2,000 per year for taxable years beginning after December 31, 2000 until the maximum credit reaches $12,000 per year for taxable years beginning after December 31, 2002.

[1,119] Additionally, for taxable years beginning after December 31, 2000, the income limitation for the credit is increased to $150,000 of modified AGI, and is phased out ratably for taxpayers with modified AGI between $150,000 and $190,000.

[1,120] Effective date. -- The provision is effective for taxable years beginning after December 31, 2000.

H. STUDY OF TAX TREATMENT WITH RESPECT TO CERTAIN OFFSHORE INSURANCE

[1,121] Under present law, under the rules of subchapter L of the Code, a life insurance company is subject to tax on its life insurance company taxable income. Similarly, a property and casualty insurance company is subject to tax on its taxable income, which is calculated by taking into account the company's underwriting income and investment income, as well as gains and other income items. An insurance company may enter into a reinsurance contract or agreement with another insurer, whereby risks, or portions of risks, are transferred from one insurer to another or are shared or allocated among insurers.

[1,122] Present law provides rules governing allocation in the case of reinsurance agreements that involve tax avoidance or evasion. Under this rule, in the case of two or more related persons that are parties to a reinsurance agreement (or an agent of a party to a reinsurance agreement), the Treasury Secretary may allocate between or among such persons income (whether investment income, premium or otherwise), deductions, assets, reserves, credits, and other items related to the agreement. The Treasury Secretary may also recharacterize any such items or make any other adjustment. The Secretary may make the allocation, recharacterization or adjustment if he determines that it is necessary to reflect the proper source and character of the taxable income (or other item) of each related person or agent. ⁶²

[1,123] Other rules also provide for the allocation of income and deductions among taxpayers. In any case of two or more organizations owned or controlled directly or indirectly by the same interests, the Treasury Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among the organizations, if he determines that it is necessary in order to prevent evasion of taxes or clearly to reflect the income of the organizations.

HOUSE BILL

[1,124] No provision.

SENATE AMENDMENT

[1,125] No provision.

CONFERENCE AGREEMENT

[1,126] The conference agreement provides that the Secretary of the Treasury is to conduct a study on the extent to which U.S. tax on investment income of U.S. insurance companies is being avoided through the use of affiliated corporations in Bermuda or other offshore locations. In conducting the study, the Treasury Secretary is to address issues concerning the application of current U.S. tax law in preventing such avoidance, changes to U.S. tax law that may be needed to prevent such avoidance, and is to make appropriate recommendations. The Treasury Secretary is to submit the study and recommendations to the House Committee on Ways and Means and the Senate Committee on Finance no later than December 31, 2001.

I. TREATMENT OF INDIAN TRIBES AS NON-PROFIT ORGANIZATIONS AND STATE

[1,127] Present law imposes a net tax on employers equal to 0.8 percent of the first $7,000 paid annually to each employee. The current gross FUTA tax is 6.2 percent, but employers in States meeting certain requirements and having no delinquent loans are eligible for a 5.4 percent credit making the net Federal tax rate 0.8 percent. Both non-profit organizations and State and local governments are not required to pay FUTA taxes. Instead they may elect to reimburse the unemployment compensation system for unemployment compensation benefits actually paid to their former employees. Generally, Indian tribes are not eligible for the reimbursement treatment allowable to non-profit organizations and State and local governments.

HOUSE BILL

[1,128] No provision.

SENATE AMENDMENT

[1,129] No provision. However, S. 3152 provides that an Indian tribe (including any subdivision, subsidiary, or business enterprise chartered and wholly owned by an Indian tribe) is treated like a non- profit organization or State or local government for FUTA purposes (i.e., given an election to choose the reimbursement treatment).

[1,130] Effective date. -- The provision generally is effective with respect to service performed beginning on or after the date of enactment. Under a transition rule, service performed in the employ of an Indian tribe is not treated as employment for FUTA purposes if: (1) it is service which is performed before the date of enactment and with respect to which FUTA tax has not been paid; and (2) such Indian tribe reimburses a State unemployment fund for unemployment benefits paid for service attributable to such tribe for such period.

CONFERENCE AGREEMENT

[1,131] The conference agreement follows the provision of S. 3152.

SUBTITLE C. TAX TECHNICAL CORRECTIONS

HOUSE BILL

[1,132] No provision.

SENATE AMENDMENT

[1,133] No provision.

CONFERENCE AGREEMENT

[1,134] The conference agreement includes tax technical corrections. ⁶³

[1,135] Except as otherwise provided, the technical corrections contained in the bill generally are effective as if included in the originally enacted related legislation. The provisions under the IRS Restructuring Act of 1998 relating to innocent spouse and to procedural and administrative issues (other than the provision relating to clarification of Tax Court authority to issue appealable decisions) are effective upon the date of enactment of the bill.

Amendments relating to the Ticket to Work and Work Incentives

[1,137] Taxable REIT subsidiaries. -- The provision clarifies that a REIT's redetermined rents (described in sec. 857(b)(7)(B)) that are subject to tax under section 857(b)(7)(A) do not include amounts received from a taxable REIT subsidiary that would be excluded from unrelated business taxable income (under sec. 512(b)(3), relating to certain rents, if received by certain types of organizations described in sec. 511(a)(2)).

[1,138] Partnership basis adjustments. -- The provision provides that the rule in the consolidated return regulations (Treas. Reg. sec. 1.1502 34) aggregating stock ownership for purposes of section 332 (relating to complete liquidation of a subsidiary that is a controlled corporation) also applies for purposes of section 732(f) (relating to basis adjustments to assets of a controlled corporation received in a partnership distribution).

Amendments related to the Tax and Trade Relief Extension Act of 1998

[1,140] Capital gains. -- The provision clarifies that if (1) a charitable remainder trust sold section 1250 property after July 28, 1997, and before January 1, 1998, (2) the property was held more than one year but not more than 18 months, and (3) the capital gain is distributed after December 31, 1997, then any capital gain attributable to depreciation will be taxed at 25 percent (rather than 28 percent). Treasury has published a notice (Notice 99 17, 1999 14 I.R.B., April 5, 1999) providing that the gain is taxed at 25 percent.

Amendments related to the Internal Revenue Service Restructuring and

[1,141] Timing of request for relief. -- Confusion currently exists as to the appropriate point at which a request for innocent spouse relief should be made by the taxpayer and considered by the IRS. Some have read the statute to prohibit consideration by the IRS of requests for relief until after an assessment has been made, i.e., after the examination has been concluded, and if challenged, judicially determined. Others have read the statute to permit claims for relief from deficiencies to be made upon the filing of the return before any preliminary determination as to whether a deficiency exists or whether the return will be examined. The consideration of innocent spouse relief requires that the IRS focus on the particular items causing a deficiency; until such items are identified, the IRS cannot consider these claims. Congress did not intend that taxpayers be prohibited from seeking innocent spouse relief until after an assessment has been made; Congress intended the proper time to raise and have the IRS consider a claim to be at the same point where a deficiency is being considered and asserted by the IRS. This is the least disruptive for both the taxpayer and the IRS since it allows both to focus on the innocent spouse issue while also focusing on the items that might cause a deficiency. It also permits every issue, including the innocent spouse issue, to be resolved in single administrative and judicial process. The bill clarifies the intended time by permitting the election under (b) and (c) to be made at any point after a deficiency has been asserted by the IRS. A deficiency is considered to have been asserted by the IRS at the time the IRS states that additional taxes may be owed. Most commonly, this occurs during the Examination process. It does not require an assessment to have been made, nor does it require the exhaustion of administrative remedies in order for a taxpayer to be permitted to request innocent spouse relief.

[1,142] Allowance of refunds. -- The current placement in the statute of the provision for allowance of refunds may inappropriately suggest that the provision applies only to the United States Tax Court, whereas it was intended to apply administratively and in all courts. The bill clarifies this by moving the provision to its own subsection.

[1,143] Non-exclusivity of judicial remedy. -- Some have suggested that the IRS Restructuring Act administrative and judicial process for innocent spouse relief was intended to be the exclusive avenue by which relief could be sought. The bill clarifies Congressional intent that the procedures of section 6015(e) were intended to be additional, non-exclusive avenues by which innocent spouse relief could be considered.

[1,144] Time for filing a petition with the Tax Court. -- As enacted, the time period for seeking a redetermination in the Tax Court of innocent spouse relief begins on the date of the determination as opposed to the day after the determination. This period is one day shorter than that generally applicable to petition the Tax Court with respect to a deficiency notice (sec. 6213) and the period during which collection activities are prohibited and the limitations period is suspended. The bill clarifies the computation of this period and conforms it to the generally applicable 90 day period for petitioning the Tax Court. Conforming amendments are made as to the period for which collection activities are prohibited and collection limitations suspended.

[1,145] Waiver of final determination upon agreement as to relief. -- Congress intended in enacting section 6015 to provide a simple and efficient procedure by which the IRS could consider relief, and if relief was denied (in whole or in part) and the spouse requesting such relief did not agree with such denial, such issue could be considered by the Tax Court. Congress did not intend to require a rigid formal process when the IRS and the spouse requesting relief agreed on the extent of relief to be granted. However, the provisions of section 6015(e) have been interpreted as requiring the issuance in all circumstances of a formal "Notice of Determination," which contains a statement of the time period within which a petition may be filed with the Tax Court and which delays final resolution of the request for relief until the expiration of the period for filing a petition with the Tax Court. The issuance of the Notice of Determination is confusing to the taxpayer when the requested relief was fully granted or when the IRS and the taxpayer otherwise agreed on the application of the innocent spouse provisions to the taxpayer's case. It also may cause unnecessary filings with the Tax Court and delay the closing of the case until the time for filing with the Tax Court expires.

[1,146] Congress has addressed the analogous situation in the deficiency context in section 6213(d). In such situations, upon written agreement, the IRS may adjust the taxpayer's liability as agreed, and no additional formal notice is necessary. The bill reflects that an analogous waiver was intended to apply in the innocent spouse context. The bill consequently permits taxpayers and the IRS to enter into a similar written agreement in innocent spouse cases, which allows for the taxpayer's liability to be immediately adjusted as agreed, and makes unnecessary a formal Notice of Determination or Tax Court review. This written agreement is to specify the details of the agreement between the IRS and the taxpayer as to the nature and extent of innocent spouse relief that will be provided. Conforming amendments are made as to the period for which collection activities are prohibited and collection limitations suspended.

Procedural and administrative issues

[1,147] Disputes involving $50,000 or less. -- The provision clarifies that the small case procedures of the Tax Court are available with respect to innocent spouse disputes and disputes continuing from the pre-levy administrative due process hearing. The small case procedures provide an accessible forum for taxpayers who have small claims with less formal rules of evidence and procedure. Use of the procedure is optional to the taxpayer, with the concurrence of the Tax Court. In view of the recent enactment of the innocent spouse and pre-levy administrative due process hearing provisions, it is anticipated that the Tax Court will give careful consideration to (1) a motion by the Commissioner of Internal Revenue to remove the small case designation (as authorized by Rules 172 and 173 of the Tax Court Rules) when the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case, as well as (2) the financial impact upon the taxpayer, including additional legal fees and costs, of not utilizing small case treatment. For example, removing the small case designation may be appropriate when a decision in the case will provide a precedent for the disposition of a substantial number of other cases. It is anticipated that motions by the Commissioner to remove the small case designation will be made infrequently.

[1,148] Authority to enjoin collection actions. -- While a dispute is pending under the pre-levy administrative due process hearing procedures, levy action is statutorily suspended for that period. The Tax Court and district courts are expressly granted authority to enjoin improper levy action in general, but that authority does not explicitly extend to improper levy action that occurs during the period when levy action is statutorily suspended under the administrative due process provisions. The provision clarifies the ability of the courts (including the Tax Court) to enjoin levy during the period that levy is required to be suspended with respect to a dispute under the pre-levy administrative due process hearing procedures.

[1,149] Clarification of permissible extension of limitations period for installment agreements. -- Uncertainty exists as to whether the permissible extension of the period of limitations in the context of installment agreements is governed by reference to an agreement of the parties pursuant to section 6502 or by reference to the period of time during which the installment agreement is in effect pursuant to sections 6331(k)(3) and (i)(5). The provision clarifies that the permissible extension of the period of limitations in the context of installment agreements is governed by the pertinent provisions of section 6502.

[1,150] Clarification of Tax Court authority to issue appealable decisions. -- The statutory provision for judicial review of a dispute concerning the pre-levy administrative due process hearing may be unclear as to whether a determination of the Tax Court is an appealable decision. The provision clarifies that the determination of the Tax Court (other than under the small case procedures) in a dispute concerning the pre-levy administrative due process hearing is a decision of the Tax Court and would be reviewable as such.

Other issues

[1,151] IRS restructuring. -- When the Office of the Chief Inspector was replaced by the Treasury Inspector General for Tax Administration (TIGTA) under the IRS Restructuring and Reform Act of 1998, Inspection's responsibilities were assigned to the TIGTA. TIGTA personnel are Treasury, rather than IRS, personnel. TIGTA personnel still need to make investigative disclosures to carry out the duties they took over from Inspection and their additional tax administration responsibilities. However, section 6103(k)(6) refers only to "internal revenue" personnel. The provision clarifies that section 6103(k)(6) permits TIGTA personnel to make investigative disclosures.

[1,152] Compliance. -- Section 3509 of the IRS Restructuring and Reform Act of 1998 expanded the disclosure rules of section 6110 to also cover Chief Counsel advice (sec. 6110(i)). This is a conforming change related to ongoing investigations. The provision adds to section 6110(g)(5)(A), after the words technical advice memorandum, "or Chief Counsel advice."

Amendments related to the Taxpayer Relief Act of 1997

[1,154] Roth IRAs. -- Code section 3405 provides for withholding with respect to designated distributions from certain tax-favored arrangements, including IRAs. In general, section 3405(e)(1)(B)(ii) excludes from the definition of a designated distribution the portion of any distribution which it is reasonable to believe is excludable from gross income. However, all distributions from IRAs are treated as includible in income. The exception was consistent with prior law when all IRA distributions were taxable, but does not account for the tax-free nature of certain Roth IRA distributions. The provision extends the exception to Roth IRAs.

[1,155] Capital gain election. -- The provision provides that an election to recognize gain or loss made pursuant to section 311(e) of the Taxpayer Relief Act of 1997 does not apply to assets disposed of in a recognition transaction within one year of the date the election would otherwise have been effective. Thus, for example, if an asset is sold in 2001, no election may be made with respect to that asset. In addition, it is clarified that the deemed sale and repurchase by reason of the election is not taken into account in applying the wash sale rules of section 1091.

[1,156] Straight-line depreciation under AMT. -- The provision clarifies that the Taxpayer Relief Act of 1997 did not change the requirement that the straight-line method of depreciation be used in computing the alternative minimum tax ("AMT") depreciation allowance for section 1250 property. It is arguable that the changes made by that Act could be read as inadvertently allowing accelerated depreciation under the AMT for section 1250 property which is allowed accelerated depreciation under the regular tax.

[1,157] Transportation benefits. -- Under present law, salary reduction amounts are generally treated as compensation for purposes of the limits on contributions and benefits under qualified plans. In addition, an employer can elect whether or not to include such amounts for nondiscrimination testing purposes. The IRS Reform Act permitted employers to offer a cash option in lieu of qualified transportation benefits. The provision treats salary reduction amounts used for qualified transportation benefits the same as other salary reduction amounts for purposes of defining compensation under the qualified plan rules.

[1,158] Tax Court jurisdiction. -- The Tax Court recently held that its jurisdiction pursuant to section 7436 extends only to employment status, not to the amount of employment tax in dispute ( Henry Randolph Consulting v. Comm'r , 112 T.C. #1, Jan. 6, 1999). The provision provides that the Tax Court also has jurisdiction over the amount.

Amendments related to the Balanced Budget Act of 1997

[1,160] Tobacco excise tax. -- Conforming amendments are provided to two provisions to reflect the fact that the tax on cigarette papers is not imposed on "books" of papers since January 1, 2000.

[1,161] Coordination of trade rules and tobacco excise tax. -- Clarification is provided that the penalty on reimporting cigarettes other than for return to a manufacturer (effective January 1, 2000) does not apply to cigarettes re-imported by individuals to the extent those cigarettes can be entered into the U.S. without duty or tax under the Harmonized Tariff Schedule.

Amendment related to the Small Business Job Protection Act of 1996

[1,163] Electing small business trusts holding S corporation stock. -- The provision allows an electing small business trust (sec. 1361(e)) to have an organization described in section 170(c)(1) (relating to State and local governments) as a beneficiary if the organization holds a contingent interest and is not a potential current beneficiary.

[1,164] Definition of lump-sum distribution. -- Section 1401(b) of the Small Business Job Protection Act of 1996 Act repealed 5-year averaging for lump-sum distributions. The definition of lump-sum distribution was preserved for other provisions, primarily those relating to NUA in employer securities. The definition was moved from section 402(d)(4)(A) to section 402(e)(4)(D)(i). This definition included the following sentence: "A distribution of an annuity contract from a trust or annuity plan referred to in the first sentence of this subparagraph shall be treated as a lump sum distribution. " The provision adds this language back into the definition of lump-sum distribution. The sentence is relevant to section 401(k)(10)(B), which permits certain distributions if made as a "lump-sum distribution."

[1,165] IRAs for nonworking spouses. -- Section 1427 of the Small Business Job Protection Act of 1996 expanded the IRA deduction for nonworking spouses. The maximum permitted IRA contributions is generally limited by the individual's earned income. However, under present law, it is possible for a nonworking (or lesser earning) spouse to make IRA contributions in excess of the couple's combined earned income. The following example illustrates present law.

Example: Suppose H and W retire in the middle of January,

Amendment related to the Revenue Reconciliation Act of 1990

Amendments to other acts

[1,169] Insurance. -- Under section 7702A, if a life insurance contract that is not a modified endowment contract is actually or deemed exchanged for a new life insurance contract, then the 7-pay limit under the new contract is first be computed without reference to the premium paid using the cash surrender value of the old contract, and then would be reduced by /1/7/ of the premium paid taking into account the cash surrender value of the old contract. For example, if the old contract had a cash surrender value of $14,000 and the 7-pay premium on the new contract would equal $10,000 per year but for the fact that there was an exchange, the 7-pay premium on the new contract would equal $8,000 ($10,000 $14,000/7). However, section 7702A(c)(3)(A) arguably might be read to suggest that if the cash surrender value on the new contract was $0 in the first two years (due to surrender charges), then the 7-pay premium might be $10,000 in this example, unintentionally permitting policyholders to engage in a series of "material changes" to circumvent the premium limitations in section 7702A. The provision clarifies section 7702A(c)(3)(A) to refer to the cash surrender value of the old contract, effective as if enacted with the Technical and Miscellaneous Revenue Act of 1988 (generally, for contracts entered into on or after June 21, 1988).

[1,170] Worthless securities. -- Section 165(g)(3) provides a special rule for worthless securities of an affiliated corporation. The test for affiliation in section 165(g)(3)(A) is the 80-percent vote test for affiliated groups under section 1504(a) that was in effect prior to 1984. When section 1504(a) was amended in the Deficit Reduction Act of 1984 to adopt the vote and value test of present law, no corresponding change was made to section 165(g)(3)(A), even though the tests had been identical until then. The provision conforms the affiliation test of section 165(g)(3)(A) to the test in section 1504(a)(2), effective for taxable years beginning after December 31, 1984.

[1,171] Exception for certain annuities under OID rules. -- The Deficit Reduction Act of 1984 expanded the prior-law rules for inclusion in income of original issue discount ("OID") on debt instruments. That Act provided an exception from the definition of a debt instrument for certain annuity contracts, including any annuity contract to which section 72 applies and that is issued by an insurance company subject to tax under subchapter L of the Code (and meets certain other requirements) (sec. 1275(a)(1)(B)(ii)). The provision clarifies that an annuity contract otherwise meeting the applicable requirements also comes within the exception of section 1275(a)(1)(B)(ii) if it is issued by an entity described in section 501(c) and exempt from tax under section 501(a), that would be subject to tax as an insurance company under subchapter L if it were not exempt under section 501(a). For example, the provision clarifies that an annuity contract otherwise meeting the requirements that is issued by a fraternal beneficiary society which is exempt from Federal income tax under section 501(a), and which is described in section 501(c)(8), comes within the exception under section 1275(a)(1)(B)(ii). However, an annuity contract issued by a foreign insurer that is not subject to tax in the U.S. as an insurance company under subchapter L with respect to the contract does not come within the exception under section 1275(a)(1)(B)(ii). It is understood that charitable gift annuities (as defined in sec. 501(m)) depend (in whole or in substantial part) on the life expectancy of one or more individuals, and thus come within the exception under section 1275(a)(1)(B)(i). The provision is effective as if included with section 41 of the Deficit Reduction Act of 1984 (i.e., for taxable years ending after July 18, 1984).

[1,172] Losses from section 1256 contracts. -- Section 6411 allows tentative refunds for NOL carrybacks, business credit carrybacks and, for corporations only, capital loss carrybacks. Individuals normally cannot carry back a capital loss. However, section 1212(c) does allow a carryback of section 1256 losses, if elected by the taxpayer. The provision amends section 6411(a) by including a reference to section 1212(c), effective as if included with section 504 of the Economic Recovery Tax Act of 1981.

[1,173] Highway Trust Fund. -- The provision modifies administrative procedures of the Highway Trust Fund to conform to the 1993 repeal of the special tax rate applicable to ethanol prior to 1994. The provision is effective for taxes received after the date of enactment. This ensures that retroactive adjustments, if any, are not made to the Highway Trust Fund.

[1,174] Conforming amendment for expenditures from Vaccine Injury Compensation Trust Fund. -- The provision makes a conforming amendment to the expenditure purposes of the Vaccine Injury Compensation Trust Fund to enable certain payments to be made from the Trust Fund.

Clerical changes

TITLE VIII

EXCLUSION FROM PAYGO SCORECARD

PRESENT LAW

[1,176] Under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, tax reduction legislation is subject to a "pay-as-you-go" (PAYGO) requirement. The PAYGO system tracks legislation that may increase budget deficits using a "scorecard" (estimated by the Office of Management and Budget). Any revenue loss would have to be offset by other revenue increases, reductions in direct spending or a combination of the two.

HOUSE BILL

[1,177] No provision.

SENATE AMENDMENT

[1,178] No provision.

CONFERENCE AGREEMENT

[1,179] The conference agreement provides that, upon enactment of the Act, the Director of the Office of Management and Budget shall not make any estimate of the changes in direct spending outlays and receipts under section 252(d) of the Balanced Budget and Emergency Deficit Control Act of 1985 resulting from the enactment of the Act.

TAX COMPLEXITY ANALYSIS

[1,180] The following tax complexity analysis is provided pursuant to section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998, which requires the staff of the Joint Committee on Taxation (in consultation with the Internal Revenue Service ("IRS") and the Treasury Department) to provide a complexity analysis of tax legislation reported by the House Committee on Ways and Means, the Senate Committee on Finance, or a Conference Report containing tax provisions. The complexity analysis is required to report on the complexity and administrative issues raised by provisions that directly or indirectly amend the Internal Revenue Code and that have widespread applicability to individuals or small businesses. For each such provision identified by the staff of the Joint Committee on Taxation, a summary description of the provision is provided, along with an estimate of the number of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues. Time constraints prevented the staff of the Joint Committee on Taxation from consulting with the IRS regarding the provisions in the conference agreement that have widespread applicability.

1. Increase deduction for business meals

[1,181] The provision increases the deductible percentage of business meal (food and beverage) expenses to 70 percent, effective for taxable years beginning after December 31, 2000.

Number of affected taxpayers

[1,182] It is estimated that almost all small businesses will be affected by the provision.

Discussion

[1,183] Because the provision increases the percentage deduction only with respect to meals and not entertainment, small businesses may have to keep additional records to distinguish between the two types of expenditures. The provision may lead to additional disputes between small businesses and the IRS regarding the nature of an expenditure, particularly in business situations where the meal and entertainment is provided as a package for a single price. No new regulatory changes would be needed to implement the provision (although a conforming change to regulations to reflect the increasing percentage would be appropriate).

2. Accelerate 100-percent self-employed health insurance deduction

[1,184] The provision accelerates the increase in the deduction for health insurance expenses of self-employed individuals so that the deduction is 100 percent in years beginning after December 31, 2000.

Number of affected taxpayers

[1,185] It is estimated that the provision will affect three million small businesses.

Discussion

[1,186] It is not anticipated that individuals or small businesses will need to keep additional records due to the provision. It is not anticipated that the provision will result in an increase in disputes with the IRS, or increase tax return preparation costs. It is not anticipated that regulatory guidance will be needed to implement the provision. Accelerating the 100-percent deduction may simplify the preparation of tax returns for self-employed individuals, because they will no longer need to keep track of the percent of health insurance expenses that are deductible, and will need to perform one less calculation.

² In making the designations, the Secretary of HUD must consult with the Secretaries of Agriculture, Commerce, Labor, Treasury, the Director of the Office of Management and Budget; and the Administrator of the Small Business Administration (and the Secretary of the Interior in the case of an area on an Indian reservation).

³ Determined using 1990 census data.

⁴ The designation of a nominated area within the District of Columbia as a renewal community becomes effective on January 1, 2003 (upon the expiration of the designation of the District of Columbia Enterprise Zone).

⁵ An "enterprise zone business" is defined in section 1397B and is described in connection with the expansion of the empowerment zone benefits.

⁶ Any gain attributable to the period before January 1, 2002, or after December 31, 2014, would not be eligible for the zero- percent capital gains rate.

⁷ Under the conference agreement, renewal communities are not "targeted areas" for purposes of permitting expensing of certain environmental remediation costs. Another provision described below extends the brownfields provision for two years and eliminates the targeted area requirement.

⁸ If a renewal community designation is terminated prior to December 31, 2009, the tax incentives would cease to be available as of the termination date.

⁹ For wages paid in calendar years during the period 1994 through 2001, the credit rate is 20 percent. The credit rate is reduced to 15 percent for calendar year 2002, 10 percent for calendar year 2003, and 5 percent for calendar year 2004. No wage credit is available after 2004 in the original nine empowerment zones.

¹⁰ For purposes of these tax incentives, a qualifying business does not include a trade or business consisting predominantly of the development or holding of intangibles for sale or license (sec. 1397B(d)(4)). While the provision does not modify the definition of a qualifying business, the sponsors of the legislation intend to review this issue.

¹¹ Except for the wage credit, which is reduced to 15 percent for calendar year 2005, and then reduced by five percentage points in each year in 2006 and 2007, with no wage credit available after 2007.

¹² As previously discussed, under H.R. 4923, the District of Columbia Enterprise Zone is given a priority designation as a renewal community effective January 1, 2003.

¹³ The additional $35,000 of section 179 expensing is available throughout all areas that are part of a designated empowerment zone, including the non-contiguous "developable sites" that were allowed to be part of the designated Round II empowerment zones under the 1997 Act.

¹⁴ The D.C. Enterprise Zone is scheduled to terminate on December 31, 2002.

¹⁵ The present-law rules of sections 1394 and 1400A continue to apply with respect to the D.C. Enterprise Zone through its scheduled expiration of December 31, 2002.

¹⁶ The additional $35,000 of section 179 expensing is available throughout all areas that are part of a designated empowerment zone, including the non-contiguous "developable sites" that were allowed to be part of the designated Round II empowerment zones under the 1997 Act.

¹⁷ Another provision described below extends the brownfields provision for two years and eliminates the targeted area requirement.

¹⁸ See section 1045 for rollover of qualified small business stock to other small business stock.

¹⁹ However, a qualifying D.C. Zone asset held for more than five years is eligible for a 100 percent capital gains exclusion (sec. 1400B).

²⁰ The portion of the capital gain included in income is subject to a maximum regular tax rate of 28 percent, and 42 percent of the excluded gain is a minimum tax preference.

²¹ Thus, a credit would be available on the date on which the investment is made and for each of the six anniversary dates thereafter.

²² A specialized small business investment company and a community development financial institution are treated as satisfying the requirements for a CDE.

²³ If at least 85 percent of the aggregate gross assets of the CDE are invested (directly or indirectly) in equity interests in, or loans to, qualified active businesses located in low-income communities, then there would be no need to trace the use of the proceeds from the particular stock (or other equity ownership) issuance with respect to which the credit is claimed.

²⁴ A record of having successfully provided capital or technical assistance to disadvantaged businesses or communities could be demonstrated by the past actions of the CDE itself or an affiliate (e.g., in the case where a new CDE is established by a nonprofit organization with a history of providing assistance to disadvantaged communities).

²⁵ Thus, a qualified low-income community investment may include an investment in a qualifying business in which the CDE (or a related party) holds a significant interest. However, as previously mentioned, in allocating the credits among eligible CDEs, the Treasury Department will give priority to CDEs that intend to invest substantially all of the proceeds they receive from their investors in businesses in which persons unrelated to the CDE hold the majority of the equity interest. For purposes of this provision, persons are related to each other if they are described in sections 267(b) or 707(b)(1).

²⁶ If at least 85 percent of the aggregate gross assets of the CDE are invested (directly or indirectly) in equity interests in, or loans to, qualified active businesses located in low-income communities, then there would be no need to trace the use of the proceeds from the particular stock (or other equity ownership) issuance with respect to which the credit is claimed.

²⁷ It is intended that the continuous boundary that delineates the portion of the census tract as a "low-income community" should be a pre-existing boundary (such as an established neighborhood, political, or geographic boundary).

²⁸ A low-income community is defined as census tracts with either (1) poverty rates of at least 20 percent (based on the most recent census data), or (2) median family income which does not exceed 80 percent of the greater of metropolitan area income or statewide median family income (for a non-metropolitan census tract, 80 percent of non-metropolitan statewide median family income).

²⁹ A record of having successfully provided capital or technical assistance to disadvantaged businesses or communities could be demonstrated by the past actions of the CDE itself or an affiliate (e.g., in the case where a new CDE is established by a nonprofit organization with a history of providing assistance to disadvantaged communities).

³⁰ For example, constitutional home rule cities in Illinois are guaranteed their proportionate share of the $1.25 amount, based on their population relative to that of the State as a whole.

³¹ A State's population, for these purposes, is the most recent estimate of the State's population released by the Bureau of the Census before the beginning of the year to which the limitation applies. Also, for these purposes, the District of Columbia and the U.S. possessions (i.e., Puerto Rico, the Virgin Islands, Guam, the Northern Marianas and American Samoa) are treated as States.

³² The unused State housing credit ceiling is the amount (if positive) of the previous year's annual credit limitation plus credit returns less the credit actually allocated in that year.

³³ Credit returns are the sum of any amounts allocated to projects within a State which fail to become a qualified low-income housing project within the allowable time period plus any amounts allocated to a project within a State under an allocation which is canceled by mutual consent of the housing credit agency and the allocation recipient.

³⁴ Also see provisions above relating to empowerment zones and renewal communities.

³⁵ Sec. 6715(a).

³⁶ P.L. 105 206, sec. 3306.

³⁷ Secs. 6715(a) and 6631.

³⁸ Sec. 6103(b)(2)(A).

³⁹ Sec. 6103(b)(2)(B).

⁴⁰ The U.S. competent authority is the Secretary of the Treasury or his delegate. The U.S. competent authority function has been delegated to the Commissioner of Internal Revenue, who has redelegated the authority to the Director, International. On interpretive issues, the latter acts with the concurrence of the Associate Chief Counsel (International) of the IRS.

⁴¹ Sections 274(h)(6)(C) and 927(e)(3) specifically provide the Secretary of the Treasury the authority to enter into tax information exchange agreements. This eliminates the need for Senate ratification, which is required for a tax treaty. In addition, all tax information exchange agreements are required to include specific non-disclosure provisions which provide that "information received by either country will be disclosed only to persons or authorities (including courts and administrative bodies) involved in the administration or oversight of, or in the determination of appeals in respect of, taxes of the United States, or the beneficiary country and will be used by such persons or authorities only for such purposes."

⁴² The U.S. Senate ratified the Multilateral Mutual Assistance Convention, subject to certain reservations, in September 1990. The Multilateral Mutual Assistance Convention entered into force on April 1, 1995, and has been signed by the following countries: Denmark, Finland, Iceland, the Netherlands, Norway, Sweden, and the United States.

⁴³ For rulings, determination letters and technical advice memoranda, section 6110(c) provides the following exemptions from disclosure:

(1) The names, addresses and other identifying details of the person to whom the written determination pertains and of any other person, other than a person with respect to whom a notation is made under subsection (d)(1) (relating to third party contacts), identified in the written determination of any background file document;

(2) Information specifically authorized under criteria established by an Executive order to be kept secret in the interest of national defense or foreign policy, and which is in fact propeerly classified pursuant to such Executive order;

(3) Information specifically exempted from disclosure by any statute (other than [Title 26]) which is applicable to the Internal Revenue Service;

(4) Trade secrets and commercial or financial information obtained from a person and privileged or confidential;

(5) Information the disclosure of which would constitute a clearly unwarranted invasion of personal privacy;

(6) Information contained in or related to examination, operating, or condition reports prepared by, or on behalf of for use of an agency responsible for the regulation or supervision of financial institutions; and

(7) Geological and geophysical information and data, including maps, concerning wells.

For Chief Counsel Advice, paragraphs 2 through 7 do not apply, however, material may be deleted in accordance with subsections (b) and (c) of the FOIA (except that in applying Exemption 3 of the FOIA, no statutory provision of the Code is to be taken into account.) See sec 6110(i)(3).

⁴⁴ H.R. Rep. 94 658, at 315 (1976).

⁴⁵ Id. at 316.

⁴⁶ 5 U.S.C. sec. 552(b)(3).

/47/The initial FOIA request of March 14, 2000, covered all competent authority agreements executed for the United States from January 1, 1990, to date. In response to a request from the Department of Treasury, by letter dated April 17, 2000, the FOIA request was narrowed to cover competent authority agreements executed between 1997 and 1999. The right to pursue the 1990 through 1996 agreements, however, was reserved.

⁴⁸ Tax Analysts v. IRS, 117 F.3d 607 (D.C. Cir. 1997).

⁴⁹ Tax Analysts v. IRS, No. 94 CV 923 (GK) (D.D.C.).

⁵⁰ The D.C. Circuit recently remanded to the district court for factual development the issue of whether the closing agreement in that case was submitted in support of an exemption application, and therefore, subject to disclosure under section 6104. Tax Analysts v. IRS, 214 F.3d 179 (D.C. Cir 2000), vacating and remanding 99-2 U.S.T.C. (CCH) 794 (D.D.C. 1999).

⁵¹ See e.g., Appendix A of Rev. Proc. 2000 38 which is a model "Closing Agreement on Final Determination Covering Specific Matters" regarding method of accounting for distributor commissions. Rev. Proc. 2000 38, 2000 40 I.R.B. 314 315 (October 2, 2000). That model agreement does not identify any particular taxpayer but sets forth the substance of the agreement.

⁵² For example, John M. Berry, "Inflation Higher Than Reported," The Washington Post, September 27, 2000, p. E 1, John M. Berry, "Rent Error Leads to Revision Of the CPI," The Washington Post, September 29, 2000, p. E 3, Nicholas Kulish, "Major Price Index Is Revised Upward As Result of Error," The Wall Street Journal, September 28, 2000, p. A2, and Nicholas Kulish, "Second-Period GDP Rose at 5.6% Annual Rate," The Wall Street Journal, September 29, 2000, p. A2. The conferees observe that these press reports highlight the potential confusion for the public regarding these data. The Washington Post reported that "the CPI figures for 1999 were not revised" (September 29, 2000 story) while The Wall Street Journal reported that "[t]he BLS said a complete revision of all the data sets would be released" (September 28, 2000 story) and "it [BLS] announced that it would revise the index" (September 29, 2000 story).

⁵³ The assumption of liabilities is treated as boot if it can be shown that "the principal purpose" of the assumption is tax avoidance on the exchange, or is a non-bona fide business purpose (sec. 357(b)).

⁵⁴ Rev. Rul. 95 74, 1995 2 C.B. 36. The ruling addressed a parent corporation's transfer to a subsidiary of substantially all the assets of a manufacturing business, in exchange for stock and the assumption of liabilities associated with the business, including certain contingent environmental remediation liabilities. These liabilities arose due to contamination of land during the parent corporation's operation of the manufacturing business. The transferor had no plan or intention to dispose of (or to have the subsidiary issue) any subsidiary stock. The IRS ruled that the contingent liabilities would not reduce the transferor's basis in the stock of the subsidiary because the liabilities had not been taken into account by the transferor prior to the transfer and had not given rise to deductions or basis for the transferor.

⁵⁵ Section 357(d)(2) contains a limitation in the case of certain nonrecourse liabilities. Also, under section 357, regulations, if issued, may provide for different results.

⁵⁶ The legislative history to the Life Insurance Company Tax Act of 1959 states that "[t]his 50 percent reduction in underwriting gains is made because of the claim that it is difficult to establish with certainty the actual annual income of life insurance companies. It has been pointed out that because of the long-term nature of their contracts, amounts, which may appear as income in the current year and as proper additions to surplus, may, as a result of subsequent events, be needed to fulfill life insurance contracts. Because of this difficulty in arriving at true underwriting gains on an annual basis, the bill provides for the taxation of only 50 percent of this gain on a current basis." Report of the Committee on Ways and Means to accompany H.R. 4245, H. Rep. No. 34, 86th Cong., 1st Sess. at 13 (1959). Similarly, the Senate report provides, "Although it is believed desirable to subject this underwriting income to tax, it is stated that because of the long-term nature of insurance contracts it is difficult, if not impossible, to determine the true income of life insurance companies otherwise than by ascertaining over a long period of time the income derived from a contract or block of contracts. Because of this, the bill as amended by your committee, like the bill as passed by the House, does not attempt to tax on an annual basis all of what might appear to be income. In both the House and your committee's bill, half of the underwriting income is taxed as it accrues each year. The other half of the underwriting income is taxed when it is paid out in a distribution to shareholders after the taxed income has been distributed, or when it is voluntarily segregated and held for the benefit of the shareholders. This other half of the underwriting income also is taxed if the cumulative amount exceeds certain prescribed limits or if for a specified period of time the company ceases to be a life insurance company." Report of the Committee on Finance to accompany H.R. 4245, S. Rep. No. 291, 86th Cong., 1st Sess. at 7 (1959).

⁵⁷ Other events are treated as a subtraction from the policyholders surplus account. If for any taxable year the taxpayer is not an insurance company, or for any 2 taxable years the company is not a life insurance company, then the balance in the policyholder surplus account at the close of the preceding taxable year is taken into income (former sec. 815(d)(2) as in effect prior to the 1984 Act, which is referred to in present-law sec. 815(f)). Further, the policyholder surplus account is reduced by the excess of the account over the greatest of 3 amounts related to reserves: (1) 15 percent of life insurance reserves at the end of the taxable year; (2) 25 percent of the amount by which the life insurance reserves at the end of the taxable year exceed the life insurance reserve at the end of 1958; or (3) 50 percent of the net amount of the premiums and other consideration taken into account for the taxable year (former sec. 815(d)(4)(A) (C), as in effect prior to the 1984 Act, which is referred to in present-law sec. 815(f)).

⁵⁸ Section 815.

⁵⁹ Section 815(b).

⁶⁰ $92 million of Amtrak's tax-credit bond authority for Northeast Corridor projects is set aside for the acquisition and installation of platform facilities, performance of railroad force account work necessary to complete improvements below grade, and any other necessary improvements related to construction at the new railroad station at the James A. Farley Post Office Building in New York City. Projects finance with this $92 million of tax-credit bonds are not subject to the Senate contribution requirement, described below.

⁶¹ Section 61.

⁶² H.R. 4192 (106th Cong., 2d. Sess.,) introduced April 5, 2000, would modify these rules relating to reinsurance transactions. That bill would provide that if a domestic person directly or indirectly reinsurances a U.S. risk with a related foreign reinsurer, then the investment income of the domestic person would be increased by the product of (1) the reserves or liabilities related to the U.S. risk ceded to the foreign reinsurer, and (2) the average applicable Federal mid-term rate.

⁶³ In addition to other tax technical corrections, the bill contains the technical corrections contained in H.R. 2488, the Financial Freedom Act of 1999 (106th Cong., 1st Sess., reported by the House Committee on Ways and Means, H. Rept. 106 238, July 16, 1999, 393 397), as passed by the House, and S. 1429, the Taxpayer Refund Act of 1999 (reported by the Senate Committee on Finance, S. Rept. 106 120, July 23, 1999, 221 225), as passed by the Senate. (The technical corrections were not included in the conference agreement to H.R. 2488, the Taxpayer Refund and Relief Act of 1999 (106th Cong., 1st Sess., H. Rept. 106 289, Aug. 4, 1999, 542 543). The Taxpayer Refund and Relief Act of 1999 was vetoed by President Clinton.) However, the bill does not include the following provisions enacted in other legislation: sections 1601(b)(2) and (c) of H.R. 2488 (and section 504(c) of S. 1429), relating to the Vaccine Trust Fund, which were enacted in the "Ticket to Work and Work Incentives Improvement Act of 1999" (P.L. 106 170, sec. 523(b)).